The Bill tabled in Parliament will give Sebi more power to act against scamsters. But the former Sebi board member tells Pankaj Anup Toppo that protecting the consumers’ interest is key
Why has the government decided to give more powers to Securities and Exchange Board of India?
There have been instances where unscrupulous entities came up with innovative schemes like goat farming, emu farming, time shares and so on that did not fit into any description of products covered by the regulatory jurisdiction of any regulator and therefore such scheme remained outside regulatory jurisdiction. Earlier, collective investment scheme (CIS) was defined as a scheme offered by a company having four distinctive features. So, people came up with a non-company structure and thereby avoided regulatory discipline. This loophole has now been removed in the Bill. Further, people came up with schemes which did not satisfy all the four requirements of the CIS. The Bill now says that if you have pooled resources exceeding Rs 100 crore by a scheme which does not meet all the four requirements of CIS and such scheme is not regulated by any other regulator, it will be deemed to be a CIS. It is still possible that someone launches a scheme that raises money from people, but the amount raised is less than Rs 100 crore, and it does not satisfy all the four characteristics of CIS, even then, Sebi can consider it CIS by specifying conditions through regulations. So, Sebi can now say that any scheme, even if the amount raised is less than Rs 100 crore and does not qualify as CIS under the law, it will be categorised as CIS if it satisfies certain conditions specified by a Sebi regulation. The aim here is to completely bridge the regulatory gap. However, it is too sweeping a change. Say, for example, if four people pool Rs 100 crore, with each contributing Rs 25 crore, to build a residential property, Sebi will be well within its rights to categorise it as CIS. Sebi, traditionally, had powers to give any kind of direction, including debarring either an individual or a company from accessing the market or trading in securities. However, the law also allowed Sebi to issue any kind of directions warranted by the circumstance. Using that implicit power, Sebi has been issuing disgorgement orders. Now, the Bill has made it clear that Sebi does have the powers to issue disgorgement orders. More importantly, from the consumer protection perspective, the Bill says that this disgorgement money will go to the investor protection fund of Sebi. Given the past experience, we expect that this disgorged money will be distributed among investors who have lost money in the related misdemeanour. So, wherever Sebi finds that someone has gained money by unscrupulous means, it should, among other things, must direct the person to disgorge the money that he has unlawfully made. Sebi should also have a mechanism to identify people who have lost money and return the same to them. That will be the biggest consumer protection move that can flow from this Bill.
What legal recourse will retail investors have, especially those, who have lost money in unscrupulous schemes?
There are many legal recourses that an individual has, but most of them are ineffective in terms of timelines. Theoretically, one can approach the police or the consumer courts. He can also approach the regulator which regulates the scheme. But the real problem for consumers of financial products is that they do not know whom to approach. And, at times, even regulators are not sure under whose jurisdiction a particular products falls. That is the reason why the Financial Sector Legislative Reforms Commission (FSLRC) recommends a single agency dedicated to consumer grievance redressal. And we need to move in that direction.
So, going ahead, will instances of people getting hit by financial scams reduce?
Having a law is not enough to prevent a crime. But, a law is a necessary condition. People who are in charge of administration of a law should have the right motivation and capability and must be allowed to work without fear and favour. So it’s all about the capability of Sebi, the level of
its motivation, the effectiveness of its surveillance mechanism and, most importantly, it must work without fear
The Bill says Sebi will have powers to seek information, including call data records of any entity in respect to any securities transaction. Will this help?
The Bill enables the securities market regulator to call for information from anybody and everybody, which is relevant for the purpose of investigation. But, the Sebi law is in addition to, and not in derogation of, any other law of the land. So if there is a telecom law which states that telephone call records can only be accessed by agencies listed therein, no one else can have access to those records. The Sebi act can’t over-ride that act. So, my understanding is that with this amendment, Sebi will not get the right to get telephone call records.
What, according to you, are the reasons for scams to flourish in the market?
An investor needs four things. First, she should know investing. Second, she should have full knowledge about the market, i.e., market participants must disclose everything about them and the products they offer. Third, she should have the assurance that there are no sharks in the market and only fit and proper persons have been allowed to participate in the market. Fourth, if at all she loses money on account of fraud or systemic failure and not due to her fault or market movements, she is indemnified. These four things, in some form or the other, are available in a regulated market. However, unregulated market has been the bane of our extant regulatory architecture. Till now, the regulatory gap was very huge. So, unscrupulous people were taking advantage of it.