WP-2011-008
               Improving the legal process in enforcement at SEBI
                          Dharmishta Raval
               Indira Gandhi Institute of Development Research, Mumbai
                            April 2011
                 http://www.igidr.ac.in/pdf/publication/WP-2011-008.pdf
                        Improving the legal process in enforcement at SEBI
                                         Dharmishta Raval
                             Indira Gandhi Institute of Development Research (IGIDR)
                                     General Arun Kumar Vaidya Marg
                                    Goregaon (E), Mumbai- 400065, INDIA
                             Email (corresponding author):  ravalandraval@gmail.com
                                              Abstract
               The first statutory regulatory body that the government of India set up post the reforms of 1991 was the
               Securities and Exchanges Board of India (SEBI). As a regulator for the securities markets, SEBI was
               given the powers to create subordinate legislation and to investigate wrong-doing and impose relevant
               penalties. In this paper, we examine and describe the legal processes at SEBI with a focus on the
               enforcement process, particularly on the quasi-judicial functions. We make an attempt to lay out the
               principles that ought to drive such functions in a regulatory body, against which we compare the
               current workings at SEBI. We propose a series of improvements through which the rule of law could be
               further strengthened.
               Keywords:
               enforcement process, securities market regulation
               JEL Code:
               G28, K22, K23, K41, K42
               Acknowledgements:
               This paper was produced as part of the \"Financial Sector Regulatory Reforms\" project at IGIDR.
                                                 i
                                  Improving the legal process
                                     in enforcement at SEBI
                                             Dharmishta Raval∗
                                               19 March 2011
                                                   Abstract
                            The first statutory regulatory body that the government of India
                         set up post the reforms of 1991 was the Securities and Exchanges
                         Board of India (SEBI). As a regulator for the securities markets,
                         SEBI was given the powers to create subordinate legislation and to
                         investigate wrong-doing and impose relevant penalties. In this paper,
                         we examine and describe the legal processes at SEBI with a focus on
                         the enforcement process, particularly on the quasi-judicial functions.
                         Wemakeanattempttolayouttheprinciples that ought to drive such
                         functions in a regulatory body, against which we compare the current
                         workings at SEBI. We propose a series of improvements through which
                         the rule of law could be further strengthened.
                      ∗I would like to thank M. S. Sahoo of SEBI, Ajay Shah of NIPFP and Susan Thomas at
                    the IGIDR Finance Research Group for initial discussions defining the scope and structure
                    of the paper. Sumedha Sarkar provided excellent research support in creating Table 1
                    analysingSAThearingoutcomes. Thepaperhasalsobenefittedgreatlyfromthecomments
                    and criticisms of two anonymous referees.
                                                       1
                       Contents
                       1 Introduction                                                                      3
                       2 The regulator in the new India                                                    4
                       3 Legal process at SEBI                                                             6
                           3.1   SEBI’s mandate . . . . . . . . . . . . . . . . . . . . . . . . . .        7
                           3.2   Legislation delegated by the SEBI Act, 1992 . . . . . . . . . .           7
                                 3.2.1   Delegated legislation by GOI . . . . . . . . . . . . . . .       10
                                 3.2.2   Delegated legislation by SEBI . . . . . . . . . . . . . .        10
                                 3.2.3   Parliamentary control over SEBI regulations . . . . . .          12
                           3.3   Process for Informal Guidance . . . . . . . . . . . . . . . . . .        12
                           3.4   Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . .      14
                                 3.4.1   Inspections and Investigations . . . . . . . . . . . . . .       14
                                 3.4.2   Orders and Directions       . . . . . . . . . . . . . . . . . .  16
                       4 Principles                                                                       21
                           4.1   Transparency and fairness in regulatory functioning . . . . . .          21
                           4.2   Enforcement mechanism . . . . . . . . . . . . . . . . . . . . .          22
                           4.3   Administrative adjudication: Quasi Judicial proceedings           . . .  23
                           4.4   Judicial control of administrative action       . . . . . . . . . . . .  25
                           4.5   Examples from the international experience          . . . . . . . . . .  25
                       5 Some proposals for change                                                        27
                           5.1   Rule making process by the Central Government . . . . . . . .            27
                           5.2   Regulation making process by SEBI . . . . . . . . . . . . . . .          29
                           5.3   Constitution of SEBI . . . . . . . . . . . . . . . . . . . . . . .       30
                           5.4   Informal guidance . . . . . . . . . . . . . . . . . . . . . . . . .      31
                           5.5   Recommendations for the enforcement process . . . . . . . . .            31
                       6 Conclusion                                                                       37
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