Tighter regulatory framework makes consent orders a rarity

Written by Ashish Rukhaiyar | Mumbai | Updated: Oct 18 2012, 06:55am hrs
The high-profile consent order mechanism, which came under heavy criticism some months back, is fast becoming a thing of the past. Ever since the Securities and Exchange Board of India (Sebi) tightened the regulatory framework, the number of consent orders is down to a trickle.

According to data available with the Sebi, 2012 has seen only 26 consent orders till date. This is in sharp contrast to 2010 when on an average one consent order was passed every second day with the total number of orders pegged at 187. In 2011, there were 100 cases, which were settled through the consent route.

Lawyers specialising in the securities market say that the number of consent applications have dropped after the new norms were announced in May. They say that the new norms have kept most serious offences outside the ambit.

The drop is on account of the decline in inflow of consent applications, says MS Sahoo, independent lawyer and a former whole-time Sebi member. During the initial years, people sought settlement of accumulated enforcement actions while they now seek settlement of mostly fresh enforcement actions, he added.

The consent order mechanism, introduced by Sebi in 2007, refers to a practice of negotiations while settling civil or administrative matters against wrongdoers. Based on the kind of offence, the regulator either imposes a monetary penalty or suspends/cancels the registration.

Early this year, Sebi chief UK Sinha had said that there was a need to review the entire consent order framework so that serious capital market offences are not settled just by paying a monetary penalty.

Thereafter, in May, Sebi announced the new regulatory framework under which front-running, insider trading, manipulation of net asset value of mutual funds along with some other fraudulent and unfair trade practices were kept out of consent mechanism.

Interestingly, while most lawyers feel that going ahead the number of consent orders would see a further fall, the view is still divided on whether Sebi was right in excluding serious offences from the new guidelines for consent orders.

In the past, Sebi settled some high-profile cases against HDFC Mutual Fund and Anil Ambani along with his group companies through the consent route.

Serious offences (such as where there is mental intention to defraud and where irregularities committed in a pre-designed manner) should not be settled through consent as it will not send the right signals to the participants, says PR Ramesh of Economic Laws Practice.

Sandeep Parekh of Finsec Law Advisors, however, counters this. Serious violations should invite extreme penalties rather than persons being barred from the consent process. Given India's criminal conviction rate of 3%, the argument that a violator should be severely punished is more theoretical than real, says the former executive director at Sebi.

Ideally, any default, irrespective of its nature and gravity, should be settled through consent, subject, however, to the condition that the settlement terms are appropriate to the alleged default, says Sahoo, who expects a further fall in the number of consent orders due to the formula driven approach.