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SEBI Regulatory Landscape: Powers, Processes, and Consequences

SEBI Regulatory Landscape: Powers, Processes, and Consequences

Part 1: Introduction

The Securities and Exchange Board of India, or SEBI for short, is a regulatory agency that was established by the government of India in the year 1992 under the acronym SEBI. Protecting the interests of investors in securities, as well as supervising and regulating the securities market, is the primary responsibility of the organisation. Additionally, it is responsible for regulating the process by which the stock market and mutual funds operate.

The Securities and Exchange Board of India (SEBI) has as its major mission the maintenance of the effective operation of the Indian Capital Market and the creation of an environment that is both transparent and secure for investors to invest their cash. This action was taken as a response to the proliferation of unethical practices in the financial sector during the tail end of the 1970s. These practices included insider trading, price manipulation, and violations of legislation governing stock exchanges. The government recognised the importance of establishing an institution to regulate the operations of the Indian Securities market and to reduce the number of unethical activities that were taking place. This was done in order to restore the faith of the general people.

In addition to its regional offices in New Delhi, Chennai, Kolkata, and Ahmedabad, the Securities and Exchange Board of India (SEBI) has its headquarters located in the Bandra Kurla Complex in Mumbai. In addition, the corporation maintains local offices in the cities of Patna, Kochi, Guwahati, Jaipur, and Chandigarh in addition to Bangalore.

The appointment of Ajay Tyagi to the position of Chairman of SEBI took place on January 10, 2017. The Securities and Exchange Board of India (SEBI) is structured in a hierarchical manner, with various divisions all being managed by their respective department heads. The organisation is managed by a single Chairman, is made up of seven boards of members, and is comprised of around twenty divisions. Several departments are included in the Securities and Exchange Board of India (SEBI), including Corporate Finance, Human Resources, Economic and Policy Analysis, Foreign Portfolio Investors and Custodians, Debt and Hybrid Securities, Information Technology, Enforcement, Investment Management, Legal Affairs, Office of International Affairs, Commodity Derivatives Market Regulation, and the National Institute of Securities Market, amongst others.

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Part 2: The Powers of SEBI

The Securities and Exchange Board of India (SEBI) is a powerful regulatory organisation that combines three key authorities into a single entity. These powers may be classified as quasi-executive, quasi-legislative, and quasi-judicial respectively.

Powers that are quasi-legislative SEBI is responsible for drafting regulations for the capital markets in its function as a quasi-legislative body. Specifically, this entails the formulation and approval of the by-laws that govern stock exchanges. A foundation for the operation of these exchanges is provided by the by-laws, which also ensure that they operate in a manner that is both fair and transparent.

Powers that are quasi-judicial Due to the quasi-judicial powers that it possesses, SEBI is able to issue rulings and directives. The Securities and Exchange Board of India (SEBI) is vested with the responsibility to adjudicate and render decisions on matters pertaining to the securities market. In the event that entities do not comply with its regulations, for instance, it has the ability to make them pay penalties.

Powers that are quasi-executive The implementation of the legislation that SEBI prepares is one of the quasi-executive duties that it performs. Among these are the pursuit of investigations and the implementation of enforcement actions. One example is that the Securities and Exchange Board of India (SEBI) has the authority to check the books of accounts of recognised stock exchanges and to request periodic returns. In addition to this, it is able to examine the books of financial intermediaries.

In addition, the Securities and Exchange Board of India (SEBI) have the authority to compel particular corporations to become listed on one or more stock exchanges. The purpose of this action is to ensure that the securities of these companies are accessible for trading to a greater segment of the general public, which will ultimately result in an increase in market transparency.

In addition, SEBI is responsible for the registration of brokers. Because of this, SEBI is able to keep a database of all of the active brokers in the securities market, which is an extremely important aspect. A further benefit is that it helps to ensure that only individuals who are suitable and appropriate are permitted to carry out the operations of a broker.

In conclusion, the Securities and Exchange Board of India (SEBI) possesses a wide range of capabilities that enable it to efficiently control and monitor the securities market. In the following section, we will talk about the procedure that SEBI uses to issue summonses, as well as the significance of complying with the system.

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Part 3: The Process of Issuing Summons

The act of issuing a summons is an essential stage in the process of commencing legal proceedings and disseminating information to individuals regarding their participation in a case. When it comes to the Securities and Exchange Board of India (SEBI), this procedure is absolutely necessary for the protection of the securities market and the implementation of its regulations.

Basis for the Legality of Summons When it comes to civil proceedings, the Code of Civil Procedure, 1908, and the Code of Criminal Procedure, 1973, govern the issuance of summonses in India. The former applies to civil cases, while the latter applies to criminal ones. The courts, attorneys, and litigants who are involved in the case are provided with guidelines by these codes, which explain the procedural features of the issue of summonses.

Submission of a Petition or Complaint Request It is necessary to submit a petition or complaint to the court that is responsible for the matter in order to commence legal procedures. In the process of submitting the essential documents and information on the case, the petitioner or complaint, through their legal agent, provides the relevant details and documents, including the names and addresses of the individuals involved.

The examination conducted by the court The documents are reviewed by the court when it has received the petition or complaint, and it is determined whether or not they comply with the prescribed legal standards. In the event that the court makes the determination that the petition or complaint is in order, it will proceed with the issuance of the summons.

Preparation for the Summons After the court has made the decision to issue a summons, it will then compile the documents that are required. It is common practice for the summons to include information such as the name and address of the court, the names of the parties involved, the case number, as well as the date and time that the parties are needed to appear before the court.

The Act of Serving Summons In the following phase, which is of the utmost importance, the summons is served on the parties involved. In India, a summons can be issued in a number of different ways, including through personal service, registered mail, and even, in certain instances, through electronic means. The process of personal service involves delivering the summons to the individual who is the subject of the summons, whereas registered post necessitates sending the summons through the mail along with an acknowledgment of receipt.

Recognisance of the Summons Served The party is required to confirm receipt of the summons by either signing or affixing a thumb impression to the acknowledgement section of the summons document. This must be done immediately after their receipt of the summons. It is evidence that the party has been properly informed of their role in the matter, and this statement acts as evidence.

Inability to Appear in Person In the event that a party that has been summoned does not show up before the court on the date that has been indicated, the court may take appropriate actions taking into consideration the circumstances. The issuance of a bailable or non-bailable warrant, the imposition of penalties, or the continuation of the case in the absence of the party’s presence are all examples of this approach.

Procedural Compliance and Procedures After the parties have responded to the summons by appearing before the court, they will have the opportunity to present their side of the argument, evidence, and witnesses. In the course of the proceeding, the court will listen to both sides of the argument and then make conclusions based on the merits of the case as well as the applicable legal provisions.

With the legislative duty of protecting the securities market and the interests of genuine investors or participants, the Securities and Exchange Board of India (SEBI) is granted the authority to issue summonses, which includes the ability to compel the production of documents or information. It is not possible to minimise the seriousness of the Noticee’s contempt for the summonses that were issued by SEBI and their subsequent refusal to cooperate with the inquiry process.

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Part 4:  Compliance and Non-Compliance

To ensure that the securities market continues to operate without any disruptions, it is of the utmost significance that the summons issued by SEBI be complied with. The SEBI Act equips the government with the authority to conduct investigations and to collect information and documents for the purpose of conducting investigations. The Securities and Exchange Board of India (SEBI) has been given the authority to issue summonses in order to compel the production of documents or information. Keeping in view the legislative mandate of protecting the securities market and the interests of the genuine investors or participants in the securities market, the Securities and Exchange Board of India (SEBI) has been granted the authority to issue summonses.

Relevance of Obligation to Comply For the purpose of bringing an inquiry to a successful conclusion, timely filing of information is of utmost importance. If an entity does not cooperate with the inquiry, it may be detrimental to the interests of investors and the securities market. This is because any delay in the investigation may have unintended consequences. The behaviour of the Noticee, which consisted of not paying attention to the summonses that were issued by SEBI and, as a consequence, not cooperating with the investigative process, is not something that can be taken lightly.

Resulting Consequences of Failure to Comply There may be severe repercussions for those who do not comply with the summonses issued by SEBI. The behaviour of the Noticee, which consisted of not paying attention to the summonses that were issued by SEBI and, as a consequence, not cooperating with the investigative process, is not something that can be taken lightly. This is especially true in situations where the appellants were involved in offences of such a serious kind that were damaging to the interests of legitimate investors as well as to the efficient and secure operation of the securities market.

The appellants’ statements were unable to be recorded because they did not reply to the second summons that was issued and because they did not appear before the Investigating Authority when they were required to do so. This in turn has made the investigation more difficult to complete. The appellants had failed to deliver the papers and information that were requested by summonses dated 01.04.2003 and 09.04.2003 respectively, which had consequently impacted the way in which the investigation was carried out.

If the appellants comply with one of the summonses that were issued on 02.07.2001 and 26.07.2001, respectively, this does not in any way exonerate them of their responsibility to comply with the subsequent summonses that were issued on various occasions. The appellants were obligated to provide the Investigating Authority with complete cooperation and to promptly produce any and all papers, records, and information that were requested for the investigation at various points in time.

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Part 5:  Penalties and Judgments

If an organisation does not comply with the regulations that it has established, the Securities and Exchange Board of India (SEBI) has the authority to levy penalties against such organisation. According to the Securities and Exchange Board of India Act, any individual who fails to provide the Board with any document, return, or report is subject to a penalty of one lakh rupees for each day that such failure persists, or one crore rupees, whichever amount is less.

As a result of non-compliance, penalties In a case involving Dwitiya Trading Limited, the Securities and Exchange Board of India (SEBI) imposed a monetary penalty of Rs. 5,00,000/- (Rupees Five Lacs only) on the Noticee, Jahman Dealers Private Limited, for failing to comply with the summonses that were issued on September 27, 2019, and subsequently two reminder summonses that were issued on October 23, 2019, and November 01, 2019. It was made very clear that the Noticee was not willing to participate with the inquiry being conducted by SEBI, which is a statutory regulator. Defaults of this nature pose a significant threat to the regulatory framework. In situations like these, taking a more tolerant stance would be contrary to the meaning of section 15A (a) of the law.

Judgements of Notable Importance Several important judgements have been handed down in relation to the penalty for non-compliance with SEBI’s summons from time to time. For example, in the case of Kunnamkulam Paper Mills Ltd. v. SEBI, the appellants were directors of the firm that violated the SEBI (Disclosure and Investor Protection) Guidelines, 2000 by allotting a high number of equity shares. This was done in contravention of the guidelines. SEBI issued a directive to the appellant, directing them to return the money obtained from the investors in accordance with the problem, together with interest5. Nevertheless, the appellants did not comply with the same, which resulted in the Securities and Exchange Board of India (SEBI) initiating a criminal prosecution by means of a private complaint in accordance with Section 24 (1) read with Section 27 of the SEBI Act, 1992 (SEBI Act), 19925. As a result, the appellants were found guilty after the charge was framed for the commission of an offence under Section 24. The accused were each had to pay a fine of fifty lakhs of rupees, and if they failed to do so, they were sentenced to simple imprisonment for a term of one year.

In a different case, Manoj Gokulchand Seksaria v. State of Maharashtra, the petitioner challenged the orders that were issued by the Special Court (CBI) taking cognizance and issuing process against him in relation to the FIR that was registered by the Chief Justice of the Nation, Securities and Exchange Board of India (SEBI). The petitioner challenged these orders under Article 227 of the Constitution of India read with Section 482 of the Criminal Procedure Code. 

The First Information Reports (FIRs) were filed in response to allegations that certain brokers and individuals working for Yes Bank Limited had allotted initial public offerings (IPOs) under fictitious names in order to corner more shares that were intended for retail investors and then sell them on higher returns after the listing, thereby enriching themselves with profits that were not justified. The corporations opened demat accounts under false and benami names in order to corner the largest quota of shares that were available in initial public offerings (IPOs). 

During this time, in April of 2007, the Securities and Exchange Board of India (SEBI) released a circular that included rules for consent orders and the consideration of requests for the composition of offences. By doing so, the Securities and Exchange Board of India (SEBI) was granted the authority to combine civil and criminal proceedings that it had initiated or was investigating against a variety of parties who had been prosecuted for violating SEBI statutes. Additionally, the petitioners took advantage of the aforementioned method by using an amount of around 2.05 crores of rupees as the disgorgement amount towards the reduction of the settlement expenses. Following this, the Securities and Exchange Board of India (SEBI) issued a consent order, which resolved all of the processes that were still outstanding under Section 11-B of the SEBI Act. In light of this, the petitioner submitted a writ petition in an effort to have the criminal proceedings that were initiated on the basis of the same set of claims that were ultimately compromised overturned.

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Part 6: Case Study

Allow me to take a look at a recent instance in which a penalty was imposed for failing to comply with a summons issued by SEBI. According to the decision that was handed down on July 23, 2021, the case is known as “Prakash Gupta vs. Securities and Exchange Board of India.”

Brief history Prakash Gupta, the appellant, was charged with committing an offence in accordance with Section 24 (1) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the “SEBI Act”). Additionally, the appellant requested that the offence be compounded in accordance with Section 24A. The application, on the other hand, was denied by the Additional Sessions Judge, who upheld the objection of the Securities and Exchange Board of India, which stated that the offence could not be compounded without the board’s agreement.

The Decision of the High Court During the revision process, the High Court of Delhi upheld the order that was issued by the Trial Judge. It was decided by the High Court that the trial had progressed to the point where the last arguments were being presented, and that the plea for compounding could not be granted without the approval of SEBI.

Decision Made by the Supreme Court In its decision, the Supreme Court of India separated the case into many categories for the purpose of analysis. These sections included the appeal, the initial public offering (IPO), the investigation conducted by SEBI and the criminal complaint, the motion for compounding, the representations made by counsel, and the analysis.

It was brought to the attention of the Supreme Court that the appellant is currently facing charges for an offence that is outlined in Section 24 (1) of the Securities and Exchange Board of India Act, 1992 (often known as the “SEBI Act”). Additionally, the appellant requested that the offence be compounded in accordance with Section 24A. The application was denied by the Additional Sessions Judge in a judgement dated November 15, 2018, and the objection of the Securities and Exchange Board of India, which said that the offence could not be compounded without the board’s agreement, was upheld.

The conclusion is that this case serves as a reminder of the significance of complying with the restrictions that are set forth by SEBI, as well as the severe penalties that can arise from failing to comply with these regulations. In addition to this, it emphasises the role that the judicial system plays in maintaining the honesty of the securities market and safeguarding the interests of investors.

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Part 7: Conclusion

In this article, we have discussed the powers and responsibilities of the Securities and Exchange Board of India (SEBI), as well as the procedure of issuing summonses and the consequences of non-compliance, which include penalties and judgements linked to the matter.

When it comes to ensuring that the securities market continues to operate in an honest manner, SEBI, as a regulatory organisation, plays a significant role. Because of its capabilities, which range from quasi-legislative to quasi-judicial to quasi-executive, it is able to regulate and monitor the market in an efficient manner.

One of the most essential tools that SEBI uses to ensure compliance with its regulations is the practice of issuing summonses. In order to ensure that the securities market continues to operate efficiently, it is imperative that these summonses be complied with. The failure to comply with regulations can result in serious consequences, including significant fines.

We gained an understanding of how failure to comply with the laws set forth by the Securities and Exchange Board of India (SEBI) might result in legal procedures and penalties by examining the case study titled “Prakash Gupta vs. SEBI.” By serving as a reminder of the significance of compliance and the role that SEBI plays in protecting the interests of investors, this case serves important purposes.

One cannot exaggerate the significance of the Securities and Exchange Board of India’s (SEBI) involvement in preserving the integrity of the securities market. It is not only a legal requirement, but also a prerequisite for the market to operate in a manner that is both fair and transparent, and compliance with its norms is required.

 

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