Column : Sebi gets it right on consent orders

Written by Manish Sabharwal | Updated: May 29 2012, 07:42am hrs
Last week, Shah Rukh Khan patronisingly offered to pay the fine for his public offence of smokinghis tone implied that the fine was complete redemption. This reminded me of our youthful calculation during our hostel days at Delhi University, comparing the cost of paying bus fees (R2 per trip) with paying the fine for ticketless travel (R20). Given the crowded DTC buses with overwhelmed conductors, many day scholars with genuine monthly bus passes, and short travel distances, we estimated that the odds of getting caught without a ticketlower than 1 in 10made it rational to not buy tickets and pay the fine when caught. This calculation is repeated today in many situations involving fraud, corruption or wrongdoing in India because of the lack of punitive consequences and low enforcement capabilities. But, as I get older, I realise that a fine should be large enough to matter, should have more social consequences than a fee, and some acts must not be subject to undoing by paying a fine. Sebis revisions to the consent order process restricting certain offences last week reflected this wisdom.

This issue is wonderfully highlighted in a new book called What Money Cant buy: The moral limits of markets by Michael Sandel. Sandel is a Professor of government at Harvard, whose legendary course Justice is available free online ( This booka bit heavy and preachy in parts, but nonetheless a great readlaments the drift from a market economy to being a market society where every act is monetised. He makes the case for a distinction between fines and fees. Fines register moral disapproval i.e. acts or an attitude that as a society we want to discourage, whereas fees are simply prices that imply no moral judgment. Sandel looks down upon a metro-riding youth in Paris who dodge the $2 single fare or monthly pass of $74 by paying $8.50 per month into an illegal insurance fund (called amutuelle des fraudeurs) which pays the fine of $60 for any of its members caught travelling without a ticket. Sandel worries about other situations: the $31,000 fine for violating the one-child policy in China, which most Chinese cant afford, but many rich Chinese dont mind paying, and the trading schemes that allow companies to buy the right to pollute. Interestingly, he supports Finland, which links fines for driving above the speed limit to the income of the offenderJussi Salonja, a twenty-seven-year old and one of the richest men in Finland, paid a fine of $217,000 for driving 80kmph in a zone with a speed limit of 40 kmph. Professor Sandels narrative of fine versus fees implies that fines should be large enough to matter to the offender and some acts should not be allowed redemption by paying a fine.

Last week, Sebi seemed to be listening to Professor Sandel very closely as it notified a major overhaul of the consent order process. The need for a consent order process is obvious; every act of omission or commission does not have the same consequences and it is better for the system to dispense quick justice than clog up the system by treating every case as equal. But some consent orders in the last few years seemed to imply redemption where it was not due. Last weeks modification to the consent process now disallow certain offences (insider trading, front running, failure to make an open offer, redress investor grievances and respond to the summons issued by Sebi, and fraudulent and unfair trade practices that lead to investor losses), from the consent process. It also addresses the financial consequences of consent orders by providing for aminimum benchmark amount for each category, includes the possibility of disgorgement of gains, and requires consideration of the track record of the applicant. In a rule in line with the Finnish speed fine linked to offenders income, Sebi proposed to link the consent amount to the stage of the proceeding, nature of the default/violation, gravity of the default/violation, volume traded, price impact, net worth, profits made, nature of disclosure not made, its impact, etc. Capital markets are a national resource that provide infrastructure to fund Indias growth. If they are not seen as fair, they will not flourish. Sebis revisions strike the right balance between continuing a useful process and fixing its birth defects.

Indian regulators in education, labour markets, telecom, and airports are at important crossroads. India needs a broad and deep debate on its regulatory philosophy; should we have laws on books we cant enforce How do we punish wrongdoers How do we avoid regularising bad behaviour by paying fines and fees but not choke up the court system How does regulation balance the conflicting needs of various stakeholders Should we introduce tort law that will impose punitive damages on companies and institutions that treat consumers badly Few Indians deny that the Anna Hazare movement and court activism havefor nowreduced wholesale corruption. But both have produced more heat than light, with the unintended consequence of decision-making paralysis because every bureaucrat and politician now wants to make decisions without leaving their fingerprints on it. Regulation is a detail-heavy art that involves learning by doing. Sebi last week demonstrated its willingness to learn from experience. Any other regulators volunteering to demonstrate their learning abilities

The author is chairman, Teamlease Services