30 January 2012

Consent orders - Bombay High Court

In an interesting ruling on the consent mechanism of SEBI, the Bombay High Court in Shilpa Stock Broker v. SEBI has some interesting notings on the process.

SEBI, as a regulator has an enabling power to settle a dispute. The guidelines merely streamline the exercise of a power which already vests in a regulator. But SEBI cannot be compelled to settle a dispute. The object and purpose of the Guidelines is to enable SEBI to resolve disputes where the regulator does not consider it necessary to pursue adjudicatory or criminal remedies. The exercise of the discretion which is conferred on SEBI is structured by the considerations which are elaborated in Clause 11 of the Guidelines. The factors which are to be considered by SEBI are as follows :
i. Whether a violation is intentional;
ii. The party's conduct in the investigation and disclosure of full facts;
iii. The gravity of the charge : whether a charge involves fraud, market manipulation or insider trading;
dmt 17 wp2120-11 iv. History of non-compliance. Whether there is a good track record of the violator i.e. it had not been found guilty of similar or serious violations in the past;
v. Whether there were circumstances beyond the control of the party;
vi. Whether the violation is technical and/or minor in nature and whether the violation warrants penalty; vii. Consideration of the amount of investors' harm or party's gain;
viii. Processes which have been introduced since the violation to minimize future violations/lapses;
ix. Compliance schedule proposed by the party; x. Economic benefits accruing to a party from delayed or avoided compliance;
xi. Conditions where necessary, to deter future non- compliance by the same or another party;
xii. Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them;
xiii. Compliance of the civil enforcement action by the accused;
xiv. Whether the party has undergone any other regulatory enforcement action for the same violation; and
xv. Other factors necessary in the facts and circumstances of the case.
7. Whether a dispute should be resolved or whether the wider public interest in ensuring regulatory compliance requires that proceedings should be initiated and, if initiated should be followed to their logical conclusion, is a matter which falls within the discretion of SEBI. 
The court found that after a final hearing (by the Supreme Court) there is no scope for consent process as nothing is pending. SEBI's rejection of the consent application was therefore correct.

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