The Securities Ordinance: At round three, some notable variations

DeekshaSinghThe past year has seen some key developments in the further evolution of the SEBI’s powers, with the promulgation of the Securities Laws (Amendment) Ordinance, 2013 (“the 2013 Ordinance”). We have discussed the implications of the 2013 Ordinance and its lapse here, here, and here.

The Securities and Exchange Board of India (“SEBI”), which was established in 1988, received statutory powers from April 12, 1992 with the enactment of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). Now, the Securities Laws (Amendment) Ordinance, 2014 (“the 2014 Ordinance”) has been notified with effect from March 28, 2014. It makes effective, the additional powers granted by the 2013 Ordinance. This provides much-needed continuity for the SEBI’s regulatory actions.

However, the 2014 Ordinance contains some notable variations.

Power to supersede orders

The 2014 Ordinance introduces a new provision — Section 15-I (c) — to the SEBI Act. It allows the SEBI to supersede an order issued by an adjudicating officer, if it feels that the order is erroneous. The term “erroneous” is linked to whether the order is in the interest of the securities market. The provision also contains the following limitations to the exercise of this power:

– The SEBI can exercise this power only within three months of the adjudicating officer’s order, or the disposal of an appeal from that order by the Securities Appellate Tribunal; and

– The purpose of such an inquiry can only be the enhancement of the penalty imposed by the adjudicating officer.

So, this new provision adds a new layer to the appellate hierarchy for the orders of adjudicating officers under Section 15T of the SEBI Act.

The reasons for introducing this new provision are hard to determine. The current provisions in the SEBI Act and the corresponding rules are aimed at providing independence to the adjudicating officer, particularly where the penalty is concerned. Since the investigating arm of the SEBI presents the case before the adjudicating officer, it seems odd that the SEBI itself can then call the penalty imposed into question.

No search and seizure without recorded reasons

SecuritiesThe 2014 Ordinance has an additional requirement in the provision amending Section 11C of the SEBI Act. Now, the Chairman can only conduct search and seizure operations “after recording the reasons thereof in writing”. This additional clause provides a check against the misuse of search and seizure powers and emphasises the Chairman’s responsibility to ensure that such invasive measures are authorised only in necessary circumstances.

Assistance from the police

With the introduction of Section 8A in the SEBI Act, an authorised officer (that is, the investigating officer) can “requisition the services of any police officer or Central Government officer or both” to assist in search and seizure operations.

These additional provisions in the 2014 Ordinance may not remain when new securities laws are finally enacted by the Parliament. The use of these powers by the SEBI in the interim could possibly determine their final form.

(Deeksha Singh is part of the faculty on


What now for the SEBI after Ordinance lapse?

DeekshaSinghIn July and September last year, the Securities Laws (Amendment) Ordinance, 2013 (“the Ordinance”) was promulgated to amend three key components of the securities law statutory framework—the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Depositories Act, 1996.

The Ordinance was expected to enable the Securities and Exchange Board of India (“SEBI”) to effectively enforce the existing statutory and regulatory framework. We have discussed the provisions of the Ordinance here and here.

Despite being promulgated twice however, the Ordinance lapsed earlier this month and now cannot be reissued. What does this mean for the SEBI?

Diminished powers

Sections 10, 15, and 21 of the Ordinance had enhanced the power of the SEBI to take strict action against defaulters, including:

– attachment and sale of movable property;

– attachment of bank accounts;

– attachment and sale of  immovable property;

– arrest and detention in prison; and

– appointing a receiver for the management of the movable and immovable properties.

New-Programme-LaunchExercising the new powers it had been seeking for a long time, the regulator passed over 300 attachment orders for recovering close to Rupees 1,700 crore from defaulters. The lapsing of the Ordinance will not affect these orders, as they were made while the Ordinance was still in effect. However, the SEBI cannot pass such orders any longer even for defaults that may have occurred while the Ordinance was still in effect. While SEBI can adjudicate and declare fines and penalties against defaulters, they can no longer proceed against the property of defaulters or carry out arrests for non-compliance with orders.

New regulations

The Ordinance gave additional powers to the SEBI including the power to conduct search and seizure of persons and premises. The SEBI could also call for information and records relevant for information, including telephone call data records. Pursuant to the establishment of these new powers, the SEBI had, earlier this month, also issued the SEBI (Procedure for Search and Seizure) Regulations, 2014. Naturally, now that the SEBI no longer has the powers of search and seizure (more about those powers here), these regulations are no longer relevant.

At the same time that the search and seizure regulations were issued, SEBI had also issued the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. These regulations established a proper procedure for cases involving settlement, including eligibility for settlement, application and so on. The SEBI Chief has expressed the view that the settlement regulations mentioned above were issued while the Ordinance was in effect, and therefore, they continue to have the force of law.

My view is that while the SEBI Chief may be right about any settlements made under the regulations while the Ordinance was still in effect, the argument cannot be extended to mean that the SEBI has the power to issue settlement orders under the regulations now. The Preamble to the regulations clearly states:

In exercise of the powers conferred by section 15JB of the Securities and Exchange Board of India Act, 1992, section 23JA of the Securities Contracts (Regulation) Act, 1956 and section 19-IA of the Depositories Act, 1996 read with section 30 of the Securities and Exchange Board of India Act, 1992, section 31 of the Securities Contracts (Regulation) Act, 1956 and section 25 of the Depositories Act, 1996, the Securities and Exchange Board of India hereby makes the following regulations to provide for the terms of settlement and the procedure of settlement and matters connected therewith or incidental thereto, namely:

The sections mentioned in the initial part of the Preamble were all inserted by the Ordinance, and since the Ordinance has now lapsed, these regulations cannot be made applicable to proceedings against defaulters. The SEBI should issue a revised set of regulations for now, without making reference to the amended sections introduced by the Ordinance.

The lapsing of this Ordinance is a setback to the growth of the SEBI, which had been armed to cope with the large number of securities laws defaulters in our country. We can only hope that the positive effects of this Ordinance are not rendered meaningless and that an amendment is enacted giving the SEBI the necessary powers to effectively regulate our markets.

(Deeksha Singh is part of the faculty on


SEBI officers should be trained in conducting legal searches

DeekshaSinghThe Securities and Exchange Board of India (“SEBI”) now has new powers of search, seizure, arrest, detention, and attachment of property. This followed the promulgation of the Securities Law (Amendment) Ordinance, 2013 and the securities regulator has turned to the Income Tax (“IT”) department for help in training its officers in the exercise of these powers. For a detailed analysis of these powers, see this link.

Jurisprudential background

The powers of search, seizure, arrest, and detention — whether exercised by civil authorities like the IT department or the police — are intrinsically linked to certain basic human rights. In particular, Articles 19 and 21 of the Constitution of India, 1950, have been interpreted, in a number of cases, to be directly linked to the right to due process of law.

In Kishore Singh Ravinder Dev v. State of Rajashthan, AIR 1981 SC 625 — a landmark judgment regarding the rights of accused persons — the Supreme Court highlighted the necessity of ensuring that the constitutional, evidentiary, and procedural laws of our country protect the dignity of the accused as a human being and grant him the benefits of a just and fair trial.

Specifically with reference to procedure, in Maneka Gandhi v. Union of India, AIR 1978 SC 597, the Supreme Court underlined that the state must follow just, fair, and reasonable procedure.

While these principles, of course, form the backbone of criminal procedure, they are equally applicable to procedures for arrests, search, and seizure followed by civil authorities like the IT department and now, the SEBI.

In this post, we will discuss some key principles relating to the search and seizure powers of the IT department that are dealt with in Section 132 of the Income Tax Act, 1961. These principles should apply equally to the SEBI.

Basis of search and seizure

For an assessing officer to conduct a legal search and seizure process, that assessing officer should have information about undisclosed amounts of money and reasonably believe that that person is likely to suppress books of accounts and other relevant documents.

In Commissioner of Income Tax v. Ramesh Chander, (1974) 93 ITR 450 (Pun.), the Punjab and Haryana High Court held that the condition precedent for authorising a search and seizure is that the assessing officer must have reason to believe the necessity of carrying out such a search and seizure. The power can be exercised only if this condition is fulfilled.

On the same lines, a search and seizure operation by the SEBI, which would mostly occur — one would imagine — in insider trading cases, should be backed by a demonstrable belief on the part of the authorising officer that such an operation is, in fact, necessary.

Use of material from illegal searches

An interesting principle applicable to searches conducted by the IT department is that if a search is rendered illegal on a technicality, it will not result in the material obtained from such a search being excluded for the purposes of ordinary assessment.

Binoculars_search_seizureIn Pooran Mal Etc. v. Director of Inspection (Investigation), Income Tax, 1974 AIR 348, the Supreme Court held that materials obtained during an illegally or irregularly conducted search or seizure can be utilised for the purpose of an ordinary assessment. In this case, the Court upheld the validity of the provisions of Section 132. Further, on admissibility of evidence, it stated:

Courts in India and in England have consistently refused to exclude relevant evidence merely on the ground that it is obtained by illegal search or seizure. Where the test of admissibility of evidence lies in relevancy, unless there is an express or implied prohibition in the Constitution or other law, evidence obtained as a result of illegal search or seizure is not liable to be shut out.

This case was examined in later cases relating to admissibility of evidence obtained through illegal search, and the Supreme Court in State of Punjab v. Baldev Singh expressed a nuanced opinion of the decision in the Pooran Mal Case.

[T]he judgment in Pooran Mal’s case cannot be understood to have laid down that an illicit article seized during a search of a person, on prior information, conducted in violation of the provisions of Section 50 of the Act, can by itself be used as evidence of unlawful possession of the illicit article on the person from whom the contraband has been seized during the illegal search”.

We can conclude therefore, that while evidence will be admissible if there is an illegality during the search process, evidence obtained during the search can be rendered inadmissible if an illegality occurs at the threshold of the search.

While the same principles may apply to searches conducted by the SEBI, SEBI officers should still be trained in conducting legal searches. Given that these powers have been granted to expedite action by the SEBI in cases involving fraud, insider trading, and other serious violations, it is important that the SEBI does not allow proceedings to be stalled owing to technical flaws in process.

We should note that the principles mentioned above evolved over time through various decisions related to the IT department and stem from the language and intent behind Section 132 of the Income Tax Act, 1961. It still remains to be seen whether the provisions of the Securities Law (Amendment) Ordinance, 2013 will find their way into a statute and what principles will govern the SEBI’s exercise of its newfound powers.

(Deeksha Singh is part of the faculty on