India

What are the relevant statutes and which government authorities are responsible for investigating and enforcing them?

Relevant statutes

Listed securities in India are primarily governed by three statutes: the Securities and Exchange Board of India Act 1992 (the SEBI Act); the Securities Contract (Regulation) Act 1956 (SCRA); and the Depositories Act 1996 (the Depositories Act), each as amended (collectively, the Primary Statutes).

The Securities and Exchange Board of India (SEBI) is the principal regulator responsible for securities law in India. SEBI was established to protect the interests of investors and to promote the development of, and to regulate, the securities market.^[2] The SEBI Act provides for, among other things: the powers and functions of SEBI;^[3] the registration of intermediaries (such as stock brokers, sub-brokers and share transfer agents);^[4] the imposition of penalties by, and powers of adjudication of, SEBI;^[5] the establishment, jurisdiction, authority and procedure of an appellate tribunal (i.e., the Securities Appellate Tribunal (SAT)) to hear and decide appeals against SEBI’s orders;^[6] and making rules and regulations to achieve the objectives of the SEBI Act.^[7]

The SEBI Act is a special law, and the powers of SEBI under the Act are not fettered by other laws on matters governed under the Act.^[8]

The SCRA was enacted to prevent undesirable transactions in securities by regulating the business of dealing in securities.^[9] The SCRA provides for, among other things: the recognition, corporatisation and demutualisation of stock exchanges;^[10] the powers of SEBI and the government of India to regulate recognised stock exchanges;^[11] the provisions governing contracts and options in securities and listing of securities;^[12] and the penalties for contravention of the SCRA and the process of adjudication of such proceedings.^[13]

The Depositories Act was enacted for the regulation of depositories and provides for, among other things, the rights and obligations of depositories, participants, issuers and beneficial owners of securities.^[14]

Pursuant to the powers granted to it under the Primary Statutes, SEBI has issued several regulations (collectively, the SEBI Regulations), including the following:

• the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (the FUTP Regulations), which, among other things, prohibit fraudulent and unfair trade practices relating to the securities market, such as manipulation of books of accounts, false or misleading appearance of trading and dealing in securities to inflate, depress or cause fluctuations in the price of such security;
• the SEBI (Prohibition of Insider Trading) Regulations 2015 (Insider Trading Regulations), which, among other things, restrict communication of, and trading by insiders on the basis of, unpublished price-sensitive information, require disclosure of trading by insiders, mandate codes of fair disclosure and conduct to be followed by listed entities, and provide the legal regime applicable to violations of these regulations;
• the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the Takeover Code), which, among other things, provide thresholds for the substantial acquisition of shares,^[15] voting rights or control in listed entities by an acquirer along with persons acting in concert, the process for such acquisition and the requirements for disclosure of acquisition of such shares, voting rights or control;
• the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations), which, among other things, specify the obligations of listed entities, including in relation to corporate governance matters to protect the interests of shareholders and investors;
• the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, which, among other things, provide for the conditions (including disclosure requirements in the offer document) and process for listing of securities by an Indian company and further issuance of securities by a listed entity (including by way of qualified placement to institutions, follow-on public offer and issuance of shares through a preferential allotment basis or a rights issue in India, or both);
• the SEBI (Merchant Bankers) Regulations 1992, which, among other things, specify the process of, and qualification for, registration with SEBI allowing entities to act as merchant bankers and their general obligations and responsibilities; and
• the SEBI (Intermediaries) Regulations 2008, which, among other things, provide for the registration and obligations of intermediaries, inspection and disciplinary proceedings against intermediaries by SEBI, and action in case of default and manner of suspension or cancellation of certificate of registration of such intermediaries.

SEBI has also issued regulations governing specific categories of investors, including foreign investors, such as:

• the SEBI (Foreign Portfolio Investors) Regulations 2019;
• the SEBI (Foreign Venture Capital Investors) Regulations 2000; and
• the SEBI (Alternative Investment Funds) Regulations 2012.

The above regulations govern:

• the process for registration of such classes of foreign investors;
• applicable investment conditions and restrictions;
• foreign investors’ general obligations and responsibilities; and
• the procedure for action in case of default by such investors.

Additionally, there are certain other statutes and regulations that may be violated in the event of a breach of securities law. These include:

• the Companies Act 2013 and the rules framed thereunder (collectively, the Companies Act) for regulation of companies;
• the Reserve Bank of India Act 1934, pursuant to which the Indian central bank (the Reserve Bank of India (RBI)) is established and provides for, among other things, the regulation of transactions in derivatives, money market instruments and securities;
• the Foreign Exchange Management Act 1999 for regulation of foreign exchange markets by the RBI and the regulation of current account and capital account transactions (including in relation to the transfer and issue of securities of Indian listed entities);^[16] and
• the Prevention of Money Laundering Act 2002, which aims to prevent money laundering and provides for confiscation of property in relation to certain specified offences.

Regulators

SEBI acts as the principal, but not the exclusive, regulator for securities laws in India. It has extensive statutory powers, including the power to: issue appropriate directions to a person who is associated with the securities market, in the interest of investors in securities and the securities market;^[17] regulate stock exchanges; prohibit insider trading; regulate substantial acquisitions of shares and takeovers of companies; and conduct inquiries and audits of entities associated with the securities market.^[18] Certain provisions of the Companies Act in relation to the issue and transfer of securities, share capital and debenture, and non-payment of dividends by listed companies are also enforced by SEBI.^[19]

SEBI is empowered to take civil and criminal enforcement actions. Civil actions generally involve issuing directions, such as: remedial orders;^[20] cease-and-desist orders^[21] and imposition of monetary penalties;^[22] suspension or cancellation of an intermediary’s certificate of registration;^[23] suspension of trading of any security in a recognised stock exchange;^[24] restraining persons from accessing the securities market and prohibiting persons from buying, selling or dealing in securities;^[25] issuance of directions;^[26] and other prohibitive orders.^[27] Criminal action involves SEBI initiating prosecution against alleged violators by filing criminal complaints before the competent courts.^[28]

SEBI has the power of a civil court for the discovery and production of books of accounts and other documents, summoning and enforcing the attendance of persons and examining them on oath, and inspection of books, registers or other documents, in relation to listed companies or public companies that intend to list their securities on a recognised stock exchange.^[29] In fact, SEBI itself determines the legal measures it will adopt to fulfil the functions assigned to it by the SEBI Act.^[30]

In addition to SEBI, the Indian securities market is regulated and monitored by the Ministry of Finance (MoF) through the Capital Markets Division and the Financial Markets Division, and by the RBI. The MoF is, among other things, responsible for formulating the policies related to the orderly growth and development of the Indian securities market.^[31]

Recognised stock exchanges in India have issued by-laws and monitor compliance by listed entities with such by-laws and the Listing Regulations. The by-laws are concerned with, among other things, regulation and control of securities contracts, dealings in securities, rights and liabilities of trading members.^[32] The stock exchanges investigate complaints in relation to their trading members or stock brokers and can suspend trading of, or withdraw admission to dealings in, a listed security for breach or non-compliance of any conditions or breach of a company’s obligations under the Listing Regulations.^[33]

The other key regulators for listed and unlisted securities in India are: the Regional Director and the Registrar of Companies under the Ministry of Corporate Affairs for ensuring compliance with the requirements of the Companies Act; the Serious Fraud Investigations Office (established under the Companies Act) for investigating cases of serious fraud and complex financial offences;^[34] the Enforcement Directorate for investigating and prosecuting offences of money laundering; and the Economic Offence Wing of each state’s police department for investigating economic offences such as fraud and market manipulation.

What conduct is most commonly the subject of securities enforcement?

The most common subjects of securities enforcement proceedings are:

• market and issue-related manipulation and price rigging under the FUTP Regulations;
• insider trading under the Insider Trading Regulations;
• takeovers under the Takeover Code; and
• violations of the Listing Regulations.^[35]

Market and issue-related manipulation and price rigging

The FUTP Regulations prohibit manipulative, fraudulent and unfair trade practices,^[36] which include, among other things: manipulation of books of accounts or financial statements;^[37] false or misleading appearance of trading in the securities market;^[38] artificially inflating, depressing, maintaining or causing fluctuation in the price of securities through any means;^[39] influencing or manipulating the reference price or benchmark price of any securities;^[40] and publishing or causing to publish false information while dealing in securities.^[41]

SEBI has initiated proceedings in respect of direct or indirect: use or employment of a manipulative or deceptive device or contrivance contrary to the provisions of the SEBI Act or the SEBI Regulations;^[42] employment of a device, scheme or artifice to defraud investors;^[43] engagement in an act, practice or course of business that operates or would operate as fraud or deceit upon a person;^[44] and buying or selling or otherwise dealing in securities in a fraudulent manner.^[45]

Insider trading

An ‘insider’ includes any person in possession of or having access to unpublished price-sensitive information (UPSI) or a connected person.^[46] A connected person^[47] is identified either based on their association with a company or because they are deemed to be a connected person. A connected person includes any person directly or indirectly associated with the company during the six months prior to the relevant act of insider trading in any capacity that allows such person access to UPSI or for whom access is reasonably expected. Such access could be by reason of frequent communication with the company’s officers or by being a director, officer or employee of, or holding a professional or business relationship with, the company, which may be either temporary or permanent. A deemed connected person includes, among others, immediate relatives of a person associated with the company, a holding company, subsidiary or associate companies, intermediaries (or employees or directors thereof) or bankers.^[48]

UPSI means information relating to a company or its securities that is not accessible to the public on a non-discriminatory basis, and when it becomes accessible, is likely to materially affect the price of its securities. Such information includes (but is not limited to) information relating to financial results, dividends, changes in capital structure, mergers, demergers, acquisitions, disposal and expansion of business, delisting and changes in key managerial personnel.^[49]

‘Trading’ includes subscribing, buying, selling or dealing, or agreeing to subscribe, buy, sell or deal, in any securities.^[[50] SEBI has initiated investigations under the Insider Trading Regulations for, among other things: directly or indirectly engaging in insider trading;^[51] directly or indirectly dealing in securities while in possession of UPSI or communication of such UPSI to any other person, in a manner that is in contravention of the provisions of the SEBI Act or the SEBI Regulations;^[52] communicating or providing or allowing access to any UPSI relating to a company or securities to any person;^[53] and failing to make adequate disclosures about acquiring or disposing of securities above a certain threshold.^[54]

Takeovers

SEBI investigates, among other things: substantial acquisition of shares or voting rights above the prescribed threshold^[55] or acquiring direct or indirect control over a company^[56] without making a public announcement of an open offer for acquiring shares of such company in accordance with the Takeover Code; and non-compliance with obligations to disclose shareholding and control under the Takeover Code.^[57]

Other miscellaneous investigations

SEBI has sought to enforce the provisions of the Listing Regulations applicable to listed entities for failure to, among other things:

• prepare and provide information in accordance with the applicable standards of accounting and financial disclosure;^[58]
• provide adequate and timely information to recognised stock exchanges and investors;^[59]
• disseminate information in simple, adequate, accurate and explicit terms and in a timely manner;^[60]
• consider the interests of stakeholders;^[61]
• comply with the corporate governance requirements identified in the Listing Regulations^[62] such as providing critical information to the board of directors of a company^[63] or requirements relating to the composition of the board of directors;^[64] and
• disclose to the stock exchanges material events or information within the prescribed time period.^[65]

SEBI has also brought proceedings under the Listing Regulations for misrepresentation or providing misleading information to stock exchanges and investors.^[66]

SEBI also brings proceedings against, among others, stock brokers, sub-brokers, share transfer agents and other intermediaries acting without requisite registrations^[67] or against intermediaries and investment advisers for failure to comply with their obligations and responsibilities under the SEBI Regulations.^[68]

SEBI is also responsible for regulating the issue and transfer of securities under the Companies Act^[69] and it commonly institutes proceedings against companies and their directors or principal shareholders for enforcement of these provisions relating to, among other things, matters to be stated (such as general information, capital structure of the company and terms of issue) and reports to be set out (such as financial information, auditors’ report, statutory information and material contracts) in the company’s prospectus,^[70] registration of the prospectus,^[71] misstatements in the prospectus,^[72] construction of references to offering shares or debentures to the public^[73] and allotment of securities to be dealt in on stock exchanges.^[74]

What legal issues commonly arise in enforcement investigations?

Overview

Investigations conducted by SEBI are quasi-judicial in nature,^[75] where principles of natural justice apply, including, but not limited to, providing the opportunity for a fair hearing and issuing a reasoned decision.^[76]

SEBI is empowered to conduct search and seizure operations, including dawn raids, but these require prior permission from a competent court.^[77]

Investigation proceedings are conducted under the rules framed for holding inquiries and imposing penalties under the Primary Statutes and the SEBI Regulations.^[78] SEBI may, either on its own or upon receipt of information or a complaint from a person, conduct initial inquiries prior to initiating a formal investigation.^[79] Upon completion of its initial inquiries, SEBI may issue any directions it deems necessary in the interest of investors or the securities market,^[80] or order a formal investigation to be conducted into the affairs of the relevant entity or person.^[81]

SEBI also has powers to issue interim, ex parte, ad interim and final orders.^[82] Interim orders may be issued pending an investigation or inquiry to prevent potential further mischief in the securities market, and final orders are issued after completion of investigation or inquiry. Further, in a situation where the action cannot be delayed, an ex parte ad interim order can be issued by SEBI.^[83]

Where the matter requires adjudication in respect of an offence,^[84] SEBI appoints one of its officers not below the rank of a division chief to be an adjudicating officer for holding an inquiry under the Primary Statutes and the SEBI Regulations.^[85] The adjudicating officer is authorised to issue summons, order discovery and production of documents, and examine witnesses.^[86] Formal regulatory proceedings commence with the issuance of a notice to show cause to the persons against whom proceedings are brought.^[87] This notice sets out the facts, circumstances and supporting documents, and identifies the specific regulations that SEBI believes have been contravened. A SEBI show-cause notice will specify the time within which SEBI expects a written response to the allegations along with supporting documents (at least 14 days).^[88] SEBI may issue a supplemental notice to show cause for additional violations.^[89]

Adjudication proceedings are quasi-judicial and the respondent is entitled to a hearing, representation through counsel and, where the notice requests it, examination and cross-examination of witnesses.^[90] If the respondent has received notice of the proceedings and does not attend a hearing, the adjudicating officer can decide the matter in the absence of the respondent.^[91]

For civil proceedings under the SEBI Act, mens rea^[92] is not an essential ingredient to establish contravention of a provision under the Primary Statutes or the SEBI Regulations.^[93] In other words, a penalty is attracted if there is contravention of a provision, regardless of an intention to commit such offence. Violations of insider trading law would qualify as a strict liability offence and an insider, while in possession of UPSI, will be presumed to be motivated by the knowledge and awareness of such information that he or she is in possession of, unless he or she can provide evidence to the contrary.^[94]

SEBI issues its decision or order in the matter, pursuant to which it may close the proceedings or impose a monetary penalty.^[95] SEBI may also issue other declaratory orders or injunctions and cease-and-desist orders (see the section below on remedies and sanctions).

Orders issued by SEBI can be challenged before the SAT.^[96] Orders of the SAT can be challenged before the Supreme Court of India on questions of law.^[97]   

Criminal proceedings

Certain offences under the Primary Statutes and the SEBI Regulations are punishable by imprisonment but SEBI is not competent to conduct a criminal trial. Therefore, upon completion of initial inquiries, SEBI may file a complaint before a court competent to try offences under Indian law, against an individual or company for such offences, which include, among other things, market manipulation under the FUTP Regulations and insider trading under the Insider Trading Regulations.^[98]

Civil proceedings and criminal proceedings can be initiated simultaneously by SEBI. As a practical matter, SEBI may await the outcome of the civil proceedings (although it is not obliged to do so) before initiating action under criminal law.

Legal issues

Privilege

Under Indian law, privilege extends to: legal advice rendered by a professional legal adviser to his or her client; communications exchanged between such professional legal adviser and client; and documents that are created in anticipation of litigation.^[99] The statutory exceptions to the rule of privilege are (1) any communication made in furtherance of an illegal purpose and (2) any fact observed by the professional legal adviser indicating that a crime or fraud has been committed in the course of his or her engagement.

However, privilege is not applicable if the client offers itself as a witness, in which case the client may be compelled to disclose such communication that the court thinks necessary to explain the evidence that the client has given, but no other communication.^[100]

Any information or documents requested by and provided to SEBI during the course of an inquiry, investigation or proceedings under the SEBI Act are received by SEBI in a fiduciary capacity. SEBI is exempt from disclosing such information or documents to third parties.^[101]

Cooperation with the investigating authorities

Failure to comply with SEBI’s directions to produce documents or information by a person being investigated can result in the imposition of a penalty amounting to approximately US$1,345 for each day during which such failure continues or approximately US$134,445, whichever is less.^[102]

Cross-border cooperation and information sharing

SEBI’s Office of International Affairs is responsible for liaising with foreign entities and other national securities regulators, such as the Securities Exchange Commission (SEC) in the United States, the United Kingdom’s Financial Conduct Authority and the Monetary Authority of Singapore. SEBI is a member of the International Organization of Securities Commissions, a worldwide association of national securities regulatory commissions, and it collaborates with foreign securities regulators to strengthen cross-border cooperation in the area of securities regulation and enforcement.^[103] For instance, following the global covid-19 pandemic, SEBI and other national securities regulators have regularly shared information on the securities policy measures that each regulator has implemented.^[104] SEBI also has bilateral arrangements with various other securities regulators (such as the SEC) to facilitate mutual assistance, provide technical assistance, and enable effective enforcement of the laws and regulations governing the securities markets.^[105] One of the significant advantages of such bilateral cooperation is regular information sharing on various issues, which includes, among other things, securities-backed loans, guidelines on investor compensation funds, the functioning of investor grievance redressal mechanisms and whistleblower policies.^[106]

Whistleblower protection

Every listed company in India is required to establish and display on its website a whistleblower policy for its directors and employees to report genuine concerns regarding, among other things, financial impropriety and regulatory non-compliance.^[107] SEBI relies on this whistleblower policy to curb violations of insider trading by enabling reporting of leaks of unpublished price-sensitive information.^[108] In 2019, SEBI introduced an informant mechanism to incentivise informants to report violations of insider trading laws to SEBI in return for a monetary reward.^[109]

Multiple investigations and parallel proceedings

The SEBI Act does not prevent SEBI from initiating parallel proceedings alongside other regulators on the basis of the same set of facts. Likewise, other law enforcement agencies, such as the Enforcement Directorate, the Central Bureau of Investigation (CBI), the Registrar of Companies and the Income Tax Department, may also initiate investigations and prosecution simultaneously with SEBI proceedings arising from the same set of facts. For instance, SEBI is currently investigating a bank and its former managing director and chief executive officer for alleged non-compliance with certain provisions of the Listing Regulations.^[110] The CBI and the Enforcement Directorate are conducting parallel investigations for offences of criminal conspiracy, cheating and money laundering that arise out of the aforesaid allegations.

Settlement and leniency mechanism before SEBI and other regulators

Under the SEBI Act, a person against whom civil proceedings have been initiated may file an application proposing a settlement of the proceedings initiated, or which may be initiated, without admitting or denying the violation or liability.^[111] Such application cannot be filed if an inquiry, investigation, audit or inspection is pending.^[112] SEBI may agree to the proposal for settlement depending on the nature, gravity and impact of the default.^[113] The terms of settlement may include monetary or non-monetary terms, or both.^[114] For monetary terms, the amount to be paid is calculated by a formula prescribed by SEBI, which currently comprises an indicative amount (minimum of US$4,035 for first-time applicants and US$9,415 for other applicants)^[115] that is then considered against various other aggravating and mitigating factors, including the conduct of the applicant during such proceedings, any other pending or concluded proceedings against the applicant for non-compliance of securities laws and the extent of harm or loss to the investors or gains made by the applicant.^[116]

Non-monetary terms may include suspension or cessation of business activities for a specified period, disgorgement on account of the action or inaction of the applicant, exit from the management of the company and similar terms.^[117] SEBI may also agree to settle-in-confidence proceedings against applicants who agree to provide substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against another person in respect of violations under the Primary Statutes or the SEBI Regulations.^[118]

What remedies and sanctions are available to government authorities?

SEBI has the power to issue both interim and final orders under the SEBI Act.^[119] Interim orders can be issued pending an investigation or inquiry and even ex parte to prevent further potential mischief or tampering with the securities market. Final orders are issued after completion of an investigation or inquiry. SEBI is required to adhere to the principles of natural justice, including providing parties with an opportunity to be heard.^[120] However, in a situation where the act to be prevented is imminent or where action to be taken cannot be delayed, a pre-decisional hearing may be dispensed with and an ex parte ad interim order can be issued.^[121] Under such circumstances, a post-decisional hearing will be provided to the affected party.^[122] Ex parte orders typically record the reasons, necessity and urgency for issuance of such orders.

Sanctions imposed by SEBI could be monetary or non-monetary in nature. Monetary actions commonly include levying a penalty, which broadly ranges between US$1,345 and US$3,361,125.^[123] The quantum of the penalty is based on factors such as the amount of disproportionate gain or unfair advantage obtained, the amount of loss caused to the investor as a result of the default, and the repetitive nature (if any) of the default.^[124] SEBI may also pass orders for refund of monies and disgorgement of unlawful gains.^[125] Non-monetary actions include: a suspension of trading of any security;^[126] a restraint against persons from accessing, and a prohibition against buying, selling or dealing in, securities;^[127] a suspension of office-bearers of any stock exchange;^[128] a suspension or cancellation of the certificate of registration of an intermediary;^[129] and a direction against an acquirer to make an open offer for acquiring the shares of the target company and, if there is a failure or delay to make such offer, payment of interest along with the offer price.^[130] Other actions that could be taken to recover the amount of penalty include attachment of bank accounts or movable and immovable property^[131] and the appointment of a receiver to manage the property of the person. SEBI may also seek court orders for arrest and detention in prison of a defaulting person.^[132]

If there is a contravention of a provision under the Primary Statutes or the SEBI Regulations for which no punishment is provided under the Primary Statutes, the Primary Statutes also prescribe a punishment by way of imprisonment for a term of not less than one month (which may extend to 10 years) or a fine of up to approximately US$3,361,125, or both.^[133] For punishment by way of imprisonment, the persons in charge of the company or responsible for the conduct of business of the company at the time of commission of the contravention may be ordered to serve the term of imprisonment as they are deemed guilty of the offence committed by the company under the Primary Statutes unless such person can establish that he or she had no knowledge of the contravention or that he or she had exercised all due diligence to prevent the commission of the contravention.^[134]

Footnotes