Sebi may go slow on consent orders

Palak Shah & Ashish Rukhaiyar
Mumbai, 24 August 2011

Chairman reviewing process after indicating it seems arbitrary.

The consent order mechanism adopted by the Securities and Exchange Board of India (Sebi) in 2007 to settle cases with wrongdoers in the equity market would now take a back seat.

Sebi's new chairman, U K Sinha, has expressed disapproval of the ‘arbitrary’ way in which some serious cases were settled by the regulator in the past, said top officials. He is reviewing the process and it would take some time before consent orders are passed, say officials.

Under such orders, those charged with specific violations were let off by paying a settlement charge, without admitting or denying guilt. This helped Sebi rake in close to Rs 200 crore in just over four years. Even some of the serious market manipulation cases and those related to the Initial Public Offer scam were let off under consent terms.

Sinha believes many such orders “gave an impression to the outside world about arbitrariness and subjectivity”. Early in January this year, in one of the highest-ever consent charges imposed by Sebi, it directed the brass of Reliance Infrastructure and Reliance Natural Resources to pay Rs 50 crore as settlement charges.

Among others, SMC Global Securities and Action Financial Services had filed for consent application seven times. Mumbai-based Systematix Shares & Stocks had filed for the same six times. Chennai-based Shriram group had six group entities, including Pioneer Overseas and SR Real Estate Finance, and its chairman filed 14 consent applications for violating the takeover regulations.

Sebi officials say that in a 13-page letter dated July 8 to the union finance secretary, Sinha has said there is a "prevailing perception" that Sebi’s consent orders were "subjective" and “provide an escape route to offenders and the quality of orders is not high and is not transparent”.

The chairman came to this conclusion after conducting an internal study, not done earlier, on the way in which consent orders were passed by Sebi. According to reports, the study shows the orders had varied widely from member to issuing member. In quantum, it varied from 50 per cent to a third to a sixth, when the period of debarment of two to five years was calculated. In the cases of companies making misleading announcements, debarment has varied from six months to two years to five years. For non-compliance of summons cases, the amount has varied from Rs 1 lakh to Rs 20 lakh.

A wide variation, unaccompanied by sufficient reason, gives an impression to the outside world about arbitrariness and subjectivity. Sinha feels good enforcement action must have some element of predictability with regard to similar cases, based on quantum and degree of offence.

"While it is easier to frame broader guidelines, the authorities (Sebi) need to look if there has been any inconsistency in imposing penalties for a similar kind of offence," says R S Loona, managing partner of Alliance Corporate Lawyers. "There are instances wherein the penalty has been substantially different for similar offences. Some kind of formula or guidelines are required to be framed for uniformity," adds Loona, who had earlier served Sebi as executive director in the legal division.

The consent order system, under debate, is copied from the US. The logic being that the regulator avoids long-drawn litigation and monetary penalties were the biggest deterrents to financial crimes. Also, when coupled with the embarrassment of the charges being published on the regulator’s website, it would be a sufficient check.

The system, however, was subverted, as there was no attempt to link seriousness of charges to the amount paid and some wrongdoers were let off. Consent applications are cleared by Sebi’s internal panel and put before a high powered advisory committee (HPAC), headed by a retired HC judge. The orders are passed by a two-member bench of whole-time Sebi directors.

Legal experts say, the process of arriving at the consent amount is non-transparent and final orders are sketchy. Until December 31, 2010, Sebi received 2,220 applications, of which 1,023 were approved by HPAC. Of these, 982 were settled. These include 74 applications in respect of which consent orders were passed by the Securities Appellate Tribunal and the Supreme Court, where cases were pending.

Sebi has also rejected 743 applications and declined to pass orders for reasons like the terms of settlement proposed by the applicants were not commensurate with the acts of violation.