Consent Guidelines Amended! Relevant For?
Today we have a one point agenda on the show - consent orders! Consent proceedings allow a party accused of violating a law or regulation to settle with the regulator, in most cases without admitting guilt or claiming innocence. Civil matters often attract sanctions and penalties and criminal matters are compounded.
Introduced in 2007, SEBI's consent guidelines were last week amended. There are two ways of examining the changes. The philosophical reasons behind the change and the operational impact. First Payaswini is going to take you through the operational changes from the offender point of view.
SEBI Chairman UK Sinha to The Firm on March 9th, 2012
Menaka Doshi, CNBC TV18: When are you expected to come out with the new Consent guidelines?
UK Sinha: Very soon
The market regulator made this promise 3 months ago. This week it lived up to it and released a set of guidelines that considerably change the consent regime.
Under the old norms, all administrative and civil actions and criminal complaints could be settled by consent. Now SEBI has put 10 offence categories on a negative list – here onwards insider trading, fraudulent and unfair practices, front-running and the like cannot be settled unless in the rarest or rare cases.
Earlier there were no restrictions on repeat offenders – now No consent application will be entertained within 2 years of a previous settlement and there will be a three year cooling off period if two consent orders have been obtained. Also, an application once rejected won’t be reconsidered.
Timelines for consent requests cannot stretch infinitely now. Consent applications will have to be made within 60 days from the date of the show cause notice
The old consent mechanism was criticized by many for lack of transparency. Now, SEBI mandates the consent order will detail the misconduct, violations and consent terms of the offenders.
Finally, while the old rules were arbitrary on ascertaining penalty amounts, the new ones have a formula for most offences – this will vary depending upon the type of violation and the person committing that violation.
The objective of the 2007 guidelines was to impose appropriate sanctions without resorting to long drawn litigation, so as to reduce costs and pendency. But the negative list, restricted eligibility criteria for applicants and shorter timelines change considerably the scope and use of the consent mechanism. The question is – now who is the consent process relevant for?
Former ED, SEBI
“The examples where still the consent could be done could be- suppose I have given a power of attorney to buy and sell for me. And the power of attorney holder may not be knowing my status vis-à-vis a company, whether I am an insider or not. And suppose that person buys even 1 share or 100 shares for a company where I am an insider, technically I am sitting in a violation of insider trading violation. So since here the intent was not wrong, it’s only technical, I think such things can be consented.”
Managing Partner, Amarchand Mangaldas
“There is a very old dispute which is pending in relation to ONGC because of the problem of uploading which happened at the time of the issue. No fault of ONGC but the complaints are still pending as if ONGC has to redress. It was issue which was made by the President of India in a divestment. It is an issue where no fresh stock had to be issued and yet the complaints are as if the company should issue new shares which was an impossibility because if the basic issue was (1) the old shares which were held in the hands of the President of India were being sold and there was an error of uploading. It was not a fault of the company but in accordance with the listing norms, the complaints keep going to ONGC and they are pending. So in those circumstances- since it is an old wrong- and it’s something which has been on for 8 years, you may need to have the discretion exercised and not treat this as an offence which is not compoundable.”
“My only problem with the current exclusions is each exclusion has an exception and then you have whatever doesn’t fall within the consent criteria, it has to go up to the High Powered Committee and a Board of Whole-time Members etc. I believe it is something which was not really required. SEBI could have kept the discretion of dealing with the matter or not dealing with the matter but not really bump it up stairs and ask someone else to deal with it.”
Managing Partner, Amarchand Mangaldas
“The discretion becomes critical in determining whether you’re dealing with trifles – whether it’s a typographical error- suppose you had to write a certain figure and as result for a wrong comma, the entire meaning of that particular paragraph changes and you’re able to detect that wrong and ask for a rectification. Then that discretion must lie with the high powered committee which has a judicial mind- a retired judge is to chair that- and that report has to be placed with two whole time members. So there is enough safeguard in serious consideration of matters which are not enumerated.”
Former ED, SEBI
In my opinion, FUTP is a serious offence as compared to insider trading because in insider trading, there is only a profit motive but in FUTP, it is profit coupled with fraudulent intent. I feel from the circular that there is a window left open for this and moreover the Annexure to the circular has detailed the calculations for FUTP settlements. That means there is an intent that FUTP can be settled. The second thing is about the Mutual funds where they say that if a MF has committed a violation, then if they are compensating the investor for the loss, the order could be consented. I am totally against this because MF is a vehicle by which investors place trust in a professional. And if the investor has belied the trust once, it’s not good that it makes good the loss. MFs can never be allowed to consent.”