Capital market regulator, the Securities and Exchange Board of India, will soon be able to attach the properties of fraudsters, file application for winding up of market intermediaries under the Companies Act to recover money that investors have lost and will get powers similar to that of a civil court.
With these significant powers, which Sebi's board approved by recommending amendments to the Sebi Act and the Securities and Contract Regulation Act, the market regulator will become stronger and more autonomous. There is also talk of doubling the amount of maximum penalty which Sebi can levy on wrong doers from the current Rs 50 crore (Rs 500 million).
The recommendations for change are the result of over two years of deliberations among various ministries, since the Sebi board consists of representatives from the ministries of finance as well as company affairs. In fact, it is only a matter of time before the Ministry of Finance introduces a bill in the Parliament to amend the respective acts.
The basic intention is penalising wrong doers and taking severe action against them. It is expected that this can act as a deterrent for others as well as help, wherever possible, in recovering money that investors have lost.
It has been proposed that Sebi can file a winding-up petition against intermediaries after issuing notice for such an action. The proceeds which are recovered as a result of the winding-up action can be distributed among investors on a pro rata basis after making a preferential payment under the Companies Act.
In case of funds that have been diverted fraudulently, or in the case of an entity disappearing after raising money from investors, Sebi will be able to attach the assets of such issuers/companies or persons/promoters through the new powers. The market regulator will then be able to auction the said assets through a court of law.
In the aftermath of the Satyam fraud, Sebi found itself handicapped and it is expected that such powers will help the market regulator to take penal actions. In case of Satyam, Sebi was the most obvious authority to investigate the scam. But it could interrogate the Rajus - promoters of the company - after a considerably long time.
Since intermediaries are becoming a global phenomenon in operations and boundaries apply only to regulators, the Sebi board has also recommended to the finance ministry that Sebi be accorded with powers that are equivalent to that of a civil court. This move will give Sebi the right to call for information from any person or company in relation with an investigation or an inquiry launched by it.
At present, Sebi only has power to call for information from persons associated with the securities market, banks and other statutory authorities. Civil court-like powers will ensure that a person from whom information has been asked obeys the market regulator, once it is endowed with such powers.
The move to empower Sebi was initiated when Damodaran was its chairman. After a lot of deliberation with the concerned ministries, the recommendations have been prepared and, according to a source familiar with the development, the finance ministry wrote a letter to Sebi suggesting that the matter be expedited so that the an amendment bill can be introduced in the Parliament as soon as possible.