SEBI finally releases Draft Regulation on Consent Order i.e. SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013

SEBI has finally issued draft regulation on Consent order i.e. SEBI (Settlement ofAdministrative and Civil Proceedings), Regulations 2013. Now, before moving on to discuss the main features of the draft regulations, certain important point needs to be discussed here. The need to have a regulation for consent and settlement order became increasingly necessary following the promulgation of the Securities Law Amendment Ordinance, 2013. Now, I shall bring out one important fallacy currently prevailing in matters relating to Consent orders passed by SEBI.

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The Ordinance granted statutory approval and sanction to the consent orders of the SEBI passed over the several past years from any challenge. It may be recalled HERE that the legal basis for guidelines relating to consent order was challenged before the Delhi High Court. However, the PIL was not successful. Thus, it appears that to overcome this and other related concern that the securities ordinance has specifically inserted Section 15JB to empower SEBI to settlement of proceedings with retrospective effect from 20th April, 2007. Also, the first GUIDELINES relating to consent order was issued on 20th April, 2007.

Now, the newly inserted SECTION 15JB (2) states that SEBI ‘may’ agree to a proposal for settlement on such terms “as may be determined by the Board in accordance with the regulations made under this Act”

SECTION 15JB (3) further reads as follows:-

“The settlement proceedings under this section shall be conducted in accordance with the procedure specified in the regulations made under this Act.”

Interestingly, no such Regulations, as mandated, have ever been framed for the settlement proceedings. Only guidelines were issued in the form of Circular by the SEBI. It seems that the earlier Guidelines relating to consent order are liable to be set aside as not being Regulations. Therefore, the SEBI has finally come up with the draft regulations to overcome this difficulty.

Now, we shall move on to discuss the salient features of the Draft regulations released by SEBI.

1.      Difference between ‘shall’ & ‘may’ pertaining to SEBI’s May 2012 circular and recently released draft regulations contained in regulation 5(2) relating to settlement of certain ‘grave’ offences.

The Draft regulation has incorporated a very subtle but important change relating to SEBI’s position on Consent and Settlement proceedings relating to settlement of certain ‘grave’ offences.

Last year, SEBI’s 25^th May, 2012 Circular relating to settlement of certain ‘grave’ offences reads as-

 SEBI ‘SHALL’ not settle the defaults listed below:

i. Insider trading i.e. violation of Regulation 3 and 4 of the SEBI (Prohibition of Insider Trading) Regulations, 1992;

ii. Serious fraudulent and unfair trade practices which, in the opinion of the Board, cause substantial losses to investors and/or affects their rights, especially retail investors and small shareholders or have or may have market wide impact, except those defaults where the entity makes good the losses due to the investors;

iii. Failure to make the open offer (except where the entity agrees to make the open offer or if in the opinion of the Board, the open offer is not beneficial to the shareholders and / or the case is referred for adjudication);

iv. Front-running; for the purpose of this circular, front running means usage of  non public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change;

v. Defaults relating to manipulation of net asset value or other mutual funds defaults where the actions of the asset management company (AMC)/ mutual fund (MF)/sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of the Board;

vi. Failure to redress investor grievances (except cases where the issue involved is only of delayed redressal);

vii. Failure to make such disclosures under the ICDR and Debt Securities Regulations, which in the opinion of the Board, materially affect the right of  the investors;

viii. Non-compliance of summons issued by SEBI;

ix. Non compliance of an order passed by the Adjudicating Officer (AO), Designated Member (DM) or Whole Time Member (WTM);

x. Any other default by an applicant who continues to be non-compliant with any order passed by the (AO) or (DM) or (WTM).

Notwithstanding anything contained in this circular, based on the facts and circumstances of the case, the HPAC/Panel of WTMs may settle any of the defaults listed above.

The defaults and list of offences listed in the circular were insider trading, offences relating to front running, violation of FUTP (Fraudulent & Unfair Trade Practices), regulations and other offences as mentioned in the Circular.

Now, the 2013 Draft regulation on Consent & Settlement Order reads as-

Regulation 5(2) under Chapter III reads as- The Board ‘MAY’ not settle a proceeding if it involves any of the following alleged defaults, namely, - [the offences are same as listed in the Circular aforementioned]

Further, the list of offences are same to those present in the May 2012 SEBI’s circular with one exception that CIS (Collective Investment Schemes) violations are also included in the 2013 draft regulation.

The one word (shall vs. May) takes SEBI’s stand from rigid to flexible. Now, the offences which were deemed 'un-settable' last year are now potentially ‘open to settlement’. It’s true that last year’s circular included an exception that HPAC (High powered Advisory committee) or WTM (whole time members) could settle the cases if they deem apt, but justifying the use of that exception would have been a tough job for SEBI. Further, each such case would have attracted high scrutiny. Now, the situation would change. It’s no longer prerogative of HAPC or WTM to settle the cases as mentioned in the draft regulation. The SEBI can very well, on its own, settle the cases aforementioned if it is ‘in the interest of the investors and development and regulation of securities market.

2.      Offences which cannot be settled through Consent & Settlement mechanism and ‘proviso’ contained therein-

Regulation 5(2) of the draft consultative paper lists out the offences for which there can be no consent or settlement proceedings. The offences which are enumerated in this regulation are as follows-

i.                    Offence of Insider trading

ii.                  Fraudulent and unfair trade practices including front running. However, proviso of this regulation provides that where the applicant has made or intends to make good the losses due to the investors then his application may be considered.

iii.                failure to make an open offer; However, proviso of this regulation provides that where the applicant intends to make the open offer or where making the open offer is found to be not beneficial to the shareholders then the application may be considered

iv.                defaults or manipulative practices by mutual funds, their sponsors or asset management companies

v.                  failure to redress investor grievances

vi.                failure to make disclosures required under the regulations framed by the Board dealing with issue and listing of securities

vii.              Offences relating to issuance of securities for illegal pooling of money (Collective Investment Schemes (CIS).

However, the word ‘may’ in these regulations gives the flexibility to SEBI to adjudicate any cases relating to offences aforementioned if the SEBI’s board is of the opinion that settlement of these offences are in the best interest of the investors and  the development of securities market. Also, irrespective of these exceptions and prerogative of SEBI, no application for settlement could be entertained if a criminal complaint/case is filed by the Board under sub-section (6) of section 11C or section 24 of the Act, or section 23 or 23M of the Securities Contracts (Regulation) Act, 1956 or section 20 of Depositories Act.

3.      Chapter II, Application for Settlement- LIMITATION

Regulation 4(1) says that no application shall be considered if it is made after sixty (60) days from the date of service of show cause notice or supplementary show cause notices. However, if the panel of whole time members constituted under sub-regulation (1) of regulation 12 may condone the delay, if it is satisfied that there was sufficient cause for not filing the application within the period of 60 days. Also, regulation 4(3) says that no application for settlement can be initiated if the case of the applicant is pending before the Tribunal or any court.

4.      Chapter III, Scope of Settlement

Regulations 5(1) provides for situation where an application for settlement cannot be made. These instances are-

i.                    No application shall be made, for settlement of any proceedings – if the alleged default was committed within a period of two years from the date of the last settlement order where the applicant is a party

ii.                  if the applicant has been party to two settlement orders

iii.                if an earlier application with regard to the same alleged default had been rejected by the Board

Lastly, a case can be settled through many ways—a certain settlement amount or appropriate directions or voluntary suspension of registration certificate or closure of business or a combination of settlement amount and other such actions. Further, under the new settlement regulations, the regulator will make details of all alleged defaults and terms of settlement public after settling the case.

(Draft regulation is open for public comments till 30th October. Those interested can mail their suggestions/recommendations at- 'comments_settlementregs@sebi.gov.in')

[For any queries, feedback or comments, you can also mail me at- rishabh.a.09@gmail.com]