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FEB 06, 2018

Finance bill, 2018 proposes significant Amendments in Securities Laws

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The Finance Bill, 2018 notified on 01.02.2018, has proposed significant amendments in Securities Law. With the intent of streamlining procedures and bring harmony in various provisions, amanedments have been proposed to the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996 and the Securities Contract Regulation Act, 1956. These amendments are to become effective and come into force on such date as the Central Government may, by notification in the Official Gazette, prescribe. The proposed changes and their impact to the Securities Laws majorly covers the following:

  1. Amendment of Section 11 and Section11B: Section 11 has been amended to now include that the Board may, by an order, for reasons to be recorded in writing, levy penalty under sections 15A-15HB after holding an inquiry in the prescribed manner. Similarly, Section 11B has been proposed to be amended to now include the words “levy penalty” after the word “direction” implying that SEBI, alongside making directions has been now empowered to “levy penalty”. So far, Whole Time Member had been passing only remedial and preventive directions and imposition of penalties was being done by Adjudicating officers for which separate proceedings were conducted. Now Section 11has been amended to remove the existing lacunae in the regime and to allow the Whole Time Member only to impose penalties alongside issuance of remedial and preventive directions.  The implications of this amendment are that since Member will now have to the power to impose penalty, there will be no requirement for SEBI to initiate separate adjudication proceedings for the same cause and consequently, the step will reduce the piling of the cases and multiplicity of proceedings and help in better channelization of resources.
  2. Amendment to Section 15A and insertion of Sections 15EA and 15EB: Section 15A has been proposed to be amended to now include the words “or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents” after the words “fails to furnish the same. The said amendment provides for penalty to be imposed in case of any person who furnishes or files false, incorrect or incomplete information, return, report, books or other documents in the same manner as a person who fails to furnish the required information. Section 15EA and 15EB have been proposed to be inserted which provide that any person who fails to comply with the regulations or directions of the Board in respect of alternative investment funds, infrastructure investment trusts and real estate investment trusts such person shall be liable to penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees or three times the amount of gains made out of such failure, whichever is higher. These amendments take care of the Regulations introduced during the law few years and these provisions now specifically provide for Imposition of penalty in case of Defaults made by Alternate Investment Funds (AIFs), Real Estate Investment Trust (REITs), Infrastructure Investment Trusts (INVITs), Investment Advisors and Research Analysts. During the past few years, SEBI had introduced Regulations for AIF, REITS, INVITs, Investment Advisors and Research Analysts, with the current amendments, separate and specific penal provision quantifying the amount of monetary penalty that may be levied for violation under these regulations has been introduced in the Act as Section 15EA & 15EB. Without the separate specific provisions, any violations under the provisions of these Regulations were to be dealt under residual Section 15HB which deals with the matters where no separate penalties are provided.
  3. Insertion of new section 28B. Section 28B has been proposed to be inserted which provides that where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay, if he had not died, in the like manner and to the same extent as the deceased. However, a legal representative shall be liable only in case the penalty has been imposed before the death of the deceased person. It has been provided that a proceeding for disgorgement, refund or an action for recovery before the Recovery Officer except a proceeding for levy of penalty, initiated against the deceased before his death may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased or it may be initiated against the legal representative as the case maybe. The liability of a legal representative under this section shall be limited to the extent to which the estate of the deceased is capable of meeting the liability.

    For the purpose of this provision, “legal representative” has been defined as a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued.

    This provision is first of its kind and a stringent step ahead because as a general rule, in cases of fraud and manipulation, the liability of a person is personal and not transmitted, although with this amendment if the proceedings are concluded, the recovery can now be made from the legal representative. Although the said amendment will have serious implications on person not involved in the alleged act but the amendment has also provided that the recovery would only be to the extent of the estate of the deceased. Also if the proceedings for levy of penalty is not initiated or completed, then those proceedings will not be continued as against the legal representative.

  4. Insetation of Section 23GA in SCRA: It is pertinent to note that under the Securities Contract Regulation Act, 1956, Section 23 GA has been inserted which provides  that where a stock exchange or a clearing corporation fails to conduct its business with its members or any issuer or its agent or any person associated with the securities markets in a manner not in accordance with the rules or regulations and directions made by the Securities and Exchange Board of India, the stock exchange or the clearing corporations shall be liable to penalty which shall not be less than five crore rupees but which may extend to twenty-five crore rupees or three times the amount of gains made out of such failure, whichever is higher. By virtue of this provision, SEBI has been empowered to impose penalty on Stock Exchanges and Clearing Corporations on failures to conduct its business with its members or any issuer or its agent or any person associated with the securities markets.
  5. Other Amendments in SCRA and Depositories Act: Provisions of the Securities Contract Regulation Act, 1956 and Depositories Act, 1996 have been proposed to be further amended on the same lines as the SEBI Act, 1992 and similar amendments have been proposed therein.
  6. These provisions that have been proposed to be introduced though have strengthened the role of SEBI as a watchdog, yet it can be observed that they are more regulatory than reformative in nature. Though with the introduction of these provisions an attempt has been made to address the void in the existing regimen yet there is a wide scope to bring necessary changes so as to increase the accountability of SEBI along with the accountability of various market players.