A parliamentary committee has recommended structural changes to the Securities Markets Code to improve the legal clarity of SEBI enforcement actions. The proposal includes separating investigation and adjudication roles and extending the probe period to one year. These changes aim to enhance transparency and reduce legal disputes, potentially making regulatory actions more predictable for market participants.
A recent review by a parliamentary standing committee on the proposed Securities Markets Code suggests fundamental shifts in how the Securities and Exchange Board of India (SEBI) conducts enforcement. The committee’s recommendations focus on creating a more balanced framework that maintains the regulator's authority while strengthening procedural fairness and legal accountability.
Structural Separation of Powers
One of the most significant proposals is the functional separation between SEBI's investigation wing and its adjudication department. Currently, the overlap in these functions has occasionally been a point of debate regarding the impartiality of proceedings. By separating these roles, the committee aims to improve the efficiency and objective nature of enforcement actions. This structural change is designed to ensure that the process from inquiry to final order follows a more structured, independent path.
Changes to Investigation Timelines
Recognizing the complexity of modern financial market investigations, the committee has recommended extending the permissible investigation period from the current 180 days to one year. This adjustment is intended to provide investigators with sufficient time to gather comprehensive evidence. To prevent unnecessary delays, the proposal includes safeguards that require the regulator to record specific reasons for any extension, ensuring that the process remains disciplined and transparent. Additionally, the committee has advised removing a provision that could have allowed SEBI to create new criminal offenses through regulations, a move intended to align the code more closely with constitutional standards.
Enhancing Legal Sustainability
To reduce the volume of legal challenges faced by the regulator, the committee has proposed clearer standards for quantifying unlawful gains and implementing objective limits on reopening cases after an eight-year period. These reforms are expected to provide greater certainty to market entities by setting defined thresholds for enforcement. Furthermore, the committee has suggested additional safeguards regarding interim orders and investor grievance procedures to protect market integrity.
While these reforms are aimed at strengthening the legal defensibility of SEBI's actions, some areas may still lead to future litigation. Specifically, the proposed changes regarding the role of depositories in fraud cases and the regulator’s power to modify penalties imposed by adjudicating officers could create points of friction. The final implementation of these rules will be critical, as the interaction between these new powers and the authority of the Securities Appellate Tribunal will need to be clearly defined to avoid jurisdictional disputes. For investors, these changes represent a move toward a more predictable regulatory environment, though the effectiveness of these measures will depend on the final legislative language and subsequent enforcement standards.