• Opines far too much discretion vested with regulator, and if in the wrong hands it will kill the market
• Describes right to bring civil action as ‘double barrelled provision’
• Cautions once Act becomes operative, costs of operation will rise significantly; possibility of spate of litigation that will follow
• Says will never get on to a board of a listed company under this proposed Act

Top corporate lawyer and former regulator Arittha R. Wikramanayake last week raised serious concerns over the new SEC Bill exposing several draconian provisions.

Though noting that the Bill has a lot of good features, Wikramanayake warned that there was far too much discretion vested with the regulator.

“There is too much power in the hands of the regulator, and if in the wrong hands it will kill the market,” Wikramanayake opined. 

“Giving discretion to this level to a single individual is a very dangerous thing,» he said, adding in lighter vein: «When I read this bill, I was thinking to myself if I had the choice of being God or the Chairman of SEC, I would be the Chairman of the SEC because the Act gives so much power.»

He also argued that the Bill places a burden that the market in his opinion is not ready to bear yet. 

“The Bill might kill the market eventually and drive out market participants, intermediaries and discourage listings,” Wikramanayake told the seminar on the new SEC Bill organised by Asian Pathfinder and Corporate Legal Consultants in association with the Daily FT. 

“I also will never get on to a board of a listed company under this proposed Act,” Wikramanayake confessed in his talk at the seminar, which also featured SEC Chairman Viraj Dayaratne PC, former Chairman and DG Dr. Dayanath Jayasuriya PC and former Director Legal and currently LOLC General Insurance CEO Kithsiri Gunawardena. It was moderated by former SEC DG and Senior Advisor Ministry of Finance Malik Cader.

Though noting that the capital market needs a new Act, and it cannot be kept waiting forever, Wikramanayake, whose presentation was limited to a very specific part of the new law: civil remedies, 

opined that the right to bring a civil action is a “double barrelled provision”.

 “Civil remedies for securities violations is a novel concept under our securities laws. Until now, securities violations could only be dealt with through criminal sanctions. The problem with this approach was that if the regulator chose to ignore violations of the law the wrongdoers would go unpunished, which was usually the case. 

“Even in the rare instances that the regulator chose to institute criminal proceedings, the final result, if ever there was a final result, would be a sanction on the wrongdoer, with the persons who were affected by the wrong being left without any remedy,” said Wikramanayake, who is a former Director General of the SEC.

He also said the existing Act suffers from a further weakness. At present, it leaves the regulator with very little room for settling any breaches of securities violations. The only alternative to a prosecution in a court of law is the compounding provision, which limits the sums for which compounding can be made. 

The usual result of compounding an offence was that it was perceived to be absurd and unfair, especially when the violation has resulted in large gains for the wrongdoer. Consequently, the regulator has been reluctant to consider compounding offences, even where it is in the best interests of the parties and the overall market.

Wikramanayake, who is the Precedent Partner of Nithya Partners, said the introduction of civil remedies seeks to address this dilemma in several ways. First, it empowers parties affected by wrongful market conduct to take matters into their own hands instead of depending on the mood or inclinations of the regulator. 

Second, it gives the regulator a greater leeway in dealing with the criminal aspects of a violation looking at the broader market interests and realities and settling matters without having to worry about the impact on the investors and perceptions of such settlements.

“The proposed law has not held back in proving self-help remedies, making provision for a whole gamut of civil remedies. And interestingly, this, at a time when advanced markets such as the US, from where several of the concepts appear to have been transplanted, have taken steps to cut back on such remedies in recent times,” he said.

Focusing on Section 112 of the proposed law, Wikramanayake said market intermediaries (who are not exempted by the Commission) and registered persons will henceforth be liable to compensate clients for direct and indirect losses or damage they suffer when they act or refrain from doing any act in reliance of a recommendation by them if there was no reasonable basis for making that recommendation to the client and they do not caution the client that the value of securities may fluctuate.

“This provision effectively statutorily recognised the right of investors to bring actions against such market players and recover damages. This is an interesting provision in that it vests very broad rights on investors and will probably expose market intermediaries and registered persons to substantial litigation,” Wikramanayake said.

He also said the next provision that contemplates civil remedies is contained in Section 151 of the proposed Act.

The section provides that ‘any person who suffers loss or damage by reason of or by relying on the conduct of another person who has been guilty of:

False trading and market rigging (section 128)

Stock market manipulations (section 129)

False or misleading statements (section 130)

Use of manipulative and deceptive devices (section 132)

Insider dealing [section 137 (2) and (3)]’

SEC may recover the amount of loss or damage by instituting an action in court against the other person whether or not the other person has been charged with an offence in respect of the contravention or whether or not a contravention has been proved in a prosecution. 

Besides granting rights to individuals, Wikramanayake said Section 152 of the proposed Act also grants the SEC the right to institute civil action in similar situations where it considers it necessary to do so given the nature and manner of the contravention, the market impact of the wrong, and the extent of loss caused to the investor(s).

The Act provides that under such an action, court may make an order for the wrongdoer to pay the Commission an amount equal to three times the gross amount of the pecuniary gain made or the loss avoided by the person and a civil penalty of between Rs. 10 and 100 million based on what the court considers appropriate having regard to the severity or gravity of the contravention. 

Monies recovered under this procedure will be evenly distributed by the reimbursement of the costs of the Commission in investigating and maintaining proceedings; compensation for the persons who have suffered loss or damage as a result of the contravention; and the Compensation Fund. Incidentally, this right of the Commission to bring such an action will not be prescribed for six years.

Although not necessarily falling under the heading of civil remedies, Wikramanayake also made some reference to the provisions in the proposed Act for compounding. 

He said Section 152 (4) of the proposed Act provides that the Commission can compound an offence under the sections [i.e., 128, 129, 130, 132 and 137 (2) and (3)] with or without the admission of liability on the payment of an amount equal to three times the gross amount of the pecuniary gain or the loss avoided by that person as determined by the Commission.

“The question that we are left with is whether these provisions are to be welcomed, in that it will lead to a better market or whether they are overkill and will result in severely retarding the market,” Wikramanayake queried.

From the perspective of a listed company or a market intermediary, Wikramanayake said one would have good cause for concern.

He said the costs of operation will rise significantly. Record keeping, governance and compliance costs will increase dramatically. It is also likely that there could be a spate of litigation that will follow, once the Act becomes operative.

“On the other hand, investors will probably welcome the provisions since they will have the right to seek self-help. Those who have made fortunes through baiting, pumping and dumping and misleading public investors will have serious cause for concern that their schemes could be met with legal action,” Wikramanayake added.

SEC Chairman backs new Bill, says provisions not excessive