Consent order changes by Sebi leads to sharp fall in out of-court settlements

The changes in consent order rules introduced by the Securities and Exchange Board of India , or Sebi , in May last year has led to a sharp fall in cases under which companies seek to settle out of-court, in terms of both settlement amount as well as the number of applications.Consent orders are similar to an out-of-court settlement agreement where the offender agrees to either pay a monetary penalty or undergoes a voluntary ban from the securities market.In May 2012, Sebi tightened consent order rules by keeping out serious market offences such as insider trading, front running and unfair trade practices out of the purview of such rules.After the new rules were introduced, the regulator was able to collect just Rs 140000000 as settlement amount between June 2012 and March 2013. In FY11, Sebi collected Rs 720000000 — the highest such settlement amount since the regulator introduced consent mechanism in India in 2007.The number of applications, which the regulator received under this scheme, too has declined. Between June 2012 and March 2013, Sebi received 167 applications.While in FY11, it received 359 applications. Securities lawyers attribute the decline to the strict rules that has kept out all cases of serious violations and the new settlement amount formula. Besides, some applicants prefer to go in for litigation rather than go for a consent settlement, which could lead to an entity or a person paying a higher monetary penalty or otherwise.“The new consent order guidelines have the advantage of clarity and transparency as the amount of settlements is fixed in advance. But they are fixed on the fairly higher side. and they often do not differentiate based on amount involved and many other relevant facts. The result is that people with high stakes may find it cheaper to go for settlement while smaller entities may be forced to pursue litigation. This is against the spirit of a fair settlement system,” said Jayant Thakur, a Mumbai-based chartered accountant and corporate law specialist.With the regulator excluding serious market offences from the consent process, a number of cases have piled up with the adjudicating officers of Sebi.In FY13, more than 1,500 fresh cases were taken up under adjudicating proceedings by Sebi, taking the cumulative pending cases to over 2,000. “A consent mechanism is an essential part of capital market governance throughout the world.As a matter of administrative efficiency, Sebi has limited resources and cannot be expected to prosecute every violation, irrespective of its impact on the market. Having said that, it is imperative to have clarity on the consent mechanism and consistency in its application,” said Suhail Nathani, of Economic Laws Practice. The US regulator — SEC, has garnered millions of dollars from securities law violators.