Sebi pending cases surge after implementation of new norms4 min read . Updated: 25 Apr 2017, 03:10 AM IST
Sebi's decision to exclude certain violations, including insider trading, from its consent mechanism has led to a surge in number of pending cases and fall in income from out-of-court settlements
Mumbai: The capital markets regulator’s decision to exclude certain violations, including insider trading, from its consent mechanism has led to an unexpected surge in the number of pending cases and a steep fall in incomes from out-of-court settlement processes.
The Securities and Exchange Board of India (Sebi) is now saddled with an uphill task of clearing 7,000 cases after the decision to exclude insider-trading, front-running, violating open-offer norms, and fraudulent and unfair trade practices from the scope of consent mechanism, a window available to settle disputes, by paying a fee.
Cases outside the scope of the consent mechanism are mostly settled through orders either under adjudication proceedings or as per section 11 of the Sebi Act, which typically includes prohibitive orders such as debarment from the market or certain securities.
Two people with direct knowledge of the status of cases pending with the regulator confirmed this, adding there is a growing concern at Sebi about its ability to clear cases against defaulters in a fair and time-bound manner after the sharp rise in the number of pending cases and the related work-pressure. They declined to be named.
There are only around 35 adjudicating officers and three whole-time members who can pass orders under section 11.
Following the tightening of settlement norms in May 2012, virtually every case started being moved either to adjudication proceedings or for actions under section 11 of the Sebi Act or for other prohibitory actions, one of the two people, a regulatory official, said.
The so-called tightening happened with Sebi deciding that proceedings of some kinds will ordinarily not be settled, and yet, Sebi may settle them if it so chose, said Somasekhar Sundaresan, a legal counsel specializing in regulatory laws.
Any default irrespective of the gravity (including insider trading) should be settled by Sebi, said Yogesh Chande, partner at law firm Shardul Amarchand Mangaldas Advocates and Solicitors.
Sundaresan said the existing norms were ambiguous and arbitrary.
“It created a wrong hierarchy of violations, and was a signal of greater stigma for some allegations as compared with others. There was no cost-benefit analysis of whether a back-up regulatory capacity was available to handle the pile of innocuous allegations that could fall under these pariah labels," said Sundaresan.
Regulatory actions related to penal or prohibitive actions demand more manpower, resources, time, efforts, costs, rigorous enquiry, more hearings and detailed investigations, which Sebi does not have at the moment, said the second person cited above.
It appears from the statistics that no corresponding investment in capacity building was made, said Sundaresan.
According to Sebi’s annual reports, the number of fresh cases initiated at Sebi under adjudication proceedings and under section 11 jumped from 571 and 346 in financial year 2011 to 1,951 and 1,808, respectively in financial year 2015.
“The theoretical argument that ‘serious’ offences should not be compromised has resulted in the absence of justice," said Sandeep Parekh, founder, Finsec Law Advisors and a former Sebi official.
Due to the steep increase in workload, around 3,579 adjudication cases and 2,558 cases under section 11 remained pending at the end of March 2015.
The numbers deteriorated further in financial year 2016 and according to Sebi’s data, at the end of March 2016, the number of pending cases under adjudication and section 11 proceedings rose to 3,843 and 3,052, respectively.
“Although the current framework of regulations permits settlement of all kinds of defaults, the same is subject to exercise of “discretion" by Sebi. This requirement should be dispensed with, thereby making it clear to the defaulter that all defaults can be consented without any discretion," said Chande of Shardul Amarchand Mangaldas.
During financial year 2011, Sebi took 389 regulatory actions against alleged defaulters while 359 consent applications were filed separately for out-of-court settlement with Sebi. This ratio of settlement applications versus regulatory actions worsened from almost 1:1 in financial year 2011 to 0.09:1 during financial year 2016.
Violations such as manipulation of net asset value in mutual funds and failure to make disclosures in offer documents were also excluded by Sebi from the scope of the consent mechanism.
In addition, for settling matters through the consent mechanism, Sebi stipulated a minimum benchmark amount for each category of default and said that once a consent application is rejected, it will not be considered again by Sebi.
Parekh said Sebi’s 2012 decision meant in effect that only very minor technical violations like filing a form a few days late remained open to settlement.
“Given the large remit of Sebi, the tightening was bound to result in a huge overhang of cases which cannot be resolved, in some cases causing delays of years or decades on end. We have seen many cases where Sebi has passed interim orders which result in punishment for years altogether and a detailed hearing only after nearly a decade," Parekh added.
The stricter settlement norms resulted in a steep fall in Sebi’s own income from consent fees. According to Sebi’s annual reports, the regulator’s earnings from consent fees fell from Rs. 73 crore in financial year 2011 to Rs. 4.4 crore in financial year 2016.
Sebi introduced the system of consent mechanism in 2007 with a view to cut down on costs, time and efforts for enforcement actions.
Following a 16 September 2013 ordinance by the President, which gave Sebi explicit powers to settle administrative and civil proceedings, the regulator, in December 2013, further tightened the settlement norms and narrowed down the options for alleged defaulters to settle cases through the consent process.
“An important regulatory objective has to be to get the maximum bang for the buck from the budget and therefore to choose the battles you want to fight and settle the battles that are not worth fighting even while inflicting financial and remedial pain through a settlement," Sundaresan said.