FEMA (Foreign Exchange Management Act)

FEMA is an Act to consolidate and amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the orderly development and maintenance
of foreign exchange market in India.
The law relating to exchange control in India has undergone a substantial change in scope, content and
approach by the substitution of the Foreign Exchange Regulation Act, 1973 ( FERA ) by the Foreign
Exchange Management Act, 1999 ( FEMA ). The most noticeable aspect of FEMA is that there is no
imprisonment prescribed for contraventions of the law, not even as an alternative punishment and for
the blatant and deliberate of violations.
The provisions of FEMA displays so much change that one could almost delink FEMA from FERA and
concludes that FEMA is a new law altogether which needs an independent reading and interpretation
divorced from the earlier law and decisions rendered there under.
 SEBI Act

The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in the years 1995,
1999 and 2002 to meet the requirements of changing needs of the securities market and responding to
the development in the securities market.

An Act to provide for the establishment of a Board to protect the interests of investors in securities and
to promote the development of, and to regulate, the securities market and for matters connected
therewith or incidental thereto.

Based on the Report of Joint Parliamentary Committee (JPC) dated December 2, 2002 , the SEBI Act was
amended to address certain shortcomings in its provisions. The mission of SEBI is to make India as one of
the best securities market of the world and SEBI as one of the most respected regulator in the world.
SEBI also endeavors to achieve the standards of IOSCO/FSAP.

In this background, the internal group constituted by SEBI consisting of its senior officers had proposed
certain amendments to the SEBI Act. The SEBI Board had constituted an Expert Group under the
Chairmanship of Mr Justice M. H .Kania (Former Chief Justice of India) to consider the proposals. The
report of the Expert Group is placed for eliciting public comments on the recommendations. It may be
noted that the Report does not necessarily reflect the views of SEBI on the various proposals and
recommendations. SEBI would consider the comments received from various sources before taking any
final view on the recommendations.

How SEBI came into picture

The World Bank and the International Monetary Fund (IMF) have introduced a benchmark i.e., Financial
Services Assessment Programme (FSAP) to strengthen the monitoring of financial systems in the context
of the IMF’s bilateral surveillance and the World Bank’s financial sector development work. The FSAP is
designed to help countries enhance their resilience to crisis and cross-border contagion, and to foster
growth by promoting financial system soundness and financial sector diversity. The mission of SEBI is to
make India as one of the best securities market of the world and SEBI as one of the most respected
regulator in the world. SEBI endeavors to achieve the standards of IOSCO/FSAP. Amendments will be
required to be made in the Securities Laws especially the SEBI Act, which will facilitate India and SEBI to
achieve above objective.

Proposed Amendments for incorporating new provisions in the SEBI Act

Investor Protection Fund

SEBI has been created inter alia for the purpose of protecting the interests of investors in securities. The
investor education is more relevant in the context of complexities involved in various options and
instruments of investments available in the securities market. Retail investors are not in a position to
identify and /or appreciate the risk factors associated with certain scrips or schemes. With the result
they are not able to make informed investment decisions. Since development of securities market
largely depends upon proper education of investors, SEBI is committed to spread awareness amongst
them.
The Joint Parliamentary Report (JPC) on securities scam of 2001 had recommended that in order to
enable SEBI to undertake investor education and awareness campaign effectively, the investor
education and protection fund established under section 205C of the Companies Act and investor
education resources of RBI should be shifted to SEBI and a joint campaign for investor education and
awareness under the leadership of SEBI must be undertaken.

The Group noted that majority of the stakeholders have agreed for the setting up of a separate investor
protection fund under the SEBI Act. It is also suggested by the stakeholders that the said fund should be
utilized exclusively for the purpose of investor education, conducting awareness programme and for
protecting the interest of investors.

The Group also noted that the proposed Investor Protection Fund is for the purpose of achieving the
objective of Investor Education and awareness.

In terms of section 55A of the Companies Act, SEBI is required to administer the provisions of sections
specified in section 55A in respect of issue of capital, transfer of securities and non payment of dividend
in case of listed companies and the companies which intend to get their securities listed on the stock
exchange. Further, SEBI is required to protect the interest of investors and enforce redressal of
grievances of investors by listed companies.

In the light of the above provisions, the Group also discussed the proposition regarding payment of
compensation to investors for the purpose of investor protection. In this regard, the Group also
deliberated on the suggestion for setting up of a Fund on the lines of Fair Fund established under the
Sarbanes Oxley Act, 2002 of United States which is used for compensating the investors out of the
penalties received. Another view was expressed during deliberations that the investors in the equity
market invest in risk capital and no assured return or compensation for non fulfilment of every
expectation may be provided in the statute. However, compensation in respect of fraud or
misrepresentations or misstatements by companies or intermediaries may be considered. Further the
Group noted that the Pension Fund Regulatory and Development Authority, Ordinance, 2004 which
mandated the Pension Fund Regulatory and Development Authority (PFRDA) to protect the interest of
subscribers to the schemes of pension funds has permitted PFRDA to set up the Subscriber Education
and Protection Fund. The said Ordinance also specifies the monies which should be credited to the said
Subscriber Education and Protection Fund. The said Ordinance also provides that all sums realised by
way of penalties by PFRDA under the Ordinance shall be credited to the Subscriber Education and
Protection Fund.

The Group felt that to achieve the objective of investor protection by investor education and investor
awareness, a separate fund under the SEBI Act on the lines of Subscriber Education and Protection Fund
under PFRDA Ordinance 2004 to be administered by SEBI may be set up and administered by SEBI for
investor education and awareness. Further, the compensation to small investors in respect of fraud or
misrepresentations or misstatements by companies or intermediaries may be considered as a matter of
investor protection out of the said Investor Protection Fund. In this regard it is felt desirable that SEBI
may specify guidelines and parameters for administration of the Investor Protection Fund the for the
purpose of Investor Education and Awareness and payment of compensation to small investors. In this
regard, the guidelines issued by SEBI in respect of Investor Protection Fund of stock exchanges may be
adopted with necessary changes.
As regards the monies to be credited to the said Investor Protection Fund, the Group took into
consideration the representation of the National Stock Exchange that the big stock exchanges are
utilising the monies for the purpose suitably. The Group also noted that the monies lying with the IPF of
small stock exchanges are not being utilised to the full satisfaction. It is considered that the monies lying
unutilized for substantial period in the Investor Protection Fund of the stock exchanges should be
transferred to the proposed Investor Protection Fund.

The unclaimed dividend and interest lying with the mutual fund and Collective Investment Schemes or
venture capital funds and the unclaimed monies or securities of the clients lying with the intermediaries
for a period of 7 years should be used in a purposeful manner.

Further, all sums realised by way of penalties imposed by the Adjudicating Officer under Chapter VIA of
the SEBI Act, should be credited to the proposed Investor Protection Fund.

Nomination Facility=

The concept of nomination has been recognized under section 109 of the Companies Act, 1956, Section
45ZA of the Banking Regulation Act, 1949 and Section 39A of the UTI Act, 1963 (since repealed). Under
the aforesaid provisions, nominee of a shareholder or debenture holder, depositor or unit holder is
entitled to the rights in securities or money held by the deceased to the exclusion of all other persons,
notwithstanding anything contained in any other law for the time being in force including the
testamentary laws. However, SEBI Act does not contain any such provision of nomination facility for the
unit holders of mutual funds and collective investment schemes.

The Group noted that SEBI (Mutual Funds) Regulations, 1996 provide for nomination facility to the unit
holders. The Group felt that the provision for nomination facility is investor friendly but such provision
should exist in the parent Act and not in the Regulations.

However, the Group is not in favour of giving any overriding effect as provided under section 109 of the
Companies Act, 1956 wherein the nominee’s rights can defeat the claim of a legal heir.

Advance Ruling

The Group was informed that SEBI receives a number of requests from various market participants for
advance guidance on the interpretation of the provisions of SEBI Act and Regulations. As SEBI Act does
not contain specific provisions like section 245B to section 245N of the Income Tax Act, 1961 authorising
SEBI to give advance ruling, SEBI has evolved a system of giving interpretive letters/no action letters
under the provisions of SEBI (Informal Guidance) Scheme, 2003. However, the guidance given under the
scheme does not equate with the advance ruling under the Income Tax Act as it is not binding on SEBI
Board.

The advance ruling system for the securities market would have the advantage of a market participant
being able to obtain a binding ruling on the applicability of a particular provision of Securities Laws to a
proposed transaction, before actually undertaking such transaction.

The Group felt that the system of advance ruling is certainly better than that of informal guidance given
under the said scheme as the advance ruling given by SEBI would be binding on its Board. The binding
effect provides, not only more comfort for the market participants, it also provides better legal status to
the whole mechanism.

However, in view of the smooth and satisfactory functioning of the Informal Guidance Scheme in vogue,
the Group felt that SEBI should analyse the option very carefully as the move of shifting from the
scheme to advance ruling would require setting up of a separate department and infrastructure on the
lines of Income Tax Act.

Self Regulatory Organisation (SRO)

The Group noted that section 11(2) (d) of the SEBI Act provides for promoting and regulating SRO. SEBI
Act, however does not have specific provision for empowering SRO to make bye-laws having statutory
force for admission of members. Further, SEBI Act does not have provisions relating to supersession of
governing boards of SROs by SEBI or restricting the voting right of members of SROs, notwithstanding
anything contained in the Companies Act, 1956. Proposed amendments seek to confer such powers on
SEBI.

The Group noted that SEBI has already framed regulations, namely, SEBI (Self Regulatory Organisations)
Regulations, 2004 under section 30 read with section 11(2)(d) of the SEBI Act for regulating the SROs,
which require inter alia SROs to seek recognition from SEBI. The Regulations also empower the SRO’s to
make rules and bye laws with the approval of SEBI. Regulation 23 of the Regulation governing SRO’s,
provides for the power of SEBI to withdraw the recognition. In view of the said power, the Group felt
that SEBI is already having the requisite power to require the SROs to regulate their activities in
accordance with the Regulations. Consequently, there may not be any need for the amendment of the
SEBI Act.

Rectification of errors in orders

The Group noted that there is no provision in the SEBI Act, which empowers SEBI to rectify the clerical or
typographical errors apparent in its own orders. A view was also expressed that SEBI does not have
powers to review its own orders even in cases when orders are passed ex parte.

The Group observed that “Review of orders” appears to give substantive powers which are usually not
available with Authorities having original jurisdiction. However, the Group felt that enabling SEBI to
rectify clerical or typographical errors apparent on the face of its order on the lines of section 26 (2) of
the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is desirabl ans fds

Retrospective effect

The Group noted that the existing provisions of SEBI Act do not empower SEBI to frame the regulations
with retrospective effect even for the limited purpose of giving relief to the market participants.

The Group felt that SEBI may be empowered to make regulations with retrospective effect in respect of
matters relating to charging of fees or procedural matters on the lines of the Income Tax Act for the
limited purpose of giving relief and not for imposing new liabilities and obligations. According to the
Group such a benevolent provision may remove undue hardship to market participants in certain cases
and hence should be viewed with favour.
 Overriding Effect

The Group discussed the suggestion to amend SEBI Act in order to provide overriding effect to SEBI Act
over other laws in the matter of securities. In order to assess the need for such an amendment, the
Group tried to identify those substantive provisions of the SEBI Act that deserve to be given an
overriding effect. After due consideration, the Group felt that SEBI Act does not contain any such
substantive provisions which deserve to be given an overriding effect. It also noted that where ever the
substantive provisions deserved to be given an overriding effect, the SEBI Act has already done by non
obstante clause.

Power to issue circulars

The Group examined the proposal to amend the provisions of SEBI Act for giving statutory power to SEBI
to issue circulars and guidelines.

The Group noted that SEBI has been issuing circulars and guidelines under section 11 of the SEBI Act.
The Group felt that there is no legal infirmity in issuing circulars or guidelines under the existing
provisions of section 11 which is the source of inherent powers of SEBI.

Transaction / Issue of securities to be treated void in certain circumstances

The Group was informed that in cases of fraudulent issue of securities, excess dematerialisation of
securities etc. SEBI should be empowered to declare such transactions as void. For this purpose suitable
provisions in the SEBI Act on the lines of section 9(3) & section 14 of the SCRA may be made to provide
that such transaction, if they are in violation of any specified regulation, shall be void.

The Group felt that such power should be performed by an independent body, preferably by the civil
courts. Administrative bodies may not be conferred with such jurisdiction.

Winding up of intermediaries

The Group was informed that one of the principles of Securities Regulations as specified by IOSCO/FSAP
is that there should be procedures for dealing with the failure of a market intermediary in order to
minimize damage and loss to investors and to contain systemic risk. The Group noted that there is no
specific power conferred upon SEBI under SEBI Act for taking steps for winding up of an intermediary in
case such intermediary goes bankrupt or the continuance of such intermediary is considered to be
detrimental to the interest of investors or clients of such intermediary.

The Group noted that Reserve Bank of India (RBI) has power to file winding up petitions against a Non
Banking Finance Company under section 45 MC of RBI Act. The Group felt that SEBI should have similar
power to file winding up petition under SEBI Act.

The Group further observed that in case of winding up of such intermediary company, the claim of the
clients of such intermediary should have priority over other claims or debts i.e. even over secured
creditors and sovereigns authorities such as Income Tax. The Group in this regard noted that under
Section 43A of Banking Regulation Act, 1949 there is a provision for the preferential payment to
depositors in priority to all other debts from out of assets of the Banking Company. The Group felt that
similar provisions should also be made in respect of claims of clients of intermediary companies while
empowering SEBI to file a winding up petition against an intermediary in case such intermediary goes
bankrupt or the continuance of such intermediary is considered to be detrimental to the interest of
investors or clients of such intermediary.

Non attachment of assets of clients with intermediaries

The Group noted that one of the IOSCO principles for securities market regulations is that the regulatory
system should enable the pool of investors’ funds to be distinguished and segregated from the assets of
other entities. Further, the investors should be protected from misleading, manipulative or fraudulent
practices, including insider trading, front running or trading ahead of customers and the misuse of client
assets.

It was brought to the notice of the Group that by the Securities Laws (Amendment) Bill, 2003, a section
27B was proposed to be inserted in the Securities Contracts (Regulation) Act, to provide that an investor
may entrust his money or securities to any intermediary who shall hold such money or securities in trust
and shall deal with them as directed by the investors. Such monies and securities shall not be part of the
assets of the intermediaries and no authority shall attach or seize such assets of investors. However, in
the Securities Laws (Amendment) Act, 2005 this provision was omitted.

The Group observed that the money or securities entrusted by an investor to an intermediary should be
held by such intermediary in trust of such investors. Such money or securities of investors should not
form part of asset of intermediary and no authority shall attach or seize such assets of investors which
are in custody or possession of such intermediary.
 Consumer Protect Act
The Consumer Protection Act 1986 is a social welfare legislation which was enacted as a result
of widespread consumer protection movement. The main object of the legislature in the
enactment of this act is to provide for the better protection of the interests of the consumer and to
make provisions for establishment of consumer councils and other authorities for settlement of
consumer disputes and matter therewith connected.

Consumer protection laws are designed to ensure fair trade competition and the free flow of
truthful information in the marketplace. The laws are designed to prevent businesses that engage
in fraud or specified unfair practices from gaining an advantage over competitors and may
provide additional protection for the weak and those unable to take care of themselves.
Consumer Protection laws are a form of government regulation which aim to protect the interests
of consumers. For example, a government may require businesses to disclose detailed
information about products—particularly in areas where safety or public health is an issue, such
as food. Consumer protection is linked to the idea of "consumer rights" (that consumers have
various rights as consumers), and to the formation of consumer organizations which help
consumers make better choices in the marketplace.

The Consumer Protection Act, 1986 was enacted for better protection of the interests of
consumers. The provisions of the Act came into force with effect from 15-4-87. Consumer
Protection Act imposes strict liability on a manufacturer, in case of supply of defective goods by
him, and a service provider, in case of deficiency in rendering of its services. The term “defect”
and “deficiency”, as held in a catena of cases, are to be couched in the widest horizon of there
being any kind of fault, imperfection or shortcoming. Furthermore, the standard, which is
required to be maintained, in services or goods is not to be restricted to the statutory mandate but
shall extend to that claimed by the trader, expressly or impliedly, in any manner whatsoever.

The salient features of the Act are:

It covers all the sectors whether private, public, and cooperative or any person. The provisions of
the Act are compensatory as well as preventive and punitive in nature and the Act applies to all
goods covered by sale of goods Act and services unless specifically exempted by the Central
Government;

It enshrines the following rights of consumers:right to be protected against the marketing of

goods and services which are hazardous to life and property; (b) right to be informed about the
quality, quantity, potency, purity, standard and price of goods or services so as to protect the
consumers against unfair trade practices; (c) right to be assured, wherever possible, access to a
variety of goods and services at competitive prices; (d) right to be heard and to be assured that
consumers’ interests will receive due consideration at the appropriate fora; (e) right to seek
redressal against unfair trade practices or unscrupulous exploitation of consumers; and (f) right
to consumer education;
 The Act also envisages establishment of Consumer Protection Councils at the central, state and
district levels, whose main objectives are to promote and protect the rights of consumers; (v) To
provide a simple, speedy and inexpensive redressal of consumer grievances, the Act envisages a
three-tier quasi-judicial machinery at the national, state and district levels. These are: National
Consumer Disputes Redressal Commission known as National Commission, State Consumer
Disputes Redressal Commissions known as State Commissions and District Consumer Disputes
Redressal Forum known as District Forum; and

the provisions of this Act are in addition to and not in derogation of the provisions of any other
law for the time being in force.