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Sebi pending cases surge after new norms

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The capital markets regulator’s decision to exclude certain violations, including insider trading, from its consent mechanism has led to an unexpected surge in the  number of pending cases and a steep fall in incomes from out-of-court settlement processes. 
The Securities and Exchange Board of India (Sebi) is now saddled with an uphill task of clearing 7,000 cases after the decision to exclude insider-trading, front- running, violating open-offer norms, and fraudulent and unfair trade practices from the scope of consent mechanism, a window available to settle disputes, by paying a  fee.
Cases outside the scope of the consent mechanism are mostly settled through orders either under adjudication proceedings or as per section 11 of the Sebi Act, which  typically includes prohibitive orders such as debarment from the market or certain securities.
Two people with direct knowledge of the status of cases pending with the regulator confirmed this, adding there is a growing concern at Sebi about its ability to clear  cases against defaulters in a fair and time-bound manner after the sharp rise in the number of pending cases and the related work-pressure. They declined to be named.
There are only around 35 adjudicating officers and three whole-time members who can pass orders under section 11.
Following the tightening of settlement norms in May 2012, virtually every case started being moved either to adjudication proceedings or for actions under section 11  of the Sebi Act or for other prohibitory actions, one of the two people, a regulatory official, said
The so-called tightening happened with Sebi deciding that proceedings of some kinds will ordinarily not be settled, and yet, Sebi may settle them if it so chose, said 
Somasekhar Sundaresan, a legal counsel specializing in regulatory laws. 
Any default irrespective of the gravity (including insider trading) should be settled by Sebi, said Yogesh Chande, partner at law firm Shardul Amarchand Mangaldas  Advocates and Solicitors.
Sundaresan said the existing norms were ambiguous and arbitrary.
“It created a wrong hierarchy of violations, and was a signal of greater stigma for some allegations as compared with others. There was no cost-benefit analysis of  whether a back-up regulatory capacity was available to handle the pile of innocuous allegations that could fall under these pariah labels,” said Sundaresan.
Regulatory actions related to penal or prohibitive actions demand more manpower, resources, time, efforts, costs, rigorous enquiry, more hearings and detailed  investigations, which Sebi does not have at the moment, said the second person cited above.
It appears from the statistics that no corresponding investment in capacity building was made, said Sundaresan.
According to Sebi’s annual reports, the number of fresh cases initiated at Sebi under adjudication proceedings and under section 11 jumped from 571 and 346 in  financial year 2011 to 1,951 and 1,808, respectively in financial year 2015. 
“The theoretical argument that ‘serious’ offences should not be compromised has resulted in the absence of justice,” said Sandeep Parekh, founder, Finsec Law Advisors  and a former Sebi official.
Due to the steep increase in workload, around 3,579 adjudication cases and 2,558 cases under section 11 remained pending at the end of March 2015.
The numbers deteriorated further in financial year 2016 and according to Sebi’s data, at the end of March 2016, the number of pending cases under adjudication and  section 11 proceedings rose to 3,843 and 3,052, respectively.
“Although the current framework of regulations permits settlement of all kinds of defaults, the same is subject to exercise of “discretion” by Sebi. This requirement  should be dispensed with, thereby making it clear to the defaulter that all defaults can be consented without any discretion,” said Chande of Shardul Amarchand  Mangaldas.
During financial year 2011, Sebi took 389 regulatory actions against alleged defaulters while 359 consent applications were filed separately for out-of-court  settlement with Sebi. This ratio of settlement applications versus regulatory actions worsened from almost 1:1 in financial year 2011 to 0.09:1 during financial year  2016.
Violations such as manipulation of net asset value in mutual funds and failure to make disclosures in offer documents were also excluded by Sebi from the scope of the  consent mechanism.
In addition, for settling matters through the consent mechanism, Sebi stipulated a minimum benchmark amount for each category of default and said that once a consent 
application is rejected, it will not be considered again by Sebi.
Parekh said Sebi’s 2012 decision meant in effect that only very minor technical violations like filing a form a few days late remained open to settlement.
The Business Standard New Delhi, 25th April 2017

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