Proposals could improve SEBI consent order rules

By Puja Sondhi and Ramanuj Gopalan, Amarchand & Mangaldas & Suresh A Shroff & Co
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India’s securities and capital markets regulator, the Securities and Exchange Board of India (SEBI), is empowered to pursue civil/administrative and criminal action under the provisions of the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Depositories Act, 1996. SEBI is also empowered to settle civil and administrative proceedings with a person who, prima facie, may have violated the securities law.

The consent order mechanism was initiated with the objective of providing appropriate sanctions and deterrence without resorting to litigation, thereby saving regulatory costs, time and effort in pursuing enforcement actions. A SEBI circular dated 20 April 2007 sets out the framework for the mechanism, which draws on a similar process by which the US Securities Exchange Commission settles a substantial number of civil and administrative orders by consent orders.

Puja Sondhi Partner Amarchand Mangaldas
Puja Sondhi
Partner
Amarchand Mangaldas

Outline of the process

Under the terms of the 2007 circular, a consent order can be passed at any stage after a probable violation has been found in a civil or administrative matter. In the event of a serious or intentional violation, a fact-finding stage has to be completed prior to completion of the process. The party applying for consent to settle its alleged violation has to file a consent form in the prescribed format, including the details of the probable violation and the consent fees which it is willing to pay.

The consent proposal is first considered by SEBI’s internal committee, which generally calls the applicant for an in-person meeting to discuss the consent proposal. The internal committee’s findings and the consent proposal are then referred to a high-powered committee, which may ask the applicant to revise the consent proposal if it finds the terms for passing a consent order inadequate. If this committee finds the proposal acceptable, it recommends appropriate terms for the consent order.

The factors to be considered in deciding on a consent proposal include: whether the violation was intentional; the applicant’s conduct in the investigation (if any) and disclosure of full facts; the gravity of the charge; factors beyond the control of the applicant; and the amount of harm to investors or the applicant’s gain.

Criticisms and proposals

A common complaint against the consent order process is that it is subjective and discretionary and lacks uniformity and transparency. The guidelines do not provide a framework for computation of the quantum of consent fee or terms of settlement. According to recent press reports, an internal study conducted by SEBI has found wide variance in the settlement terms for similar offences (both in quantum of consent fee and number of years the applicant is barred from the securities market).

Ramanuj Gopalan Amarchand & Mangaldas & Suresh A Shroff & Co
Ramanuj Gopalan
Amarchand & Mangaldas &
Suresh A Shroff & Co

There is also a perception that serious offences, such as deliberate insider trading or market manipulation, have been settled by consent, instead of harsher enforcement action. Further, the applicant does not have access to either the proceedings before the high-powered committee or the recommendations made by the internal committee to the high-powered committee.

Recent press reports say that SEBI is planning to revise its regulations on the consent order process. The penalty under the new regulations would take into account the applicant’s size, its past violations, and whether a previous application has been rejected by the regulator. Further, offences may be categorized by their seriousness, duration and impact on retail investors. A new concept of a minimum consent amount may also be introduced, as well as guidelines on settling violations committed by group entities on a consolidated basis.

Conclusions

The proposed changes could streamline the consent order process to provide consistency and predictability. It is hoped that under the new regulations SEBI will be able to strike the right balance whereby the consent process becomes an efficient, uniform and transparent process to settle routine or procedural non-compliances but at the same time it does not become an easy escape route for serious or habitual offenders.

SEBI may also consider whether the consent process should be available at all for certain serious, intentional and/or repeat offences. Further, to promote greater transparency, SEBI may consider allowing the applicant to review the recommendations made by the internal committee and make representations before the high-powered committee.

Press reports indicate that out of 2,296 consent applications received by SEBI to 31 March 2011, SEBI has accepted 1,012. These figures illustrate that the number of consent applications and their success rate in India are much lower than in the US. It is hoped that the new regulations will address some of the issues that have arisen and make the consent process more effective.

Puja Sondhi is a partner and Ramanuj Gopalan is a senior associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.

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New Delhi – 110 020

Tel: +91 11 2692 0500

Fax: +91 11 2692 4900

Managing Partner: Shardul Shroff

Email: shardul.shroff@amarchand.com

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