The decision by the Securities and Exchange Board of India (Sebi) to review its consent settlement procedure is a step in the right direction. It’s been around four years since the market regulator introduced the consent order mechanism. This is more than sufficient time to take stock of how the new system has worked and take remedial action.
According to news reports, Sebi has conducted an internal study, which shows that the terms of settlement have varied widely for similar offences. While Sebi members who gave these orders may have justifiable reasons for doing so, this does create a perception that the consent process is arbitrary and devoid of any underlying logic. Needless to say, the regulator must take steps to put such speculation to rest. Besides, market participants who have been charged by Sebi will have no way of knowing the terms and criteria that should be followed while negotiating consent terms with Sebi. While no one’s expecting a rate card for various violations, Sebi must communicate the broad parameters that it will adopt in different situations.
Having said that, just because the consent order system hasn’t worked flawlessly in the first four years of its evolution in India, it doesn’t mean that it should be shunned. In many cases, such as with first-time offenders, consent orders can save the regulator as well as market participants precious time and effort. If Sebi is, as one newspaper report suggests, planning to go slow with consent orders, it has no choice but to beef up its investigation and enforcement team considerably from current levels. Even then, it will have to prepare for years of litigation to clear the volume of cases that it handles.
One major argument against consent orders is that they only result in a paltry payment. This needn’t always be the case, as is evident from the consent order with Anil Ambani, two of his group companies and four other directors in these firms. Not only was the amount hefty at Rs 50 crore (the highest in Sebi’s history), but it also included non-monetary directives, including a restriction on investing in the secondary markets.
Another gripe is that consent orders don’t reveal much about the nature of the case. This is a thorny issue, because the very basis of the order is that charges haven’t been fully established. Still, Sebi should look at improving disclosures as part of its review of the system. In sum, Sebi’s review of the consent order mechanism is welcome, and should look at how the system can be best used to provide a good alternative to settling the regulator’s pile of cases.
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