Critically analyse various types of Securities Fraud in India and how
they are sought to be prevented in India
Mukund Multani, SLC 2013-14, SLC Roll No: 35 Research Paper Set II Word Count: 5700
Introduction Indian corporate and securities law has its roots in English common law. England passed a homogenous set of company laws throughout the British Colonies to assist British entrepreneurs via a common investment framework. Post independence, Prime Minister Nehru believed that state control of foreign investment was necessary to prevent foreign capital, foreign interests, and foreign businesses from dominating India. Consequently, the Capital Issues Controls Act 1947 provided government with the power to regulate equity issuance - to ensure companies that raised money served the governments goals and priorities. This Act required companies to obtain approval from the Controller of Capital Issues to raise money, and the government restricted the price of equity issuances to a complex accounting formula rather than letting the market set the price. From the mid-1960s until the economic reforms of 1991, the government viewed the financial system as a source of public finance. During this time, the government controlled the banks and their lending decisions and used this to control competition. Commercial and cooperative banks provided companies with working capital. Indian development banks and a few government-funded financial institutions provided most of the medium- to long-term financing of companies. In the 1990s, the most significant reform involving capital markets was the governments abolition of the Controller of Capital Issues in 1992. After the government abolished the Act, companies were free to set the price of their issues. Securities regulation in India evolved into a primarily disclosure based regime, with the philosophy that accurate and timely disclosures are fundamental in maintaining the integrity of the securities market. The evolution of securities markets in India began with the establishment of the Securities and Exchange Board of India (SEBI) in 1989, initially as an informal body and in 1992 as a statutory autonomous regulator with the twin objectives of protecting the interests of investors and developing and regulating the securities market over a period of time. This was a dramatic shift from the focus of the Securities Contracts Act of 1956, which primary focused on investor protection through heavy regulation and disregarded market promotion The regulatory regime evolved in response to changing market dynamics as well as to instances of fraudulent activity, more prominent among these being the Harshad Mehta fraud, the vanishing companies scam, the Ketan Parekh scam, the Satyam accounting fraud, and more recently, the crisis at the National Spot Exchange of India Limited (NSEL). While analysing each of these in detail is beyond the scope of this paper, we will look at the Harshad Mehta scam closely, as it was instrumental in shaping SEBIs behaviour in the 1990s. Harshad Mehta Fraud of 1991-1992 The securities market scam of 1991-1992, perpetrated by Harshad Mehta (Harshad Mehta Fraud) was in essence a diversion of funds from the banking system (in particular the inter-bank market in government securities) to brokers for financing their operations in the stock market. The regulatory response included the establishment of the Janakiraman Committee by the RBI to investigate the possible irregularities in funds management by Commercial Banks & Financial Institutions, and in particular in relation to their dealings in Government Securities, Public Sector Bonds, and other instruments. The Janakiraman Committee submitted its final report in April 1993, concluded that there was collusion between the officials of some nationalised banks and stock brokers. According to the committee, the gross problem exposure of banks in the securities scam was Rs 4,025 Cr. The detailed mechanism of the fraud is explained in the following sections. Ready forward / repurchase transactions The mechanism through which the scam was effected was the ready forward deal (more commonly known internationally as a repurchase agreement or a repo). A ready forward deal is a combination of two transactions entered into between the same parties on the same security. One transaction is a spot transaction and the other is a forward transaction. Essentially, a ready forward is a secured short-term loan with the difference between the spot and forward price being the interest compensation. The ready forward served two purposes in the Indian context: It provided liquidity to the government securities market It was an important tool for banks to manage their Statutory Liquidity Ratio (SLR) requirement - banks were required to maintain 38.5% of their demand and time liabilities (DTL) in government securities and certain other approved securities, collectively known as SLR securities. For instance, a bank with a temporary surge in DTL may not want to purchase SLR securities outright and then sell them when the DTL comes back to normal. Instead, it could enter a ready forward deal, effectively borrowing the securities for the short-term Importantly, a ready forward is not legally considered to be a loan. Since the deal is not shown as a loan in the books of accounts, the bank is not required to make cash reserve ratio (CRR) and SLR provisions for the funds procured under the deal. Issuance of Bankers Receipts / BRs in ready forward deals Typically, in a ready forward deal, the selling bank delivers the securities and the buying bank makes the payment by cheque as a settlement of the spot deal. However, if the selling bank was not able to deliver the securities due to certain technical reasons, then it was allowed to issue a bankers receipt (BR) instead. The BR specified the name of the securities sold, along with the quantity and other necessary identifying details, and was a valid document for the buying bank towards (i) proof of purchase, (ii) compliance with SLR provisions. In practice, a BR was allowed to be issued in the following circumstances 1. When the selling bank is waiting for the receipt of securities from another bank 2. When the selling bank is yet to receive the (physical) certificate of securities allotted to it under a public issue 3. When the selling bank has a (physical) consolidated jumbo certificate for a large quantity of securities, but the quantity sold is less than the quantity represented by the jumbo certificate In practice, BRs came to be used in lieu of actual securities for several reasons. For example, since they BRs eliminated the need for delivery, they could simply be cancelled and returned when the deal was reversed. RBI Role & Subsidiary General Ledger Specifically as far as government securities were concerned, the Reserve Bank of India acted as custodian for these securities via its Public Debt Office (PDO). Physical securities are never issued, and the holding of these securities is represented by book entries at the PDO. The ledger in which the PDO maintains these accounts is called the Subsidiary General Ledger (SGL), and these securities are referred to as SGL securities. When a holder of SGL securities sells them and wishes to transfer them to the buyer, he fills up an SGL transfer form and gives it to the buyer. This SGL form can be compared to a cheque: the buyer deposits it into his SGL account at the PDO, and the PDO makes a book entry reducing the holding of the seller and increasing that of the buyer. However, the PDO was an inefficient and slow-moving organization in an industry where accuracy and speed was essential. Like a cheque, an SGL form could bounce if the seller did not have sufficient securities in his SGL account. The buyer needs to be informed about this promptly; else, he may resell the same securities by issuing his own SGL forms in the belief that he has sufficient balance in his account. The inefficiency of the PDO made the SGL form an inconvenient and unreliable instrument, and banks preferred to use BRs, a practice which was in violation of an RBI directive stating that BRs were not to be used for SGL securities. Brokers Increasing Role in Ready Forward Deals The normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other. The broker's only function is to bring the buyer and seller together and help them negotiate the terms, for which he earns a commission from both the parties. He does not handle either the cash or the securities. During the scam, however, the banks or at least some banks adopted an alternative settlement process which was similar to the process used for settling transactions in the stock market. In this settlement process, deliveries of securities and payments are made through the broker. That is, the seller hands over the securities to the broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then makes the payment to the seller. In this settlement process, the buyer and the seller may not even know whom they have traded with, both being known only to the broker. There were two important reasons why the broker intermediated settlement began to be used in the government securities markets: The brokers instead of merely bringing buyers and sellers together started taking positions in the market. In other words, they started trading on their own account, and in a sense became market makers in some securities thereby imparting greater liquidity to the markets. When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in handy. The broker provided contract notes for this purpose with fictitious counterparties, but arranged for the actual settlement to take place with the correct counterparty. Brokers Misuse of Account Payee Cheques As described above, the broker intermediated settlement now allowed the broker to lay his hands on the cheque since it went from one bank to another through him. If the broker could now find a way of crediting the cheque to his account, he could essentially divert funds from the banking system to finance his operations in the stock market. The hurdle was that the cheque was drawn in favour of a bank and was crossed account payee. As it happens, it is purely a matter of banking custom, that an account payee cheque is paid only to the payee mentioned on the cheque. In fact, exceptions were being made to this norm, well before the scam came to light. Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the interest loss. Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 Cr cheque was about Rs. 8 lacs. On the other hand, when banks make payments to each other by writing cheques on their account with the RBI, these cheques are cleared on the same day. The practice which thus emerged was that a customer would obtain a cheque drawn on the RBI favouring not himself but his bank. The bank would get the money and credit his account the same day. This was the practice which the brokers in the money market would eventually exploit to their benefit. The buying bank used to issue an RBI cheque favouring the selling bank that would state Pay to XYZ Bank. Brokers such as Harshad Mehta would add their name on the cheque, making it look like Pay to XYZ Bank A/C Harshad Mehta. Consequently, the amount was routed to the brokers account instead of the selling banks account. Summary As a result of the regulatory loopholes described above, Harshad Mehta was able to divert funds from the banking system into the stock market. Between December 1991 and April 1992, the Sensex rose by nearly 150%. After the fraud was discovered, the Sensex fell nearly 40%. The scam became a catalyst for policy-makers to think hard, setting in motion a chain reaction which lead to developments like the development of the listing agreement, Securities Laws (Amendments) Act 1995, which widened SEBIs jurisdiction and allowed it to regulate depositories, FIIs, venture capital funds and credit-rating agencies. SEBI was also empowered to penalise capital-market violations and its investigative arm could summon persons, enforce production of books of accounts, and conduct enquiries, audits and inspections of mutual funds, stock exchanges and other intermediaries.
Various Types of Securities Fraud in India Some of the more prominent types of securities fraud that have occurred in India and the regulatory measures taken to counteract them are detailed below: Mis-selling and unsuitability: Under the current distribution model in India, financial intermediaries (agents, financial advisors, etc) sell products to customers, but these intermediaries earn their income from the product manufacturers (banks, mutual funds, insurance companies, etc). Often, the investment advice is bundled with distribution. Due to this model, distributors are incentivized to market the product which is most profitable to them rather than recommend the one most suitable for the client. In response, SEBI has sought to segregate the roles of a distributor and that of an advisor and under the new regulatory structure both roles cannot be assumed by the same person. SEBI has approved and notified the SEBI (Investment Advisers) Regulations, 2013 in this regard. Under these regulations, a distributor is liable for mis-selling and an investment adviser is liable for recommending unsuitable products. Additionally, mis-selling of financial products is dealt with under the SEBI FUTP Regulations, where it is considered as unfair and fraudulent activity. Manipulation of Securities: Broadly, this may be of two types price manipulation or volume manipulation. Price Manipulation: Popularly known as pump and dump, the process involves constantly purchasing shares of a company with the intent of forcing up the price, and then selling the shares at the artificially inflated price. Other forms of price manipulation could include making false statements touting the stock to unsuspecting investors. There have been instances where manipulators have stimulated demand in an IPO after-market by entering into arrangements with persons to purchase additional shares in the after-market. In another form of manipulation commonly known as painting the tape, manipulators make a series of end-of-day purchases in order to influence the closing price of a stock, since this is the most widely reported number by the financial media. Volume manipulation: This could be of several types, (i) artificially constricting supply by capturing the free float of the company, (ii) circular transactions i.e. placing simultaneous orders to buy and sell quantities with no effective change in beneficial ownership, with the intention of artificially creating volumes, (iii) matched sales where orders on opposite sides of the trade are entered at substantially the same time, place and quantity. However, these may be entered by genuine investors as well. (iv) Parking or withholding shares thereby reducing the trading float and constricting supply. These types of manipulation are dealt with under Regulations 3 and 4 of SEBI FUTP Regulations, relevant portions of which are reproduced below: 3. Prohibition of certain dealings in securities No person shall directly or indirectly (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: (a) indulging in an act which creates false or misleading appearance of trading in the securities market; (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; (c) advancing or agreeing to advance any money to any person thereby inducing any other person to offer to buy any security in any issue only with the intention of securing the minimum subscription to such issue; (d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or moneys worth for inducing such person for dealing in any fluctuation in the price of such security; (e) any act or omission amounting to manipulation of the price of a security; (f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;
(k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors;
(n) circular transactions in respect of a security entered into between intermediaries in order to increase commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security;
(r) planting false or misleading news which may induce sale or purchase of securities. Insider Trading Insider trading is dealt with by the SEBI (Prohibition of Insider Trading) Regulations, 1992. In recent times, there has been a move to overhaul the regulatory regime, and SEBI has set up an advisory committee headed by Justice N.K. Sodhi, which has developed the draft SEBI (Prohibition of Insider Trading) Regulations, 2013. Regulation 3 and 3A of the Insider Trading Regulations reads as follows: Prohibition on dealing, communicating or counselling on matters relating to insider trading. 3. No insider shall (i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or (ii) communicate o] counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities : Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law. 3A. No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information. Any person who violates these regulations Is guilty of insider trading. An insider is defined in Regulation 2(e), which reads as follows: insider means any person who, (i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information One of the measures taken with respect to trading by insiders is the enhancement of disclosures. The Companies Act, the listing agreement and the Insider Trading Regulations require the company to make dissemination of price sensitive information to the market. Regulation 13 of the Insider Trading Regulations requires that major shareholders dealing in shares of a company shall disseminate information about their trades on crossing certain threshold limits prescribed in the regulation. Additionally, the Companies Act 2013 has also defined and prohibited insider trading, as per section 195, which reads as follows: 195. (1) No person including any director or key managerial personnel of a company shall enter into insider trading: Provided that nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or employment or under any law. Explanation.For the purposes of this section, (a) insider trading means (i) an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company; or (ii) an act of counselling about procuring or communicating directly or indirectly any non-public price- sensitive information to any person; (b) price-sensitive information means any information which relates, directly or indirectly, to a company and which if published is likely to materially affect the price of securities of the company. (2) If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both. The power to enforce insider trading under the Companies Act 2013 for listed and about to be listed companies is delegated to SEBI. Overview of Regulatory Provisions Dealing with Fraud Establishment of SEBI & SEBI Act As a result of the unravelling of the Harshad Mehta scam, the Government of India promulgated the Securities and Exchange Board of India Ordinance, 1992 giving substantial powers to SEBI over the securities market, Finally, a statute by the name SEBI Act, 1992, was enacted and notified by the Parliament on 12 April 1992. Section 3 of the SEBI Act establishes SEBI. The SEBI Act was amended in 1995 to introduce monetary penalties on violators of the SEBI Act and the regulations made thereunder. These penalties, subsequently enhanced, can extend up to Rs 25 Cr and are in addition to any remedial provisions like disgorgement of ill-gotten gains. With the establishment of SEBI, India began to evolve from the old philosophy of merit based control (prevalent under the Controller of Capital Issues regime) to a philosophy of full and fair disclosure. Source of Regulators Powers Constitution of India: List I of Schedule VII of the Constitution of India prescribes the areas where the Parliament of India is competent to pass laws. The key entries which are used to give powers to SEBI are contained in entries 43, 46, and 48 of List I. Statutes: Statutory provisions include the SEBI Act 1992, the SCRA 1956, Companies Act 2013, and the Depositories Act 1996. The statutes provide a broad framework, and the detailed regulatory regime is included in the delegated legislation Delegated Legislation: There are four kinds of delegated legislation: (a) Rules passed under the SEBI Act by the government of India which describe the way the Board will function, provisions for appeal, etc, and which provide a broad governance structure to SEBI. Further, there are rules made under the the SCRA 1956, Companies Act 2013, and the Depositories Act 1996
(b) Body of regulations where the legislature has given SEBI the power to fill in the mandate of the SEBI Act by way of delegated authority. For example, insider trading is prohibited by SEBI (Prohibition of Insider Trading) Regulations, 1992, and fraud and manipulation are prohibited by the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The majority of securities laws are contained in SEBI regulations. Both the rules and regulations passed under the SEBI Act are tabled before each house of the Indian parliament for 30 days and have the full force of law supported by punitive provisions for disobedience.
(c) Clarificatory or interpretive powers of SEBI are used to issue guidelines, circulars, schemes, no-action letters and interpretive letters. This set of regulation does not pass through the Parliament, and as a result, parties have challenged the validity of guidelines, albeit unsuccessfully. Though there is no direct authority to pass guidelines, and the securities tribunal, SAT, has held the guidelines to be not strictly of the nature of law, its legitimacy has not been disturbed in the interest of market integrity. SEBI has already converted its guidelines into regulations.
There is also a system of informal law making by way of circulars, which are distributed to the public, stock exchanges, companies and entities registered with SEBI. SEBI issues clarificatory letters to persons writing a letter to it with a fee. These no action letters and interpretive letters give the opinion of SEBI or affirm that no enforcement action will be recommended given a particular set of facts of the case and subject to the conditions as stated. On a more specific level, SEBI can pass directions to regulated entities under the powers granted to SEBI under section 11 read with section 11B of the SEBI Act 1992.
(d) Lastly, there are the stock exchange rules, regulations, by-laws and the listing agreement. The rules and regulations of exchanges and the listing agreement have statutory force as delegated legislation. Section 23E of the SCRA 1956 specifically penalises the violation of the listing agreement, which would otherwise be merely a contractual document between the company and the exchange. SEBI has powers under the SEBI Act over all listed companies and any person committing securities frauds in such companies. Fraud is covered in section 12 A of the SEBI Act, which reads as follows: Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; (d) engage in insider trading; (e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; (f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act. Fraud is also defined in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, as follows: fraud includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent, (7) deceptive behaviour by a person depriving another of informed consent or full participation, (8) a false statement made without reasonable ground for believing it to be true. (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. Enforcement Actions by SEBI There are three forms of remedies for securities fraud (a) Administrative enforcement action by SEBI (b) Criminal prosecution (c) In some cases, civil law remedies in courts either under the a statute or under common law SEBI has been authorised under the SEBI Act 1992, to take remedial actions (which are in addition to civil and criminal actions which can be sought in courts). SEBI also has administrative powers under SCRA, 1956 and the Depositories Act, 1996, however its powers are the widest and most developed under the SEBI Act. The broad categories of actions which can be passed by SEBI under the SEBI Act are as under: (a) Cease & Desist order under section 11D (b) Suspension or debarment of person registered as intermediary with SEBI under section 12(3) (c) Imposition of administrative penalty under sections 15A to 15HB read with section 15-I (d) Remedial directions whether interim or final under section 11 read with section 11B Role of Other Regulators Several other regulators may also have concurrent jurisdiction where economic offences are committed. Besides the role of RBI, IRDFA, PFRDA, and FMC with respect to sectoral offences, the MCA and their subordinate office, the Serious Fraud Investigation Office (SFIO) also often plays a vital role. While SEBI continues to play the lead role in dealing with fraud, the Companies Act 2013 places additional tools in the hands of SEBI and also bodies like the registrar of companies and the Serious Fraud Investigation Office. Under the Companies Act, 2013, the registrar of companies or SFIO can investigate fraud under section 206 or 211. A civil suit and class action by investors would lie against fraud under section 245. And penalty for fraud has been provided in section 447 as follows: 447. Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years. Explanation.For the purposes of this section (i) fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; (ii) wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled; (iii) wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled. Conclusion Indias securities regulations have evolved with and in response to various securities frauds. We have already discussed the impact the Harshad Mehta scam in the empowerment of SEBI. Similarly, the Ketan Parekh scam resulted in the SEBI (Amendment) Act of 2002, which gave SEBI the power to call for records from any bank, authority or board. It also empowered the regulator to inspect books of any listed public company. Post this amendment, SEBI could suspend trading of a security, bar persons and companies from accessing markets and suspend any office bearer in a stock exchange. It was also granted powers to attach, impound, and retain the proceeds of any transaction that was not by the book. SEBI could also specify requirements for listing and transfer of securities. Offences like insider trading and unfair trade practices were more clearly defined and expressly forbidden. Penalties of upto Rs 25 cr or three times the unlawful gains, whichever is higher, were allowed and jail terms from 1 to 10 years were introduced. Recently, the government of India has passed the Securities Laws (Amendment) Second Ordinance, 2013 which has further strengthened SEBIs hand in controlling fraudulent activity. Among other things, the Ordinance has given SEBI greater powers to crack down on ponzi schemes, seek call data records to check insider trading and carry out search and seizure operations. The amendments also give SEBI the legal backing to clamp down on unscrupulous entities "using newer methods to take gullible investors for a ride", as per a government statement issued at the time of promulgating the first ordinance.
Bibliography
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