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Sebi Consent Rules: Difference Between 'Shall' and 'May'

Published on Tue, Oct 15,2013 | 11:35, Updated at Wed, Oct 16 at 19:08Source : Moneycontrol.com 

By: Menaka Doshi, CNBC-TV18

The Past & Present Of SEBI's Consent Guidelines….

SEBI's powers to ‘settle’ an offence were always a bit suspect. There are no explicit ‘settlement’ or ‘consent’ directions in the SEBI Act. So SEBI relied upon Section 15 T(2) which went something like this

SEBI Act
15T(2)
No appeal shall lie to the Securities Appellate Tribunal from an order made—
(a) by the Board on and after the commencement of the Securities Laws (Second Amendment) Act, 1999;
(b) by an adjudicating officer,
with the consent of the parties
Last year a PIL filed in the Delhi High Court challenged SEBI’s powers to settle a violation, but before the case could reach a conclusion an ordinance amended the SEBI Act… and gave it explicit powers to settle or consent, retroactively from 2007, thereby legitimising all consent orders passed to date.
SEBI Act (Updated)
Settlement of administrative and civil proceedings.
15JB. (1) Notwithstanding anything contained in any other law for the time being in force, any person, against whom any proceedings have been initiated or may be initiated under section 11, section 11B, section 11D, sub-section (3) of section 12 or section 15-I, may file an application in writing to the Board proposing for settlement of the proceedings initiated or to be initiated for the alleged defaults.
(2) The Board may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the Board in accordance with
the regulations made under this Act.
(3) The settlement proceedings under this section shall be conducted in accordance with the procedure specified in the regulations made under this Act.
(4) No appeal shall lie under section 15T against any order passed by the Board or adjudicating officer, as the case may be, under this section.
If you read sub-section 2 you will notice a reference to ‘regulations made under this Act’. So far SEBI has not issued regulations for consent proceedings, it has relied on circulars to lay down the process. But this ‘old but new’ retroactive power to settle/consent now needs regulations.

So on Monday, October 14th, 2013, SEBI released draft SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2013.

So far so good - the explicit power to settle/consent has been granted by law and regulations are being aired for public comment. But wait there's a twist! (Isn't there always? Sigh!).

THE DRAFT REGULATIONS INDICATE A SUBTLE BUT VERY IMPORTANT CHANGE IN SEBI’S POSITION ON CONSENT PROCEEDINGS.

Last year in May SEBI, in a dramatic move, decided to not allow settlement of certain defaults. The May 25, 2012 circular reads

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.
SEBI decided this long list of violations will not be considered for settlement. But it gave itself a small ‘out’ – the last few lines suggest that exceptions could be made to the rule! '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.'

In that week’s episode of The Firm I asked if SEBI was ahead of the curve or boxed in? M Damodaran, Former SEBI Chairman and Harvey Pitt, Former SEC Chairman were both keen to watch how this SEBI black-list of offences would work…
Since May 2012 SEBI has rejected dozens of consent requests where the violations fall within the 2012 black-list, including a few high-profile insider trading ones. But there is no information whether a case, not eligible for consent because it pertained to an offence on the black-list, was considered by the High Powered Advisory Committee of Panel of Whole Time Members for consent.
Anyways, now that position seems to have changed. Actually just one key word has changed. The 2013 draft regulations say
(2) The Board may not settle a proceeding if it involves any of the following alleged defaults, namely,-
(a) commission of insider trading or communication of unpublished price sensitive
information in contravention of the provisions of the Act and the regulations made thereunder;
(b) fraudulent and unfair trade practices including front running, which are serious and which in the opinion of the Board, has a market wide impact or, has caused substantial losses or affects the rights of investors in securities, especially retail investors and small shareholders:

Provided that where the applicant has made or intends to make good the losses due to the investors, his application may be considered.
Explanation.- For the purpose of this clause, front running means usage of nonpublic 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;
(c) failure to make an open offer in accordance with the provisions of the Act and the regulations made thereunder:

Provided 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, his application may be considered;
(d) defaults or manipulative practices by mutual funds, their sponsors or asset management companies that result in substantial losses to unitholders, except in cases where the applicant has compensated the unitholders for the losses, to the satisfaction of the Board;
(e) failure to redress investor grievances except where the alleged default is of delayed redressal;
(f) failure to make disclosures required under the regulations framed by the Board dealing with issue and listing of securities, which in the opinion of the Board materially affect the right of the investors;
(g) raising of monies by issuance of securities or pooling of funds, in violation of securities laws where the remedy is refund of such monies;
(h) non-compliance of notices and summons issued by the Board or summons issued by the adjudicating officer;
(i) non-compliance of an order passed by the Board or by an adjudicating officer.
(3) An application in respect of proceedings involving alleged defaults referred to in subregulation (2) may be rejected by the Board, without examination by internal committee or high powered advisory committee.
(4) Notwithstanding anything contained in this regulation, the Board may in the interest of the investors and the development and regulation of securities market, consider an application for settlement of the alleged defaults referred to in sub-regulation (2).
(5) No application shall be considered if the investigation or inspection, if any, in respect of the alleged default, is not complete.
(6) No application under these regulations shall be considered if a criminal complaint 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.

Yup, that’s it – just one word… the May 2012 circular says ‘SEBI shall not settle the defaults listed below’. The October 2013 draft regulations say ‘The Board may not settle a proceeding if it involves any of the following alleged defaults’.
That one word (shall vs. may) takes SEBI’s stand from rigid to flexible and suddenly…offences that were deemed 'unsettlable' last year are now potentially ‘open to settlement’. Yes, last year’s circular included an exception or out, but justifying the use of that exception would have been a tough job for SEBI and each such case would have attracted high scrutiny and media coverage.  Now SEBI has given itself the license to settle even unsettlable cases if a settlement is 'in the interest of the investors and the development and regulation of securities market. So the black-list of offences is now more a grey-list.
Besides this, the list of offences/defaults is the same in the 2013 draft regulations as in the 2012 circular with one exception. CIS violations are now on the black-list, er…grey-list
(g) raising of monies by issuance of securities or pooling of funds, in violation of securities laws where the remedy is refund of such monies;
2 other points I’d like to make…

The 2013 draft regulations say this about pending applications…

Pending Applications.
19. Applications pending under circulars issued by the Board dated April 20, 2007 and May 25, 2012 shall be dealt with in accordance with the corresponding provisions of these regulations.
Does 'pending' apply only to those applications that haven’t been dealt with or does it also apply to applications that were rejected under the 2012 circular but now have hope of being considered for settlement? Can think of a few insider trading violations that were keen to settle but SEBI had rejected them under the 2012 black-list!

And finally last year SEBI had also issued guidelines on computing settlement amounts, depending on the nature of the violation.
But the draft regulations make no mention of the benchmark amounts in existence or new ones in the making. So will the settlement/consent amounts apply as per last year’s list or are they too about to change?

If you find interesting details to report in the draft consent regulations please do write in…
thefirm@in.com
@thefirmupdate
@menakadoshi

 
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