Mumbai, August 1, 2017

Sebi may widen the scope of the consent mechanism that allows settling of disputes by paying a fee without admitting guilt

A pile of 7,000 cases is prompting the Securities and Exchange Board of India (Sebi) to widen the scope of the so-called consent mechanism that allows settling of disputes by paying a fee without admitting guilt.

The market regulator is proposing to expand the applicability to all cases, irrespective of the nature of the infringement, except where the violation has caused a significant loss to the public at large, said two people aware of the development, including a senior Sebi official.

Current settlement regulations disallow violations such as insider trading, fraudulent and unfair trade practices such as front running, and the failure to make an open offer in case of a takeover to be settled through the consent window. Further, violations such as failure to redress investor grievances, failure to make material disclosure in offer documents and non-compliance of Sebi notices are also excluded from the scope of settling with a fee.

That’s about to change.

The new rules being proposed will allow, for instance, cases in which someone makes unfair gains on the basis of possessing price-sensitive insider information to be settled for a fee through consent mechanism, provided these trades have not caused a big loss to the public.

This proposal is a further retreat from the regulator’s 2012 orders when it had excluded most violations from the scope of the settlement mechanism.

In 2016, Sebi had said that only those infractions that have market-wide impact and where the losses to investors are significant can’t be settled under the mechanism, in order to bring down pending cases.

However, most of the violations listed earlier, were excluded from consent irrespective of their market impact. For these reasons, the 2016 amendment didn’t help in solving the huge pendency of cases at Sebi and the case backlog kept rising.

“Every case should be allowed to be settled through consent mechanism,” said Sandeep Parekh, founder of Mumbai-based law firm Finsec Law Advisors and a former Sebi official. “Consent terms may vary in terms of fees and penal actions. After investigation, even if Sebi finds a case to be serious, it should agree to settle the case for a consent fee if the alleged defaulter agrees for a debarment from the market for a certain period and agrees to disgorge the illegal gains and compensate the investors. The maximum delay happens at the level of adjudication due to the prolonged processes of hearing, verifying facts and ascertaining the nature of penal action for passing the order. If one AO (adjudicating officer) has too many cases, orders get delayed further.”

Delays in disposing cases have earned Sebi the ire of higher judicial authorities such as the Securities Appellate Tribunal and the Supreme Court. Earlier this year, the apex court pulled up Sebi for “dragging its feet” in concluding the case against accounting firm PricewaterhouseCoopers India in the Satyam Computer Services Ltd fraud case.

A Sebi spokesperson didn’t respond to calls and emails seeking comment.

Under consent mechanism norms, someone who anticipates penal actions by Sebi can settle the matter in question by offering Sebi a fee. The application is first made to an internal committee of Sebi. If the internal committee agrees with the amount of the settlement fee, it sends the file to a high-powered advisory committee of Sebi, which comprises senior Sebi officials and retired court judges or legal experts. If this committee agrees with the decision of the internal committee, the file is sent for final approval to a whole-time member of Sebi. If the whole-time member too agrees to the consent terms, the case is settled via consent mechanism.