All posts by Nidhi Kapoor

SEBI Settlement Mechanism (SEBI Consent Orders)

Legal Framework

The adage “Justice delayed is justice denied” holds utmost significance when the concept of dispensing justice is discussed. Over the years, the judicial system has evolved to incorporate methods for dealing with the arrears of cases. Methods such as plea bargaining have been effective in the USA where majority of the criminal cases are not tried but disposed of through plea bargaining. Settlement for securities laws violations, was introduced in India in the year 2007 via a SEBI Circular. Since then, there have been challenges in implementation; hence, SEBI focused on facilitating a more effective mechanism.

Consent orders  provide  flexibility  of a wider  array  of enforcement  actions  which  will achieve twin goals of an appropriate sanction and deterrence without resorting to long-drawn  litigation before SEBI,  SAT,  and Courts. Passing  of  consent  orders  also  reduce regulatory  costs  and  save  time  and  efforts  in  pursuing  enforcement  actions.

Who can apply?

A person (including body corporate, LLP, Partnership firm) against whom any specified proceedings have been initiated and are pending or may be initiated, may make an application to the Board in the Form specified in Part-A of the Schedule-I of the Regulations.

Fees?

The application shall be accompanied by a non-refundable application fee of Rs. 15000/- per applicant along with the undertakings and waivers as specified in Part-C of Schedule-I of the Regulations.

Application?

Application can be made either Suo-moto by the applicant or post initiation of a specified proceeding by Board.

SEBI may issue a ‘settlement notice’ prior to the issuance of the notice to show cause, indicating the substance of the probable charges and enforcement actions that may be issued by the Board, so as to enable the applicant to file a settlement application. The applicant will have to make the application for settlement within 15 days from the date of receipt of the settlement notice.

The filing of an application for settlement of any specified proceedings already initiated shall not effect the  continuance  of  the  proceedings; although the  passing  of  the  final  order  shall  be  kept  in abeyance till the application is disposed of. Where  the  application  is  filed  in  case of  proceedings  that  may  be  initiated  against  the applicant, such proceedings shall not be initiated till the application is rejected or withdrawn.

Brief Procedure?

Pursuant to the Regulations, appropriate  administrative  or  civil  actions viz. proceedings  under sections 11, 11B, 11D, 12(3) and 15I of SEBI Act and equivalent proceedings under the SCRA and  the  Depositories  Act,  1996  and  other  civil  matters  pending  before  SAT  and  courts could be settled between SEBI and a party who is prima facie found to have violated the securities laws or against whom administrative or civil action was commenced for such violation.

The consent proposal is first considered by SEBI’s internal committee, which generally calls the applicant for an in-person meeting to discuss the consent proposal. The internal committee’s findings and the consent proposal are then referred to a high-powered committee, which may ask the applicant to revise the consent proposal if it finds the terms for passing a consent order inadequate. If this committee finds the proposal acceptable, it recommends appropriate terms for the consent order. The Board may order for a Summary Settlement Procedure if deemed fit.

The settlement process should not be used as a platform for forum shopping. Accordingly, an application shall not be filed for the same alleged default again, if the earlier application was rejected. Such a step will ensure that the settlement process is taken seriously by an applicant.

Offences that are serious in nature or that have market-wide impact or cause substantial losses to investors or effect the rights of investors in securities, especially retail investors and small shareholders, are kept out of its purview. Example: Insider Trading, unfair trade practices, failure to make the open offer, etc.

Duration?

SEBI shall dispose of the consent application expeditiously preferably within a period of six months from the date of registration of the consent application. Applicant shall get one opportunity to resubmit within 15 days of date of service of notice by SEBI.

Can application be withdrawn?

An application may be withdrawn at any time prior to the communication of the decision of the HPAC.

How is the Settlement Amount (SA) calculated?

  • SA shall comprise of the Indicative Amount (IA) arrived  at  in terms  of  the relevant guidelines .The IA shall not be less than: 3 lakh for first time applicants or Rs. 7 lakh for others.

  • Based on the stage of proceeding(s), the proceeding conversion factor (PCF: Chapter III, Schedule II) shall   be applied when calculating the IA. PCF is lower in case an entity makes application suo motto, before the receipt of any notice to show cause, intimate the Board of such a default.

  • IA shall be calculated per count of default, jointly or separately as per the facts and circumstances of the case, in accordance with these guidelines.

  • In case the applicant is body corporate, the Board may require that the SA to be paid by the  officers  in default.

Miscellaneous:

The  consent  order  shall  be  binding  on  the  party  and  in  cases  where  the  party  undertakes  any compliances, it has to comply with the same as per agreed schedule.

The applicant shall have to submit certain mandatory waivers, example: the rights to appeal/review before/by SAT/ court of/against the settlement order, the demand to reopen the case, etc.

Case studies:

Suo-moto application: Reliance Communications Limited

Reliance Communications has settled a case with the Board for alleged non-cooperation with credit rating agencies and debenture trustees in violation of listing norms. The company reached a settlement regarding non-compliance with listing norms, including failure to inform interest payment default on debentures.

SEBI Summary settlement notice: Aditya Birla Money Limited

SEBI on the basis of its examination, revealed that Ms. Sucharitha Reddy of Aditya Birla Money Limited had delayed in making the disclosures of change in shareholding under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Specified proceeding already initiated: Alankit Assignments Limited

Procedural Aspects of Compounding under FEMA

Dealing with RBI has been never been an easy task but with the passage of time RBI has been putting lot of efforts to bridge the procedural gaps. RBI has been taking steps in this direction and a very good example of this is the consolidated Master Circular issued for each subject matter, annually or half yearly, whereby it compiles all the amendments done or circulars issued during the year, into one so as to give a convenient access to updated provisions on the subject and which has also served the base of this article.

Procedural Aspects of Compounding Mechanism under FEMA

On receipt of the application, the Compounding Authority shall review the application and may as well call for additional information, wherever required. In case, after verification the application by RBI is found to be complete in all respects then the contravention is admitted. The action initiated by the RBI on receipt of the application shall depend and be in accordance with the nature and gravity of the contravention. In case the application is found incomplete, then the contravention shall not be admitted and the said application will be returned along with the application money.

The manner in which a contravention shall be dealt shall depend on its nature.

What are the classification of a Contravention?

Whether contravention under the Foreign Exchange Management Act (FEMA) is to be treated as technical and/ or minor or serious would be decided by the Reserve Bank on the merits of the case. The application will be disposed of keeping in view the procedure notified in this regard. Persons who have contravened the provisions of FEMA should not take upon themselves suo moto, or on the basis of external advice to decide whether a particular contravention is technical or minor in nature.

Nature of Contraventions:

Technical or minor in nature: Can be dealt with by way of an administrative/ cautionary advice.

Material:  Necessary compounding procedure has to be followed

Sensitive or Serious: Referred to the Directorate of Enforcement (DOE).

Pre- requisites for compounding process:

  • No similar contravention committed by the applicant within a period of three previous years. Any second or subsequent contravention committed after the expiry of a period of three years from the date on which the contravention was previously compounded shall be deemed to be a first contravention.

  • Contraventions where proper approvals or permission from the Government or any statutory authority is required, they shall not be compounded unless the required approvals are obtained from the concerned authorities.

  • In case where adjudication has been done by the Directorate of Enforcement and an appeal has been filed under section 17 or section 19 of FEMA, 1999, no contravention can be compounded in terms of Rule 11 of Foreign Exchange (Compounding Proceedings) Rules, 2000.

Brief Process for Compounding:

(The total time taken for disposal of compounding cases shall be 180 days)

  • Receipt of application
  • Receipt of fees
  • Examination by RBI and call for additional documents, if required
  • Opportunity for personal hearing
  • Passing compounding order
  • Payment of compounding amount
  • Issuance of certificate of payment of penalty
  • Payment of penalty within 15 days from the date of order (Non-payment shall be deemed as if the said compounding application was never received)

(Application fees shall be refunded in cases where the application is returned by the RBI on grounds of non- receipt of approvals, etc.)

What is the fees payable with the compounding application?

The application in the prescribed format along with necessary documents and a demand draft for Rs. 5000/- (Rupees five thousand only) drawn in favour of the “Reserve Bank of India” should be sent to the Reserve Bank of India.

Case Laws?

RBI seems to take a lenient view in the cases pertaining to the delay in reporting. Although the RBI conferred with the power under section 15(1) f Foreign Exchange Management Act, 1999, to impose a penalty up to three times of the amount involved, there has been rare case evidencing such heavy penalty.Some of the case laws have been cited below:

S. No.

Particulars

Regulation Contravened

Contravention

Penalty

1. JBM MA Automotive Private Limited
  • Para 8 of Schedule I to Notification No. FEMA 20/2000- RB

  • There was a delay of 10 months in reporting since the first inward remittance.

  • The shares were not issued to the person resident outside India within 180 days from the date of receipt of the inward remittance/share application not refunded to the person resident outside India within 180 days from the date of receipt of the inward remittance amounting Rs. 30, 44, 96,000/-

The RBI compounded the offence with a total amount of penalty of Rs.11, 79,360/- (Eleven Lakh Seventy Nine Thousand Three Hundred and Sixty).

2. M/S Xiaomi Communications And Logistics India Private Limited
  • Para 9(1)(A) , 8 and 9(1)(B) respectively, of Schedule I to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified, vide Notification No. FEMA 20/2000-RB dated May 03, 2000 and as amended from time to time (hereinafter referred to as Notification No. FEMA 20/2000-RB)

  • There was a delay in reporting receipt of foreign inward remittances towards subscription to equity.

  • There was a delay in submission of form FC-GPR to the Reserve Bank of India after issue of shares to a person resident outside India.

  • The contravention relates to an amount of Rs.2, 99, 99,000.00.

The RBI compounded the offence with a total amount of penalty of Rs.2, 15,350 (Two Lakh Fifteen Thousand Three Hundred and Fifty.

3. Eastman Industries Limited
  • Regulation 13, 15(i) and 15(iii) of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

  • The delay in reporting was for a period of approximately 6 years.

  • Non-Reporting of setting up of Step-down subsidiary within stipulated time period.

  • Non- Receipt of share certificate within stipulated time period.

  • Non-submission of Annual Performance Report (APR) under stipulated time period.

The matter was compounded by the RBI with a penalty of Rs.2,20,000/- (Two Lakh Twenty Thousand).

Compounding of Contraventions under FEMA

As per the Black’s Law Dictionary, to “Compound” means to settle a matter by a money payment, in lieu of other liability.” Thus, Compounding is a mechanism that provides the offender an opportunity to avoid prosecution for an offence committed by him by way of a monitory payment in lieu of it. It is the process of voluntary acceptance of contraventions and seeking redressal for the same by avoiding a long drawn process of prosecution. It helps in minimising both cost and time and enables the person in default to make honourable discharge of his/her liability.

The attention of the reader is sought to the below figure, that depicts the Legal Framework for Compounding of Offenes under FEMA in India.

Willful, malafide and fraudulent transactions, serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation are, however, viewed seriously, which will not be compounded by the Reserve Bank.

Compounding under FEMA

Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.

Why should one go for compounding?

The following are the benefits of admitting a fault, pleading guilty and seeking redressal via Compounding Mechanism:-

  • It minimises the transaction cost involved.
  • Time bound disposal ( 180 days) makes it an expedient process.
  • No proceeding or further proceeding initiated or continued.
  • Attendance in personal hearing is not mandatory and hence the application can proceeded merely on the basis of the documentations submitted.

What are the ways by which a contravention can be detected?

A contravention can be suo- moto admitted and disclosed to the RBI by a party at fault or the RBI can initiate further action on becoming aware of the said contravention by any of the following means:

  • Volountry disclosure by the party at fault,
  • RBI Inspection,
  • Receipt of information by RBI through AD,
  • Analysis of data of the potential party at fault
  • Through other media- reportings.

Whom to approach for compounding?

The Government of India has in consultation with the Reserve Bank placed the responsibilities of administering compounding cases to the Reserve Bank of India except in case of serious contraventions i.e Hawala Transactions. The compounding with respect to Hawala Transactions shall be reffered to the Enforcement Directorate.

What can be compounded?

Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ orders/ circulars issued there under.  The RBI can compound any contravention under FEMA on receipt of a specified sum and after offering an opportunity of personal hearing to the contravener. However, in the case of Hawala Transactions, the compounding authority lies with the Enforcement Directorate.

When should one apply for compounding?

  • When person is made aware of contravention by the RBI or any other statutory auditors or auditors or by any other means.
  • Suo-moto on becoming aware of the contravention.

Factors considered for passing of a Compounding order?

The RBI before passing a Compounding order, considers various factors for arriving on the  compounding amount to enable the contravener to make an honourable discharge of his/her liability:

  • the amount of gain of unfair advantage, wherever quantifiable.
  • the amount of loss caused to any authority/ agency.
  • economic benefits accruing to the contravener from delayed compliance or compliance avoided;
  • the track record and/or history of non-compliance of the contravener;
  • contravener’s conduct and disclosure of full facts during the personal hearing; and any other factor as considered relevant and appropriate.

What is the criteria for calculation of the compounding amount?

The compounding amount to be payable by the contravener is calculated by the RBI on the basis of certain parameters mentioned above and on the basis of the RBI Guidance Structure for the same. It may, however, be noted that the guidance note is meant only for the purpose of broadly indicating the basis on which the amount to be imposed is derived by the compounding authorities in Reserve Bank of India. The actual amount imposed may sometimes vary, depending on the circumstances of the case taking into account the factors indicated in the foregoing paragraph. The reader can have a detailed look at Compounding of Contraventions under FEMA, 1999. And RBI Master Directions with respect to the same.

Can orders be appealed?

Since, compounding is a voluntary process, there is: No provision of appeals against the order of the Compounding Authority; No Request for reduction of amount compounded; No Request for extension of time for payment of amount imposed.

Not all matters of contraventions be reported for compounding:

The RBI also provides for a simple procedure for payment of late fees to regularise the instances of delay in reporting under FEMA. Please visit Late Submission Fees( LSF) for details.

You may also like to read about the Procedure to be  followed for making a Compounding Application.