Needed: A good settlement mechanism

One area that needs more attention is the dichotomy between the principle that the strength of the defence is irrelevant and the consideration of major and minor character of the violation alleged

Recommendations from a committee set up by the Securities and Exchange Board of India (Sebi) to reform the regulatory framework for settlement of proceedings, mark the beginning of a much-needed reform in this space. The Indian capital market has struggled in this department. The committee has made some beginnings and made some misses — but significantly, come up with some important reform recommendations.

The report is heavily laden with literature on the subject from the United States but falls short of computational reform in the field of sentencing. However, some obviously unworkable and arbitrary aspects of the current settlement mechanism have been picked up for cleaning. The committee has promised another report on the principles for quantifying gains made and losses inflicted — one must hold one’s breath for it — but more importantly, some significant reform measures are laudable.

First, the Sebi should be lauded for forming a two-man committee — a retired judge and Sebi’s regular advocate on record in the Supreme Court. Jumbo-sized committees with 20-plus members can be challenging for nuance and focus with a complex and technical subject.

Second, the caste system of offences in the current settlement framework, has come in for reform. The committee has proposed to move away from the absurd signalling in the current regulations — that some offences would never be settled, even while the Sebi may indeed, at its discretion, settle even those offences.  Instead, the committee has proposed to move to a principles-based framework in which violations that involve a market-wide impact, losses to a large number of investors and which affect the integrity of the market may not be settled. While this too is a very subjective standard (technically, every offence would affect the integrity of the market), such an approach, at the least, would do away with the signalling that some offences are better or worse than the others — which sends an insidious coding of the judicial mind too when it comes to hearing appeals involving such offences. The Sebi’s capacity to settle even such offences has been retained with reasonably objective criteria such as the undertaking of any remedial measures by the alleged offender.

Third, the time frame within which one may propose a settlement has been tweaked but an excellent chance to reform natural justice compliance by the Sebi has been squandered. Currently, proposals to settle may be made within 60 days of the receipt of a show cause notice. However, even in this day and age, the approach to compliance with natural justice varies from one quasi-judicial officer to another — some enable a full inspection of the record, while others nitpick about providing access to the record, often losing months in battling against fair inspection in the name of fighting against dilatory tactics. The 60-day time frame ought to start from the time inspection is complete so that the person accused in a show cause notice has an opportunity to understand the full case and all its strengths and weaknesses before considering a settlement — only fair since this is what would be required for a party that chooses to contest the charges too. The committee could have proposed reform in this process too, but has not done that. The committee has indeed proposed that one could seek to settle up to 120 days after the 60-day deadline but agree to pay interest at the rate of 25 per cent per annum for such delay.

Illustration by Binay Sinha

Fourth, in terms of timing of an approach to settle, the committee has proposed that the Sebi must not entertain any settlement proposal unless investigations are complete. Indeed, the committee has also said the Sebi may entertain such an approach if it helps in completing the investigations (somewhat like an approver system; or akin to the “lesser penalty” regulations of the Competition Commission of India, which rewards co-operation). This is retrograde. Instead, the committee ought to have noticed that even today, the Sebi does issue show cause notices in some cases, without even completing the investigations. If a show cause notice can get issued, it should be capable of being settled. Interestingly, the committee has proposed to reserve the right of the Sebi to pass interim orders even while a settlement process is underway. That being so, there ought to be a reward for walking up to Sebi even before a show cause notice is issued — precisely what the Competition Commission of India rewards.

Finally, the committee has acknowledged that the confidentiality of the identity or portions of the terms of the settlement, could itself be a condition of settlement. While the committee has dedicated a large page-length to the subject, all it ends up doing is to acknowledge the need to have confidentiality as a discussion point on the table. This needs more attention and discussion — hopefully public comments would lead to an informed conversation on the subject. Likewise, the committee has provided for detailed regulations on recusal by a member of the committee that considers the proposal but has not taken the opportunity to regulate how the initial discussions between the Sebi and the person accused must be conducted. Today, there is a dichotomy between the principle that the strength of the defence is irrelevant (settlements are of accusations, as levelled) and consideration of “major” and “minor” character of the violation alleged. This is an area that needs more attention. Hopefully when the committee looks at quantification of losses and gains arising due to violations, this aspect would also be paid attention to.

The author is an advocate and independent counsel. Tweets: @SomasekharS