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SEBI Enforcement: Focus Has Been On Unregulated Entities, Says Study

A study of around 8,000 orders passed over 10 years reveals insightful findings on how SEBI has used its enforcement powers.

<div class="paragraphs"><p>(Source: Francis Mascarenhas/Reuters)</p></div>
(Source: Francis Mascarenhas/Reuters)

The Securities and Exchange Board of India has largely concentrated its enforcement actions against a limited set of violations in the Indian securities market, and directed the bulk of its enforcement powers against unregulated entities, according to a study.

Researchers Devendra Damle and Bhargavi Zaveri examined about 8,000 enforcement orders, passed by SEBI over a span of 10 years, to map the manner in which the regulator has used its enforcement powers.

The key findings include:

Enforcement Areas

SEBI has prioritised cases involving unfair trade practices, insider trading, takeover of companies, securities market brokers, and violations within the purview of Companies Act over others, the study showed.

Proceedings under these regulations account for 54% of the total references to violations in SEBI's orders.

The number of proceedings as a whole decreased from 2011 to 2016 and then increased rapidly.

This indicates that either the number of violations increased after 2016, or SEBI developed the capacity to dispose more enforcement actions, the researchers have said.

<div class="paragraphs"><p>Enforcement of securities laws in India: An empirical overview—Devendra Damle, Bhargavi Zaveri-Shah</p></div>

Enforcement Areas

Types Of Sanctions

The study reveals that SEBI prefers monetary sanctions over non- monetary sanctions, except in cases involving violation of Companies Act, 2013.

Around 65% of the cases involving unfair trade practices resulted in a monetary sanction whereas only 40% of the Companies Act cases attracted monetary penalty.

As per the researchers, a possible explanation for this could be that under the Companies Act, SEBI enforces against companies that raise public monies without complying with the requirements to issue offer documents and prospectuses mandated under the law.

Despite the preference towards monetary sanction, the regulator has failed to provide sufficient reasoning for the quantum of penalty imposed despite directions from the Supreme Court in the Bhavesh Parbari case, the researchers observed.

In a vast majority of the cases in our sample, the size of the violation was not calculated. We also find that a bulk of the orders in which amount involved was not calculated pertained to insider trading and PFUTP (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market).
Enforcement of securities laws in India: An empirical overview
<div class="paragraphs"><p>Enforcement of securities laws in India: An empirical overview - Devendra Damle, Bhargavi Zaveri-Shah</p></div>

Preferred Sanctions

Enforcement Targets

SEBI has concentrated its powers against unregulated entities. Around 75% of the actions were against market participants, insiders and listed companies and not SEBI-licensed intermediaries, the study said.

Most of these actions were undertaken by an adjudicating officer and resulted in a monetary sanction.

<div class="paragraphs"><p>Enforcement of securities laws in India: An empirical overview - Devendra Damle, Bhargavi Zaveri-Shah</p></div>

Enforcement Targets

Enforcement Outcomes

Enforcement can result in either acquittal or conviction of the person involved. In 80% of the cases, the regulator found them guilty of all the violations they were charged with.

Unregulated entities were stricken hard with a comparatively higher rate of conviction to regulated entities at 76% conviction rate.
Enforcement of securities laws in India: An empirical overview

Across different categories, the range varied from 74% to 87% with a relatively higher rate of 84% in Takeover Code violations.

<div class="paragraphs"><p>Enforcement of securities laws in India: An empirical overview - Devendra Damle, Bhargavi Zaveri-Shah</p></div>

Enforcement Outcomes

Based on the data set, the study concludes that SEBI has been an active enforcer of its regulations, with the intensity of enforcement increasing after 2017.

However, the enforcement capacity is seen mostly directed towards a limited set of violations, namely unfair trade practices, insider trading and the Takeover Code.

Further, the regulator prefers monetary sanctions over non-monetary sanctions.

A closer look exposes the impropriety in determination of penalty as the size of the violation is often immaterial and not proportionate to the size of the penalty.

Finally, the high conviction rate could signify the high enforcement capacity of the regulator.

However, this wouldn't be complete without an analysis of the cases that went for appeal before the Securities Appellate Tribunal and other constitutional courts laying the ground for further research, Damle and Zaveri have said.