The rapid developments with
regard to the “Consent
Order” mechanism to settle regulatory action initiated by the Securities &
Exchange Board of India are rather intriguing – Virendra K Jain
On
Friday, 25 May the Securities and Exchange Board of India (SEBI) released
revised consent rules by amending its Consent Circular of 20 April 2007. It did
this even as proceedings related to a Public Interest Litigation (PIL)
challenging the very legality of the Consent Circular were underway at the
Delhi High Court.
Meanwhile, The Economic Times reported today that Reliance
Industries (RIL), India’s largest private sector group has moved the Bombay
High Court urging that action initiated against it in a massive insider trading
case should be allowed to be settled under the now-discarded consent
regulations.
Wrong news – ET has
retracted this news.
RIL’s action comes after SEBI has apparently rejected its
consent application twice before. However, it is not clear why SEBI has not
initiated regulatory proceedings against the group for so many years. The RIL
case suggests that there is no clear process for initiating punitive action
once the regulator rejects a consent request. It is also unclear under what
rules and circumstances it does this, since there is apparently a very long
window available to some entities to keep revising their settlement offers.
The PIL in Delhi HC has prayed, amongst others, for quashing of
the 2007 circular and all consent orders passed by SEBI pursuant to it. It has
argued that SEBI’s circular does not have clear legal basis.
S. 15(T)(2) of the SEBI Act, 1992 is the basis of the
consent process
SEBI’s recent amendment to the consent rules states that it will
not settle charges such as insider trading, fraudulent and unfair trade
practices, failure to make the open offer, front-running, manipulation of net
asset value or othermutual funds defaults, failure to redress investor
grievances and failure to make disclosures under the ICDR. But, having
said that, it still keeps a window open for by arming itself with discretionary
powers to settle any case even in these defaults!
The original SEBI consent mechanism was obliquely justified on the grounds that it was modelled on the lines of the settlement procedure followed by the US Securities and Exchange Commission (SEC). This is factually incorrect.
The original SEBI consent mechanism was obliquely justified on the grounds that it was modelled on the lines of the settlement procedure followed by the US Securities and Exchange Commission (SEC). This is factually incorrect.
Unlike the SEBI Act, the SEC has specific provisions in its statues to govern the settlement procedure (and not consent) with clear objectives of investor protection and fairness.
It doesn’t
– they just have a two liner administrative rule and no statutory backing to consent.
They focus on disgorgement of illegal gains and compensation to
affected investors from the money disgorged and fines collected. The SEBI Act
has no provision for awarding compensation or damages for the losses suffered
due to fraud or unfair practices. The fines imposed by SEBI are deposited in
consolidated fund of the Government of India.
Incorrect.
SEBI has collected well over 100 crores in disgorgement – this does not to the Consolidated
Fund of India. Only penalties go to the CFI. SEBI typically collects both penalties and disgorgement beside other actions (like consent bar from the market).
Further, settlement terms
of the SEC require the approval of a court (which can also reject the
settlement). SEBI’s consent orders are entirely negotiated by its staff and
ratified by its own chosen committee, headed by a retired judge. There is no
known case where this committee has objected to the consent terms or sought
their modification.
Wrong on
both. Court approval is necessary only where a case has been filed in court –
in both cases SEC and SEBI. In fact the SEC
has no external objective body which looks at the consent mechanism –
the staff alone decides the amount. The
HPAC rejects well over 60% of all cases –
these are contained in SEBI’s annual
report – so there are hundreds if not thousands of known cases.
This
means that even after the latest amendment, the fundamental issue of whether
SEBI’s consent rules are legally valid has still to be decided by the
courts. Does SEBI have the powers to settle all type of defaults? In my
view, it does not. In fact, once it is satisfied that a violation or
transgression of rules has occurred, SEBI is mandatorily required to impose the
penalty prescribed for that particular offence under the Act. It has no
discretion in the matter. For instance, “a penalty of Rs25 crore or three times
the amount of profits made out of insider trading, whichever is higher,” is to
be levied for insider trading or non-disclosure of acquisition of shares and
takeovers or fraudulent and unfair trade practices.
If it had no discretion, why
would Parliament have inserted S. 15(T) (2).
Both SEBI circulars on consent proceedings—dated 20 April 2007
and 25 May 2012—turn the intent of the legislature as well as the letter and
spirit of the legislation on its head. The legislation provides for mandatory
and specific (in most of the violations) penalties whereas SEBI’s circulars
over-ride this and empowers itself to decide matters on a case-by-case basis. A
close reading of the latest amendment makes it obvious that it is another exercise
in self-empowerment and SEBI’s sympathies lies with the violators rather than
in protecting investors’ interest and safeguarding market integrity.
In
consent cases, SEBI normally imposes a higher penalty, and disgorgement rather than dilute the law.
In other words, the penalties are not subverted but enhanced. Of course this is done with an order "without admitting or denying guilt in return".
The
new regulations are strange in another respect. They in fact formalize the
process for those who commit an offence or violate a rule to walk through the
consent door every two years (from the date of the previous consent order or even earlier “if the default is
minor in nature”). Only those who have already received two consent orders (or
pardons) already have to wait for three years before applying for consent
again.
SEBI’s
consent rulings so far have been extremely opaque and arbitrary, so one can
only draw inferences from the amendments. One such amendment says
that a consent application cannot be filed until the investigation is complete.
Does this mean that in the past, under a more lawless regime, SEBI has allowed
entities to file consent applications even before it had completed its
investigations and figured the extent of wrongdoing?
No, even in the previous
circular, investigation had to be completed before consent could be done –
except in cases where the violation is technical and obvious i.e. where
investigation is not necessary.
Clearly, the new consent regulations are also grossly
inadequate. SEBI is India’s capital market regulator, it would do well to
regulate, strictly within the parameters set by the legislature and leave
legislation to parliament.
It has – see above.
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