Fine-tuning SEBI’s settlement mechanism

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New Delhi | Published: September 20, 2018 3:43:02 AM

Issuance of the notice of settlement will require SEBI to make a preliminary determination on whether the alleged violation is amenable to settlement and such a step will save SEBI’s time and resources

SEBI had settled 378 cases during 2014-15 to 2017-18 and collected approximately Rs 52.25 crore as settlement amount. (Reuters)

The SEBI board, on Tuesday, considered the 209-page report of the SEBI high level committee, chaired by Justice AR Dave, a former judge of the Supreme Court of India, which was released on August 13, 2018. It accepted all key recommendations paving the way for the fourth avatar of the Settlement Regulations.

The SEBI Act, 1992, read with the Settlement Regulations, envisages a mechanism for settlement of specific violations by the payment of fees without admitting guilt. SEBI had settled 378 cases during 2014-15 to 2017-18 and collected approximately Rs 52.25 crore as settlement amount.

Currently, violations of the provisions of the Companies Act, 2013, such as the failure to pay dividend, or those provisions contained in the chapter relating to public offers and share capital and debentures by listed companies, were not amenable to be settled since the settlement mechanism was restricted to the violations of specific securities laws only. This committee had recommended expansion of the scope of the settlement mechanism by amending the definition of ‘securities laws’ and ‘specified proceedings’ to include violations of such provisions under any law which are administered by SEBI. This is a positive move towards increasing settlements rather than resorting to full-blown

While initially, the SEBI settlement mechanism was not envisaged to settle serious violations, the committee had suggested that SEBI may settle proceedings for serious violations based on a case-to-case basis. However, if the alleged default has market-wide impact or has caused losses to many investors or has affected the integrity of the market, it shall not be settled. This recommendation is in light of the fact that, for various serious violations (for example in the NSE co-location and PWC in Satyam fraud cases), alleged defaulters have filed settlement applications which had led to considerable delay in enforcement, though, in most cases, they were rejected by SEBI.

The committee had also enlisted factors which need to be ascertained before admitting applications for any serious violations. This provision has very broad language and continues to confer wide discretion to SEBI, however, it is a welcome move towards principle-based regulation.

This committee had recommended that, prior to the issuance of a show-cause notice, a notice of settlement (and not summary settlement) must be served to the alleged defaulter with a description of the probable charges and possible enforcement actions. These charges and actions shall not be binding on SEBI and it may modify or levy additional charges on the alleged defaulter. Issuance of the notice of settlement will require SEBI to make a preliminary determination on whether the alleged violation is amenable to settlement. Further, such a step will save SEBI’s time and resources. These resources can be directed towards creating a more robust monitoring and enforcement mechanism.

However, if the alleged defaulter fails to make a settlement application within the stipulated time-period or withdraws it, SEBI might initiate the specified proceedings and the alleged defaulter shall not be permitted to file settlement applications until such proceedings are concluded. While such provisions may mitigate the usage of filing settlement applications as a delay tactic (as the final order is kept in abeyance during the pendency of a settlement application) and reduce frivolous applications, it will not allow an alleged defaulter to pursue the consent route after perusal of the material-on-record as provided in the show-cause notice.

Borrowing from policy directives issued by the Securities Exchange Commission (SEC) in the US and the leniency regime under the Competition Act, 2002, the committee recommended that an applicant who is guilty of an alleged violation and willingly assists SEBI in any investigation or proceedings must be offered the benefit of a lower settlement amount.

Deriving powers from Section 15JB of the SEBI Act, the committee recommended that, in order to allay any fears of assurance being withdrawn after reasonable assistance has been provided, a circular may be issued in this regard detailing the contours of settlement with the confidentiality feature. The proposed framework does not envisage an approach where cooperation is rewarded by not imposing any penalty. Such an approach has been adopted by the SEC in the US in a recent case involving the CEO of a biopharmaceutical company. Such provisions may be considered by SEBI while framing the revised Settlement Regulations. Needless to say that settlements with lesser penalties and confidentiality is the first step towards incentivising strong internal controls and prompt remedial and cooperative measures for corporates and individuals to mitigate SEBI’s enforcement exposure at their end.

While these proposed reforms have been certainly aimed at refining the SEBI settlement mechanism, their effects can only be tested once implemented. While all settlement orders are published (including for settlements with confidentiality, without the name of the alleged defaulter), SEBI needs to provide clear bifurcation of settlement orders on its website in relation to the nature of the alleged default to facilitate a detailed analysis. Lastly, SEBI must come out with an objective guidance on the working of the settlement mechanism in order to mitigate the exercise of discretion and maintain consistency.

-Param Pandya is Research fellow, Vidhi Centre for Legal Policy

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