SEBI Settlement Mechanism (SEBI Consent Orders)
February 11, 2019 by Nidhi Kapoor
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.
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 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may be initiated against the applicant, such proceedings shall not be initiated till the application is rejected or withdrawn.
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.
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.
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.
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