This article has been written by Srishti Mukherjee pursuing a Bank Law Officer Exam – Preparation Course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The Securities and Exchange Board of India, also known as SEBI, is a regulatory body that plays a vital role in maintaining stable growth and development of the Indian capital market by protecting investors’ confidence, preventing malpractice, and providing transparency. Being established in the year 1988 and given statutory power in the year 1992, SEBI has its main headquarters in Mumbai and regional offices throughout the nation’s top-tier cities like New Delhi, Kolkata, Ahmedabad, and Chennai.  

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Background of SEBI

The Securities and Exchange Board of India (SEBI) is a regulatory body that reports to the Ministry of Finance and maintains the Indian stock market. It started as a non-statutory body that was established by the government of India on April 12, 1988. It was later established as a statutory body and given statutory powers to regulate the stock market through the SEBI ACT, 1992, by the Indian Parliament, which came into force on January 30, 1992. Before the establishment of the Securities and Exchange Board of India (SEBI), the stock market of India was regulated by the “Controller of Capital Issue,” administered by the Capital Issue (Control) Act of 1947, which was repealed in May 1992.

Objective of SEBI

The Securities and Exchange Board of India (SEBI) was established to prevent unfair practices, safeguard investors’ interests, and enforce regulation in the security market. SEBI mainly operates with three core objectives:

Protection of investors

To ensure that the investors are protected from fraud and malpractice. SEBI ensures the protection of investors by providing timely and accurate information that is relevant and reliable for the investors during investments in the public domain to have smooth and safe transactions and prevent them from unfair trade practices.

Promote market development

SEBI to increase development, promotes the stock market by introducing new products, modernising infrastructure, and encouraging a greater number of investors to participate.

Regulating the security market

SEBI’s main objective is to regulate the security market. By regulating the market, it ensures the proper and fair conduct of the market as well as the orderly functioning of the market. This includes regulating stock exchanges, portfolio managers, brokers, and other intermediaries in the security market.

Apart from these three main objectives, SEBI has several other objectives, such as promoting fair practices, education, awareness, etc.

SEBIs’ role in the Indian economy therefore becomes crucial to ensuring safe, fair, and transparent transactions of investment in the Indian capital market.

Jurisdiction of SEBI

The Securities and Exchange Board of India (SEBI) was established for the growth and development of the stock market but with development come unfair practices. To ensure that these unfair practices or malpractices are not exercised in the market and the interests of the investors are protected, the SEBI is provided with certain jurisdiction of its own:

Quasi-judicial

SEBI has the authority to act as a judicial body and adjudicate cases involving fraud and unfair practices in the security market. It can investigate violations, conduct hearings, render judgements, impose penalties, and take legal action.

Quasi- executive

SEBI has the executive powers that enable it to perform the executive functions necessary to regulate and supervise the securities market. SEBI can inspect the books maintained by the accounts and important documents of other participants, such as brokers, listed companies, and so on, to accumulate evidence of violation and fraud. SEBI continuously monitors market activities to identify irregularities and ensure that the market is free from unfair trade, providing transparency.

Quasi- legislative

SEBI quasi-legislative powers allow SEBI to create rules and regulations overseeing the security market. SEBI can develop and implement guidelines and regulations that are important for every participant to follow. SEBI constantly updates its regulations to adapt to the changing market, keep investors well-informed and provide transparency in fair trading.

SEBI’S power to investigate and enforce

The Securities and Exchange Board of India (SEBI) is a regulatory body that is established with the core objectives of protecting the investor’s interest, promoting market development, and regulating the security market. To maintain the security market and perform these duties effectively, SEBI is granted extended power of investigation and enforcement in the confines of the security market. However, to exercise these powers, SEBI needs to balance such power between strict enforcement and procedural fairness to protect market integrity and investor confidence.

Power of investigation

According to Section 11C of the SEBI Act, 1992, whenever the SEBI has reasonable grounds to believe that any act of fraud or unfair practices are being dealt with inside the market or any individual associated with the market has violated any rules and regulations or is against following any provision under this act, it may order in writing an investigating authority under Section 11C(1) to investigate such individual or intermediary. Investigative power empowers the regulator to take a wide range of actions to investigate violations of securities law. Such power allows the authority to:

Summon and examine individuals

Section 11C(3) of the Securities and Exchange Board of India (SEBI) Act, 1992, empowers the investigating authority with the ability to summon and examine any individual or intermediary under oath in order to gather information and evidence necessary for an investigation. This authority is specifically granted to ensure that the investigating authority can thoroughly and effectively carry out its duties.

The investigating authority can issue a summons to any person or intermediary that it believes possesses relevant information or can assist in the investigation. The summons can require the person to appear before the investigating authority at a specified time and place to provide testimony under oath. The person may also be required to produce any documents or records that are relevant to the investigation.

The authority to summon and examine individuals and intermediaries under oath is a crucial investigative tool that allows the investigating authority to obtain information from a wide range of sources. This information can be used to identify potential violations of securities laws and regulations, gather evidence against individuals or entities suspected of wrongdoing, and understand the underlying causes of misconduct.

The investigating authority can also use the information obtained through summons and examinations to identify potential witnesses and build cases against individuals or entities involved in securities law violations. Additionally, the information can assist the investigating authority in developing strategies to prevent future violations and enhance the overall effectiveness of the regulatory framework.

Demand production of document

Section 11C(5) of the SEBI Act of 1992 specifically authorises the investigating authority to demand books, accounts, and any other document that may be relevant to the investigation.

Key elements of Section 11C(5):

  1. Authority to demand documents:
    Section 11C(5) explicitly authorises the investigating authority to demand books, accounts, and any other documents that may be relevant to the investigation. This broad scope of document collection ensures that the investigating authority has access to vital information and evidence necessary to uncover potential violations or irregularities.
  2. Relevance to investigation:
    The authority to demand documents is not unlimited. The documents requested must have relevance to the investigation being conducted. The investigating authority must establish a connection between the documents sought and the specific matters under investigation to ensure that the document collection is targeted and focused.
  3. Issuance of summons:
    To exercise this authority, the investigating authority typically issues a summons or formal notice to the person or entity in possession of the relevant documents. The summons specifies the documents required, sets a deadline for their submission, and may include additional instructions or requirements.
  4. Obligation to comply:
    The recipient of the summons is legally obligated to comply with the investigating authority’s demands. Failure to comply may result in legal consequences, such as fines, imprisonment, or both. This obligation ensures that the investigating authority has access to the necessary documents to conduct a thorough investigation.
  5. Confidentiality and protection of information:
    Section 11C(5) also recognises the importance of maintaining confidentiality and protecting sensitive information during the investigation process. The investigating authority is responsible for ensuring that the documents and information obtained are handled securely and in accordance with applicable laws and regulations.
  6. Judicial oversight:
    The powers granted to the investigating authority under Section 11C(5) are subject to judicial oversight. If a person or entity believes that the document demand is excessive, irrelevant, or violates their rights, they may seek legal remedies through appropriate channels, such as filing a petition in court.

Interrogation

Section 11C(6) states that an investigating authority can order any individual or intermediary to appear for answers they think are relevant to the investigation. Any person who refuses to be present without any reasonable cause can face punishment that might extend up to one year of imprisonment with a fine, which may extend up to one crore rupees.

Conduct searches and seizures

Section 11C(8) of the Securities and Exchange Board of India (SEBI) Act empowers the investigating authority with significant powers to aid in the conduct of investigations. This provision authorises them to search any premises or seize any document, book, or asset that they deem relevant to the investigation. The purpose of this provision is to prevent the tampering or destruction of evidence that could hinder the investigation process.

The investigating authority has the discretion to determine what constitutes relevant material for the investigation. This flexibility allows the authority to gather a wide range of evidence, including financial records, correspondence, electronic data, and physical assets. The authority may also search and seize items from various locations, such as offices, homes, and warehouses.

The power to search and seize is subject to certain safeguards to protect the rights of individuals and entities. The investigating authority must obtain a warrant from a competent court before conducting a search or seizure. The warrant must specify the premises to be searched and the items to be seized. Additionally, the authority must provide a copy of the warrant to the person or entity whose premises are being searched or whose assets are being seized.

The authority must exercise its powers under Section 11C(8) reasonably and in accordance with the law. Any abuse of power or violation of due process rights could result in legal challenges and potential consequences for the investigating authority.

SEBI’s power of enforcement

After the completion of the investigation stage, if evidence is found against anything that is considered a violation under Section 11C(1), SEBI has several types of penalties provided under Section 15A to Section 15HB that it can enforce on the offender:

Monetary penalties

Under Sections 15HA and 15HB, SEBI is empowered to impose money or fine penalties for unfair trades, fraudulent cases, and contraventions where no specific penalty is described.

Cease and desist proceeding

Section 11D empowers SEBI to order any entity to cease work if violation allegations are proved against such work after inquiry.

Suspending and cancellation registration

Section 12(3) empowers SEBI to suspend or cancel the registration of any intermediaries for violation of any rule, regulation, or act.

Initiative prosecution

Section 24 empowers SEBI to initiate prosecution and imprison or impose a fine on any offender found to be violating the act, rules, or regulation.

Disgorgement

Section 11B empowers SEBI to order an offender to disgorge the profit gained through illegal activities, which helps ensure that the capital gained from the unfair practice does not go to the offender.

Procedural safeguards

The Securities and Exchange Board of India (SEBI) is endowed with a broad range of powers to regulate and supervise the Indian securities market. These powers include the authority to investigate violations of securities laws, initiate enforcement actions, impose penalties, and issue regulations. While these powers are essential for SEBI to effectively carry out its mandate, it is also crucial to ensure that these powers are exercised fairly and transparently and that no individual falls victim to their abuse.

To this end, SEBI has implemented a number of procedural safeguards to protect the rights of individuals and entities subject to its regulatory powers. These safeguards include:

  1. Notice and hearing: Before SEBI can take any enforcement action, it must provide notice to the individuals or entities involved and give them an opportunity to be heard. This includes the right to present evidence, cross-examine witnesses, and make legal arguments.
  2. Fairness and objectivity: SEBI is required to act fairly and objectively when exercising its powers. This includes avoiding bias, prejudice, or favoritism, and taking into account all relevant factors when making decisions.
  3. Transparency: SEBI is committed to transparency in its operations. This includes making public its decisions, regulations, and enforcement actions, as well as providing access to information through its website and other channels.
  4. Right to appeal: Individuals and entities affected by SEBI’s decisions have the right to appeal to the Securities Appellate Tribunal (SAT). The SAT is an independent quasi-judicial body that reviews SEBI’s decisions and can overturn them if they are found to be unlawful or unreasonable.
  5. Independence: SEBI is an independent body that is not subject to the control or interference of the government or any other external entity. This independence is essential for SEBI to exercise its powers impartially and without fear or favor.

These procedural safeguards play a vital role in ensuring that SEBI’s powers are used fairly and transparently and that the rights of individuals and entities are protected. They also contribute to maintaining the integrity of the Indian securities market and promoting investor confidence.

Investigating process

  • The regulatory framework cannot impose penalties or fines without issuing a show-cause notice to the offender. A chance is given to the offender to present their side of the case for the violations listed in the notice and defend themselves. This is done to make sure every party has a fair chance of voicing their side and that fair justice is served.
  • During this process, SEBI secures the services of an adjudicating officer whose main agenda is to hear out both parties and make a decision based on evidence and legal principles without being biassed towards any of the parties.

Transparency and internal review

  • To ensure no decision of SEBI goes against an individual’s fundamental rights, SEBI is required to clearly state all the reasons why and how a decision is finalized, and these reasons are made public with the decision to maintain transparency as well as to dismiss any uncertainty and gain the investor’s confidence.
  • To keep SEBI’s power from being misused or abused by authorities, internal reviews are done to keep everything in check and fair.

Appeal against SEBi’s decision 

  • Any party that thinks that the order given by SEBI was not fair can raise an appeal in the Security Appellate Tribunal (SAT). The security appellate tribunal will examine the legal principles and evidence and change or uphold the decision, therefore providing an independent review itself.
  • These decisions can further be appealed in the High Court and Supreme Court, showcasing the fact that different remedies are available for anyone who is affected by SEBI’s decision.

Legal Challenges

Despite SEBI having such a thorough investigative and enforcement process and with such detailed procedural safeguards, there are still many ways in which SEBI faces legal challenges. It can be:

  • One of the most common legal challenges that SEBI faces is not issuing proper notice,  resulting in an improper hearing and violating the very first procedural safeguard of the issue of notice for a fair decision.
  • Another legal challenge that SEBI faces is an excessive amount of fines. SEBI can impose a larger sum of fines for violations that are not severe, resulting in parties seeking judicial relief.
  • Another legal challenge that SEBI faces is over jurisdictional disputes. Another regulatory body can challenge the actions of SEBI, whether they come under SEBI’s jurisdiction or not.
  • Another legal challenge that SEBI faces is the lack of evidence, where it becomes common for the aggrieved party to argue that SEBI has not collected a sufficient amount of evidence for the case, resulting in unfair justice.
  • Another one of the common legal challenges that SEBI faces is accusations of being biassed, where an aggrieved party can argue that SEBI is biassed and did not provide fair justice, seeking a review of the case from the court.

Conclusion

The Securities and Exchange Board of India (SEBI) is a regulatory body created to maintain the securities market and regain investors’ confidence, promote the development and growth of the market, regulate the market to free it from any fraud and unfair practices, and provide transparency to protect the investors.

SEBI has investigative and enforcement powers that help it regulate the market and overview other essentials it should survey, such as protecting investors, maintaining transparency, and preventing fraud and unfair practices. However, SEBI must balance the use of these powers with procedural safeguards so that fair justice can be served to everyone.

Though SEBI has procedural safeguards to balance out its powers, it still faces many legal challenges, such as lack of evidence, lack of proper notice, and so on.

References

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