Government of India Volume I: Analysis and Recommendations

FUNCTIONS AND POWERS OF THE REGULATOR
Table of Recommendations 4.11 Requirement for proportional penalties
The regulator must ensure that the penalties deter potential violators in the future. It is impossible to ensure that all
violators are caught. However, violators must pay fines proportional to the damage and the illegal gain. The following
are the steps the regulator must follow:
◮ For each violation, the regulator must carry out an investigation on the illegitimate gain made by the violator;
◮ The regulator must make an effort to determine the amount of illegitimate gains made by the violator;
◮ The penalty will be a multiple of the illegitimate gain, but limited to a maximum of 3 times the illegitimate
gain;
◮ The regulator must compensate any direct victims of the violations if they can be ascertained; and
◮ The regulator must have regulations and processes for calculating and enforcing the fines.
Table of Recommendations 4.12 Compounding of offences
The system for compounding offences must:
◮ Be guided by a policy set out by the regulator;
◮ Have adequate checks and balances to prevent interference from external parties;
◮ Be transparent to prevent allegations of favouritism;
◮ Consider previous behaviour of the party; and
◮ Consider whether the party itself offered compounding before any investigation was started.
4.2.7. Compounding of offences
The Commission believes that the system of compounding offences is important for reducing
judicial burden and addressing minor violations, which are common in the financial
sector. However, the system of compounding offences requires a standardised structure
across all regulators which is not present as of date. The recommendations of the
Commission are provided in Table 4.12.
4.3. Administrative law and role of tribunals
In exercise of their supervisory and enforcement powers, regulators need to assess whether
or not regulated entities have adequately complied with the provisions of financial
laws and in case of any detected breach, they have the power of impose appropriate
penalties. These wide ranging executive powers given to regulators necessarily need to
be balanced with proper systems governing the application of administrative law. Therefore,
the Commission recommends that the exercise of quasi-judicial (administrative law)
functions by regulators needs to be carried out within the bounds of a sound legal framework
that ensures the separation of administrative law powers from other powers of the
regulator.
In addition, there also needs to be a mechanism to review the actions taken by regulators
in exercise of their quasi-judicial functions. Given the specialised character of financial
markets and the complicated nature of issues involved, the Commission finds
that there is a strong case for having a dedicated appellate tribunal.
The Commission therefore makes specific recommendations in respect of the processes
governing these two areas:
1. Administrative law functions carried out by the regulator: How the regulator separates and carries
out regulatory function within its organisation.
2. Judicial review by appellate tribunals: How the decisions of the regulator are reviewed through a
dedicated financial sector appellate tribunal.
4.3.1. Administrative law functions of the regulator
At the level of the regulator’s board, at least one executive member should be designated
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 37