Mumbai, January 4, 2017

220 out of 750 cases heard at SAT were remanded back to Sebi. This is a jump over the 20% and 9% referral rate seen in the last two years, respectively

Orders passed by the Securities and Exchange Board of India (Sebi) seem to be losing their edge because of the added collective investment scheme (CIS) oversight for the markets regulator.

In 2016, one out of every three Sebi orders that was challenged at the Securities Appellate Tribunal (SAT) was referred back to the capital markets regulator by the appellate body. In all, 220 out of 750 cases heard at SAT were remanded back to Sebi. This is a jump over the 20% and 9% referral rate seen in the last two years respectively.

“This calls for a quality check at Sebi. Sebi needs to take a pause and ask itself if this kind of orders at all need to be passed,” said Sumit Agrawal, a former Sebi official and now, partner at Suvan Law Advisors. “This entire issue raises a big question whether this entire regime of CIS needs to be reviewed.”

An email sent to Sebi on Thursday remained unanswered.

According to two people familiar with the regulator’s adjudication proceedings, including a Sebi official, officers at the regulator find it difficult to ascertain the exact amount of illegitimate gains made by defaulters in CIS activities.

This is owing to the fragmented way in which these activities have grown over the years and often the penalties imposed by Sebi are either based on complaints filed by aggrieved investors or some receipts and documents with the registrar of companies.

This opens up the possibility for orders to be challenged.

“Since the exact gains made by alleged defaulters are often not fully verified and the ultimate beneficiaries of such illegal gains are not identified with adequate proofs, the orders and the penalties imposed by Sebi may often fall weak when challenged at the court,” said the first person.

One such case is the illegal fund-raising activities of PACL Ltd. On 1 November, SAT set aside Sebi’s order imposing a Rs7,296 crore penalty on the company and its four directors. While doing so, SAT has directed the regulator to “reconsider the matter afresh”.

Sebi’s penalty order came after a previous order in 2014 where PACL was asked to refund Rs49,100 crore it had collected through illicit schemes over 15 years.

SAT said even if the adjudication officer (AO) considers the appellants to be “highly unscrupulous and that the appellants have indulged in fraudulent and unfair trade practices, it was obligatory (for the) AO to determine the quantum of profits made in such practice and thereafter ...impose penalty under Section 15HA of the Sebi Act”.

“Most of the cases in which orders have fallen short of quality relate to CIS activities. If the issue there is solved, I feel Sebi has a sufficiently large and competent team to deal with adjudication proceedings against defaulters and pass quality orders,” said Sandeep Parekh, founder, Finsec Law Advisors and a former executive director at Sebi.

The larger issue, according to Parekh, is Sebi’s inherent inability to regulate CIS, which ideally should be regulated by state authorities.

“Sebi is not sufficiently equipped to regulate all deposit taking activities. It cannot go to all the small locations in the country and understand the varying nature of fund-raising and ponzi scheme businesses that have grown over decades,” Parekh said. Even though Sebi has passed orders against several CIS entities, it may only be 5% of the overall size of such schemes, he added.

[Livemint]