2010 –The Big Year in securities enforcement

The year 2010 has been a landmark year for securities law enforcement in India. Last year SEBI aggressively pursued its investigations against companies and market intermediaries and it resulted in some of the landmark orders (like the penalty imposed on enam securities, prohibition of sahara group from accessing capital markets, prohibitions imposed on FIIs for violating reporting norms etc.). Many orders passed by SEBI/SAT in 2010 (like the Subhkam case, MCX case) were characterized by its comprehensive analysis of the applicable rules and implications on the capitals markets. In the legislative front, the proposed takeover code and report on ownership of stock exchanges proposed certain out of the ordinary rules and received much criticism from the industry. In addition, SEBI also issued certain important rules/ regulations like the mandatory 25% public shareholding rule, introduction of volatility index and the pre-open session, regulation of media companies and the private treaty business etc. At the same time, SEBI also had its own share of controversies like the ban of ULIPS, its refusal to grant permission for running stock exchanges in the case of MCX etc.

A brief summary of the important events of the year 2010 is given below:

1.    Ban on Sahara

In November 2010 SEBI banned the directors and promoters of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited from accessing capital markets. This was pursuant to a possible violation by the Sahara Group of DIP Guidelines/ICDR Regulations and the other applicable laws in relation to raising capital from the public. This was followed by a number of legal developments including Sahara Group publicly challenging the authority of SEBI through newspapers etc. Later SEBI put up a notice on its website cautioning the investors against investing in the above mentioned companies and the matter is currently pending before the Supreme Court.

2.    Fine imposed on Enam

The year 2010 ended with the news of SEBI imposing a fine of 25 lakh rupees on Enam Securities for its failure to exercise due diligence in the public offer of YES Bank. SEBI also noted that Enam Securities, who were the BRLM to the IPO of Yes Bank, failed to disclose, in the offering document, Rabobank International Holding B.V. as the promoter of Yes Bank.

3.    Rejection of the application of MCX-SX

In September 2010 SEBI rejected the application of MCX-SX to run bourses trading various products, including stocks and equity derivatives, saying that it wasn't in "the interest of trade and public interest to allow the application". In its order SEBI has stated that MCX-SX is not fully compliant with Manner of Increasing & Maintaining Public Shareholding (MIMPS) norms for recognised stock exchanges. This SEBI order too unfolded into a controversy and it was followed by the submission of the report of the Bimal Jalan committee on "Review of Ownership and Governance of Market Infrastructure Institutions" which added fuel to the fire. The order of SEBI is currently under the review of the Bombay High Court upon a writ petition filed by MCX-SX challenging the same.

4.    Ban on issuance of ULIPS

SEBI in April 2010 stated that ULIPs (Unit Linked Insurance Plans) are a combination of investment and insurance and therefore it can be offered/launched only after obtaining registration from SEBI under section 12(1B) of the SEBI Act. Through its order SEBI directed insurance companies not to raise money from investors through ULIPs without obtaining prior registration from SEBI. Not surprisingly this order too lead to a war of words between the two regulators (SEBI & IRDA) until the Central Government stepped in and passed an ordinance amending the RBI Act 1934, Insurance Act 1938, SEBI Act 1992 and Securities Contract Regulations Act 1956 clarifying that life insurance business would include any ULIPs or scripts or any such instruments. This brought an end to the 2 months long battle between the regulators SEBI and IRDA, by giving IRDA the jurisdiction over ULIPs business.

5.    Rules/ Regulations

It was in year 2010 that SEBI effectively addressed the need for consolidated circulars by issuing master circulars following the footsteps of the RBI. These master circulars are compilations of the circulars/communications issued by SEBI up to the date of the master. As on today SEBI has issued master circulars for stock exchanges and depositaries, mutual funds, anti-money laundering, administration of stock exchanges, stock exchanges- cash market and Exchange traded derivatives.

SEBI also introduced call auction mechanism in pre-open session and permitted stock exchanges to introduce derivative contracts on volatility index in the year 2010.

6.    Committee Reports

Two major committee reports were submitted in the year 2010 namely (i) Report of the Bimal Jalan committee on "Review of Ownership and Governance of Market Infrastructure Institutions" and (ii) Report of the Achuthan Committee on Takeover Regulations. It is worthy to note that SEBI so far has not acted upon these reports.

7.    Others

Veto rights not to constitute 'Control'

In January 2010, SAT in the matter of Subhkam Ventures (I) Private Limited v. SEBI held that that veto rights in favour of certain shareholders to veto certain actions proposed to be undertaken by the company (affirmative voting rights in the shareholders agreements) do not constitute 'Control' under the Takeover Code and that the shareholders having such affirmative rights need not make an open offer under the Takeover Code to the other public shareholders of the target company. This SAT decision is currently under Supreme Court's scrutiny. In the event the Supreme Court agrees with the SAT decision it would be beneficial to private equity (PE) and venture capital (VC) firms in India.

Offerings

In the offerings front, Standard Chartered Bank, for the first time, successfully raised capital from India through Indian Depository Receipts (IDR) route.

Regulation of media companies

SEBI made it mandatory for media companies to disclose the details of the stake held by such media companies in various companies. SEBI stated that such disclosures should be made in the news report/ article/ editorial in newspapers/television relating to the company in which the media group holds such stake.

What to expect in 2011?

The year 2011 started with the news of SEBI settling a case with Anil Ambani group companies for a record settlement amount of Rs. 50 crore. SEBI also barred two Anil Ambani group companies from investing in the secondary markets till December 2012 for allegedly routing money raised through overseas bonds to the stock market in 2007. This was followed by news reports that SEBI plans to levy a record penalty upto 1500 crores on Reliance Industries (RIL) for its alleged involvement in insider trading.

In light of the above, one may safely assume that SEBI is getting stricter with its enforcement measures and going forward SEBI enforcement measures would assume more importance than its role as a law maker. Recently Shri U K Sinha took charge as the Chairman of SEBI replacing the Shri CB Bhave. As his predecessor is credited as one of the best heads SEBI ever had, Shri U K Sinha has big shoes to fill.