The new consent order framework announced by the Securities and Exchange Board of India (Sebi) will apply to the Reliance Industries Ltd (RIL) case and other existing ones.
A senior Sebi functionary told Business Standard the idea behind the move was to put in place a transparent mechanism to ensure nobody was allowed to get away with major offences such as insider trading and market manipulation.
Existing as well as new cases would be disposed of within the prescribed time-frame of six months, the official said. He explained the regulator’s decision was derived from legal principles on the compounding of offences; minor offences were compoundable but not serious ones.
“You can’t talk of investor protection on the one hand and allow consent orders in cases where investors have suffered,” the official said.
He said the exception would be the few cases that had gone to the judges’ High Powered Advisory Committee and in which the companies involved had already given firm proposals to settle the matter. He said there were only three-four cases in that category. The official stressed the framework had provided a window to handle exceptional cases differently but that would be utilised rarely.
The Sebi had issued a showcause notice to RIL in February 2010, as the parties could not agree on the consent terms for insider trading. However, RIL later reapplied to the Sebi, requesting it to go for a consent process. The Sebi’s consent order norms allowed companies to approach it again for consent in some cases, even if the first attempt was unsuccessful.
The case was regarding the sale of shares of Reliance Petrochemicals held by RIL in 2007. The company had hedged their sale position in the derivative segment. During the process, it had made a huge profit, of Rs 500 crore. While the company had shown the profit in its balance sheet and paid the relevant tax, the Sebi said RIL was aware of the likely gain from derivatives trade in the name of hedging. RIL had first sold the shares in derivatives and then, while selling the shares in the open market, covered the derivatives position, which resulted in a profit.
It argued before the Sebi it had hedged its sale position to ensure the market price did not crash when it offloaded its holding. The regulator outlined in its new guidelines on Friday it would not settle serious offences, including insider trading and front-running, by the consent process.
The defaults falling in the category of fraudulent and unfair trade practices, which in the opinion of the Sebi were very serious and had caused substantial losses to investors, would also not be consented.
It listed offences, including insider trading, failure to make an open offer, front-running, manipulation of NAV (net asset value), failure to redress investor grievances and non-compliance of summons, to be excluded from the consent process.
Under the new framework, the Sebi will only accept a consent application within 60 days of the servicing of a showcause notice. After an applicant files for the consent process, the application will be taken up by an internal committee, which would have a Sebi general manager. After that, the consent terms will be placed before the HPAC, which will consist of a retired high court judge and three other external experts.
The recommendations made by the HPAC will then be placed before a panel of two whole-time members for approval. The whole-time members may enhance or reduce the settlement amount or may even reject the consent process.
Once the Sebi rejects a consent application, it will not consider any further application for the same default at a later stage.
The Sebi has said the consent terms may also include other directives, including the disgorgement of ill-gotten profits.
The consent process, introduced in 2007 and modelled on the US system, is a settlement of proceedings between the Sebi and the alleged violator without admission or denial of the guilt, subject to a fine and also a voluntary ban in some cases. The consent process was introduced with a view to cutting the costs and time involved in enforcement actions.
In January 2011, the Sebi had settled a probe through consent with the Anil Ambani-led Reliance Group over alleged routing of money raised through overseas bonds, for a settlement charge of Rs 50 crore — the highest till date. The market regulator decided to review the consent process in mid-2011, after internal assessment indicated there was a lack of consistency in cases of similar offences.