SEBI Circular May 25 2012 – Amendment to the Consent Circular dated April 20 2007

Prachi Pande, the founding proprietress of Corporate Attorneys discusses the new SEBi Circular, which has introduced several new provisions with respect to considering and settling disputes via the consent mechanism..By Prachi Pande .In the summer of 2007, SEBI by its circular dated 20th April (“Old Circular”), provided for a broad framework for passing of consent orders and for considering request for composition of an offense.[1] Couple of days ago, SEBI has issued another circular on the same subject modifying its erstwhile five year Old Circular. It appears that by the recent circular of May 25th 2012 (“New Circular”)[2], SEBI aims and proposes to improvise and fortify the extant consent mechanism of SEBI. On a prima facie reading of the New Circular it appears that SEBI is trying to address the shortcomings it faced in the last five years while practically implementing the consent proceedings and further ensuring that the consent mechanism holistically achieves the purpose it was conceived for. [3].By the New Circular, SEBI has introduced several new provisions with respect to considering and settling disputes via the consent mechanism. One of the hi-lights of the New Circular could be said to be Annexure A which are Guidelines for determining terms of consent. The said Guidelines are divided into several chapters and stipulate complex formulas for calculating settlement terms vis-à-vis. monetary amount..One of the reason, SEBI’s consent mechanism as per the Old Circular was criticized was that there was no uniform parameters for deciding the terms of consent, either in terms of monies or the number of years one would refrain from the capital market or a combination of both. Even if there were, the same was not made public or informed to the applicant. This was one of the reasons for many to consider SEBI as arbitrary and capricious whilst deciding the terms of consent, as it had absolute discretion, power and authority to decide, accept or reject any consent proposal of the applicant. The New Circular aims at addressing this pitfall to quite an extent. Annexure A of the New Circular is divided into several chapters, which inter alia provide for the formulas and basis of calculation of different offences under the SEBI Act and the Regulations framed thereunder. For example, Chapter I deals with General Guidelines. Clause (b) of Chapter I states “Except for entities treated as name lender, the Indicative Amount shall not be less than Rs. 2 lakhs for first time applicant or Rs. 5 lakhs for others”. The said chapter defines ‘Indicative Amount’ to mean the settlement terms (monetary amount) under consideration of the HPAC / Panel of WTM. The final amount is termed as ‘Settlement Amount’ which shall be computed as per the Guidelines..Further, Chapter V prescribes benchmark amounts for violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market), Regulation, 2003 (“FUTP Regulations”). The said chapter further prescribes mode of calculating the terms of consent (monetary value) where there is a violation of FUTP Regulations along with breach of any Insider Trading or substantial acquisition and takeover norms. The said Chapter also provides for different calculations for various distinct categories of applicant. For example the terms of consent of an Intermediary are different from the terms of consent of a Promoter..Other provisions introduced by the New Circular are as follows – .Negative List.One of the highlights of the New Circular is the negative list of offenses which cannot be settled through the mechanism of consent proceedings, such as:.(a) Violation of Regulation 3 and 4 of the SEBI (Prohibition of Insider Trading) Regulation, 1992;.(b) Serious fraudulent and unfair practices which, in the opinion of the Board has caused substantial loss to the investors, specially retail investors and small share holders..What is pertinent to note is that SEBI has not defined as to what amounts to being “serious” and the definition of the same has been left entirely to the opinion of the Board. Thus giving SEBI absolute discretion and judgment to define as to which fraudulent and unfair trade practice amounts to being “serious”..(c) Failure to make an open offer. (Except where the entity agrees to make the open offer or in the opinion of the board the open offer is not beneficial to the shareholder and/or the case is refereed for adjudication).(d) Offences of front running also cannot be settled through the consent mechanism..(e) Defaults relating to manipulations of net asset value or other mutual fund defaults where the actions of the asset management company/mutual fund/ sponsors results in substantial loss to the unit holders..The exception to this default is when the entity has made good the losses of the unit holders to the satisfaction of the Board..Again, there is considerable amount of discretion in the hands of the Board, as unless the Board is satisfied that shareholders have been satisfactorily compensated it would not consider consent applications of asset management companies / mutual fund / sponsor..(f) Failure to address investor grievance (Expect cases where the issue involved is only of delayed Redressal).(g) Failure to make disclosures as mandated under ICDR and Debt Securities Regulation, which in the opinion of the Board materially affect the right of the investor..(h) Non-compliance of summons issued by SEBI.(i) Non-compliance of an order passed by the Adjudicating Officer (AO), Designated Member (DM) or Whole-Time Member (WTM) of SEBI..(j) Any defaults by an applicant who continues to be non-compliant with any order passed by the AO, DM or WTM of SEBI.. Non-entertainment of Application.Consent application will also not be considered in the following scenarios:.1. Application filed prior to the completion of any investigation / inspection with respect to the alleged default..2. If the alleged default is committed within 2 years from the date of any consent order except where default is minor in nature..The New Circular does not define as to which defaults are “minor”..3. If the applicant has already obtained more than 2 consent orders then for a period of 3 years since the last consent order, no application of the applicant would be entertained..4. Where more than one proceedings arising out of the same cause of action is pending..As per the Old Circular, consent orders could be passed at any stage after probable cause of violation had been found. It was only in the event of serious and intentional violation, the consent proceedings could not completed till the fact finding process was concluded, whether by way of investigation or otherwise. .Time Frame.The New Circular has also introduced a time frame within which a consent application is required to be filed. Any application filed later than the period stipulated in the New Circular shall not be considered. However, in the same vein, the New Circular has conferred the Competent Authority the power to condone the delay, if the delay is for reasons beyond the control of the applicant. The limitation period prescribed for filing consent application is 60 days from the date of:.1. Service of the notice to show cause including supplementary notices, whichever is later..2. This circular, if the proceedings are pending before AO / DA / DM / WTM..Fee .Another new introduction by the New Circular is an “a non-refundable processing fee of Rs. 5000”. Prior to the New Circular there was no fee payable by the Applicant..HPAC Composition.The New Circular has also slightly modified the composition of the High Powered Advisory Committee (HPAC). As per the Old Circular, HPAC consisted of a retired judge of a high court and 2 other external experts. The New Circular has expanded the HPAC to now comprise of a retired judge of a high court and 3 other external experts..Internal Committee.The New Circular also provides for “Internal Committee” (IC). The IC’s role would be to assist HPAC. There could be more than one IC which would comprise of the following:.i) A Chief General Manager, who shall not be administratively associated with the case..ii) Division Chiefs of the concerned Operational Department of SEBI..iii) Division Chiefs of the Legal/Enforcement Department of SEBI..The Consent Mechanism.IC shall collate the data and provide the same to HPAC. On the basis of the data, the HPAC shall then make a recommendation to a panel of 2 WTM for their approval. The HPAC / panel of WTM after considering facts and circumstances of the case and the gravity of the charge, it may either –.1. Enhance the settlement amount in serious cases; or.2. Reduce the amount if the settlement amount is disproportionally higher vis-à-vis. the nature of violation; or.3. Refuse to consider the case under the consent proceedings..Thus the circular provides for a 3-tier scrutiny of consent application, viz..Expeditious Disposal.The New Circular also puts some amount of pressure on SEBI to expeditiously dispose consent application within a period of 6 months. There was no such mention in the Old Circular. However the said disposal timeline as per the New Circular is merely suggestive and not mandatory..Conclusion.Whilst there can be no straight jacket formula to arrive at terms of consent and the same would have to be evaluated on a case by case basis; it is good to note that there is finally some bench mark and yardstick to arrive at terms of consent. The Old Circular did not provide for any basis for negotiating and arriving at terms of consent. The applicant would suggest the consent proposal which would be a shot in the dark and would then be left in the hands of SEBI to ultimately decide its application’s fate. The New Circular by prescribing some parameters has brought about clarity and lucidity to the consent mechanism of SEBI, which was a pressing need of the hour!.Prachi is the founding proprietress of Corporate Attorneys, a law firm based in Mumbai. The firm undertakes capital market and SEBI related matters. She can be contacted at prachi@corporateattorneys.in. Tejasvi Saxena, a 2nd year student at The West Bengal National University of Juridical Sciences, assisted the author..[1] http://www.sebi.gov.in/cms/sebi_data/attachdocs/1291879532674.pdf..[2] http://www.sebi.gov.in/cms/sebi_data/attachdocs/1337946507938.pdf. The New Circular comes into force with immediate effect..[3] The author has written a detailed article on the consent mechanism of SEBI which is available at : https://barandbench.com/brief/3/1692/sebis-consent-proceedings-brickbats-bouquets-or-a-bit-of-both