Summary proceedings, as the name suggests, refer to proceedings that provide an individual with an opportunity to swiftly dispose of a case on merits without taking recourse to an ordinary procedure. While ordinary procedure, in cases where the violation of law is clear, can be time-consuming, inefficient, and cumbersome, the summary procedure offers a time and cost-efficient alternative to it. The Securities and Exchange Board of India (‘SEBI’) has released a consultation paper titled ‘Consultation Paper on Proposed Legal Provisions for Summary Proceedings’ proposing the inclusion of a provision for Summary proceedings for certain violations of securities law by Intermediaries to deal with these problems. The goal of the consultation paper is to strengthen the board’s resilience, allowing it to respond promptly and effectively to intermediaries who break the law, thereby improving the market’s overall integrity, efficiency, and transparency.
This post delves into the implications of such a proposal, emphasising the risk associated with summary proceedings in cases mentioned in the proposal and scrutinising the potential trade-off between speedy disposal and potential sacrifice with the overall integrity of the market. The article begins with an analysis of the brief background of the regulatory framework surrounding summary proceedings, further discussing the need for such a proposal, later moving towards the potential impacts of the proposal over the market and lastly concludes by advocating for a balanced approach considering both the spirit and potential impact of the proposal.
What are the current regulatory lacunas?
Previously, the summary proceedings were outlined in Chapter III of the erstwhile SEBI (Procedure of Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. However, Intermediaries Regulations 2008, led to the previous regulations being repealed in May 2008. Despite this, the need for a summary procedure arises in cases where the nature of violations is obvious or where the intermediary itself admitted the violation of law or where minimal to bare evidence & documents are required to corroborate the facts.
Cancellation of the certificate of registration is one such instance. Since it requires the intermediaries to pay an annual fee for keeping in force their registration after the permanent registration is granted. Therefore, Non-payment of fees by intermediaries leads to cancellation of their certificates. Currently, the existing regulatory framework requires following the lengthy process outlined in Chapter V of the Intermediaries Regulations for cancellations, even in cases where the violation is clear and undisputed. A comparable issue may occur when an intermediary does not submit periodic reports within the timeline set by SEBI, potentially resulting in the cancellation of their registration. Procedures governing the same also require a lengthy and unnecessary trial, thereby undermining the prompt enforcement of regulatory requirements.
Need for Summary Proceedings
For such kinds of violations as mentioned above, opting for an ordinary procedure of handling cases under Chapter V of the Intermediaries Regulations may be cumbersome and inefficient, resulting in unnecessary administrative burden and delay (Refer “Here”). This regulatory inefficiency underscores the importance of different regulatory approaches, which eventually pave the way for Summary proceedings. These proceedings ensure an expeditious and efficient disposal of such cases, thereby reducing an administrative strain on resources and allowing for quicker resolution and enforcement of regulations.
The proposed provisions for summary proceedings outline the criteria for determining which cases qualify and provide detailed guidelines for the procedure. Additionally, it offers an opportunity for the entity to present its submissions, explaining why the facts on which the proceedings are initiated should not be concluded against him with adverse consequences. Overall, the proposed legal framework for summary proceedings by SEBI represents a significant step towards improving the efficiency and timeliness of regulatory actions against intermediaries violating securities laws.
Analysis of the Proposed Legal Framework for Summary Proceedings by SEBI
The SEBI has been trying to resolve the cases efficiently for the last few years and the proposed regulation is a step in the right direction. Summary proceedings will improve the efficiency and effectiveness of many proceedings against several intermediaries. The framework proposes guidelines with regard to violations by intermediaries to protect investors and make the securities market more efficient. Summary proceedings will deal with straightforward violations such as non-payment of fees, failure to submit periodic reports, or non-compliance with registration requirements, thereby streamlining the regulatory process.
While the SEBI’s approach to making the securities market more efficient is appreciated, but there seem to be many significant concerns in the new framework as well, which are needed to be addressed on an urgent basis. Most of the violations that are to be tried with summary proceedings are not of serious nature which can materially affect the securities market. But the authors would like to draw attention to 2 violations in which summary proceedings are prescribed- handling cases where an intermediary is not traceable (Regulation 30A(1)(f)) and where periodic reports have not been submitted for three consecutive periods (Regulation 30A(1)(g)) which can lead to severe challenges in the future.
Complexity in Insider Trading Cases-
One of the primary concerns that may arise in future may be the risk of insider trading by the intermediaries. Unlike straightforward regulatory breaches, Insider trading involves layers of encrypted and indirect communications, making it difficult to rely on direct evidence. Therefore, it is a complex violation which demands a thorough investigation generally. In India, Insider Trading is regulated by SEBI through the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. It is tough to get direct evidence in cases of Insider Trading which gives rise to indirect and circumstantial evidence.
Atlanta Ltd. case acknowledged the difficulty in obtaining direct evidence in cases of insider trading due to encrypted communications by the offenders thereby emphasising the need for circumstantial evidence. The N.K. Sodhi Committee Report also mentioned the need for looking into the “facts and circumstances” on a case-to-case basis as there can be no thumb rule to get evidence of insider trading. Further, the Supreme Court in SEBI v. Kishore R. Ajmera further reinforced this approach, asserting that circumstantial evidence can establish insider trading if it leads to an “irresistible inference” of guilt. Similarly, in SEBI v. Rakhi Trading (P) Ltd., the insider trading was proved through circumstantial evidence only.
This underlines the complexities in the insider trading violation cases in India and how it hard it is to prove the offence even through such thorough enquiries. In such cases, if an intermediary involved in such activities becomes untraceable and the case is handled through summary proceedings (Regulation 30A(1)(f)), it will be nearly impossible to uncover the full extent of the crime. Due to this, the authors argue that the summary proceedings lack the rigour required to investigate in such complex cases.
Manipulation and Insufficient Scrutiny-
Another concern is that the summary proceedings might not be sufficient in order to uncover frauds or malpractices by intermediaries. This is particularly concerning in cases where intermediaries fail to submit periodic reports (Regulation 30A(1)(g)). Non-compliance in this area could be indicative of deeper issues, such as financial misconduct or fraud, which necessitate thorough investigation rather than a summary resolution.
It is quite easy for the intermediaries to manipulate the facts in the written submission in the case of an enquiry under summary proceedings which might act as an incentive for them to commit more frauds, not provide disclosures and get away by manipulating the written submissions (Refer “Here”). These frauds will be detectable only if proper proceedings and enquiries are done on such intermediaries which will leave no way for them to escape from SEBI.
Recommendations
To address these concerns, the authors propose to exclude Regulation 30A(1)(f) and Regulation 30A(1)(g) from the summary proceedings framework. Instead, these cases should come under proper investigation to unveil any fraud or malpractice by the intermediaries. Further, SEBI must scrutinise all the written responses thoroughly and do complete due diligence to ensure that no violation goes unnoticed. This approach would enhance the effectiveness of SEBI’s regulatory actions and ensure that serious violations do not go unpunished.
In conclusion, while SEBI’s efforts to make trials more efficient are appreciated but there is a need to tailor the regulations in such a way that it does not harm investors and other stakeholders as well. Addressing the specified violations from the scope of summary proceedings will further enhance the security of the securities market.
This blog is written by Arihant Sethia, 3rd year Student of B. Com. LL.B.(Hons.) at GNLU, Gandhinagar and Keshav Kulshrestha, 4th year Student of B.A. LL.B.(Hons.) at the Institute of Law, Nirma University