Securities and Exchange Board of India Act, 1992

Think of it like this

Key terms in this chapter

Architecture of the penalty provisions

Section 15, through its various sub-sections, prescribes a minimum and maximum amount of penalty for violations, and empowers the relevant authority to levy a penalty on a per-day basis, subject to the maximum amount specified, for so long as the default continues.

Civil court powers under section 11(3)

Notwithstanding anything in any other law in force, while exercising its powers SEBI has the same powers as are vested in a civil court under the Code of Civil Procedure while trying a suit, in respect of the discovery and production of books of account and other documents at such place and time as SEBI specifies; summoning and enforcing the attendance of persons and examining them on oath; inspection of any books, registers and other documents of any person; inspection of any book, register, other document or record of the company; and issuing commissions for the examination of witnesses or documents.

Functions of SEBI

Regulating the business in stock exchanges and any other securities markets; registering and regulating the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and other intermediaries associated with the securities market, as well as depositories and their participants, custodians of securities, foreign institutional investors, credit rating agencies and other notified intermediaries; registering and regulating venture capital funds and other collective investment schemes including mutual funds; promoting and regulating self-regulatory organisations; prohibiting fraudulent and unfair trade practices; promoting investors' education and training of intermediaries; prohibiting insider trading; regulating substantial acquisition of shares and takeover of companies; calling for information from and undertaking inspection, inquiries and audits of stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations, and calling for information and records from any person including any bank, authority, board or corporation established under any Central or State Act relevant to an investigation or inquiry; calling for or furnishing information to other authorities in India or abroad having similar functions in matters relating to prevention or detection of violations of securities laws; performing functions and exercising powers under the Securities Contracts (Regulation) Act, 1956 as delegated by the Central Government; levying fees or other charges; conducting research; calling from or furnishing information to specified agencies; and performing such other functions as may be prescribed.

Measures under section 11(4)

SEBI may by order, for reasons to be recorded in writing, in the interest of investors or the securities market, and either pending an investigation or inquiry or on its completion, suspend the trading of any security in a recognised stock exchange; restrain persons from accessing the securities market and prohibit any person associated with the securities market from buying, selling or dealing in securities; suspend any office-bearer of a stock exchange or self-regulatory organisation from holding such position; impound and retain the proceeds or securities in respect of any transaction under investigation; attach, for a period not exceeding ninety days, the bank account or other property of any intermediary or person associated with the securities market involved in a violation of the Act, rules or regulations; and direct any intermediary or associated person not to dispose of or alienate an asset forming part of a transaction under investigation.

Powers and status of the Securities Appellate Tribunal

Under section 15U the SAT is not bound by the procedure laid down by the Code of Civil Procedure, 1908, but is guided by the principles of natural justice and has power to regulate its own procedures, including the places at which it sits. For discharging its functions it has the same powers as a civil court under the Code of Civil Procedure while trying a suit in respect of summoning and enforcing the attendance of any person and examining him on oath; requiring the discovery and production of documents; receiving evidence on affidavits; issuing commissions for the examination of witnesses or documents; reviewing its decisions; dismissing an application for default or deciding it ex parte; setting aside any order of dismissal for default or any order passed ex parte; and any other prescribed matter. Any proceeding before the SAT is deemed a judicial proceeding within the meaning of the Indian Penal Code, and the SAT is deemed a civil court for all purposes mentioned in the SEBI Act.

Purpose of the SEBI Act, 1992

The Act was enacted to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.

Section 11A — issue of capital and listing

Without prejudice to the Companies Act, SEBI may, for the protection of investors, specify by regulations the matters relating to the issue of capital, transfer of securities and other incidental matters, and the manner in which such matters are to be disclosed by companies; and may by general or special orders prohibit any company from issuing a prospectus, offer document or advertisement soliciting money from the public for the issue of securities, or specify the conditions subject to which a prospectus, offer document or advertisement, if not prohibited, may be issued. Without prejudice to section 21 of the Securities Contracts (Regulation) Act, 1956, SEBI may also specify the requirements for listing and transfer of securities and other incidental matters.

Section 12A — prohibition of manipulative and deceptive devices and insider trading

No person shall directly or indirectly use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the Act or rules; employ any device, scheme or artifice to defraud in connection with the issue of or dealing in such securities; engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person in connection with the issue of or dealing in such securities in contravention of the Act, rules or regulations; engage in insider trading; deal in securities while in possession of material or non-public information, or communicate such material or non-public information to any other person, in a manner contravening the Act, rules or regulations; or acquire control of any company, or securities more than the percentage of the equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange, in contravention of the regulations made under the Act.

Section 12 — registration of intermediaries

Section 12 vests SEBI with the power to issue certificates of registration, without which no stockbroker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or other intermediary associated with the securities market may buy, sell or deal in securities. Applications follow the forms prescribed by the relevant regulations, a stockbroker for instance applying under Form A of the SEBI (Stock Brokers) Regulations, 1992. No person may sponsor or cause to be sponsored, or carry on or cause to be carried on, any venture capital fund or collective investment scheme including a mutual fund without obtaining a certificate of registration from SEBI; and none may sponsor or carry on the activity of an alternative investment fund or a business trust unless a certificate of registration is granted by SEBI in accordance with the regulations made under the Income Tax Act, 1961. Applications and fees follow the regulations, and SEBI may by order suspend or cancel a certificate of registration after giving the person concerned a reasonable opportunity of presenting his case.

Section 15A — failure to furnish information, return etc.

Penalty applies where an intermediary fails to furnish any document, return or report to SEBI or files false, incorrect or incomplete information, return, report, books or other documents; fails to file any return or furnish any information, books or other documents within the time specified in the regulations, or files false, incorrect or incomplete ones; or fails to maintain books of account or records. The penalty is not less than one lakh rupees but may extend to one lakh rupees for each day during which the failure continues, subject to a maximum of one crore rupees.

Section 15F — defaults by stockbrokers

Three defaults are covered. Failure to issue contract notes in the form and manner specified by the stock exchange of which the broker is a member carries a penalty of not less than one lakh rupees up to one crore rupees. Failure to deliver any security or to make payment of the amount due to the investor in the manner and within the period specified in the regulations carries not less than one lakh rupees, extending to one lakh rupees for each day of continuing failure, subject to a maximum of one crore rupees. Charging brokerage in excess of that specified in the regulations carries not less than one lakh rupees, extending to five times the amount of brokerage charged in excess of the specified brokerage, whichever is higher.

Section 15G — insider trading

Penalty applies where an insider, acting on his own behalf or on behalf of another, deals in securities of a body corporate listed on any stock exchange on the basis of unpublished price-sensitive information; where an insider communicates any unpublished price-sensitive information to any person, with or without a request for it, except as required in the ordinary course of business or under any law; and where an insider counsels or procures any other person to deal in securities of a body corporate on the basis of unpublished price-sensitive information. The penalty is not less than ten lakh rupees and may extend to twenty-five crore rupees or three times the amount of profits made out of the insider trading, whichever is higher.

Section 15HAA — records and SEBI's electronic database

Penalty applies where a person knowingly alters, destroys, mutilates, conceals, falsifies or makes a false entry in any information, record or document, including electronic records, required under the Act or rules or regulations, so as to impede, obstruct or influence any investigation, inquiry, audit, inspection or proper administration of a matter within SEBI's jurisdiction; where a person without authorisation accesses or tries to access, denies access to or modifies access parameters to the regulatory data in the database; downloads, extracts, copies or reproduces regulatory data maintained in the system database; knowingly introduces any computer virus or other computer contaminant into the system database and brings about a trading halt; without authorisation disrupts the functioning of the system database; knowingly damages, destroys, deletes, alters, diminishes in value or utility, or otherwise affects the regulatory data in the system database; or knowingly provides assistance to or causes any other person to do any of these acts. A person is deemed to have altered, concealed or destroyed a record where he knowingly fails to report the matter immediately to SEBI or fails to preserve it while it remains relevant to any investigation, inquiry, audit, inspection or proceeding and its conclusion. The expressions computer contaminant, computer virus and damage bear the meanings assigned to them under section 43 of the Information Technology Act, 2000. The penalty is not less than one lakh rupees and may extend to ten crore rupees or three times the amount of profits made out of the act, whichever is higher.

Section 15HA — fraudulent and unfair trade practices

Penalty applies to persons indulging in fraudulent and unfair trade practices relating to securities, being not less than five lakh rupees and extending to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.

Section 15HB — residual penalty

Where a person fails to comply with any provision of the SEBI Act, the rules or regulations made or directions issued by SEBI under it, and no separate penalty has been provided, the penalty is not less than one lakh rupees and may extend to one crore rupees.

Section 15H — non-disclosure of acquisition of shares and takeovers

Penalty applies for failure to disclose the aggregate of one's shareholding in a body corporate before acquiring any of its shares; to make a public announcement to acquire shares at a minimum price; to make a public offer by sending a letter of offer to the shareholders of the company; or to make payment of consideration to shareholders who sold their shares pursuant to the letter of offer. The penalty is not less than ten lakh rupees and may extend to twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.

Section 15T — appeal to the Securities Appellate Tribunal

Any person aggrieved by an order of SEBI made on or after the commencement of the Securities Laws (Second Amendment) Act, 1999 under the SEBI Act or the rules and regulations made under it, or by an order of an adjudicating officer under the Act, or by an order of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, may prefer an appeal to the SAT having jurisdiction in the matter. Every appeal must be filed within forty-five days from the date on which a copy of the order is received, in the specified form and with the prescribed fee. The appeal is to be dealt with as expeditiously as possible and an endeavour is to be made to dispose of it finally within six months from the date of receipt of the appeal.

Section 15Z — appeal to the Supreme Court

Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the SAT to him, on any question of law arising out of that order.

Sections 15B, 15C, 15D and 15E

Section 15B penalises failure to enter into an agreement with a client where the SEBI Act requires it. Section 15C penalises failure to redress investors' grievances after being directed in writing, including by electronic communication, by SEBI to do so within a specified time, and applies to listed companies as well. Section 15D penalises defaults by mutual funds and collective investment schemes — sponsoring or carrying on a scheme without the required certificate of registration, failing to comply with the terms and conditions of registration, failing to submit an application for listing of the scheme, failing to despatch unit certificates, failing to refund application monies within the specified period, and failing to invest the money collected in the manner or within the period specified. Section 15E penalises an asset management company's failure to comply with regulations placing restrictions on its activities. Each carries a penalty of not less than one lakh rupees, extending to one lakh rupees for each day of continuing failure, subject to a maximum of one crore rupees.

Sections 15EA and 15EB

Section 15EA penalises default by alternative investment funds, infrastructure investment trusts and real estate investment trusts in complying with SEBI's regulations or directions, with a penalty of not less than one lakh rupees extending to one lakh rupees for each day of continuing failure, subject to a maximum of one crore rupees or three times the amount of gains made out of such failure, whichever is higher. Section 15EB penalises default by an investment adviser or research analyst in complying with SEBI's regulations or directions, with the same daily formula subject to a maximum of one crore rupees.