Market regulator pushes for anti-avoidance provisions

In a submission to the Supreme Court-appointed committee to look into the Adani saga, the market regulator said that no matter how strict the laws are, there will always be market participants who would like to follow the laws in letter but not in spirit. Therefore, the market regulator urged the committee to recommend the creation of anti-avoidance provisions, which gives SEBI the power to take action against entities that avoid complying with the law, the committee report showed.

Anti-avoidance legislation is a major force at the disposal of global tax regulators to punish entities or individuals who create innovative structures to avoid paying higher taxes.

Even the Indian Tax Department has such power which comes under General Anti Avoidance Rules (GAAR). Now, SEBI wants a similar provision that would enable the regulator to crack down on related party transactions, insider trading and other potential market violations.

“SEBI stated that whatever the regulations may prescribe, there will always be a structural vulnerability or an intrinsic opportunity for the structure of the transaction not required to comply with the law,” the committee report said. SEBI submitted to the Committee that the Committee should recommend introduction of provisions like general anti-avoidance rules which are now prevalent in the tax laws.”

However, the Committee noted that SEBI already had general powers under the SEBI Act to deal with such scenarios. The committee noted that Section 12A of the SEBI Act empowers SEBI to take action against any person who uses deceptive schemes to cheat investors.

A former Sebi official said the general provisions are aimed more at fraud in situations like misappropriation of funds from the company or artificial pump and dump of shares to inflate share prices. “But Sebi’s demand appears to be from the point of view of various corporate transactions designed to avoid compliance with regulations,” said the former official. Such a provision would require an amendment to the SEBI Act and hence would have to come from the government. ,

Related party transactions are a major area where listed companies often come up with structures to avoid compliance with regulations. For example, there is a steel company which buys some raw material from other companies which belong to the promoter group of the steel firm. However, since related party transactions require shareholder approval and are often subject to corporate governance concerns, the company will structure the deal in such a way that shareholders and regulators do not find that the selling company is a promoter. Related party.

There have also been instances in the past that have come to the notice of SEBI where promoters of a company have classified themselves as ordinary shareholders to avoid compliance with the requirements applicable to promoters. Similarly, there is a limit of 10 lakhs for sale of shares by insiders of the company. Hence any purchase or sale above the limit will be recorded in the Insider Monitoring System of the stock exchange. Therefore, in the past some company insiders spread such transactions into multiple tranches to ensure that each transaction is less 10 lakhs. say instead of selling They could sell 9 million shares in one go Shares worth 9 lakhs ten times.