Sebi shuts the consent route for insider traders, front-runners

Written by fe Bureau | Mumbai | Updated: May 26 2012, 08:11am hrs
Unclear whether new rules will apply to Reliances alleged insider trading case

Companies, promoters and even individuals indulging in offences like insider trading, front-running and fraudulent and unfair trade practices will no longer be able to settle the matter through the consent order route.

In its first major revamp of the consent order guidelines since it was introduced five years back, the Securities and Exchange Board of India (Sebi) has decided to exclude such serious capital market offences from the list of defaults that can be settled by way of a consent order. FE had reported in its edition on May 25 that insider trading offences will not be considered for consent orders.

The new guidelines will be applicable to all new and pending applications, except those where consent terms have been received from the applicant for placing before the High Powered Advisory Committee (HPAC) or cases pending at any stage thereafter. It is unclear at what stage the Reliance Industries Limited (RIL) case is at present and therefore, whether the new rules will apply to it or not.

In a circular released Friday, the market watchdog also said defaults related to manipulation of net asset value (NAV) or other mutual funds defaults resulting in losses to unit holders will also not be settled through the consent route.

The consent order mechanism refers to the practice of negotiations while settling civil or administrative matters against wrong-doers. Based on the kind of offence, the regulator either imposes a monetary penalty or suspends/cancels the registration. It is based on the plea bargaining mechanism, which is popular with the Securities and Exchange Commission (SEC) in the US.

Some of the other offences kept out of the consent mechanism include failure to redress investor grievances, failure to make disclosures under the ICDR and Debt Securities Regulations (that in Sebi's opinion materially affect the rights of investors), non-compliance with summons issued by Sebi and non-compliance with an order passed by an adjudicating officer, designated member or whole-time member.

Meanwhile, Sebi has clarified that no consent application will be considered for three years if the applicant has already obtained more than two consent orders. The period will be computed since the date of the last consent order. Also, an application will not be considered before the completion of any investigation/inspection or contemplated in respect of the alleged default.

An entity wanting to avail of the consent route for any of the eligible offences will have to file the application before 60 days from the receipt of the show-cause notice, including supplementary notices, if any, whichever is later.

Interestingly, the terms of the consent will now be based on a minimum benchmark amount for each category of default and also the track record of the applicant. The consent terms may also include other directives like disgorgement of ill-gotten profits, etc if considered necessary, said the circular.

SEBI will also not consider any subsequent application with respect to the same default if in case a consent application has already been rejected. The regulator intends to dispose of the consent application within a period of six months from the date of registration of the consent application.