Financial code provides compounding provisions

With no clear provisions in current law, Sebi's consent mechanism relies on circulars, which are often challenged in courts

The new financial code drafted by the Srikrishna Commission has laid down clear provisions for compounding of offences.

Through compounding, an accused pays charges in lieu of undergoing prosecution consequences. The process seeks to avoid lengthy legal proceedings and settle financial crime cases.

Clauses 412-414 under the draft code talk about elaborate provisions on the procedure for applying for and making a compounding order. It also says an application for such an order has to be disposed off within 90 days. The draft code submitted, alongwith a report by the Financial Sector Legislative Reforms Commission, requires the regulatory agency to provide clear guidelines on the offences that can be compounded, the amount of penalties, etc.

The financial code Bill requires the regulator to stipulate through regulations the list of violations that cannot be compounded, the list of violations that can be compounded, the method of calculating any monetary penalty that may be imposed, the considerations that the financial agency may take into account while issuing a compounding order and the process for making an application for compounding action.

The elaborate provisions of the new Bill are in contrast to single-word mentions of these concepts in the existing law. Through circulars, the Securities and Exchange Board of India (Sebi) had spawned these words into an elaborate consent order and a compounding mechanism, which settled hundreds of cases. However, this mechanism has come under legal fire, with public interest litigation challenging its validity. The new code would put the regulators on a stronger footing and give them a better framework to rely on, said legal experts.

“After the recent circular issued last year, Sebi has stopped accepting consent applications on cases relating to insider trading, takeover code violations, etc. Even in cases where it is accepting applications, it is asking applicants to include a disclaimer through which the consent settlement can be withdrawn if a high court decision goes against it,” said Pavan Kumar Vijay, managing director, Corporate Professionals, a Delhi-based advisory.

Delhi-based businessman Deepak Khosla has filed a public interest litigation in the Delhi High court, challenging the validity of the 2007 Sebi circular that operationalised the consent order mechanism. Last year, Sebi opposed this saying a new mechanism had replaced this. The hearing in this case is expected to resume later this week.

The Securities and Exchange Board of India Act, which governs the functioning of the market regulator, didn’t have any clear-cut or elaborate provision relating to compounding of offences, except Section 24 A. According to this section, “Any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.” Section 15 T of the Sebi Act says, “No appeal shall lie to the Securities Appellate Tribunal from an order made” with the “consent of the parties”. In 2007, these two sections were read together and a circular on “consent order and composition of offences” was issued by Sebi.

In one stroke, a new mechanism was created through which practically every case, including those related to insider trading, takeover code violations or other unfair practices, could be settled for a fee. Last year, Sebi revised the framework following allegations of disproportionate settlement amounts alluding to corrupt practices to keep serious violations out of the consent mechanism.

LEGAL CLARITY

• Sebi Act did not provide elaborate provisions for consent/compounding
• Section 15T says orders made with “consent” of parties cannot be appealed against
• Section 24A provided for compounding of criminal offences
• These two sections were used to float an elaborate consent order mechanism
• Petitions filed questioning legal validity of this mechanism
• New code provides for elaborate provisions for compounding