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Kumkum Sen: Sebi reforms: Confusion in consent terms

The 2012 amendments were introduced with the intent of providing more clarity on the scope and applicability of the regulation

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Consent orders are probably the best way to settle disputes, which is why courts and tribunals encourage settlements. Other than referring parties to mediation or arbitration, for quick time bound resolutions, civil courts take suo moto cognizance of all forms of consent terms, according them the force of a decree. The also treats various offences e.g. cheating, theft, and certain cases of breach of trust as compoundable. The accused can pay money in lieu of undergoing prosecution and possible punishment. Not perfection, but since such practices are usually applicable in personam, the benefit is in reduction of delays and costs. Regulatory consent orders require a more holistic and demonstratably transparent approach, as they could potentially impact third parties.

The Securities and Exchange Board of India (Sebi) introduced consent terms in April, 2007, for composition of offences and settlement of defaults under the Act, 1996 Securities (Regulation) Act, 1996 (SCRA) and Depositories Act,1956. SCRA and the Depositories Act both contained existing inbuilt provisions for composition of offences. As regards Sebi, legislative sanction is envisaged inasmuch as Section 15(T) with the Sebi Act provides that “an order by the Board made with the consent of the parties is not appealable”. Given the inherent delays in the process, this initiative expectedly generated considerable relief for corporates.

Since such proceedings are confidential, unlike courts’ proceedings, concerns arose on transparency as even in cases where the (HPAC) was reportedly involved, consent orders were being routinely passed in disregard of Clause 11 of the 2007-guidelines. Certain orders in some high profile and sensitive matters were subjected to media criticism, and the Delhi High Court actually issued notice in a public interest litigation on Sebi’s powers to decrease or wave mandatory penalties.

Insofar as securities regulations are concerned, consent orders should be applied to petty violations or pure monetary regularisations. Expectedly the 2012-guidelines provide several checks to ensure there is no abuse of this process. Yet companies were being liberally permitted to file consent terms several times for different violations, availing of consent as the norm, rather than the exception. Post amendment the numbers of consents are restricted to two per year and no consent application shall be considered before the completion of any investigation in respect of the alleged default. Under the 2007-guidelines the history of non-compliance is to be considered in passing such orders – a version of the clean hands doctrine, which appears to have been routinely flouted, as were the minimum penalty threshold provisions. The penalties imposed were chicken feed. On preconditions too, reportedly there were waivers and lapses. Most criticism is directed against consent terms being applied regardless of gravity of charge, notably in insider trading cases. Hence, the 2012 amendments were introduced with the intent of providing more clarity on the scope and applicability of the regulation. Incidentally, from inception to March, 2012, approximately 1,186 consent orders were passed, 843 were disallowed and 366 pending. However, there has been a slowdown post amendment. Ltd is believed to have approached the Bombay High Court, for a declaration that the insider trading case against them be tried under the 2007-guidelines. The courts are unlikely to grant such relief.

How is the amendment expected to impact the existing regime? Media coverages have been going overboard about the impropriety of the consent terms being applied to settle insider trading cases.

The amendment provides that Sebi will not settle certain defaults, listed in Item 1, of which insider trading is the foremost, front running a close second, and others such as failure to make an open offer, unless Sebi is of the opinion that such offer would not be beneficial to investors, serious fraudulent and unfair trade practices, manipulation of net asset value, failure to address investor grievances and such significant others.

There seems to be no major changes, except that Sebi’s involvement in the consent process has been pared down. The non-obstante clause at the end of Item 1 makes it clear that notwithstanding the negative list at Item 1, the HPAC / Panel of Whole Time Members would retain the power of settlement of all defaults. In the pre amendment process, the orders were issued by the Adjudicating Officer who after consulting with the HPAC would release the terms. Will this procedure still hold good? Clause 9 of 2007-guidelines has been amended requiring that an applicant making a request for consent has to submit an application as per the prescribed format in Annexure-A which details the information and supporting original documents to be submitted and the terms passed as per Annexure-B. However it is still not clear whether the point of contact will still be the Division of Regulatory (Action Division) within Sebi and the proposal would be placed before the HPAC after their scrutiny.

Presumably, this Division would provide only ministerial support and not be involved in the decision making process or issue. Who would then be the interface with the HPAC? The non obstante clause does not address the above anomaly and its application, therefore, remains inchoate.


 

The author is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in  

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