Eligible for settling? Details soon

Sebi to consider 'market-wide impact' to boost settlements for small offenders under consent mechanism

The Securities and Exchange Board of India (Sebi) is planning to change guidelines for settling violations under the so-called consent mechanism because there has been a sharp drop in settlement of cases under this route.

Akin to out-of-court settlement, the consent mechanism allows an offender to settle charges without admitting or denying guilt by paying a penalty or undergoing a voluntary market ban or both.

The framework does not allow settling of serious violations that have “market-wide impact”. The regulator plans to change the regulation to define a market-wide impact.

“We have clarified what is a market-wide impact through an internal guideline. However, there is demand that it be done through a regulation. We will be coming up with changes in our regulations,” said U K Sinha, chairman, Sebi, on the sidelines of the Thomson Reuters South Asia Risk Summit.

“We conducted a study of our consent mechanism and found the number of cases has been coming down. Officers in Sebi as well as the advisory committee are not very sure (on what is a market-wide impact),” he added.

Some of the typical fraudulent and unfair trade practices are issue of securities by furnishing wrong information, misleading investors and mis-selling mutual fund schemes. The criterion for market-wide impact is significant impact on the market. It is not limited to one security and its investor.

“This is a welcome move. This will ensure enforcement proceedings are concluded quickly and will also widen the ambit of the mechanism,” said Sandeep Parekh, founder, Finsec Law Advisors.

“The regulator needs to provide clarity on settlement fees as the formula adopted is very complex,” said RS Loona, managing partner at Alliance Corporate Lawyers. Non-acceptance of the settlement amount leads to rejection of a consent application.

The current process takes several months because it has to go through checks in three different Sebi committees before arriving at the final consent terms. Ideally, cases should be closed within a month, which can be done if Sebi sets up dedicated teams, experts feel.

Experts believe the pending Reliance Industries insider-trading case may not be settled through the consent route even under the new framework.

Besides the consent framework, Sinha said Sebi was working with global experts and regulators to frame guidelines for high-frequency trading. “There is a race globally to bring down the latency and regulators are struggling to contain the risks. We have to be very careful in taking measures because one disruption could affect hundreds of people,” he said.

On allowing futures trading in new commodities, he said, “Sebi has been very careful in allowing trading in new commodities.”