Mumbai: Stock market regulator Securities and Exchange Board of India, or Sebi, has been resolving long-pending disputes through a series of out-of-court settlements in an attempt to remove the backlog of cases before it.
In the first six months of this year, it settled 66 cases this way. And since it introduced the norms for such so-called consent orders in April 2007, it has cleared 87 cases.
The exact number of pending cases isn’t known, but people at Sebi say it could run into thousands.
The out-of-court settlements, reached with the consent of the involved parties and the regulator, resolve administrative, civil and criminal disputes.
Under Sebi guidelines, the proposal to settle a dispute is first placed before a high-powered advisory committee of the regulator. If the proposal gets the committee’s nod, terms of settlement are drafted and, finally, a panel of two wholetime directors of the regulator passes the order. The panel normally imposes penalty on the “offenders” and can also temporarily suspend a market participant for its involvement in such cases.
If a case is pending before the Securities Appellate Tribunal, or SAT, the body that hears appeals against the regulator’s orders, the committee files the terms of settlement before the tribunal.
In normal circumstances, an order passed by the regulator against market participants such as brokers, custodians, depositories, mutual funds, or foreign institutional investors can be challenged before SAT. At the next stage, the market participants can move a high court, or even the country’s apex court if they are not happy with the SAT order. The entire process can take years before a case is finally resolved.
In out-of-court settlements, orders are passed after Sebi establishes the cause and nature of violation. For any settlement, it is mandatory for the “accused” to give an undertaking to the regulator that it will refrain from taking any legal action against Sebi.
If the “accused” violates any condition of the settlement, the regulator can always revive its legal action.
Sebi’s initiative to settle disputes through out-of-court settlements is based on a system used by the US market regulator, the Securities and Exchange Commission, or SEC. SEC settles the majority of its civil and administrative cases through consent orders.
Harjit Singh Sethi, chief executive of Mumbai-based brokerage Almondz Global Securities Ltd, says this is a “very healthy (way) to resolve issues”. “It takes a lot of time and energy to build an enterprise and the mistakes are not always very grave. At the end of the day, everyone wants to close issues (with the regulator) and go ahead with their business.”
Dharmishta Raval, former executive director in charge of Sebi’s legal cell, says consent orders are a perfect way of resolving technical and procedural offences. “It saves the time, efforts and money of the regulator as well as the violators (of rules) as they don’t have to go through a gamut of legal proceedings.”
However, Raval has a word of caution and says Sebi should not aggressively follow this path for all cases. “In extremely grey offences, the regulator should think twice before agreeing to a consent order,” he adds.
In June, Sebi received its first batch of a “consent” payment from some persons in a case related to the initial public offering scam in which a few market intermediaries cornered a sizable chunk of equity offerings meant for retail investors.
These persons paid a penalty of Rs71.75 lakh, including Rs59.75 lakh towards so-called disgorgement of alleged ill-gotten gains. So far, this has been the maximum penalty imposed by the regulator on any individual or firm.
Thus far, the regulator has collected about Rs3.30 crore from the settlement of disputes and Rs60 lakh through disgorgement.
Currently, Hosbet Suresh, a former judge of the Bombay high court, and two experts —Ketan Dalal, tax partner at PricewaterhouseCoopers, and M. Balachandran, former chairman and managing director of Bank of India—are the members of the advisory committee that presents the settlement terms before the panel of wholetime Sebi directors.