Written by Sandeep Parekh
Securities markets are always evolving and the regulator must always stand on its own two feet, revising and updating its rules and practices with the changing environment. Therefore, the regulator should reconsider its policies in certain cases.
Recently, various guideline letters and directives issued by SEBI have created confusion as to what services an entity can provide in the power of a registered mediator. In light of the recent show cause notice, and the settlement order passed by SEBI in the case of Amit Jeswani, the scope of services that may be provided by SEBI-registered research analysts (RA) has come under review, where SEBI has complained to SEBI (Research Analyst) Regulations, 2014-. Model portfolio services to its customers outside the scope of RA as defined under it, as it does not give investors the option to invest in stocks other than the stocks mentioned in the model portfolio. These results call into question current market practice based on the understanding that such model portfolios fall within the scope of research reporting because they only provide recommendations for specific securities to buy / sell / hold, based on a specific theme and not clients. – Specific recommendations. Although the scope of the activities clearly falls within the definition of a RA, SEBI has developed its own, more limited definition of sending a show cause notice, assuming that the allotment of shares is allowed, not the allocation of a model allocation percentage.
Similar confusion has arisen over the ability of SEBI-registered intermediaries to advise on foreign securities, as has been the case with various informal guidance letters issued to Ask Wealth Advisors. Deviating from the conventional market practice, SEBI stated that ‘Securities’, as defined under Section 2 (h) of the Securities Contracts (Regulation) Act, 1956, includes only those instruments issued, listed or listed by Indian companies. Has been, and section. 24 of the Companies Act 2013 only empowers SEBI to handle matters relating to securities listed on recognized stock exchanges of India. This will limit the opportunity for Indian investors to take full advantage of the geographical diversity. In the face of this confusion, regulators must provide a clear outline of the scope of services provided by SEBI-registered intermediaries to allow these entities to remain loyal at all times.
Another group of market intermediaries that have recently been affected by the regulator’s policy proposal is the ESG rating provider (ERP). As ESG investments in the domestic market accelerate, so does the demand for reliable ESG ratings, and as the number of players in the market grows, some quality control issues such as greenwashing and misallocation of resources are highlighted and need regulators. To address the need for supervised regulated ERP, SEBI recommends that only registered credit rating agencies (CRA) and RA-E be eligible for recognition as ERP, excluding other entities that provide these services. It will also act as an entry barrier for foreign players who are currently dependent on large Indian companies and foreign investors who generally prefer to get an ESG rating from world-renowned ERPs. Thus, while Sebi’s initiative to require mandatory accreditation for ESG is commendable, it is recommended that it reconsider the eligibility requirements and allow such recognition to other entities subject to meeting infrastructure and technical requirements.
Another aspect that requires regulatory review is the process of investigation and application and the quality of evidence applicable to them. Conventional practice, especially when investigating insider trading violations, relies on a combination of contradictory assumptions and circumstantial evidence. However, such practices allow SEBI to prosecute serious offenses on the basis of low quality of evidence while imposing undue burden on the notice to prove their innocence. In its recent judgment on Balaram Gorg v. Sebi, the Supreme Court has said that such allegations would be subject to a higher standard of evidence, which would be a “predominance of probability” based on an assessment of all available information. The situation, which must be of a final nature and should be such that all other conjectures are omitted but one is proposed to be proved. The SC said that the level of distance and reliance on conjecture should be reduced without any specific evidence.
Another key aspect of the application process that should be reconsidered is the segregation order issued by SEBI. In many of the orders adopted by SEBI, splitting guidelines are made on the basis of alleged conceptual gain without establishing any actual gain made by such notice, thus acting as a de facto penalty imposed by them. This not only violates the established principle of division but also goes beyond the scope of section 11B of the Securities and Exchange Board of India Act, 1992, where the interpretation of section 11B limits the scope of division to the extent of actual unlawful gain. Avoid damage. SEBI also reiterated this principle in its order regarding Dhyan Finstock Ltd. where the Judicial Officer, while determining the amount of separation, assumed that the separation of funds would only avoid actual gain or loss, and accordingly set aside the amount of separation related to the conceptual gain created by the notice. Therefore, it is imperative that SEBI reconsiders not only the manner in which it conducts its investigative and enforcement activities but also the quality of evidence applicable when alleging violations and to provide fair and equitable treatment to those against whom such notices and directives have been issued.
Although the need for cogent regulation is always felt in the market, regulators need to be wary of over-regulation that inadvertently reduces stakeholder activity and growth. Effectively addressing the concerns raised above will not only provide the necessary clarity but also give stakeholders the confidence to expand their operations in the market without fear of regulatory clampdown. Only the rogues will tremble when the Sebi knocks on the door, not every person who makes a mistake or violates the relatively innocent provisions of the law.
The author is a managing partner, FinSec Legal Adviser
Co-author Mihir Deshmukh, Associate, FinSec Legal Adviser