Mumbai, April 19, 2018

Some Sebi employees want the government to remove Clause 15JA of Sebi Act that says all money collected by Sebi as penalties must be remitted to the Consolidated Fund of India

The Securities and Exchange Board of India (Sebi) is in talks with the ministry of finance to prevent an outgo of around Rs4,400 crore from its accounts to the government, fearing that it will impact its autonomy as regulator and hinder market development projects, said two people with direct knowledge of the matter.

“In a meeting on 2 April, Sebi discussed the issue with finance ministry officials and sought to preserve its autonomy like the Reserve Bank of India (RBI) and to prevent an outgo of any funds, including service tax,” one of the two people cited above said, requesting anonymity.

A group of employees at Sebi are seeking that the government remove clause 15JA of the Sebi Act, said the second person, also requesting anonymity. The clause says all money collected by Sebi as penalties should be remitted to the consolidated fund of India. According to Sebi’s latest statement of accounts, in the financial year 31 March 2018, the regulator had Rs1,970 crore in its so-called general fund. When the interest on this amount is added, it totals to at least Rs3,000 crore, the two people cited above said. “Sebi wants this general fund to remain with the regulator. Sebi is an autonomous authority and the law says Sebi is independent to earn and utilize its own income,” said the first person.

Sebi is also mulling asking the government that an amount of around Rs650 crore that has been remitted to the government in the past three years should be returned to the regulator, the two persons said.

Sebi has collected this amount from penalties on market defaulters, bidding fees (for allocation of investment limits to foreign investors), disgorgement of illegal gains by defaulters and various other capital market measures. Additionally, Sebi wants the government to stop demanding service tax dues worth around Rs300 crore from the market regulator.

“Sebi uses these funds for market development and investor awareness. Sebi is faced with Rs300 crore of service tax dues (including interest). The finance ministry is refusing to step in to aid the regulator against tax demand. Sebi, in its board meet on 28 March, had also deliberated on whether it would challenge the demand notices or just cough up the funds,” said the second person.

Sebi was issued a second service tax show cause notice in the last week of February, which includes the service tax demand for fiscal 2015-16. While the earlier demand stood at Rs130 crore (including interest), it has increased to Rs213 crore (with interest).

“Sebi is in the process of replying to the second show cause. It does not include a penalty for late payment, which at the rate of 30% will be an additional Rs70 crore. Sebi is considering three legal options to combat the issue—file an appeal in the high court against the show cause notice challenging the merit of show cause notice; appeal in the tribunal against the demand notices when it is served, or pay up the entire amount,” said the second person.

An email seeking comments sent to Sebi did not elicit any response.

Sandeep Parekh, founder and CEO of Finsec Law Advisors, said, “While Sebi should be allowed to charge a fee from market participants, a large surplus probably indicates that it has charged more than it should have. The regulator should relook at its current fee structure so that the market becomes more competitive. While Sebi should be allowed to keep a reserve, it should continue to remit penalties to the government, as it should not be incentivised to charge higher penalties to bolster its accounts.”