Sebi announces new consent norms
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New norms issued by the Securities and Exchange Board of India (Sebi) on Friday to streamline the consent order process still give the regulator a window of discretion to deal with various offences.
The Sebi circular prohibits use of monetary settlement for dealing with a list of serious offences, including various fraudulent trade practices, as also insider trading and front running, other serious offences which cause substantial losses to investors or affect their rights, failing to make an open offer and manipulation of net asset values of mutual funds.
Paradoxically, the circular also gives Sebi's high powered advisory committee (HPAC), which recommends the cases to be settled through consent, and the panel of whole time members (WTMs), which takes the final decision on the consent order to settle any matter through consent, the power to pass a consent order on these very same offences.
"Notwithstanding anything contained in this circular, based on the facts and circumstances of the case, the HPAC/Panel of WTMs may settle any of the defaults listed above," notes the Sebi circular.
The consent order mechanism, put in place in April 2007, currently allows alleged offenders in cases being investigated by the stock market regulator to settle the charges against them through payment of a monetary penalty without admitting or denying guilt. There has been some criticism of the lack of transparency in the process, including through a public interest litigation filed in the Delhi High Court. The regulator was reviewing the process.
The latest Sebi circular describes the benchmarks depending on the nature of various offences, as well as a list of ten offences which cannot be settled through consent.
According to these, consent orders can only be considered after the completion of investigations or inspections contemplated as a result of the alleged offence.
Applications will not be considered for a consent order if the offence was within two years of Sebi passing a consent order or if the applicant has already obtained more than two consent orders, for a period of three years, from the date of the last consent order.
There will be no consent order if more than one proceeding arising out of the same cause of action is pending, unless it is for all the proceedings.
Consent applications would have to be filed within 60 days of show cause or supplementary notices issued by Sebi officials. They also cannot be filed after 60 days of the current circular if proceedings are pending before Sebi officials as on that date.
The HPAC shall consist of a retired Judge of a High Court and three other external experts.
There will be an internal committee comprising Sebi officials not associated with the case for assisting the HPAC.
The recommendations made by the HPAC shall be placed before the panel of two whole time members for their approval.
The panel may increase or decrease the penalty or dismiss the application altogether.
There would be a minimum benchmark amount for each category of default, as well as additional amounts for previous defaults.
Weightage would be given factors including the stage of the proceeding and the gravity of the violation.
The consent order and the details of the case would be put up on the Sebi website.
Applicants cannot reapply for consent once an application is rejected. This clause shall come into effect on the expiry of 30 days from the date of this circular.
The consent application shall be disposed of expeditiously, preferably within six months of the application.
The circular will apply to all new applications and pending applications, except those which have reached the HPAC or thereafter.
For the record, the largest settlement through consent till date has been in the case of the Anil Ambani group of companies, which had paid `50 crore in addition to voluntarily refraining from participation in the stock market.
Media reports indicate a larger order has been pending, in a case pertaining to Reliance Industries.
The new rules evoked a mixed response.
"Regulatory untouchability — making some types of allegations incapable of being settled — is not a good idea, said Somasekhar Sundaresan, partner, J Sagar Associates, pointing out that every single legal and regulatory dispute is capable of settlement, provided the terms are right.
"It would burden the noticee to undergo the pain of having to prove himself innocent, and Sebi would have to undergo the pain of having to persist with proceedings despite not being sure of itself. Sebi would have to either become very careful not to initiate an action in cases of the type that are excluded because it could lose and that would hurt its image. Alternately, it would become trigger-happy and chase even cases that it cannot win, saying the one setting things aside would be the judiciary and so it can retain a pristine image of doing its dramatic best with the judiciary having to face the image of a spoilsport," he said.
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