Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Mon, 28 Mar 2016

Regulatory priority: punish, deter or protect?

When a serious breach of market integrity is suspected, what should the regulators’ priorities be: should it try to punish the guilty, or should it seek to deter other wrong doers or should it focus on protecting the victims? Both bureaucratic and political incentives may be tilted towards the first and perhaps the second, but in fact it is the last that is most important. I have been thinking about these issues in the context of the order of the Securities and Exchange Board of India in the matter of Sharepro Services, a Registrar and Share Transfer Agent regulated by SEBI. The order which is based on six months of investigation and runs into 98 pages finds that:

If one assumes that these findings are correct, then the key regulatory priority must be to take operational control of Sharepro and thereby protect the interests of investors who might have been harmed. A Registrar and Share Transfer Agent is a critical intermediary whose honest functioning is essential to ensure market integrity and maintain the faith of investors in the capital markets. I think that SEBI’s powers under section 11B of the SEBI Act would be adequate to achieve this objective, but in case of need, resort could also be had to section 242 of the Companies Act 2013.

The SEBI order does take some steps to punish the top management of Sharepro but does too little to protect the investors who appear to have lost money. It does not even cancel or suspend the registration of Sharepro as a Registrar and Share Transfer Agent, but merely advises companies who are clients of Sharepro switchover to another Registrar and Share Transfer Agent or to carry out these activities in-house. The only investor protection step in the order is the direction to companies who are clients of Sharepro to audit the records and systems of Sharepro. But if the records have been falsified, then only a regulator or other agency with statutory powers can carry out a meaningful audit by obtaining third party records.

A decade ago, when the Satyam fraud occurred, I was among the earliest to write that the government should simply take control of the company. I would argue the same in the case of Sharepro as well assuming that the SEBI findings are correct.

Posted at 19:01 on Mon, 28 Mar 2016     5 comments     permanent link

Comments...

Pratik Datta wrote on Tue, 29 Mar 2016 19:35

Re: Regulatory priority: punish, deter or protect?

Sir, without going into whether nationalisation is the appropriate remedy or not in this case, I would argue that SEBI does not have the legal power to do what you are suggesting.

First, section 11B can be used to debar a person from accessing the capital markets. But taking over a company by SEBI is clearly not within the scope of this section. If you see nationalisation statutes, they are clearly worded to empower the appropriate authority to take over enterprises. The wording of section 11B is not the same. Therefore, any such attempted takeover would be struck down as ultra vires (beyond the scope of) the SEBI Act.

Second, s. 242 powers can be used by the Tribunal only after an application under s. 241 has been filed. A s. 241 application can be filed only by a member of the company. SEBI is not a "member" of Sharepo.

Therefore, your suggestion is legally untenable.