Investigation under the SEBI Act-by Vedant Karia at LexCliq

 Investigation under the SEBI Act-by Vedant Karia at LexCliq

On April 12, 1988, the Government established the Securities and Exchange Board of India (SEBI) as a non-statutory body to develop and regulate the securities market, protect investors, and make recommendations to the Government. On January 30, 1992, SEBI received statutory status and powers.

SEBI became a statutory body on February 21, 1992. The SEBI Act, 1992, was passed by the Indian parliament on April 4, 1992, repealing the Ordinance and giving SEBI statutory powers. It was introduced to improve investor transparency in India.

SEBI Act

The Act empowered SEBI to regulate capital markets, not just to observe but also to enforce the SEBI Act's guidelines and twin objectives, namely investor protection and the orderly evolution of capital markets. The SEBI Act provides regulatory authority over the following areas:

• Members of the SEBI Board of Directors, their composition, and their actions.

• Members of the SEBI Board of Directors, their composition, and their actions.

• The sources of funding for SEBI, which include contributions from the Union Government.

• These rules govern sanctions and legal channels.

• The Act's Section 11C discusses investigation. 

• SEBI conducts investigations to elicit evidence of alleged securities market violations such as price tampering, artificial market formation, insider trading, public issue-related irregularities, and other misconduct, as well as to identify the individuals or entities responsible for these irregularities and violations. SEBI has increased its investigative efforts over the years.

When can the board start an investigation?

Under Section 11C(1), the board may direct an individual to investigate the affairs of such intermediary or anyone associated with the securities market at any time by writing an order if the board has reasonable grounds to believe that securities transactions are being handled in a manner detrimental to shareholders or the securities market, or if any intermediary or person associated with the securities market has violated any provision of this Act.

• Duties of such intermediary or persons to comply with the authorities

• Under Section 11C(2), 11C(3), all books, registers, other documents and records of, or relating to the company must be preserved and produced to the Investigating Authority, or any person authorised by it on its behalf, by every director, officer, employee of the firm, or anyone affiliated with the securities market. 

• The Investigating Authority will have the right to retain the records with them for a period of six months and can call for the records again from the intermediaries mentioned under Section 12 if the Investigating Agency needs the documents again.

Exemption

Unless a company engages in insider trading or market manipulation, a magistrate, judge, or court may not order the seizure of the books and records of a listed public company or a public company (other than the intermediaries listed in section 12) that intends to list its securities on a recognised stock exchange.

Punishments under the section

• If a company's management, director, employee, or intermediary fails to deliver required reports, information, or documentation, or fails to appear personally before an investigation agency or sign examination notes, he faces up to one year in prison or a fine of up to Rs. one crore, or both, as well as a fine of up to Rs. five lakhs per day the failure continues.

Legal representation during an investigation under the Act

• While ‘Courts’ and ‘Tribunals’ have a clear ‘judicial’ character to them and hence leave little debate about the application of legal representation, regulators frequently exercise quasi-legislative, quasi-executive, and quasi-judicial authorities. As a result, the conditions surrounding the right to legal representation before regulators are complex. 

• In Lafarge Umiam Mining Pvt Ltd v. Union of India (2014), the Supreme Court noted the distinction between a ‘Regulator’ and a ‘Court’ or ‘Tribunal,’ saying: “The distinction between a regulator and a court must be borne in mind.” The court/tribunal is essentially an authority that responds to a matter that has been brought to its attention. A regulator, on the other hand, is a constructive entity with the authority to enact statutory legislation and norms. 

• SEBI has not developed a standard or sanctioned legal representation at the investigative level.  The SEBI rulebook or standards for conducting investigations have remained secretive and confidential. In the absence of an explicit judgement under securities regulations, administrative tribunals and statutes can be used as precedents.

• In Kothari Industrial (1995), the Karnataka High Court considered whether the Chief Coffee Marketing Officer, before whom proceedings were begun, constituted a “Court, Tribunal, or Authority,” and therefore whether an individual has the power to nominate an attorney before such proceedings. The Karnataka High Court held that when a person is “legally authorised to take evidence” due to a contract rather than a statute, as was the case with the Chief Marketing Officer, the proceedings before this officer are not like those before a Court, and thus there is no right for a litigant to be represented by an Advocate.

• In the case of Kothari Industrial, it was held that the right to legal representation cannot be exercised during a “preliminary” stage of an inquiry proceeding, there is a growing trend of decisions that have allowed legal representation and the presence of an advocate during such preliminary stages of proceedings with some safeguards.

• In Mitesh Manubhai Sheth v. Secretary, Government of India and Others (1997), the Gujarat High Court found in favour of the broker’s right to be represented by a lawyer. The court decided that having a lawyer present is beneficial not only to the criminal but also to the tribunal or inquiry committee in reaching a just and suitable verdict. It is now generally accepted that, in a matter involving a judicial, quasi-judicial, or even administrative decision that affects a person’s legal rights, the party affected should be allowed to be defended by a lawyer if the facts of the case merit it.

SEBI investigations over the past few years have had a positive effect on  financial markets. The investigations, combined with ongoing surveillance methods, have reduced the number of alleged cases of market manipulation and price fraud. Following the conclusion of the investigation, various administrative and punitive proceedings were initiated under the SEBI Act and various SEBI rules and regulations. Monetary sanctions, warnings, suspensions and deregistrations, restrictions on stock trading and access to stock markets, calls for mutual fund directors and key people to resign over does not protect the interests of investors, etc. are examples. Share.

Vedant Karia