Sebi to open consent doors for serious violations, cut burden of cases

The regulator is working on simple formulae to arrive at settlement fees, say sources

The Securities and Exchange Board of India (Sebi) is broadening the scope of the consent mechanism to reduce the number of cases it is handling.

According to sources, the regulator is planning to allow serious offences such as insider trading, front running, or fraudulent and unfair practices to be settled under the mechanism. 

Sources privy to the development said Sebi would take a fresh look at the pricing formulae to decide the settlement amount under consent. 

Currently, the formulae prescribed by Sebi have too many variables, making the process ambiguous.

The regulator is working on simple formulae to arrive at settlement fees, sources say, adding that the new consent framework will be introduced in less than two months.

During the last board meeting, the Sebi chief had acknowledged the need for tweaking the consent rules.

“We are revisiting the settlement norms and have started rewriting certain regulations,” Ajay Tyagi, chairman, Sebi, had said.

The move comes when the regulator is grappling with pending cases. According to the Sebi Annual Report for FY17, there are more than 7,000 cases with Sebi.

The consent mechanism is the process under which an alleged wrongdoer can settle a violation with Sebi without admitting or denying the transgression. The settlement involves penal action, which could be fees, a market ban, or both. 

A large number of these cases involve serious violations such as insider trading, which, at the outset, shuts the consent door in the current framework. However, in a lot of them, the loss incurred by investors or damage caused is very minimal. The new framework is being designed primarily to address such cases.

“Opening up the consent mechanism for all violations would help in reducing the burden of cases. There are many cases involving unlawful gains worth even less than Rs 1.5 million. However, due to statutory limitations, Sebi is unable to settle them,” said a source.

Bringing serious violations under the consent mechanism has been a contentious issue for the regulator. Sebi came up with a circular for settling cases through the consent mechanism first in 2007. The circular talked about the basic procedure that needed to be adopted for consent. However, it didn’t exclude any of the violations from the ambit of consent. 

In 2011, Sebi settled a case against Anil Ambani and his ADA Group, which were allegedly accused of routing money raised through overseas bonds to the stock market in 2007. Ambani had paid settlement fees of Rs 500 million.  

However, following the backlash for the settlement, Sebi revisited the regulations in 2012 with a new circular, which said serious violations like insider trading, fraudulent and unfair trade practices that have a marketwide impact, failure to make open offers, and front running were excluded from the consent process. Later in 2014, it enacted a regulation termed Settlement of Administrative and Civil Proceedings to give more legal sanctity to the consent framework. 

“Under the Sebi settlement regulations, serious offences which have marketwide impact or have caused substantial losses to or have affected the rights of in investors in securities, especially retail and small shareholders cannot be settled,” said Yogesh Chande, partner, Shardul Amarchand Mangaldas.

Simplifying the price formulae to determine the settlement fees is another key aspect that Sebi is looking to revamp. The current method of calculation is complex and open to interpretation. The current scheme takes into consideration more than 10 factors, including the value of violation and the stage of the case. Legal experts say Sebi could come up with a simpler approach wherein there would be three variables.

Globally, consent is a popular route adopted by market regulators to reduce the burden of investigation and prosecution. For instance, in the US markets, close to 90 per cent of the alleged violations are settled through the consent mechanism. 

KEY TAKEAWAYS
 

• Sebi could allow serious market violations such as insider trading and front running to be settled via consent
• This will help Sebi in reducing the burden of pending cases
• There are a lot of insider trading and fraudulent trade practice cases pending with Sebi, where the value of damage is less than even Rs 1.5 million
• Sebi also looking to revise the formulae used to arrive at the settlement fees payable
• Legal experts say the current formulae have too many variables, making the process ambiguous