Mumbai: India’s capital market regulator is reviewing a system of settling cases with companies through consent for allegedly violating rules to make the process more consistent so that action is proportionate to the gravity of alleged breach.
This so-called consent procedure is a type of out-of-court settlement between the regulator and a company without any admission or denial of guilt.
It involves the company paying a fee and, in some instances, voluntarily agreeing to restrict some business activities.
“We found that in some cases the action taken (under consent proceedings) was not as strict as it should have been in view of the seriousness of the violation,” a top official of the Securities and Exchange Board of India (Sebi) said, requesting anonymity. “Also, where a minor violation was found, a relatively harsher order may have been imposed.”
At the time of introducing the system in the country in April 2007, the regulator had said the process will “reduce regulatory costs and save time and efforts taken in pursuing enforcement actions.”
The official clarified that Sebi has no plans to do away with the practice of settling cases through consent.
The market regulator needs to develop a criterion and marking systems where one could “transparently expect what principles would be adopted for settlement” while settling a case through consent, according to Somasekhar Sundaresan, a partner at J Sagar Associates, a Mumbai-based law firm.
“Some broad objective parameters should evolve and be notified transparently,” Sundaresan said. “Also, some broad procedure for how to professionally negotiate consent terms should be developed so that one can approach the regulator with a clear expectation of fair and professional treatment.”
Sebi received 2,296 consent order applications as on 31 March and accepted 1,012 of them.
It has collected Rs188.59 crore as settlement charges.
The consent system in India is a “good model”, but it is time for a comprehensive review, preferably by an independent body, to assess whether it is functioning efficiently and what can be done to improve it, said Jayant M. Thakur, a Mumbai-based chartered accountant, who runs his own firm Jayant M Thakur and Co.
“Where it can, Sebi makes a violating entity disgorge the ill-gotten profits and return it to the investors,” Thakur said. “In some cases, there may be an argument on whether the amount recovered is enough to recompense investor losses.”
The amount received towards settlement charges is remitted to the Consolidated Fund of India, but money that comes from the so-called disgorgement is distributed among investors.
The Securities Appellate Tribunal (SAT), which hears appeals against Sebi orders, has in the past questioned the propriety of the regulator disposing of a particular case by levying a monetary penalty.
While hearing a case concerning violation of insider trading norms and prohibition of unfair trade practices relating to the securities market by Yashraj Containeurs Ltd, the tribunal in December 2010 observed that Sebi should not have been content with imposing a fine after the charges were proved through an adjudication process.
It should have issued “appropriate directions against the appellants (Yashraj and others) to protect the integrity of the market and the interest of investors,” it said.
Sebi should refrain settling cases by consent where the alleged violations concern the interests of a large retail investor base, experts said.
“While in procedural matters, consent is welcome, in other cases (the regulator should not) encourage consent,” said C. Achuthan, former president officer of SAT. “Otherwise they (the guilty) will get emboldened to repeat the same. No escape route should be given to a market manipulators.”
“Sebi should go by the gravity of the offence and its impact on the investor in deciding consent,” Achuthan added. “Not all offences should be settled through consent.”
However, any sort of filter put in place to decide which cases may or may not be admitted for consent proceedings may lead to an abuse of the system where officers “pick and choose and unfairly discriminate” on which cases can be settled, according to Sundaresan of J Sagar. “Every dispute should be capable of being settled by consent,” he said. “It is the magnitude and merits of the case that would determine the size of the settlement.”
Achuthan also said the legal validity of the practice of giving consent in India is debatable.
“Consent as a route is adopted for convenience. I very much doubt its legal backing,” Achuthan said. “I won’t be surprised if it is made a part of law as and when the Sebi Act is amended.”
Some of the consent orders passed by Sebi in recent times that entail potential retail investor interest are in the instances of Edelweiss Capital Ltd and Reliance Securities Ltd.
In the Edelweiss case, a Sebi investigation found that the entity had not sought independent professional advice in verifying records in some instances, and did not provide correct information in the draft red herring prospectus of clients, among others.
The regulator settled the case in May for a payment of Rs15 lakh.
In the case of Reliance Securities, Sebi found irregularities such as the brokerage charging excess securities transaction tax (STT) to clients and lack of information of various charges at the time of registering clients, among others.
Sebi also observed in its consent order passed in June that the entity had prominently displayed the name of Reliance Money in all its offices, websites and visiting cards of employees, while the registered broker was Reliance Securities, and this could have led to confusion in the minds of investors as to who the registered intermediary was.
Sebi settled the case through a payment of a fee of Rs25 lakh and another Rs1 crore to be spent by the company on investor education and awareness. According to the terms of consent, the brokerage was also supposed to stop registering new clients for 45 days from the date of issuing the consent order.
The brokerage on its own had found that around 76,000 clients were charged an excess STT cumulatively amounting to Rs11 lakh over a period of 22 months, according to Vikrant Gugnani, executive director of Reliance Securities. Similarly, some 80,600 clients were short-charged a cumulative STT of Rs650,000 because of a technical issue with the online trading software.
The excess amount charged was refunded to the investors at the earliest, Gugnani said, while those short-charged were not asked for any additional payment.
“As on date, we have no pending customer complaints at the level of Reliance Securities,” Gugnani said. “All of them have been addressed to the satisfaction of the customers and two cases are being decided upon by the mandatory arbitrator (National Stock Exchange) and the Delhi high court, respectively.”