Market regulator pushes for anti-avoidance provisions

In submissions made to the Supreme Court appointed committee to look into the Adani saga, the market regulator said no matter how strict the laws are, there will always be market participants who would look to comply with laws in letter but not in spirit. Hence, the markets regulator urged the committee to recommend creation of anti-avoidance provisions that give Sebi powers to go after entities looking to avoid complying with the law, the committee report showed.

Anti-avoidance laws are a key power at the disposal of the global tax regulators to penalise the entities or individuals who create innovative structures to avoid paying higher taxes.

Even the Indian tax department has such a power which is covered under General Anti-Avoidance Rules (GAAR). Now, Sebi wants a similar provision which will enable the regulator to crack down on related party transactions, insider trading and other potential market violations.

“Sebi submitted no matter what the regulations stipulate, there will always be a structural vulnerability or an intrinsic opportunity to structure transactions in a way as to comply with the law while not necessarily abiding the spirit of the law,” said the committee report. “Sebi submitted to the committee that the committee ought to recommend introduction of provisions akin to the general anti-avoidance rules that are now in vogue in tax laws.”

However, the committee observed that Sebi already had general powers to deal with such scenarios under Sebi Act. The committee said Section 12A of the Sebi Act gives powers to Sebi to take action against anyone who employs deceptive schemes to defraud investors.

A former Sebi official said the general provisions are intended more towards frauds in situations like siphoning of funds from the company or artificial pump and dump of shares to inflate share prices. “But Sebi’s ask seems to be from the point of view of various corporate transactions designed to avoid compliance with rules,” the former official said. “Such a provision will need amendment to the Sebi Act and hence it has to come from the government.”

Related party transactions are a key area where listed companies often come up with structures to avoid compliance with the rules. Like say there is a steel company that purchases some of the raw materials from other companies which are related to the promoter group of the steel firm. However, since related party transactions need shareholder approval and are often subject to corporate governance concerns, the company would structure the deal in such a way that that the shareholders and regulators don’t know the vendor company is a related party of the promoter.

In the past there have also been instances that have come to Sebi’s notice where promoters of a company classified themselves as ordinary shareholders to avoid compliance with the requirements applicable to promoters. Similarly, there is a threshold of ₹10 lakh for sale of shares by company insiders. So any purchase or sale above the limit will be captured in stock exchange’s insider monitoring system . Hence, in the past some of the company insiders stretched such transaction into multiple parts to ensure each transaction is less than ₹10 lakh. Like instead of selling say ₹90 lakh shares in a single go, they could sell ₹9 lakh worth shares ten times.