SEBI Seeks a Proactive Role in Fraud Detection

SEBI, Headquarters, BKC, Mumbai

While there seems to be no end to financial frauds in India – one after the other keeps coming to light – Indian corporate and particularly banking system continues to reel under the financial turmoil.

The most worrying factor is that the financial frauds prospect is constantly registering an upward trend.

The Securities and Exchange Board of India (SEBI) wants to play a greater part in reducing, if not eliminating this menace and thus, has requested the powers-that-be for greater powers to hunt down the fraudsters to thwart frequent occurrence of these frauds.

Such powers shall, inter alia, include:

(i) To inspect/investigate the listed entities account books during any instance of flouting of any corporate/securities laws.

(ii) To initiate unswerving/direct action on fraudsters who are proven guilty.

As of now, SEBI is broadly entrusted with the authority to inspect cases associated with violation of various securities laws related, inter alia, to insider trading, fraudulent or unfair trade practices provided SEBI has adequate reasons to suspect the company’s involvement in act of insider trading, fraudulent or unfair trade practices.

However, going forward SEBI wants to play a pro-active role even in detecting any such violations. Therefore, SEBI has urged the central government to expand its authority to inspect the business records of companies which have violated any corporate/securities laws rather than confining SEBI’s role merely to investigate violation cases related to few securities laws.

The following are the other SEBI proposals:

·  Any act of obstruction/impediment of a legal investigation by a company via mutilation, destruction, falsification, or concealment should be punished with hefty penalties.

·  Applicability of disgorgement order for recovery of illegal gains should be extended to all joint violators without connecting its implementation with the gains/averted losses of the violators.

·  Replacement of the term ‘material or non-public information’ with ‘unpublished price sensitive information’ in insider trading laws. As of now, penalty is imposed on the persons dealing in securities “On basis of material or non-public information” for violation of insider trading laws.

·  SEBI proposes that every act of alteration, mutilation, concealment, falsification or destruction of business records by any company personnel should be treated as fraudulent and punishable under the corporate/securities laws.

·  Any such fraudulent act would attract a penalty in the range of INR 5 lakh to 10 crore or 3 times the profit generated from such fraudulent acts.

 ·  No attempt should be made by any company personnel to manipulate the business records with the assistance of any device, scheme or artifice to influence the share price or to siphon off the funds/assets/earnings of listed entity/potential listed entity.

From SEBI’s perspective, it is important to have adequate authority to take direct action on the financial fraudsters to reduce to ashes the adverse impact of such frauds to uplift the confidence of shareholders/investors in the capital markets.

As of now, Ministry of Corporate Affairs (MCA) is the sole authority to monitor/supervise the account books of companies. Delegation of such authority to SEBI will not only reduce the work burden on MCA, but also exemplify the intensity of the security checks. On the other side, it may also lead to confusion regarding jurisdiction.

The government is likely to give significant weightage to the opinions of Finance Ministry and MCA prior to taking any final decision on the SEBI proposed amendments. Apparently, there is already a conflict of opinion among SEBI, Finance Ministry and MCA on certain proposed amendments.

Delegation of certain powers to SEBI and a clear cut demarcation of authority will certainly ease the work burden on other government authorities and will establish highly efficient security system to monitor and curb the illegal/unfair/fraudulent acts of fraudsters.

Hopefully, such a mechanism will detect and hunt down financial fraudsters more effectively. It may also lead to serve justice to people / quarters adversely affected by such fraudsters and will repose the lost confidence of shareholders/investors in the capital markets.



Bhumesh Verma (International Corporate Lawyer | Author | Guest Faculty | New Delhi | India)