Changes in SEBI Act: comprehensive and balanced report by Kania Committee

An investor protection fund under the Act suggested for investor education AN EXPERT group under Justice M. H. Kania was constituted in August 2004 by the capital market regulator to suggest improvements to the Securities and Exchange Board of India Act 1992. The experts had the benefit of a background paper prepared by an internal team of SEBI. Pointing out that securities legislation has to be proactive to take care of the needs of a dynamic market, the group felt that despite three amendments in a decade, there were lacunae in the Act. The group's recommendations that have been put up on SEBI's website for comments are comprehensive and include amendments for incorporating new provisions as well as changing existing provisions of the Act. Since these two will inevitably impinge on existing laws in related areas (say company law) the committee has suggested changes to those as well. New provisions An investor protection fund figures high in the list of recommendations. The concept is not new in India. There is already such a fund created under the Companies Act. In the case of the capital market, the stock exchanges run such funds, often with mixed results. More recently the Pension Fund Regulatory and Development Authority has been authorised to set up a fund, whose corpus will be used to educate subscribers to the new pension schemes and protect their interests. The Kania committee wants a similar fund under the SEBI Act to be set up for the purpose of investor education and awareness. Its corpus, to be made up of unclaimed dividend or interest under any mutual fund scheme, collective investment scheme or venture capital for more than seven years; any unclaimed money or securities of a client lying with an intermediary for more than seven years; monies lying unutilised in the investor protection funds of stock exchanges and all sums realised as penalties. The corpus of the fund can be used to compensate small investors in case of fraud or misrepresentations. Another investor friendly recommendation is to incorporate a provision in the Act for providing nomination facilities to unit holders of mutual funds and collective investment schemes. This removes a major lacuna and brings these categories of investors on a par with shareholders and debenture holders and unit holders to a large extent. The group has viewed with favour the requests received by SEBI for providing advance ruling on aspects of the SEBI Act and regulations. An advance ruling is better than the informal guidance now available with market participants it provides better legal status and moreover is binding on SEBI. Market participants can now be sure of the outcome of a particular transaction under the securities law. No sweeping changes have been contemplated for extending SEBI's jurisdiction. The group recommends that SEBI needs to be empowered suitably to frame regulations with retrospective effect only in procedural areas and that too for providing relief and benefit and not for imposing new liabilities and obligations. Nor does the group contemplate an amendment to the SEBI Act to give it an overriding effect over other laws. Even in an area where substantial malfeasance has been observed — such as fraudulent issue of securities and excess dematerialisation — the group, while agreeing that SEBI should be empowered to declare such acts as null and void, would prefer that such power be exercised by an independent body or a civil court rather than by SEBI. However, if the expert group has its way SEBI will get powers to file winding up petitions against intermediaries that have gone bankrupt or whose continuance is detrimental to the interests of the market. Another important new provision that will be added to the SEBI Act will protect investors' money given to an intermediary on trust from being attached or seized for whatever reason. This would bring Indian regulation in line with what obtains in the developed world. Intermediaries The proposal to include asset management companies, stock lenders and STP service providers in the gambit of regulation is to be commended. These are intermediaries which have been gaining in importance recently. SEBI will be empowered to seek information from professionals, without infringing on the latter's rights to confidentiality vis-a-vis his client. In case such professionals furnish false information they can be debarred from appearing before SEBI which will also get the necessary powers to adjudicate. Market information can be shared with regulators of other countries in certain cases. Under this category of recommendations, the group has touched upon a number of issues connected with enquiry and the role of appellate authority. Changes in related laws To avoid overlap in certain key areas between SEBI and other bodies such as company law administration, it is necessary to clarify the respective jurisdictions. However, the Kania committee would prefer a decision taken by the Government through a policy statement. Even in the matter of conferring jurisdiction under the Securities Contracts Regulation Act the group has left the decision to the Government. At present the jurisdiction is divided between the Reserve Bank of India (money market, repos, debt market) and SEBI. Consolidation of securities laws into one comprehensive legislation on the lines of the British Financial Services and Market Act 2000 will be highly desirable but here again the Government has to take a view. C. R. L. NARASIMHAN