Sebi shuts consent route to punish offenders

The market regulator — Securities & Exchange Board of India (Sebi), on Friday, amended the five-year old consent guidelines to take a tough stand on insider trading and other serious fraudulent and unfair trade practices in securities market.

With the new guidelines coming into immediate effect, a window that was available till date for settling disputes on payment of a fee without admission or denial of guilt has been shut for good. It will be applicable to all new and pending applications except those where consent terms have been received from the applicant for placing before the HPAC (high powered advisory committee) or cases pending at any stage there after.

This means that henceforth companies, promoters and individuals indulging in offences like insider trading, front-running and unfair trade practices can no longer settle the disputes through the consent order route. They will be prosecuted and punished as per the law.   

Even offences like front running — the practice of a broker trading an equity based on information from the analyst department before a client has been given the information — and failure to make an open offer to shareholders, redress investor grievances, and respond to summons issued by Sebi can no longer be settled through consent. In the case of mutual funds, manipulation of net asset values or activities that cause losses to unit holders will not be covered by the consent process unless the fund house compensates investors.

Legal advisory firm Amarchand Mangaldas MD Cyril Shroff says, “tt brings more predictability and transparency to the process, as it carves out certain types of offenses or violations which cannot be compromised to a short-cut.”

At the same time it puts in place for rigorous process by which a settlement can take place, he added. “The overall approach seems that some aspects of enforcement have been made untouchable for settlement,” said Somasekhar Sundareshan, Partner at law firm J Sagar & Associates.

It may be noted that Sebi’s consent order mechanism, whose legality has been challenged through a petition in the Delhi high court, had been used to resolve at least 1,089 cases of suspected wrongdoing as of March 2011.

As per the latest Sebi’s annual report, the regulator had received 2,451 applications from various entities for resolving their cases through consent on March 31 and of these as many as 769 were rejected and 285 were treated as withdrawn or infructuous. Also, Sebi said it had collected at least Rs 190.5 crore through this mechanism between April 2007 and March 2011. In January 2011, Sebi had settled a probe through consent with the Anil Ambani-led Reliance Group, for alleged routing of money raised through overseas bonds, for a settlement charge of Rs 50 crore, the highest till date. But It's not clear at which stage the high-profile case involving Reliance Industries is, where consent order proceedings were initiated for alleged insider trading in 2007.

The consent process, introduced in 2007 and modelled on the US system, is a settlement of proceedings between Sebi and the alleged violator without admission or denial of the guilt, subject to a fine and also a voluntary ban in some cases.

Prior to this guidelines, Sebi could impose a penalty higher between Rs 25 crore and an amount equivalent to three times the profit allegedly made by the suspected entity through insider trading or other manipulative activity. The consent process was introduced with a view to cut down on costs and time involved in environment actions.