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Turf war breaks out again between DCA and Sebi

Surajeet Das Gupta

Serious differences have cropped up between the Department of Company Affairs and the Securities and Exchanges Board of India on which agency should initiate action against companies that deployed funds in contravention of the Companies Act, as mentioned in the Sebi interim report.

The Sebi interim report detailed how Ketan Parekh allegedly sent large amounts of money to support transactions in various scrips including Zee Telefilms, DSQ, Global Tele-Systems and others to brokers in Calcutta including in the unofficial market. It had pointed out that there should be an investigation on how these funds were acquired and utilised.

In a letter to D R Mehta, chairman of Sebi, the DCA has asked the regulator whether it has initiated action to inspect the various firms mentioned in the report under section 209A of the Companies Act, under which powers have been delegated to Sebi.

Under the Act, the books of account and other books and papers of every company shall be open to inspection by the registrar of companies or by any other officer authorised by the Central government.

The DCA, in its letter, also points out that the department has ordered an inspection in regard to Zee Telefilms under this section.

In its letter, the DCA has also queried whether the regulator has taken any action under Section 77 of the Companies Act on Zee and others as it presently falls under their purview.

The section lays down rules on restrictions on purchase by company or loans by company for purchase of its own or its holding company's shares.

In reply, D R Mehta in his letter to DCA on June 11, has pointed out that "Section 209A provides that Sebi can conduct investigation in respect to matters which are listed under Section 55A and this section empowers Sebi in relation to issue of prospectus, allotment and dividend."

The letter further states: "Section 209A does not empower Sebi to conduct inspection on issues other than these areas. In view of this, Sebi has not initiated any action under Section 209A of the Companies Act as the violation which Sebi has found do not directly arise from prospectus, allotment or letter of offer."

In its counter reply on June 21, DCA has pointed out that the preliminary report has indicated that there are certain violations under Section 77 of the Companies Act in respect of companies. "As you are aware, with the amendment of the Act, powers under Section 77 are conferred on Sebi and it could take action under Sections 55A which includes Section 77," the letter points out. In simple term, it means that Sebi according to DCA does have the powers to investigate on the question of deployment of funds.

In addition, the DCA points out, "I find that Sebi could investigate into the sources of fund under the Sebi (insider trading) Regulations. The board's right to investigate is derived from Regulation 5(1) and 5(2) (a) and (b), a combined reading shows that Sebi can investigate into the books of accounts of insider which includes company under the management or group as the case may be or others deemed to have been connected with the company."

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