SEBI’s Committee on Fair Market Conduct, constituted to make recommendations for improving the integrity of the securities market and to improve fair market conduct, submitted its final report in August 2018. The Report has suggested numerous revisions to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Trade Market) Regulation 2003 (the regulations governing market abuse and manipulation) and the SEBI (Prohibition of Insider Trading) Regulations 2015 (the regulations governing insider trading). The recommendations are inter alia based on learnings from recent SEBI investigations and include both broad concept level changes and precise revisions to specific restrictions. A number of these recommendations have already been implemented by way of amendments to the above specified regulations and look certain to assist SEBI in their future investigations and enforcement actions. A greater focus on cases involving diversion or siphoning of funds from listed companies by the controlling shareholders is also expected.
Some of the other recommendations of the Fair Market Conduct Committee include: (i) fast-track procedures for investigation and enforcement in sensitive case, new types of manipulation or cases involving large-cap companies; (ii) empowering SEBI to intercept telephone calls to aid in investigation; and (iii) signing of a memorandum of understanding among the various regulatory bodies and enforcement agencies for information-sharing and joint investigation in certain cases. If these measures are implemented, they are bound to greatly impact several facets of securities litigation in the years to come.
Further, SEBI has also introduced restrictions on transferability of shares held in physical form and has implemented measures mandating disclosures by listed companies of their significant beneficial owners (persons holding stakes greater than 10 per cent either directly or indirectly). These measures are also likely to prevent fraudulent transactions and assist SEBI in investigations.
The Ministry of Corporate Affairs had constituted a committee to review the offences prescribed under the 2013 Act, to recategorise offences that are technical defaults or procedural lapses as civil liabilities. The committee has inter alia suggested that, to relieve special courts from adjudicating routine offences, 16 offences be brought under the jurisdiction of an in-house e-adjudication framework wherein defaults would be subject to levy of penalty by the authorised adjudicating officer (ie, Registrar of Companies). This is expected to reduce the case load of the special courts thereby assisting in speedy disposal of serious offences.
One of the most significant reforms in the past few years has been the enactment of the comprehensive IBC. While the IBC has been successful in dealing with the large cases, the overwhelming number of applications has resulted in delays in resolution of small and medium-sized cases. Interplays between the IBC regime and the regulations prescribed by SEBI are constantly evolving. SEBI has introduced provisions in its regulations to assist in giving effect to resolution plans approved through the IBC. Further, SEBI has notified the SEBI (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations 2018 (Administrator Regulations) which will govern the appointment of administrators for recovery of monies from defaulters against whom the SEBI has passed orders, and to regulate the process of refund of such monies to investors. In cases where recovery proceedings under the Administrator Regulations and the resolution process under the IBC are under way, it remains to be seen whether the interests of creditors or those of investors will be given precedence.
In the background of the Indian government’s efforts to tackle black money and tax evasion, in 2017, SEBI had commenced taking stringent action against 331 listed shell companies that were allegedly used as vehicles for siphoning off funds and market manipulation. Measures included suspension of trading of such companies. In October 2018, SEBI and the stock exchanges commenced a forensic audit of some of these shell companies for verifying their credentials or fundamentals. On conclusion of such audit in the coming months, enforcement actions against such shell companies are expected to rise.
Revelations from several recent high-profile matters have caused regulators to focus on the critical role played by auditors, company secretaries, valuers, market intermediaries, etc. In response, SEBI has been exercising its powers to penalise auditors for their alleged failure to detect financial statement fraud and market intermediaries for their involvement in misstatements in offer documents. Further regulations governing such entities are also being considered and are expected to result in enforcement actions in the years to come.
Further, SEBI has commenced a number of investigations on instances of leakage and communication of price-sensitive information using internet-based messaging applications. While listed companies are taking measures to address such issues and avoid future litigation, with the recent amendments to the SEBI (Prohibition of Insider Trading) Regulations 2015, there is bound to be greater focus on detection, investigation and enforcement relating to such matters.
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