SEBI realized FinTech potential in effectuating investor protection and promoting the security market, SEBI releases a discussion paper on “Regulatory Sandbox” to boost development and adoption of FinTech solutions in the securities market. Regulatory Sandbox is a live testing environment where product, processes, service or business model can be deployed on a limited set of the eligible customers for a certain period having exemption or relaxation from SEBI regulations and guidelines.

Earlier this month, SEBI had proposed ‘Innovation Sandbox’ which was lubricated at providing information to FinTech companies which could not have been readily available to them, to enable their innovation on historical data in a closed system having regard to anonymity to promote innovation in the securities market before actually testing in a live environment on real customers. However, market players were concerned about the scope of its applicability to SEBI rules, to what extent exemptions may be granted. Thus, a notion of confusion had flown among market players and thus, demanded a lot of clarity on the same.

In that light, SEBI proposed a regulatory sandbox which would enable financial institutions regulated by SEBI to test their innovation and financial technology in a live environment and on real customers subject to necessary safeguards maintained for investor protection and provide the extent of exemptions, applicability, and procedural requirements. This regulatory sandbox came into light in the backdrop of innovations without proper regulatory oversight which have been detrimental to investors.

SEBI believes that innovation investor-centric experimentation can bring about better financial outcomes and deeper penetration and enable large scale financial inclusion. However, lack of due diligence, proposed solution similar to the market offering, lack of intention of deployment, etc. would not be permitted to operate on Regulatory Sandbox.

The purpose of Sandbox is to set off dialogue with the financial companies leveraging innovative technologies so that inventive step may be instituted in the regulatory framework of SEBI at an early stage and to identify and avoid the potential adverse events. This mechanism would facilitate direct and seamless information sharing between innovative firms and SEBI. On one hand, it would give a chance to FinTech industry to check their innovation while on other, it would help SEBI to frame policies that foster time saving and less transaction cost techniques and solutions for investors. The similar mechanism has been already devised by other regulators like RBI, IRDAI, etc.

This mechanism would stimulate many benefits like greater participation of the investor or people raising capital or providing services, increased financial inclusion and penetration of financial products in tier II or tier III town/cities and rural areas, easy accessibility for retail investors including reducing operational costs, increased transparency and lower transaction charges, etc.

Applicability

All the market participants registered under Section 12 of the SEBI Act will be eligible players for testing within the regulatory Sandbox. The market participant can come their own or through the way of FinTech services; regardless of who applies, the market participant will be considered the applicant for the purpose of the application and be responsible solely for all testing solutions.

Also, the paper fosters that depending on the application or response, the SEBI may consider other participants like FinTech Start-ups, and firms to be permitted for testing under a regulatory framework. For the interim solution, they may opt for innovation sandbox wherein they can do testing in a closed manner based on historical data.

Regulatory Exemptions

The exemptions that could be bestowed to the financial institution are –

·   No exemption would be provided in case of the overarching principle of investor protection and market integrity like investor protection framework, know your customer (KYC) and Anti-Money Laundering and thus, would quintessential to carry out proper due diligence.

·     With the intention of a less-burdened regulatory mechanism, SEBI has proposed specific relaxation according to the case to case basis after analyzing the testing requirements of Sandbox applications. The annexure 1 of Discussion Paper contains provisions that are mandatory to follow and also, categories where the exemption may be allowed. Mandatory regulatory compliances like confidentiality of information, handling of customer’s money and assets by intermediaries, prevention of money laundering and countering the financing of terrorism, Risk check, and KYC has to be maintained. However, relaxations may be provided in cases of net-worth, track record, registration fees, SEBI guidelines (technology risk management guidelines and outsourcing guidelines), financial soundness, etc.

·  Also, the market participants have been enabled to request for relaxations from specific SEBI regulations/provisions if they think fit in terms of hampering their innovations or acting as a barrier to the entry of products in the market.

Eligibility criteria

SEBI has stipulated certain eligibility criteria for the applicant like genuineness of innovation, a genuine need for testing, limited prior offline testing, beneficiary to users, no risk to the financial system, the readiness of application or software, deployment post-testing, etc. These conditions must be afforded by the applicant for use Regulatory Sandbox. If an applicant has devised application but does not contain any innovative step or does not want to deploy it broadly, then such testing application cannot be proceeded with under the current proposal.

The applicant must not only provide all details of the plans, scope but also identify potential risk about the testing application and must fully aware associated with plans and take an informed consent of the user. The applicant shall also follow appropriate disclosure to risk, protection, and compensation norms and also set up a grievance redressal mechanism.

Application and Approval Process

If the applicant and project meet the eligibility criteria, the applicant may file an application (attached as Annexure 1) signed by the chief executive officer (CEO) or any officer authorized by him. SEBI shall review the application and within 30 days will inform the applicant about its suitability. Meanwhile, SEBI can also seek guidance from the applicant regarding the project. If the application is admitted, then SEBI will evaluate with the applicant’s specific regulatory requirement to be followed (including test parameters and control boundaries); then proceed with the application if the applicant is willing to adopt the suggested measures. The evaluation criteria would be scoring based upon information in the application on different parameters like profile, innovative technique, risk mitigation, feasibility to deploy, etc. After approval, the testing would be done, and the applicant is required to disclose potential risks to users and take informed consent or acknowledgment about the risk presented.

If the applicant wants to do some material change after approval, then he should seek SEBI’s approval prior in 1 month specifying proposed plans with reasons. The duration of the testing period is a maximum of 9 months and can be extended up to 3 months upon request. He is also required to submit interim reports of testing. After the testing is done, the applicant is required to submit the final report containing key outcomes, performance indicators, findings of the test, etc. These reports shall be confirmed by CEO/authorized individual and a SEBI officer would be assigned to guide application for deployment and testing in the sandbox.

The application may also be revoked if undermining any of the eligibility criteria and provide false information, gone in liquidation, risk of cybersecurity involved, etc.

Thus, this mechanism will not only leverage future long term opportunities to FinTech Companies to expand its horizon its terms of innovation in better technologies but also provide end customers with a deeper sense of inclusion in financial service and make an environment investment friendly because of easy accessibility, lower transaction cost, and reliable software. Also, SEBI in a symbiotic relationship with FinTech Companies in future as a direct applicant will foster a seamless information sharing system and would help in watching out the activities and transactions of the market players and avoiding white collar crimes like insider trading, fraud, manipulation, etc. Thus, this can a remarkable step in boosting confidence in the securities market and make the country’s economy to a higher loop.

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According to Prison Statics report by NCRB,[2] the Indian prisons have overcrowded by 14% than its capacity in terms of occupancy ratio. Not only, is the prison space packed like sardines, but due to the high percentage of under-trials prisoner and insufficiency of the funds, the reform to prison system has been an unattainable task since long.  These constraints have left the women in a disgraceful state and denied justice. Not late to rise, the Standing Committee on Empowerment of Women, has released a report on ‘Women in Detention and Access to Justice’ to deliberate on the issues of Women safety in prisons, a mechanism for reducing the undertrial women prisoners and access to Justice.[3]

Female in Jail: Living in Overcrowd

The Committee identified that the number of inmates in the Central jails extends up to 1,85 182 against the authorized capacity of 1,59,158. This has succumbed women from basic amenities like food, sanitation, and health care facilities. The underlying cause for overcrowding in the prisons is the unduly long under trials for the petty offenses and non-criminal offenses because the prisoners who are facing less serious charges have outnumbered the prisoners accused of the grave and serious offenses. Besides, additions of new inmates clog the system very badly.  Due to the above-said reason, this has a serious and detrimental effect on the health of women including physical deterioration and mental problems. In addition to, this has been the expenditure of the jail which has again the exacerbated the prevailing conditions.

The Ministry of Home affairs has highlighted the issue of enormous overcrowding, by stating that there are jails wherein the proportion is 300% higher than its capacity to hold occupancy. Ministry elucidates the problem that Prison System come in State subject under Schedule VII of Constitution and which State Govt. overhauled of lack of funds to meddle with the efficient infrastructure and building.

The suggestion of the Committee –

1. That the prisoners who have been charged with the petty offenses or less serious criminal offenses like ticketless, drug offenders etc. should be dealt with alternative methods.
2. The Report advocates that indirect cause of overcrowding is unnecessary and unjustified arrest by the police. Therefore, restraint by the police for unwarranted arrest would make a headway for reducing the people in the jails, embarking upon the Supreme Court guidelines.
3. Central Govt. should intervene in the meticulous understanding of the prison system’s condition and provide sufficient funds as in Phase I in ear 2004-2009 for the proper maintenance.

Training and Recruitment

The ministry, in reply, has informed the committee that there is a shortage of women officials in the management of prison due to not having the full access to leave, shifts etc. which pose a serious and adverse impact on the women prisoners as well. Notably, the committee expounded that women are more prone to anxiety due to incarceration which got escalated when the social contact is less or absent.

The Suggestion of the Committee –

1. Training and Recruitment – More women officials like welfare officers, psychiatrists, after-care officer, teacher, instructor, law officer, and another officer.
2. To enforce measure which ensures the gender-sensitive prison to allay the mental anxieties of the women.
3. To conduct workshop and training of officials to develop positive behavior towards women prisoners

Custodial Rapes-Access to Justice through better surveillance in Jails and involvement of Civil Rights Activists

Custodial rapes have been a serious threat to Women across the country. In the State of UP, reported custodial cases were 189 in 2014 and 91 in 2015, whereas the other States have shown deviance to the extent of nil.

The brutality or harshness shown by the police reminded the committee to recommend Gore Committee on Police Training 1972, which is of the view to inculcate the right attitude towards public and to never forget that civil servant is a servant, not the master of the community.

The Suggestion of the Committee

1. To install a better surveillance system in the prison-like formulate a guideline for the installation of CCTV and supervision by the senior officers of the police.
2. To provide a greater interface with the civil rights activists and to make arrangement for meeting them.
3. To achieve the desired objective within the stipulated or bound time.

The issue of Undertrials

Why the under-trials are still increasing even after repeated orders of the Supreme Court?

Failure of the implementation of the Supreme Court orders and its guidelines, the effective criminal justice system loses its sheen over reforming the prison system. In Bhim Singh v. Union of India,[4] the Supreme court has given directors of the release of eligible under trails –

The Supreme Court reiterated that the effective implementation of Section 436A of CrPC, 1973 is a quintessential step towards reducing the under-trial prisoner. The Supreme Court, in an order dated 5^th Sept. 2014, directed the CJM/ Sessions judge to hold a single sitting in a week in each prison of their jurisdiction for the next two months. The magistrate shall identify such eligible persons who have completed half of the maximum period of imprisonment for the said offense and shall make an appropriate order to release them. Also, the magistrate shall report to registrar general of the High Court after that two months.

MHA has issued a letter to all States/UT to comply with the Supreme Court order and to make arrangement for release for a vulnerable group like women and who fall under the ambit of Section 436A of CrPC.

Thus, this implementation for two months has brought a significant change in the prison system and has embarked upon changing the prison reform regime. Therefore, it is should be directed to retired judges or para-legal committee to take permanent action in lieu of increasing undertrial prisoners.

Access to Justice

The Committee explored the dimension that ‘Why Women are facing problems in accessing justice’ and to court process. It was discovered that non-availability of surety bond is a serious problem as far as women prisoners are concerned. Therefore, the committee has proposed to undertake measures to provide legal aid. The District Legal Aid societies have been established with the purpose of providing legal assistance to all inmates or prisoner particularly the indigent ones. Therefore, the committee has solicited the free legal aid to Women in reforms and to engage more Women lawyers in District Legal Aid Services to encounter with the Women prisoners.

Moreover, it was highlighted the MHRD that it is a responsibility of Jail administration to track the status of the Court cases, for under-trial prisoner, and a history ticket is allocated to each of them upon their admission which is updated with the court proceeding & production. The Ministry has assured that to update all details and the cases status etc. upon the Integrated Prison software system to electronically manage all the details and information.

The Suggestion of the Committee

1. The DLSAs and other legal aid counsellings cell must take a concerted effort to rope in all the legal volunteers who can help the undertrials by drafting the application of bail, affidavits and other legal procedure. To help women, in arranging the surety bonds and
2. The DLSAs should be made an electronically accessible viable software which would make a headway in accessing the details of the prisoner and would help in reducing the under-trials prisoners.

Gender-specific Health problems

The Committee looked into the aspects that whether the details of the common problems among women prisoners are available or not. To the surprise, no details or information related to Gender-specific health problem were known. The committee found that HIV/AIDS, TB, certain venereal disease, gynecological illness, and other menstrual problems have shown occurrence among the Women prisoners.

The suggestion of the Committee –

1. To undertake a detailed survey regarding the common health problems among the women prisoners across the country and suggested to maintain a central data bank for the prevailing health issues in prisons.
2. To recruit the health care officials in view of the larger interest of the women and to have a ratio of medical officers as laid down in norms.
3. The task of maintaining the critical ratio as to women prison to be managed by the States/UTs.

Model Prison Manual

Initially, the management of the prisons are governed by the Prison Act, 1894 and Prison Manuals/ Regulations prepared and ordinated by the State Governments. That has been the legislation which was remained unchanged to a long time except for the certain amendment by the States to suit their local jurisdiction. However, the States have implemented the separate legislation to regulate and manage the prison-related affairs and manual for the prisoner in their separate jurisdiction in consonance with the modern corrective philosophy or criminal victimology.

The Govt. of India to bring uniformity in rules and regulations, has framed the Model Prison manual 2003 which covered the basic rules in consonance with the corrective guidelines and lays down the framework for superintendence and management of the prison. The States had been directed to revise their Prison rules/manual in lieu of this model guidelines.

The Standing Committee, in 2017, affirmed that no concrete steps towards the effective implementation of  Model Prison Manual, 2003 has been taken. Besides this, since last 16 years, no impact assessment was done, which fall back into the thought of deploring condition of Prisons in India.

The suggestion of the Committee – To take an impact assessment of 2003 Model Prison Manual and New 2016 Model Prison Manual.

Conclusion

The Standing Committee on Empowerment of Women has fostered a synchronized and structured approach to deal with the women in the prison across India, including revising the Model Prison Manual to an extent, to conduct surveys and to collect data. TO ENSURE EFFECTIVE IMPLEMENTATION, no word could be better than ‘a data or information’. The most severe problems encountered with the effective mechanism for reforming the prison in lieu of gender sensitivity, are the lack of data available, no study has been conducted and no effective implementation of the existing rules/regulations advocated. Thus, the effective approach must adhere to technological advancement which would significantly attain the purpose of bringing this report into existence.

The need for the prison reforms has been an incomplete task which can be trajected on right path owing to technological employment, high-level ethics and professional conduct, efficient funds from Central Govt. and involvement of NGO and Civil rights activist.

Also Read this article:

Women in Indian Prisons: Over Crowded jails, lack of sanitation, custodial incidents & shortage of doctors (Read Report)

[1] 10^th Report, Women in Detention and Access to Justice, Committee on Empowerment of Women, Parliament of India,  http://164.100.47.193/lsscommittee/Empowerment%20of%20Women/16_Empowerment_of_Women_10.pdf ( last accessed Nov. 30, 2018)

[2] Prisons Statistics of India, 2015, National Crime Records Bureau, Ministry of Home Affairs, India (2015), http://ncrb.gov.in/statpublications/psi/Prison2015/Full/PSI-2015-%2018-11-2016.pdf (last accessed Nov. 30, 2018).

[3] Standing Committee Report Summary, Women in Detention and Access in Justice, PRS Legislative Research, Parliament of India,(2017), (last accessed on Nov. 27, 2018), https://www.prsindia.org/sites/default/files/parliament_or_policy_pdfs/Standing%20Committee%20Report%20Summary%20-%20Women%20Prisoners.pdf

[4]  19 (1981) DLT446 (India).

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The purpose of this ordinance is to relook into the offences given under the Act and to bring insightful changes into the structure of the prosecution and the re-categorization of the offence as to de-burden the court from the offences which could be efficiently dealt with by the in-house adjudication because of the procedural and technical lapses involved in the court process. Besides, it is essentially dealing with the norms of Corporate Governance including the commencement of the business, maintenance of registered office etc.

This ordinance has been portrayed as exonerating the company from criminal liability by substituting the fine or imprisonment with the word ‘penalty.’ In Director of Enforcement Corporation v. MCTM[1], it was held that imposing of the civil penalty is for mere ‘blameworthy conduct’ but fine implies a guilty intention thus, requires a greater standard of proof. Thus, the burden of proof would be less on the regulator in determining the civil violations.

Salient Features of Companies (Amendment) Ordinance 2018

1.    Re-Categorisation of Offences –

2.    Declogging the NCLT –

·         Change in the definition of ‘Financial Year’ – Effectuating the power of Central Govt. in disposing of the application for the selection of the financial year. Amendment in the proviso of Section 2(42) stipulates that a company, whether it is a holding or subsidiary company or associate company or any company incorporated outside India, the Central Govt. on application from the company allows any period as its financial year, whether or not that period is a year. Initially, this power of selection of financial year was vested with NCLT, but to disencumber the NCLT from such process, the Central Govt. has been authorised to move it in that aspect.

·         Power to Central Govt. in altering the Status – The power to change the company from Public to private company now has been vested with Central Govt. instead of NCLT by amending Section 14 of the Act. However, the pending applications before the date of commencement of Ordinance would be disposed of by NCLT. Initially, this power was vested with Central Govt. under the 1956 act, but the same was transferred to NCLT. But considering the speedy disposal for conversion application, the same power has been given to Central Govt. now, who may delegate such power to ROC or RDs, even NCLT in certain classes of companies.[2]

·         Extending pecuniary jurisdiction of RD – Considering the bulk of cases falling into the domain of NCLT, the pecuniary jurisdiction for compounding the offence of RDs has been increased from Rs. 5 lakhs to Rs. 25 Lakhs.

3.    Improving Corporate Governance

·         Commencement of Business – (Insertion of Section 10A) – A company commencing its business or exercising its borrowing power must:

a)      Director to file a declaration within 180 days with ROC as to every subscriber to MOA has paid the value of Shares. Penal provisions are 50000 Rs for Company and 1000 Rs each day for an individual extending up to 1 Lakh.

b)     The Company has verified its registered office in e-form INC 22.[3] (Addition of New Section 10A).

This provision has been restored which was omitted by the Companies (Amendment) Act, 2015 which will hugely assist in the early identification of inactive companies and thus, ROC does not have to wait for 2 years under Section 248.

·         Verification of Registered Office – 1) Physical verification of registered office can be done on the reasonable cause to believe that no business operation is going on. 2) The Registrar may remove the name of the Company in case of default found. (Section 12 read with Section 248 – Addition of new clauses). This provision is included in order to do away with ‘the paper companies’ because in reality, owing to large enquiries and inspection, the companies are not maintaining the registered office.

·         Register of Significant beneficial Owner in Company- Considering the importance of disclosure in Corporate regime, in case a person ( beneficial owner) has failed to disclose in the interest in the company, he shall be liable with imprisonment for term which may extend to one year or with fine to the extent of 10 Lakh rupees or with both. [Section 90(10)]. Also, empowers the company to file an application before NCLT for determining the number of shares of the beneficial owner if the company has a reasonable basis regarding the person possessing significant ownership. (Section 90(1)).

·         Disqualification of Director ( Section 164 (1) (i) r/w Section 167(1)) – If the director is not complying with the number of directorships stipulated under Section 164(1) of the act i.e. 10 in case of Public Company and max 20 directorship, the director shall be subjected to disqualification.

4.    Amendments in the adjudication of Penalties.

·         Adjudication of Penalties (Section 454(3)) – Now, adjudicating officer may impose the penalty on ‘any other person’ signifying the wide powers of an adjudicating officer and can also direct the person to make good the default. Also, the amendment in Clause 8 of Section 454 by removing the penalty imposed by the adjudication officer, thus increasing the scope of the penalty that can be levied.

5.    Increasing Punishment for Fraud and insertion of repeated defaults.

·         In Section 447 of the Act, the maximum punishment for the fraud has been increased to 50 Lakhs from 20 lakhs where the fraud involved the amount of 10 Lakhs or 1 % of the turnover whichever is lower.

·         Insertion of Section 454A – Double penalty to be imposed in case of repeated default within three years.

Conclusion

This ordinance has brought significant liberalisation in the economic and company related offences and on the same page, has improved the corporate efficiency by improving the corporate governance norms like Commencement of the business etc. The report has been more or less been adopted by the Ministry of Law and Justice. Turning the phase of corporate criminalization would trigger the ease of doing business in India, thus soliciting Corporate Autonomy.

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We invite law students to submit articles for the August issue of the NILS India Blog on any of the following contemporary legal issues:

1) Relevance and the legality of Article 35A of the Constitution of India.

2) Right to Privacy in Digital India.

3) Challenges faced by the Insolvency and Bankruptcy Code, 2016.

4) Inclusion of “Stalking” as a crime in the Indian Penal Code.

5) Apex Court ruling on Section 498A of the IPC: A Regressive step?

General Guidelines –

a) The authors are requested to not exceed the limit of 2000 words for their submission (including end notes).

b) Co-authorship is restricted to a maximum of two authors.

c) The articles must be unpublished and original. Any form of plagiarism is discouraged and shall result in disqualification of the entry for publication.

Formatting and Citation guidelines –

a) The body of the article shall be in Times New Roman, font size 12 with 1.5 line spacing.

b) The end notes shall conform to Bluebook 19th Edition rules of Citation.
The article should preferably contain endnotes (and not footnotes).

Submission guidelines –

a) All submissions must be e-mailed in Word Format (‘.doc’ or ‘.docx’) with the subject of the E-mail being “NILS India Blog | August Issue | Submission” to
vp-publications@nilsindia.org

b) The body of the E-mail must mention the name of the author(s), contact number, academic year, Educational Institution of the author(s) and Title of the paper.

Deadline for Submission is September 15th, 2017, 11:59 P.M.

For any queries contact –
SHRESTH VARDHAN – 9726668356 | vp-publications@nilsindia.org

Regards

Shresth Vardhan
(Vice-President (Publications)- NILS INDIA

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