The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as "...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto"
(Source - http://www.sebi.gov.in/
Powers of SEBI with relevant examples
As explained in the above sections, SEBIâ€™s primary motive is to protect the interests of the investors and to ensure the appropriate functioning of the securities market. Such a body without power would be a toothless tiger. SEBI enjoys itâ€™s powers via the SEBI act 1992. Such powers were provided to SEBI in 1995 via an amendment to the SEBI act 1992. The power it obtains via the act can be categorized into 3 broad areas
- Power to Issue Directions
- Power to Investigate
- Power to Enforce (Cease & Desist Proceedings)
(Source - http://www.sebi.gov.in/
) In the sections below, weâ€™d explore each of the above areas alongwith relevant examples of the same based on information publicly available.
Power to Issue Directions
As per Section 11B of SEBI Act 1992, SEBI can issue directions to secure the interests of the investors and/or proper functioning of securities market or for appropriate management of entities that fall within itâ€™s ambits. Such directions can be issued to individuals or companies as appropriate. SEBI can issue such directions after appropriate enquiry has been made in to the matters. (Source - http://www.sebi.gov.in/
) Some cases where SEBI has ordered such directions post enquiry have been shared below.
Attachment of Deposit Money of A G Shares and Securities
In an order issued on 16th Jun 2014, SEBI directed NSE to remit the deposit money of A G Shares and Securities in favour of the regulator. A G Shares and Securities had to pay SEBI towards outstanding turnover fees but it failed to do so. With this backdrop, SEBI issued the direction to NSE to ensure that it recovers the money as well as other market participants are aware of such penalties incase of such situations. This direction was issued in exercise of powers conferred under Section 28 A(1)(b), 11(2)(ia) of the SEBI Act 1992. (Source - http://www.sebi.gov.in/cms/sebi_data/attachdocs/1402913142682.pdf
Vibgyor to refund money
On 20th Feb 2014, SEBI directed Vibgyor Allied Infrastructure Ltd. to refund all the money raised by itâ€™s promoters from the investors within 3 months after factoring in the interest due assuming an interest rate of 15%. SEBI found out that Vibgyor had raised money from investors via means that were not within the statutory requirements of the law. SEBI as part of itâ€™s enquiry found out that the details of most of the investors were bogus and suspected the money used to buy such bonds were probably not coming from legitimate investors. In order to ensure that the genuine investorâ€™s interests are not impacted and to ensure that the financial system is not misused, it issued such a directive to the founders of the company. (Source - http://www.telegraphindia.com/1140221/jsp/business/story_18005038.jsp#.U58aavmSxyw
Power to Investigate
As per Section 11C of SEBI Act 1992, SEBI can investigate individuals or companies to secure the interests of investors and/or to ensure appropriate functioning of the securities market. The board need not have concrete proof to start such an investigation and a reasonable doubt would suffice to initiate the investigation. As part of itâ€™s investigations, SEBI can request various documents from the individuals or companies and they would be bound to provide such documentation to SEBI, which SEBI can keep upto 6 months with them. SEBI can also direct individuals to appear personally before the board or itâ€™s representatives failing which the individual would be liable for jail upto one year or a fine of 1 Crore Rupees or both. Further any delay beyond the initial date of appearance would require the individual to pay up to 5 Lakh Rupees per day making it one of the stiffest fine under the Indian law. Such strict fines/punishment shows the power that SEBI truly enjoys. (Source - http://www.sebi.gov.in/
) In the paragraphs below, we discuss in detail cases where such investigations were carried out by SEBI.
Investigate Credit Suisse for Insider Trading
On 5th Jun 2014, SEBI ordered an investigation against Hong Kong based asset fund Factorial Capital Management Ltd for short selling L&T Finance Holdings Ltd. SEBI had reasonable belief that Factorial had access to insider information about a possible share sale at a discounted price in future and took a heavy short position. On 13th Mar 2014, Factorial bought aggressively L&T Finance Derivative at a price of Rs. 79.15/- per share. This single derivative accounted for 84.15% of the entire outstanding position causing this an obvious outlier. At the end of the day the discounted share sell announcement was made with the price fixed at Rs. 70/- per share. Factorial is accused of making close to Rs20 Crore as part of this deal. At the time of accusation, SEBI didnâ€™t have concrete information to prove itâ€™s case but it had a reasonable doubt based on the transaction type and volume and the profit made by the asset management company, especially when the company didnâ€™t have any significant exposure to this particular security before. If proven guilty, Factorial would have to pay up to 3 times the profit it made from the deal. Factorial spokesperson maintained that Factorial didnâ€™t do anything wrong and they would cooperate with SEBI in the entire investigation process. Factorial has 21 days to respond to the orders of SEBI but till the time the investigation is completed, they have been barred from participating in Indian security markets. (Source - http://www.sebi.gov.in/cms/sebi_data/attachdocs/1401975796790.pdf
Investigate for Suspicious/Insider Trading Transactions Post Election
Post the 2014 Lok Sabha elections RBI, SEBI and other institutions had created different committees to monitor any suspicious or insider trading activities. On 16th May, SEBI noticed abnormal movement of the market and ordered an investigation of 30 entities that included some of the financial institutions as well as high net worth individuals. SEBI had created 2 separate committees to monitor such trades. While one of the committee was monitoring the results, another was keeping a tab on the price movement. SENSEX jumped by 2,100 points within one minute of trading and trading had to be halted to prevent a large volatility. (Source - http://mg.glpublications.in/epaperpdf//1952014//1952014-md-hr-2.pdf
Investigate HDFC Mutual Fund for Front Running
Before we go into the details of the case, it is important to understand the concept of â€œFront Runningâ€ for the benefit of the readers. Front running means that an entity places an order in front of another entity who has a definite intent of acquiring certain specific securities. For Ex:- If entity B wants to buy 100, 000 shares of a company and someone has an advanced information about it, then another entity A could technically buy these shares before and increasing the price of the share. This would mean that entity B will be buying the securities at a higher price. Another approach could be the entity A could quote a higher price to sell similar number of quantities and make a profit. The profit would be high if entity B happens to be a large financial institution. In 2007, SEBI found occurrences of such trading by a particular dealer working for HDFC named Nilesh Kapadia in connivance with another 3 individuals. SEBI initiated a probe that lasted almost 7 years showing the determination of SEBI to uncover the truth. As part of itâ€™s investigation SEBI not only gathered the details of the financial transaction but also leveraged itâ€™s power to collect transcripts of the phone conversations between the individuals. In this particular case Nilesh Kapadia would tip his college mate about an upcoming trade that he will be making on behalf of HDFC so that his friend could first place the orders and in the process making a large profit that was shared between them. SEBIâ€™s thorough investigation successfully proved the allegations and even though initially Mr. Nilesh refused of any wrongdoing he eventually told the truth when faced with irrefutable evidence that included phone conversations. (Source - http://www.sebi.gov.in/cmorder/orderhdfc.pdf
Power to Enforce (Cease & Desist Proceedings)
As per Section 11D of SEBI Act 1992, SEBI can stop people or companies to trade or conduct business to secure the interests of investors and/or to ensure appropriate functioning of the securities market. (Source - http://www.sebi.gov.in/
) As explained under the above investigation section, SEBI finally barred the individuals involved in front end running frauds from participating in the Indian securities market. SEBI can bar entities from dealing in the Indian securities market even when they are under investigation like it did for Factorial.
Bar Mrs. Reena Bansal from Trading
On 9th Jun 2014, SEBI barred Mrs. Reena Bansal from any trading in the indian securities system as well as instructed both NSDL and CDSL not to execute any instructions from her. The order was primarily issued to prevent her from acting as a sub-broker. While she was not a registered broker with SEBI, all her transactions (buying/selling of shares as well as money transfers) had ample evidence to show that she was acting as a broker. She was issued a summon that was undelivered and since she didnâ€™t respond within the stipulated time, she was barred from doing any transactions. (Source - http://www.sebi.gov.in/cms/sebi_data/attachdocs/1402307620679.pdf
CEASE AND DESIST ORDER AGAINST DR. NALAMOTHU VENKATA KRISHNA
In Nov 2009, SEBI ordered Dr. N V Krishna not to trade directly or indirectly in the India securities market. It also asked him not to issue any online or offline solicitation from public about any information or investment. What SEBI noticed in this particular case is that Dr. N V Krishna was advertising via his online blogs that he can generate high return based on his access to certain insider information. This was clearly against the interests of the market and hence SEBI barred him from participating in any transaction. (Source - http://www.sebi.gov.in/cmorder/nalamothuorder.html
In presence of a lot of fraudulent activities that happened in early nineties, it was essential that a regulator is needed to monitor the indian securities sector. Since itâ€™s inception SEBI has done a fantastic job in checking a lot of such activities and has taken a lot of individuals and companies to task. While this is worth highlighting, SEBI has also been alleged to be a bit high-handed in certain scenarios. Recently SAT sent a signal in this direction to SEBI. In conclusion, while SEBI has been doing a great job, it needs to ensure that it doesnâ€™t cross a lot of boundaries causing itself to get overwhelmed with counter cases and fail. India needs a regulatory body like SEBI to protect the interests of the investors as well as appropriate functioning of the stock market.