Recently, there have been instances of certain collective investment schemes (CISs) attempting to circumvent regulatory oversight. In addition, some market participants have not complied with Securities and Exchange Board of India's (SEBI) orders of payment of penalty and refund to investors. In August, the Securities Laws (Amendment) Bill, 2013 was introduced in the Lok Sabha to amend the Securities and Exchange Board of India Act, 1992 (the SEBI Act, 1992), the Securities Contract (Regulation) Act, 1956 (SCRA, 1956) and the Depositories Act, 1996. The Bill replaced the Securities Laws (Amendments) Ordinance, 2013. The Bill makes the following key amendments: a) Definition of Collective Investment Schemes The SEBI Act, 1992 defines CISs as schemes in which the funds of investors are pooled, yield profits or income and are managed on behalf of investors. It also exempts certain types of investments which are regulated by other authorities. The Bill introduces a proviso to the definition of CIS. This proviso deems any scheme or arrangement to be a CIS if it meets all three of the following conditions: (a) funds are pooled, (b) it is not registered with SEBI, or it is not exempted by SEBI Act, 1992, and (c) it has a corpus of Rs 100 crore or more. These provisions could potentially lead to some schemes not conventionally defined as CIS to fall under the definition. For instance, partnership firms operating in the investment business or real estate developers accepting customer advances could be termed as CISs. SEBI has been given the power to specify conditions under which any scheme or arrangement can be defined as a CIS. This raises the question of whether this is excessive delegation of legislative powers - usually the parent act defines the entities to be regulated and the details are entrusted to the regulator. b) Disgorgement (repayment) of unfair gains/ averted losses SEBI has in the past issued orders directing market participants to refund i) profits made or ii) losses averted, through unfair actions. The Bill deems SEBI to have always had the power to direct a market participant to disgorge unfair gains made/losses averted, without approaching a court. This power to order disgorgement without approaching a court is in contrast with the provisions of the recently passed Companies Bill, 2011 and the draft Indian Financial Code (IFC) which require an order from a court/tribunal for disgorgement of unfair gains. Further, the Bill specifies that the disgorged amount shall be credited to the Investor Education and Protection Fund (IEPF), and shall be used in accordance with SEBI regulations. The Bill does not explicitly provide the first right on the disgorged funds to those who suffered wrongful losses due to the unfair actions, unlike the draft IFC. c) Investigation and prosecution The Bill empowers the SEBI chairman to authorise search and seizure operations on a suspect’s premises. This does away with the current requirement of permission from a Judicial Magistrate. This provision removes the usual safeguards regarding search and seizure as seen in the Code of Criminal Procedure, 1973, the recently passed Companies Bill, 2011 and the draft Indian Financial Code. The Bill also empowers an authorised SEBI officer to, without approaching a court, attach a person’s bank accounts and property and even arrest and detain the person in prison for non-compliance of a disgorgement order or penalty order. Most regulators and authorities, with the exception of the Department of Income Tax, do not have powers to such an extent. d) Other Provisions of the Bill The Bill retrospectively validates consent guidelines issued by SEBI in 2007 under which SEBI can settle non-criminal cases through consent orders, i.e., parties can make out-of-court settlements through payment of fine/compensation. The United States Securities and Exchange Commission settles over 90% of non-criminal cases by consent orders. The Bill retrospectively validates the exchange of information between SEBI and foreign securities regulators through MoUs. The Bill sets up special courts to try cases relating to offences under the SEBI Act, 1992. For a PRS summary of the Bill, here.
A recent news report has discussed the methods by which states such as Chattisgarh have attempted to reform the Public Distribution System (PDS). Chattisgarh has computerised its PDS supply chain and introduced smart cards as part of a slew of measures to plug pilferage and weed out corruption in the system. In an effort to create a national computerised database for PDS, the Ministry of Consumer Affairs has launched an online National Transparency Portal for the Public Distribution System. The portal aims to provide end-to-end computerisation of PDS; it is a single platform in the public domain for all PDS related information. The PDS is a centrally sponsored scheme that entitles beneficiaries to subsidised foodgrains every month. Currently, beneficiaries are divided into the following groups: Below Poverty Line (BPL), Above Poverty Line and Antodaya Anna Yojana. As such, several challenges have been identified in the implementation of PDS. Some of them are as follows:
The creation of the e-portal could help track these issues more effectively and increase transparency in the system. The portal contains information relating to FPS and ration cards attached to the FPS. It is likely that this will help weed out bogus ration cards and improve targeting of subsidies. The portal also has information on capacity utilization of Food Corporation of India, state storage godowns, and data on central pool stocks. This helps track storage supplies of grains at each level and aims to prevent leakage of grain. With respect to data on PDS in states, the portal hosts information such as the central orders on monthly allocation of foodgrain to states, state-specific commodity sale prices, lifting position of states, etc. for public view. All states and union territories will be required to maintain and update the data on the portal. The reforms come at a time when the National Food Security Bill, 2011 is pending in Parliament. The Bill aims to deliver foodgrain entitlements through Targeted PDS to 75% of the rural and 50% of the urban population. The Bill is currently under examination by the Standing Committee of Food, Consumer Affairs and Public Distribution. It proposes reforms to the TPDS, which include the application of information and communication technology, including end-to-end computerisation. These reforms seek to ensure full transparency of records in the PDS and prevent diversion of foodgrains. The creation of the e-portal might be a step towards reforming the PDS. For an analysis of the National Food Security Bill, see here.
