Collaboration Could Prevent Reinventing the Wheel-A view on Financial Crimes

AIbEiAIAAABDCNHI9JDL38HrYSILdmNhcmRfcGhvdG8qKGRmZjM3Y2IyNGFiNzVkYTE5Y2QxOWM5YjVjZDg5YzZhODkzY2FhYmYwAeb12e_1DLWxFoaTlOyiwl7aGBdwRecently, a lot of thought churning has happened on the laws dealing with financial regulation (1. 2.

The Securities Law (Amendment) Second Ordinance, 2013, has bestowed powers of search of premises and seizure of evidence to SEBI. It has also empowered SEBI to assume jurisdiction over any public fund pooling over Rs 100 crores, by deeming such fund pooling activity to be a CIS, under SEBI’s regulations for ‘Collective Investment Schemes’. These amendments basically address existing concerns on securing evidence in market investigations speedily and plugging the yawning gap on regulating large scale collection of funds from the gullible public, under the guise of  unregulated CIS-like schemes.

The 2nd major activity was the massive exercise by the Financial Sector Legislative Reforms Commission under the Finance Ministry, to modernize all economic regulatory activity under a single ‘Indian Financial Code’ a draft of which has been submitted to the Government by the Commission. This mammoth exercise of making a single, sector-neutral financial code for 7 financial agencies(including reconstitution of the current 5 financial regulators) to administer, also resulted in a review of existing more than 60 laws under which these regulators currently conduct regulation of their specific financial sectors. The main attempt seems to have been to break the sector-based silos in enforcement of financial regulations and instead base it on the principles involved in the regulatory activity.

Seen on this backdrop of a draft unified financial code, the additional powers given to SEBI under the Amendment cited above, to conduct searches, seems to tilt again towards silo-ization, since it will further increase the distance between SEBI’s investigation and police’s criminal investigation in those serious market fraud cases which require both investigations to comprehensively deal with the fraudulent activity. The issues are 2-fold: 1. Does the regulator have or want to develop expertise in the various processes underlying search/seizure, including training in self defence and firearms?, and 2. Does the regulator require to undertake search/seizure procedure in market cases which do not have any element of criminality?

As regards 1., The processes underlying conduct of search requires that the search team either itself has self-defence expertise including use of firearms, or it requisitions the help of the local police for protection during the process. If police help has to be requisitioned, there would be need to develop institutional co-operation for this activity, between SEBI and the State Police, if there would arise oft-repeated requests for assistance.

As regards 2., from my limited experience at SEBI, the market manipulation cases which are investigated by SEBI, generally get the required co-operation from the regulated entities in the matter of production of documents. The non response and stone-walling can come from entities not regulated by SEBI, like banks, ISPs, telecom companies or individuals who are not themselves investors but who conspire with market entities in a market fraud etc.  In such cases, the limited need is to enable SEBI to legally the requisition the documents from those connected with the investigation irrespective of them being regulated by SEBI or otherwise. And this has been enabled in the Amendment mentioned above. So is there still need to empower and develop expertise within SEBI for the requirements of the procedure of search/seizure?  I would think that pure market violations without criminality should not need invocation of  such powers. It was my experience while in SEBI, that some cases do have an element of criminality in the operation of the fraud. The best scenario for such cases would be for SEBI to move on evidence along with the police, who should simultaneously investigate the criminality angle in the fraud. Such co-opting is seen in the US between the SEC and the police and the collected evidence is used in both the criminal prosecution as well as the case being heard in SEC. Since criminal investigation requires greater weight of hard evidence even to pin circumstantiality of the act, those of SEBI’s cases which need search/seizure processes could be better strengthened if done alongside police. Simultaneously, the added advantage is that the fraudster is holistically dealt with by punishments under the SEBI Act as well as the criminal law. In the current scheme of things, the two agencies of Govt deal with the same act of the fraudster independently, with the expertise of one not being availed of by the other, and many times the benefit of this lack of collaboration accrues to the fraudster.

For this then, what would be required is amending the SEBI Act to change SEBI’s method of  criminalizing offenses from the current ‘complaint before the criminal court u/s 26 SEBI Act’ to ‘complaint to the police u/s 154 CrPC’.  This could give better results in punishments since evidence from the criminal investigation by the police would also add weight to the findings of SEBI and vice versa. A critical factor in successfully developing this collaboration would the development of protocols for institutional co-operation(filing FIRs, sharing evidence and expertise, joint searches) between SEBI and police EOWs(Economic Offences Wings) or the CBI, for investigating the criminalities in specific market crimes like Insider Trading and market frauds. And designated courts for trial of the criminal market fraud cases chargesheeted by the police, on a fast track basis. Since the financial sector regulatory thinking shows an inclination for breaking silos, I have expanded that concept to market investigations.


2 thoughts on “Collaboration Could Prevent Reinventing the Wheel-A view on Financial Crimes

    1. Thanks for your comment Sir. However, to put the current situation on these investigations into perspective, market crimes like the Satyam case or the past mega frauds like the Harshad Mehta scam or Ketan Parikh scam and some lesser known cases like the Pyramid Saimira market manipulation are investigated for their criminality independently by the police as well as by SEBI. My point was to bring in collaboration as the way to go, on such and other cases, within a laid down framework such that the evidence collected by independent and joint processes by both agencies can be used to deal with the deviant as well as the deviance effectively. Presently, this effectiveness is lacking and I feel it can be remedied by collaboration protocols.
      In fact, criminal investigations in such matter by police will be vastly helped by the data analysis skills in SEBI and SEBI’s investigations will hugely benefit from the evidence on malafide intent of the perpetrators and the conspirators.
      A case in point was the investigations into the Galleon Insider Trading case in the USA by FBI and SEC, which could successfully establish knowledge, intent and acts by famous names like Rajat Gupta.


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