Sebis action has met with some criticism but has largely been ignored by investors as well as the corporate sector. In fact, the regulators first amnesty merits discussion, if only because it offers to let off violators of capital market regulations with a slap on the wrist. So far, only the Department of Company Affairs (DCA) had offered a one-time amnesty on filing of annual accounts by companies and on other reporting requirements. The Companies Act also permits compounding of offences, but this is done without any transparency and no public disclosure. On the other hand, even the United States powerful Securities and Exchange Commission (SEC) allows investigations to be settled, so long as offenders pay up a hefty fine and the settlement itself is made public and is permanently posted on its website.
Every once in a while, the SEC too is accused of letting off companies easily or failing to levy a stiff enough fine. But US investigation agencies, in their public statements, argue that a stiff monetary fine is usually the best deterrent for economic offenders and allows the regulator to avoid long-drawn, expensive and time consuming litigation, which often lets off companies and only enriches corporate lawyers.
Sebis first amnesty needs to be examined in this context. Responding to criticism about the amnesty scheme, Sebi chairman G N Bajpai recently explained that there are around 9,000 cases relating to disclosure lapses under the takeover code. Of these, 5,000 cases involve companies and 4,000 pertain to individual disclosures. The mere effort of adjudication proceedings in all these cases would require Sebi to hire a few hundred extra people in its legal department. According to Mr Bajpai, if the organisational energy is used only to fulfill the formalities of regulation, there is little else that the regulator would do.
One must also keep in mind that violations of the takeover code are just a small portion of pending cases that G N Bajpai is trying to clear on a war footing. For seven years in the pre-Bajpai period, Sebis supervision had dwindled to near extinction. The backlog of pending cases in almost all departments sometimes goes back to 1994-95. Mr Bajpai has been trying to clear pending matters by the hundreds every week and has been driving Sebi executives to work over weekends to complete hearings and issue orders.
Despite these Herculean efforts, the organisation can only become up-to-date on disciplinary proceedings by initiating drastic measures such as a one-time amnesty for trivial lapses. He also points out that while the maximum penalty leviable by Sebi remains at Rs five lakh, the cost of initiating legal proceedings will itself be higher than the maximum punishment. (Incidentally, the proposed amendments to the Sebi Act are expected to clear a massive increase in monetary penalties, though it has still to get past the objections raised by the DCA before it finds its way to Parliament for final clearance.) In the circumstances, an amnesty scheme that operates like the SECs settlement procedure is welcome, but in the Indian context there are a few nagging concerns.
In this case, for instance, the penalty of Rs 10,000 per disclosure seems too paltry to have any deterrent effect. Although Sebi would collect Rs nine crore through the amnesty scheme, a stiffer penalty seems warranted. Every company facing punitive action by the regulator, would have spent a multiple of Rs 10,000 even to make a proper representation to Sebi. Monetary penalties will only deter economic offenders if they are large enough to cause pain.
Second, the language of the amnesty scheme leaves much to be desired. It says Sebi may initiate appropriate penal action against those who fail to take advantage of the three-month amnesty. Sebis executive director in charge insists that Sebi will indeed launch prosecution against all companies that fail to take advantage of the amnesty scheme. But it would have been much better if the amnesty scheme had been more precisely worded, with less room for discretion. Third, the amnesty scheme will make sense to investors only if Sebi discloses and publishes on its website the names of all 9,000 companies and individuals who breached the code as well as their exact offence.
Finally, there is the question of amnesty schemes themselves. G N Bajpai has taken charge of Sebi at a difficult time. Over the last seven years, Sebi has lost all credibility as an effective supervisor, allowed a huge backlog of cases to pile up in almost every department, has deliberately changed its rules to favour market participants and has been open to allegations of favouritism or worse. So one cannot complain too much about a one-time amnesty scheme, which is limited to offences relating to reporting requirements and is only meant to clear Sebis books.
Can limited amnesty schemes be extended to other offences Or will they only encourage capital market offenders not to admit offences in the hope that there will always be a one-time clearance opportunity of the sort provided by the Income Tax authorities every three years
Some sort of permanent settlement procedure is indeed desirable, and would reduce needless litigation. But Sebi must first work on a transparent settlement procedure that should be widely discussed with all market participants and investors before it is introduced. The procedure should compel the regulator to disclose and publish all charges framed against those under investigation and settlements should only be permitted if they are accompanied by stiff monetary damages. After all, one must remember that the settlement process itself would be prone to abuse under accommodating chairmen. So, there must also be some checks on Sebi in order to ensure that it does not sabotage its own investigations and settle cases to favour businessmen and market intermediaries.