Changes to speed up process and ensure names of defaulters are not disclosed at an early stage
The capital market regulator is planning to alter the norms of its so-called consent mechanism to speed up the process and ensure that identities of alleged defaulters are disclosed only after a thorough probe and not at an early stage, said two persons familiar with the regulator’s thinking.
The consent mechanism is an out-of-the-court process through which the Securities and Exchange Board of India (Sebi) settles cases of suspected wrongdoing by listed companies. It currently allows an alleged defaulter to settle cases without admission or denial of any wrongdoing in the capital market.
Under existing rules, the regulator has to disclose the details of entities at an early stage, when the consent applications to Sebi are rejected. “It is not fair as a rule of natural justice to disclose the names of alleged entities merely because their consent applications are rejected, even while adequate investigations are pending or adjudication proceedings are not completed from the regulator’s end,” said the first person cited above.
“And, in any case, consent mechanism, by definition, is something which allows a party to do an out-of-court settlement with the regulator without admission of guilt. Until all investigations are completed or required adjudication proceedings are done to prepare an order in the matter of the alleged entity, the identity of the alleged entity should not be disclosed,” the person added, on condition of anonymity.
Sebi decided to disclose the details of consent applications that are rejected in May 2012. Between 3 January 2013 and 22 May 2015 (the latest available data), the market regulator has revealed the names of 275 such entities as they were either found not to be in consonance with its 25 May 2012 circular or Sebi’s settlement of administrative and civil proceedings regulations, 2014.
An email sent to Sebi on the proposed move on 22 February remained unanswered.
Sebi feels that an early stage or pre-mature disclosure on the basis of allegations may affect the reputation of the alleged entity, said the first person quoted above. In many cases, the person added, post investigations, the alleged entity is found to be innocent.
“Since consent mechanism goes through three stages of consideration by three different set of panels at Sebi, such instances are possible. So, ideally, Sebi should reveal the names of alleged entities only after all proceedings are completed and Sebi is in a position to either levy penalties or dispose of the matter in case the alleged party is found to be innocent and can be exonerated with just a warning,” said the first person.
Sebi is also looking at ways to reduce the time taken to settle cases through consent mechanism, he said. Currently, it takes up to several years to arrive at terms to settle a case.
“Sebi has taken a number of steps to streamline the consent mechanism process, exclude certain types of allegations from its scope and set up dedicated teams to expedite settlement of cases through the consent mechanism. The regulator is now looking at ways to settle consent-related cases faster after serving the show cause notice on the alleged entities,” said the first person.
Existing Sebi norms say that a consent application will be disposed of expeditiously, preferably within six months from the date of registration of the application.
Further, the market watchdog does not allow cases pertaining to defaults in terms of insider trading; serious fraudulent and unfair trade practices causing substantial losses to investors; failure to make open offers; front-running; and defaults relating to manipulation of net asset value in mutual funds, to be settled through the consent mechanism.
However, based on the facts and circumstances of the case, the high-powered advisory committee or HPAC of Sebi or a panel of whole-time members may settle any case of defaults through consent.
In case of rejection of consent terms, the proceedings are continued from the stage at which it was pending.
“I support Sebi’s idea to avoid disclosing the names of the alleged entities merely because their consent applications have been rejected due to some reason. Unless all the proceedings are completed, it may not make sense to disclose the identities as a matter of natural justice,” said Sandeep Parekh, founder of Mumbai-based law firm Finsec Law Advisors.
Parekh, a former executive director of Sebi, was the head of the regulator’s enforcement and legal affairs department between 2006 and 2008 when the concept of consent mechanism was introduced.
“I was one of the Sebi officials who introduced the concept and started the process of consent mechanism at Sebi. According to me, the current process of following a three-level check through three different Sebi committees before arriving at the final consent terms should not be diluted. However, at present, it often takes years to close consent-related cases. Ideally, matters related to consent should be closed successfully within 2-3 months, especially with the judicial and the court systems in the country becoming so advanced over the past few years. Sebi can set up dedicated teams to expedite consent processes and focus more seriously on closing consent matters without keeping any scope of delay,” Parekh said.
Currently, along with the list and details of rejected applicants’ names, Sebi mentions that the pending proceedings in their respective cases will continue in accordance with law and the rejection of consent application, however, will not prejudice the pending proceedings in any manner.
In the first stage of the existing consent process, an internal committee comprising a chief general manager of Sebi, not administratively linked with the case, and division chiefs of the concerned operational department and legal/enforcement department of Sebi, respectively, asks the applicant to appear before it to draw up the consent terms. After this, the applicant needs to submit the consent terms, including the non-monetary directives, if any, within one week.
In the second stage, the consent terms are placed before the HPAC, which consists of a retired high court judge and three external persons with expertise in securities market. The HPAC recommendations are placed before the panel of two whole-time Sebi members for approval and concluding the terms of the consent.
Subsequently, the applicant needs to accept the terms within 15 days and remit the settlement amount in lump sum to Sebi. In case of non-acceptance of the settlement amount, the application is treated as rejected.
HT Mint, New Delhi, 29th February 2016
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