Sebi mulls another revamp of settlement proceedings

To allow settlement in preliminary stage itself; may impact transparency, lead to delays feel some

The Securities and Exchange Board of India (Sebi) is working on facilitating settlement of enforcement proceedings even before the formal show cause notice has been issued, sources have said.

According to people privy to the matter, the regulator before the issue of formal enforcement show cause notice will send its basic findings to the entity under scrutiny by way of a basic notice.

The notice will ask if the entity wishes to settle the proceedings through the consent mechanism. The issue is likely to come up tomorrow at the Sebi board meeting in Mumbai.

"By way of this notice we will let the parties know that they can approach us for settlement of the matter by way of consent," said an official.

The basic intimation notice with respect to enforcement would be delivered to parties after the action is approved by Sebi Whole Time Member.

The parties would be required to approach Sebi within sixty days to settle enforcement proceedings, said multiple sources.

Consent order allows the parties to settle proceedings with the regulator if prima facie found violating securities laws. The settlement is done without accepting or denying the charges.

As a part of current practice, settlement of civil proceedings commences after the issue of show cause notice as parties only become aware of probable action after the issue of the show cause notice.

The markets regulator's intent behind this move is to save cost and time.

"The issue of basic notice would help the regulator incur less cost and will save time," said a source.

After the show cause is issued the reply to the notice is examined followed by a personal hearing and then preparation of final order. Any order whether it is consent, dropping of charges or a final order is generally disclosed by the markets regulator in public domain.

If the matter is disposed off in the preliminary phase itself, some fear that this could mean that they may not be disclosed in the public domain-leading to a loss of transparency for such proceedings.

" The order may not come in the public domain as the matter is settled before enforcement proceedings," said one market participant.

However, the practice of sending out a basic notice is not without precedent globally. A similar practice exists in the US markets. This is called the 'Wells notice', and is named after the 1972 Wells Committee which proposed the mechanism.

"A Wells notice is issued by SEC in the US before the authorization of the enforcement proceedings. However, SEC has decided against adoption of a formal requirement of sending such a notice. If the SEC issues a Wells notice, it is required to commence enforcement proceedings (if any) within 180 days. The issue of whether a company that receives a Wells notice is required to disclose it in its public fillings is still being debated," said Vanessa Abhishek, Bombay high court lawyer.

Legal experts believe that while implementing the new aspect in enforcement proceedings Sebi should ensure that companies are making the right disclosures to the public.

"The issue of a Well notice before the issue of a formal show cause may not lead to additional level of non-transparency. The intent according to me is to avoid any damage to the reputation of the company at a prima facie phase," said Sandeep Parekh, Finsec legal advisors.

"The party to which the Wells notice is sent, if inclined to undertake the consent route may then proceed for it much in advance and which may expedite the outcome. This may also assist Sebi in spending that much less time and resources as it will not be required to prepare and send a full-fledged show cause notice," said Tejesh Chitlangi, IC Legal

Others said that the move has its own risks.

"Regulator should ensure that the parties don't end up using the Wells notice as delaying tactic and delay the enforcement proceedings," said a market participant.

An email sent to the regulator on Monday did not receive a response.