Sebi is currently vested with powers equivalent to that of a civil court and passes penalty orders against entities that commit market offences. However, if it wants to initiate criminal prosecution against any such market perpetrators, it has to go through the regular courts. In the past few years, Sebi hasn’t used its prosecution powers too often.
But in the new Sebi Act that’s in the works, the government is planning to make it mandatory for the regulator to prosecute certain kinds of offences.
The idea is to create a greater deterrent against fraud by market entities. This change is in line with the Companies Act, under which certain kinds of violations can’t be settled through penalties.
Sebi and the finance ministry didn’t respond to queries.
“In all developed countries, security market frauds like insider trading result in prosecution. Although Sebi has similar powers, the same have been used by the regulator very rarely,” said a person with direct knowledge of the matter. “If the proposed changes are finalised, Sebi will be mandated to prosecute the serious market offenders.”
‘Special Courts Needed’
According to Sebi’s annual report for FY21, the market regulator initiated proceedings in 1,763 cases, out of which prosecution was started in three. In FY20, Sebi initiated action in 2,070 cases, of which only 10 involved prosecution, data showed.
Delays in proceedings and the higher threshold for evidence in regular courts were two key reasons why Sebi has chosen to rarely exercise prosecution powers, said market participants. “Regular court proceedings take years to conclude, plus Sebi will also be required to prove to the court beyond any reasonable doubt that the accused has violated criminal penal code provisions,” said one of the persons cited above. “But any such tweaks should also be accompanied by creation of more special courts for Sebi, since judges adjudicating on such cases would need some technical knowledge on the securities market.”
To be sure, the market regulator can initiate proceedings against market offenders in any criminal court of the country depending on the location of the accused. But the Mumbai sessions court has a special Sebi bench, which hears security market-related cases. If the number of prosecution cases goes up, there will be a need to create more such special benches, experts said.
Not all offences, however, will lead to criminal prosecution. For instance, there may not be a criminal angle to disclosure lapses by a company or a broker not managing the minimum margins required. These offences will continue to be adjudicated by Sebi and will result in penalties. On the other hand, offences like insider trading or mismanagement of investor money may have criminal intent to defraud investors. In such cases, prosecution powers may be used.