SEBI Panel Proposes Widening Of Consent Mechanism

The market regulator’s settlement mechanism is set to get a makeover.

Widening the scope of the framework to include fraud, introducing a time limit and allowing settlement with confidentiality are some of key provisions suggested by the Justice AR Dave committee set up on Dec. 14, 2017. A settlement or consent mechanism allows entities to settle market infractions by paying a penalty without admitting or denying guilt.

Expansion Of What Can Be Settled

The existing mechanism allows parties to file an application for settlement of minor infractions, excluding serious offences such as fraud, insider trading and front-running.

The committee recommended that this list can be expanded to include cases of fraud, insider trading, misstatement in financial statements and front-running on a case-to-case basis as against the current blanket ban.

But the recommendations come with certain riders. The committee suggested that a consent application for such serious offences may be considered if:

• Money is refunded to SEBI’s satisfaction
• The applicant has provided an exit or purchase option to investors in compliance with securities laws
• The applicant has complied with SEBI’s orders and directions.

This widening of the settlement mechanism was needed to reduce the number of pending cases and the current logjam at Securities Appellate Tribunal, Sumit Agrawal, a securities lawyer and founding partner at RegStreet Law Advisors, told BloombergQuint. “SEBI anyway is free to put harsh terms and conditions of fact and circumstances of a case it considers if settling a particular matter will not be in interest of investors.”

The committee also recommended that repeat offenders, wilful defaulters and economic offenders shouldn't be allowed to settle cases.

No Second Chances

SEBI’s existing consent framework allows applicants to make more than one attempt to settle a matter even after the application has been rejected.

The committee proposed an end to this practice, saying the platform should not be used for forum shopping. It recommended that an application shall not be filed for the same alleged default again, if the earlier attempt was rejected. Such a step will ensure that the settlement process is taken seriously by an applicant, the report said.

Cooperate And Get Confidentiality

Currently, SEBI’s consent framework doesn’t allow for confidentiality to parties who may have been involved in violation of securities laws and are willing to assist the regulator in the investigation of such cases.

“There are no explicit provisions for an applicant to voluntarily provide information to the board relating to the fraudulent and unfair trade practices and other serious defaults that would assist the board in dealing with any inquiry, investigation, inspection, and audit,” said the committee in its report.

The committee proposed such a provision, similar to the leniency provisions under the competition law. This would be applicable for an applicant who may be guilty of violation of securities laws and willingly assists SEBI’s investigation against any other person, the report said.

Interim Relief For Investors

Under existing rules, the regulator cannot pass any interim directions or orders until a consent application is rejected or withdrawn. The committee proposed to do away with this provision if interim directions are needed to protect the interest of investors.

Also, in cases where action is pending or has to be initiated against several entities in a case and a consent application has been filed by only one of them, the market regulator should be allowed to proceed against the others, the committee suggested.

SEBI has sought public feedback on the committee’s report by Sept. 1.