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Why Sebi's Consent Mechanism Needs An Overhaul

Sebi's consent mechanism for settling cases without admitting guilt is uncertain due to widely written regulations and non-uniform settlements. While over 600 cases were settled in the first three years after the mechanism was introduced in 2007, only 103 cases were settled in 2016-17, collecting just Rs. 13 crore in penalties. Experts say serious offenses and those with major market impacts should not be eligible for consent settlements to deter wrongdoing, and penalties and their calculation need more clarity and consistency. Improving the consent mechanism could help reduce Sebi's backlog of over 1,300 pending cases.

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40 views

Why Sebi's Consent Mechanism Needs An Overhaul

Sebi's consent mechanism for settling cases without admitting guilt is uncertain due to widely written regulations and non-uniform settlements. While over 600 cases were settled in the first three years after the mechanism was introduced in 2007, only 103 cases were settled in 2016-17, collecting just Rs. 13 crore in penalties. Experts say serious offenses and those with major market impacts should not be eligible for consent settlements to deter wrongdoing, and penalties and their calculation need more clarity and consistency. Improving the consent mechanism could help reduce Sebi's backlog of over 1,300 pending cases.

Uploaded by

Richa Mc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Why Sebi's consent mechanism needs

an overhaul
Keep a demarcation on what is to be kept out of consent settlement to deter offences, say
experts

Shrimi Choudhary & Sayan Ghosal Last Updated at September 11, 2017 00:16 IST

Sebi’s widely written regulations and non-uniformity in settlement have created uncertainty

Audit firm Price Waterhouse recently moved a consent plea with the Securities and
Exchange Board of India (Sebi) to settle an eight-year old investigation relating to
the Satyam Computer Services fraud. Earlier, the National Stock Exchange was in talks
with Sebi to settle the co-location matter through a consent mechanism. These high-
profile cases have once again put a spotlight on the consent route, which helps alleged
wrongdoers settle pending matters with Sebi without accepting or denying guilt by
undergoing a penal action.

Introduced in 2007, the consent mechanism initially gained popularity among stock
market participants, as it helped save time and expenses of a legal proceeding.
However, legal experts say there is scope for improvement in the framework. Also, data
provided by Sebi show, due to lack of clarity, not many cases have been settled through
this mechanism in recent years.
Earlier, there were doubts over its legal sanction because it was implemented through a
mere circular. On several occasions the consent circular was challenged in court on the
ground that it lacked legislative backing. First through an ordinance and later by enacting
a regulation, the Settlement of Administrative and Civil Proceedings, 2014, the consent
mechanism’s legal standing has been fortified.

During 2016-17, Sebi had received 171 applications and settled 103 applications by
passing orders in the consent and compounding category. The total settlement amount
for these cases was a paltry Rs 13 crore. In 2015-16, 177 consent applications were
received by Sebi.This was a far cry from the 600-odd applications processed in the first
three years after the mechanism was introduced.

Experts say the modified settlement rules have place many restrictions on offences that
qualify for consent settlement, which could be deterring applications. Offences that are
serious in nature or that have market-wide impact or cause substantial losses
to investors or affect the rights of investors in securities, especially retail investors and
small shareholders, are kept out of its purview.

This is leading to ambiguity. Also, there is lack of clarity in computing the penalty, say
experts. “Sebi’s widely written regulations and non-uniformity in settlement have created
uncertainty. The formulae for computing the settlement amount are also questionable,”
says Sumit Agrawal, founder, Suvan Law Advisors and author of a book on the Sebi Act.

Outgoing Sebi whole-time member S Raman recently told Business Standard that the
scope of the consent mechanism could be increased. “It is wrong to exclude many
infractions from the consent mechanism. We are actually diluting the system by filing so
many inefficient cases. Instead, hefty penalty should be a sufficient punishment,” says
Raman.
Experts say there needs to be a clear demarcation on what is to be kept out of consent
settlement to deter serious offences. They point out that in 2012 the market regulator
moved to make only more objective violations capable of being settled through the
consent scheme. “The key would be to see how the penalties can be levied and
how Sebi deals with more subjective violations,” says Simone Reis, head, PE and M&A
practice, Nishith Desai Associates. An easy settlement process may incentivise non-
compliance with the laws, she adds.

Reis is of the view that the terms of the settlement in cases of more
serious securities law violations should be stricter and the penalty higher.

The smooth functioning of the consent route is also critical for Sebi, which is
overburdened with pending litigation. Despite all efforts, litigation remains a challenge for
the market regulator; during 2016-17, 376 cases were filed across various judicial
forums. As on March 31, 2017, 1,311 cases were pending before various judicial forums.
Besides, 470 appeals were filed in the Securities Appellate Tribunal (SAT). Further, 185
appeals were dismissed (ruled in favour of Sebi) while seven were allowed (ruled
against Sebi). About 411 appeals were pending with the SAT as on March 31.

Experts suggest several alternatives to Sebi for reducing the number of pending cases.
Increasing the number of adjudicating officers, new benches and members in the SAT
(as proposed by Finance Minister Arun Jaitley in the 2015-16 Budget) and the opening
of new benches will be helpful, says Reis.

There is always the possibility of competitors challenging settlement mechanism


agreements as market impact and profits made are open to interpretation. Exploitation of
this relaxation is another factor that Sebi needs to guard against. “Some traders may be
open to the risk of fee settlement or short-term debarment while seeking to gamble with
small and medium gains,” notes Prem Rajani, managing partner, Rajani Associates. As
a way out, some experts are in favour of graded penalties, which can be low for the first
or second offence, but high for repeat offenders.

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