MoU between SEBI, MCA will succeed if an exchange is coordinated well

Updated: July 18, 2019 7:09:38 AM

The Companies Act, 2013, which deals mainly with unlisted companies, and the SEBI Act, 1992, which governs capital markets and listed companies, have separate mechanisms inbuilt for investigations.

MoU, SEBI, MCA, financial express, financial express editorial, MCA, Securities and Exchange Board of India, SEBI Act,CAG With respect to collaborative efforts, inter alia, the Coordination and Monitoring Committee (CMC), set up in 1999, was formed to identify and monitor the state of ‘vanishing companies’ and take appropriate action under the Companies Act and the SEBI Act.

By L Badri Narayanan
& Gunmeher Juneja

In what appears to be a step towards tackling fraud in India Inc, the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) executed a formal memorandum of understanding (MoU) on June 7, 2019. The purpose of the MoU is to ensure seamless linkage and collaboration between SEBI and the MCA. This will be in addition to the existing mechanism of partnership in place between the two. SEBI explains the rationale behind this move as the increasing need for surveillance in the context of corporate frauds affecting important sectors of the country.

Existing measures
The Companies Act, 2013, which deals mainly with unlisted companies, and the SEBI Act, 1992, which governs capital markets and listed companies, have separate mechanisms inbuilt for investigations.

Under the Companies Act, investigation into the affairs of a company can be made when the central government is of the opinion that the same is necessary based on: (1) registrar’s report after inspection, (2) a special resolution of the company that its affairs ought to be investigated, (3) public interest, and (4) the order of a court or the Company Law Tribunal. The Serious Fraud Investigation Office (SFIO) is the office in charge of such investigations. Where a case has been assigned by the central government to the SFIO, no other investigating agency of the government can proceed with any investigation for any offence under the Companies Act.
Under the capital markets regime, SEBI can order for investigation in case it has reasonable ground to believe that: (1) the securities of a company are being dealt in a manner detrimental to the investors and, or, the securities market, or (2) any intermediary or any person associated with the securities market has violated any of the provisions of the SEBI Act, rules or regulations or directions issued by SEBI.

With respect to collaborative efforts, inter alia, the Coordination and Monitoring Committee (CMC), set up in 1999, was formed to identify and monitor the state of ‘vanishing companies’ and take appropriate action under the Companies Act and the SEBI Act. The time period 1993 to 1995 had witnessed new companies tapping the market and collecting funds from the public through public issue of shares/debentures. Some of these companies defaulted in their commitments made to the public while mobilising funds, and subsequently ‘vanished’.

While both the MCA and SEBI have strived to work together previously, coordination between the two regulators has room for improvement. The CAG Report in 2005 criticised the MCA for lack of coordination of activities and data-sharing with other regulatory bodies such as SEBI and RBI—for instance, the report highlighted that 303 companies were found working as NBFCs in Shillong, Odisha and Rajasthan without registration with RBI.

Mandate of the MoU
The MoU strives to facilitate sharing of data and information between SEBI and the MCA on automatic and regular basis. It assumes a holistic approach to solve fraudulent cases—as between the two regulators there is a database of listed entities and all other registered firms/companies.

The MoU also refers to the constitution of a Data Exchange Steering Group, which will meet periodically to review the data exchange status and take steps to further improve the effectiveness of the data-sharing mechanism.

The way forward
The message is clear—to clean the muddle created by fraudulent practices within the corporate sector. While there exist other mechanisms, such as the CMC, the mandate of the MoU appears to be broader than merely working on one type of fraud or incident.

With corporate fraud issues having come up in various sectors in the past, including pharmaceuticals, finance and airlines, the burden on the economy is high enough to take immediate and strict action. Fraud in the corporate sector inevitably puts stress on other sectors. The private sector plays an important role in the growth of the economy, and a robust mechanism to fight fraud is required to advance the economy. The MoU marks the beginning of a new era of cooperation and synergy between the two regulators.

However, just as there have been issues pertaining to coordination in the past, any scope provided by the MoU will only come to pass if the exchange between the two regulators is coordinated well and is seamless, with time being of essence.

Lack of coordination, or rather confusion, could also happen due to certain overlapping subjects covered by the SEBI Act and the Companies Act. These especially came into play, at least on paper, after listing regulations were revised in order to incorporate the recommendations of the Kotak Committee on Corporate Governance. The regulators could consider working on such issues together and provide clarifications in a uniform manner.

Narayanan is partner and Juneja is legal analyst, Lakshmikumaran & Sridharan

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.