‘Not possible’ to straitjacket probe timelines: Sebi to Supreme Court

The submission was made to the apex court in response to the recommendations made by an expert committee set up in the Adani-Hindenburg case. Besides overseeing the probe, one of the mandates given to the six-member panel headed by former SC judge Justice A M Sapre was to suggest structural reforms for Sebi.

In its 173-page interim report in May, the panel made several recommendations to strengthen the existing statutory and regulatory framework of Sebi.

Legal experts said Sebi, in the 46-page affidavit submitted on Monday, is trying to play down the need for an overhaul in its functioning. One of the key suggestions made by the panel was to introduce mandatory timelines for the initiation and completion of investigations, proceedings, and disposal of settlement.

Highlighting the practical challenges in enforcing this recommendation, the capital markets regulator has stated that the timelines depend upon various factors like the complexity of violations, the need for exhaustive investigation, and the gathering of adequate evidence.

Sebi also cited amendments and norms in the Sebi Act and other regulations, which show that the regulator can initiate prosecution without any period of limitation. 

Emphasising its view that it was not appropriate to prescribe timelines for the disposal of cases, Sebi cited complex matters such as stock options manipulation, Global Depository Receipts scam, and initial public offering irregularities.

“In such grave violations which have far-reaching implications on the market/investors which came to the knowledge of Sebi at a later date, the regulator cannot turn a blind eye to the plight of investors. In such a scenario, it is obligatory on the part of the regulator to commence the investigation for gathering required evidence before the enforcement actions are initiated,” it said.

The watchdog also countered the expert committee’s observation that Sebi experienced difficulties in identifying economic interest holders partly because of the repeal of ‘opaque structures’ provisions in foreign portfolio investment (FPI) regulations.

The regulator stated that the changes made in FPI regulations in 2018 and 2019 effectively tightened the disclosure requirement related to beneficial owners.

It further said that after changes, every FPI had to mandatorily disclose all their beneficial owners upfront, and in the absence of any natural person as a beneficial owner, the senior managing official had to be identified as a beneficial owner while earlier there were certain exemptions to upfront disclosures.

It added that the reference to ‘opaque structures’ was removed as it had an element of redundancy and ambiguity. Further, the submission states that a stricter threshold of 10 per cent was also mandated for FPIs from high-risk jurisdictions in 2018 for beneficial owner identification

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  Misconduct in securities market not always evident immediately
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  Several challenges in prescribing specific timelines for investigation/proceedings
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  Proceedings initiated by Sebi have not ‘sky-rocketed’
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  Separation of powers between quasi-judicial and executive arm already in place
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  FPI regulations and disclosures strengthened after 2019
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  Reference of ‘opaque structures’ from FPIs removed due to ambiguity

“Sebi has already put in place measures to ensure separation of powers to avoid bias and conflict of interest,” the regulator said in its latest submission.

“Presently, Sebi has over 20 departments, and there is a clear demarcation of activities of each of the said departments. There is delegation of powers from the board to the chairperson, whole-time members, and other officials of the board,” it further said.

The market watchdog also cited the current status of the use of technology and data in disclosures and surveillance, along with challenges in shifting to any other framework for related-party transactions.

Sebi requested the SC to consider its submission in the matter.

Sebi’s role and functioning had come under question following allegations made by New York short-seller Hindenburg Research and the subsequent Rs 12-trillion wipeout in market capitalisation at Adani Group companies.

In March, SC had given Sebi three months to complete its investigation in the Adani-Hindenburg matter. In May, it allowed the regulator time until August 14 to finish its probe.