Report on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues

HIGH LEVEL COMMITTEE UNDER THE
CHAIRMANSHIP OF
JUSTICE ANIL R. DAVE, RETIRED JUDGE, SUPREME
COURT OF INDIA

A REPORT ON THE MEASURES FOR STRENGTHENING
THE ENFORCEMENT MECHANISM OF THE BOARD
AND INCIDENTAL ISSUES

PREFACE

The Securities and Exchange Board of India was set-up with the following mandates, –

(i) to protect the interest of investors in securities;

(ii) to promote the development of the securities market; and

(iii) to regulate the securities market.

Protection of investors’ interest is the primary and one of the most important responsibilities of the Board. The Board regulates the manner of raising monies from the public and in case of any default, it protects the investors’ interest by initiating several measures including suspending and cancelling the certificate of registration, debarring, penalizing, prosecuting defaulters, ordering recovery and directing disgorgement and refund to identifiable investors. The Board also regulates trading of securities and ensures that the same is carried out in tune with investors’ interest. The Committee has considered various issues pertaining to the enforcement mechanism of the Board and made recommendations thereon to make it more robust and efficient. These recommendations
seek to introduce tactical, strategic and systemic changes in the enforcement process spread over a period of few years, to enhance and improve the capabilities of the Board in protecting the investors and indicting the defaulters.

Part-A: Review of Intermediaries Regulations:

The securities market is largely built on the infrastructure and services provided by the intermediaries. A deficiency in the functioning of an intermediary may possibly impact the functioning of the securities markets and erode investors’ trust. The Board regulates intermediaries through:

(i) substantive Regulations which are entity specific and which specify the eligibility criteria for obtaining the certificate of registration and lay down the operating standards for providing financial services to clients, and

(ii) the SEBI (Intermediaries) Regulations, 2008 which regulate the manner of holding enquiry against them in case they violate the substantive regulations.

In order to protect the interests of the investors, the Board should be able to initiate remedial and punitive action against the delinquent intermediaries efficiently and in a timely manner for the effective regulation of the securities market. On the basis of experience gained in the enforcement proceedings against the intermediaries so far, it is felt that the current process under the SEBI (Intermediaries) Regulations, 2008 is unjustifiably drawn-out and hence needs to be reviewed. The fact that intermediaries owe a fiduciary duty to the investors unlike other market participants, underscores the need for proceedings against the intermediaries to be conducted and concluded in a timely fashion.

Hence, to enable efficient regulation of intermediaries, the Committee has proposed rationalization of processes in the SEBI (Intermediaries) Regulations, 2008 to avoid duplicity of proceedings before the Designated Authority and the Designated Member. SEBI is required to adhere to the principles of natural justice in the course of its proceedings against an intermediary but such adherence cannot be meant to extend the application to such an extent that permits holding the system hostage at the cost of compromising the very interest of the investors. It is thus proposed that once the Designated Authority has provided personal hearing to the intermediary and submitted the report to the Designated Member, in the second stage of enquiry, the Designated Member shall, after issuing a notice to show cause and granting an opportunity of written submission to the noticee, proceed to pass an appropriate order in the matter in the interest of justice, equity and good conscience.

Please refer to the attached file for details