May 17, 2023SEBI moves to Crowdsource Information to Augment Recovery of Penalties
The Indian securities regulator, the Securities and Exchange Board of India (SEBI) on 8 March 2023, introduced the Securities and Exchange Board of India (Grant of Reward to Informant under Recovery Proceedings) Guidelines, 2023 (RRP). SEBI has launched this program in exercise of its powers under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 (the “SEBI Act”).
SEBI’s Perennial Woes in Recovering Penalties
For several years, SEBI has been plagued with challenges in recovering the penalty imposed on defaulters. Prior to 2013, SEBI was not empowered to recover such penalty, which severely circumscribed its powers as the regulator of securities laws in India. This lacuna was finally rectified through the enactment of the Securities Laws (Amendment) Act, 2014.
“While this amendment equipped SEBI with the necessary teeth to enforce and recover the penalty levied by it, SEBI still faced several challenges in recovery of penalties.”
The amendment introduced Section 28A to the SEBI Act, which empowers SEBI to recover penalties including byattaching and selling the defaulters movable/immovable assets. While this amendment equipped SEBI with the necessary teeth to enforce and recover the penalty levied by it, SEBI still faced several challenges in recovery of penalties.
To address these issues, a High-Level Committee under the Chairmanship of Justice Anil Dave, Retired Judge of the Supreme Court was formed in December 2017 to suggest measures for strengthening the enforcement mechanism for SEBI. One of the challenges identified by the Committee in its final report of June 2020, impacting recovery, was the transfer of assets by defaulters to third parties, after the final order was passed but during the pendency of the recovery proceedings. The Committee alsoconsidered the powers of the Securities and Exchange Commission of the United States of America (SEC) and suggested certain changes to further empower SEBI.
While some critical recommendations suggested in the report to aid recovery are still to be implemented, SEBI in the interim has launched the RRP.
Key Features of the RRP
SEBI, through the RRP, seeks to incentivise individuals to disclose information regarding untraceable assets. The RRP identifies the following in the “difficult to recover” dues category:
- an individual who is untraceable, has become insolvent, died or has no attachable assets;
- an Indian company/body corporate/firm has become defunct and whose directors, who are also defaulters, have no attachable assets; and
- in case of a foreign entity, is one which has no presence/place of business/management in India as well as no representative or attachable assets in India.
The RRP rewards individuals who provide sufficiently specific and credible information, provided such information assists SEBI in identifying and attaching the assets of defaulters in the “difficult to recover” category. If a person meets this requirement, the RRP contemplates providing reward(s) in the following two stages:
- Interim stage: If the asset(s) for which the information is given is found to be unencumbered and a minimum price is fixed for such asset, an interim reward not exceeding lesser of 2.5% of such minimum price or INR500,000, may be given to the informant; and/or
- Final stage: Once the recovery process in relation to the asset is completed, a final award not exceeding lesser of 10% of the dues recovered from such asset(s) or INR 2 million may be given to the informant.
All such rewards are proposed to be paid from the Investor Protection and Education Fund and shall be subject to the discretion of the concerned authority. The factors which will be considered while determining the reward amount are:
- accuracy of information;
- extent and nature of the informant’s assistance;
- quantum of work involved in utilising the information;
- amount recovered from such information; and
- informant’s risk and trouble as well as the expense incurred by such informant in securing the information.
Accordingly, the determination of the reward is a subjective determination. The RRP further contains an assurance that the identity of the informant shall be held in confidence.
Global Success of Regulator Driven Public Participation Programmes
The RRP seeks to replicate the public participation models adopted by various nations around the globe. Over the years, this model has proved successful in leveraging public participation to uncover possible legal violations, identify concealed/siphoned off funds/assets and expose acts of bribery. These programmes are particularly attractive since they help bridge the gap between the information available to governmental departments through public records and the defaulters’ attempts to manipulate/contravene the legal framework for their personal gain.
The success of such programmes is evident from the whistleblower programme implemented by the SEC, which encourages individuals to report fraud and misconduct involving security law violations in exchange of a reward. This programme has been implemented under the Securities Exchange Act, 1934 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010. As per the 2022 annual report of the SEC Whistleblower Office, the Commission received over 12,300 whistleblower tips during the financial year and awarded approximately USD229 million in 103 awards.
In Canada, the Ontario Securities Commission (OSC) has also implemented a similar public participation program which encourages individuals to report information on serious securities or derivatives related misconduct to OSC in exchange for a reward. This programme has been launched pursuant to the OSC’s duty under the Securities Act, RSO 1990, to provide protection to investors from unfair, improper or fraudulent practices.
“The RRP is unique to the extent it focuses on tracing assets to recover the penalty, after the violation has been identified and the defaulter has been punished.”
Similarly, South Korea has been successfully using public participation programmes such as the Tax Evasion Informant Reward Programme and the Foreign Financial Account Report Reward Programme to counter attempts by individuals to violate the country’s legal framework for their personal gain. In the past seven years, South Korea has awarded informants rewards aggregating to approximately USD44 million.
SEBI has implemented a programme similar to the model adopted by SEC and OSC, of incentivising individuals to report the violation of securities laws (Chapter IIIA, SEBI(Prohibition of Insider Trading) Regulations, 2015). Other governmental departments in India have also launched public participation schemes to unearth information regarding concealed assets in return for a reward. For instance, the Ministry of Finance has launched public participation programmes to uncover information regarding tax evasion (Income Tax Informants Rewards Scheme, 2018) and benami transactions (Benami Transactions Informants Rewards Scheme, 2018).
While the aforementioned schemes focus on tracing the violation itself, the RRP is unique to the extent it focuses on tracing assets to recover the penalty, after the violation has been identified and the defaulter has been punished.
Recovery – the Road Ahead
It is hoped that the RRP will assist SEBI in addressing its perennial hardship of enforcing the penalty against defaulters who have been successful in surreptitiously hiding their assets to escape liability. It is further expected that the recommendations of the High-Level Committee will also be introduced in the near future, to further strengthen SEBI’s recovery mechanism. The following suggestions may come of assistance to SEBI in further strengthening its enforcement mechanism:
- introducing of Securities and Exchange Board of India (Recovery) Regulations, setting out a procedure for recovering amounts due;
- defining the term “property” to provide clarity on the kind of properties which may be attached for the purposes of recovering dues under the certificate drawn up under Section 28A of the SEBI Act;
- giving the Recovery Officer the power to seek from any person, any information which may be relevant to execution of the certificate of recovery or to any investigation or inquiry by the Recovery Officer; and
- giving an option to the Central/State government to purchase the attached property at a price not lower than the reserved price, if the property remains unsold in auction.