BackSAT asks RIL, Sebi to clarify on new consent norms
SAT seeks clarification from RIL and Sebi on effects of new consent settlement norms issued by regulator
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Mumbai: The Securities Appellate Tribunal (SAT) on Wednesday sought a clarification from Reliance Industries Ltd (RIL) and the Securities and Exchange Board of India (Sebi) on the impact new consent settlement norms the regulator has put in place would have on their dispute over alleged insider trading.
SAT, which decides on appeals against the capital market regulator, is hearing RIL’s appeal challenging Sebi’s decision to take the six-year-old case out of the consent process, which allows companies and individuals to settle disputes by paying a sum of money without admission or denial of wrongdoing.
Sebi in May 2012 tightened consent norms by excluding serious offences such as insider trading, front running, violations of listing disclosure and illegal pooling of money from the settlement process. The new norms are retrospective, applying to all cases from 20 April 2007. The regulation also requires an entity to file for consent within 60 days of receiving a Sebi show-cause notice.
“Before we pronounce the order we would like to know whether the RIL appeal will hold since the new Sebi regulations are retrospective in nature," J.P. Devadhar, presiding officer of SAT, said.
The next hearing in the case was fixed for 24 February.
The dispute relates to Reliance Petroleum Ltd’s (RPL) merger with RIL through a process that involved the alleged short sale of shares in RPL by entities related to RIL ahead of the union.
A short sale occurs when borrowed shares are sold with the intention of buying them back later at a lower price. In 2007, RIL sold a 4.1% stake in RPL, but to prevent a slump in the latter’s stock, the shares were sold first in the futures market and later in the spot market, covering the share sales in the futures market.
In 2008, Sebi started an investigation into the matter and in 2010 initiated quasi-judicial proceedings. Sebi’s claim is that because the company was aware of the sale of equity shares and sold futures ahead of that, its actions amounted to fraudulent and unfair trade practice.
Through the dealings, RIL received revenue of ₹ 4,023 crore and its profit from the transaction in the futures segment was ₹ 513 crore. RIL challenged a show-cause notice issued by Sebi in December 2010.
While the new consent regulations have limited discretionary powers over the settlement process, experts say that companies accused of serious offences can still seek consent in certain instances.
“Defaults involving insider trading need not in all cases be ineligible for settlement under the new regulations," said Christopher Krishnamoorthy, associate partner (corporate and mergers and acquisitions) of law firm Majmudar and Partners. “Where an applicant makes out adequate grounds in his consent application, it may still be considered by Sebi in the interest of investors or for the development and regulation of the securities market."
Earlier, Janak Dwarkadas, the lawyer representing RIL, had asked SAT to fix a timetable for hearing RIL’s consent application by Sebi once again.
He said that the regulator was wrong in saying that RIL’s application could not be dealt with under the consent mechanism, as the company had been clearly told on 15 April 2011 that it can apply for a settlement through consent.
Sebi’s lawyer Darius Khambata has maintained that the regulator cannot be compelled to settle a case through consent.
In May 2012, Sebi for the first time tightened the norms for settlement through the consent framework. As a result, many cases, including those related to insider trading, were not being settled through this mechanism.
Earlier, SAT suggested that Sebi consider RIL’s consent application. Sebi, however, declined to do so, leaving it to SAT to make a decision.
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