SEBIs Consent Proceedings Brickbats bouquets or a bit of both

Prachi Pande of Chambers of Corporate Attorneys discusses the concept of consent proceedings of SEBI, the process of how and when these proceedings can be initiated and also the pros and cons of these proceedings. Prachi also talks about various companies resorting to these proceedings in settling actions initiated by SEBI..In October 2009, PriceWaterhouse (PwC) had moved a consent application with the Securities and Exchange Board of India (SEBI) asking for a settlement on the Satyam matter. PwC at the relevant time had said that the settlement would avoid long-drawn legal proceedings and also clarified that the consent application is not an admission of any wrong-doing. However, the consent application ultimately did not go through..So what is this consent proceedings? When these consent proceedings can be initiated? Who can initiate consent proceedings? What does consent proceeding entails?.Foremost, India’s capital market regulator, SEBI, can pursue two kinds of enforcement actions, viz. Administrative/Civil and criminal. If a person does not want to go through the ordeal of protracted litigation or prolonged legal disputes, it may choose to settle the matter with SEBI by way of consent proceedings, in case the enforcement action is civil in nature. Even if the proceedings initiated by SEBI are criminal in nature, the same can be settled, however it slightly varies from the settlement mechanism of civil proceedings..The Indian legislature has recognized the powers of SEBI to pass consent orders under section 15T of the Securities and Exchange Board of India Act, 1996 (SEBI Act) and section 23A of the Depositories Act, 1996 (Depositories Act)..Whilst the SEBI Act and the Depositories Act, long ago recognized this dispute resolution mechanism, it came in limelight and in sharp focus only with SEBI’s circular No. EFD/ED/Cir-1/2007 dated April 20, 2007 (Circular)..Another reason for the consent to gain impetus was some leading companies approaching (and some were successful too in settling) SEBI to settle proceedings initiated against them by way of consent proceedings. PWC and Anil D. Ambani’s Reliance Infrastructure Limited, are a few big names who have recently resorted to consent mechanism of SEBI. In the case of Ambani, the consent fee agreed was a whopping Rs. 50 crore, along with agreeing to not participate in the capital market for some time. Whilst arriving at the terms of consent, the company neither accepted nor denied any charges leveled against them. This being one of the primary reasons why several market participants are adopting SEBI’s consent proceedings, as it enables one to resolve and put an end to proceedings initiated by SEBI without being stigmatized..As per a recent article in the Mint (July 25, 2011), SEBI has received 2296 consent order applications as on March 31, 2011 and it has accepted 1012 of them. It implies that barely 50 percent of the consent applications are accepted, as opposed to 90 percent by United States’ Securities and Exchange Commission (SEC), from whom SEBI draws its inspiration..SEBI defines Consent Order to mean an “order settling administrative or civil proceedings between the regulator and a person (Party) who may prima facie be found to have violated securities laws. It may settle all issues or reserve an issue or claim, but it must precisely state what issues or claims are being reserved. A Consent Order may or may not include a determination that a violation has occurred.”. Thus, the primary aim and object of consent proceedings are:.To get away with long drawn litigation pending before SEBI/ Tribunal/Courts.To save time and efforts of the party involved and the regulator.To reduce regulatory costs incurred by SEBI for passing enforcement action..In a nut shell, consent proceeding adopts and attempts to enforce the philosophy of ‘settling’ and ‘resolving’ as opposed to ‘litigating’. Considering India’s litigation scenario, such an approach is much welcomed as it contributes by not further burdening the Indian judiciary..Consent orders can be passed at any stage after probable cause of violation has been found. SEBI however believes that, if the violation is grave and intentional then the consent process should not be closed until fact finding process is completed. However, terms such as ‘grave’ and ‘serious’ have not been defined in the Circular and hence their interpretation is solely in the hands of SEBI..Consent mechanism can also be resorted to by such parties against whom no action has been initiated, but such party has a reasonable ground to believe that, a civil proceeding may be initiated against it / him. This enables the party to put its apprehensions of potential proceedings to rest and eases it from the sword of Damocles which would otherwise lie on its head..As per an article in Business World’s on April 14, 2009, “SEBI has found a convenient way to dispose off old cases that have been dragging on for more than four years where it has issued show-cause notices to potential violators. Earlier, intermediaries, particularly brokers and depository participants, would come under Sebi’s scanner for every minor violation, with different consistencies. Small deviances from ‘Know Your Client’ norms or small transaction value violations would invite swift and strict action, thereby piling up cases. But now, even new cases get settled under the consent orders system instead of clogging Sebi’s internal enforcement machinery which can, theoretically, focus on larger and more severe cases.”.Even when an appeal is preferred to SAT, parties can still apply to SEBI to put an end to the litigation by initiating the consent mechanism of SEBI. However, practically, it must be noted that SAT (unlike in the case of quasi judicial proceedings, viz. proceedings before Adjudicating Officer and Wholetime Member) is under no obligation to keep its proceedings at abeyance whilst the ongoing of the consent proceedings. This implies that even if a party is in the process of arriving at consent terms with SEBI, SAT’s proceedings could continue de hors the consent proceedings..When the consent mechanism fails, i.e. when the SEBI and the applicant are unable to arrive at terms of settlement (in the form of fee payable and/or the number of years the applicant is to refrain from the capital market or otherwise) in such an event the investigation/other legal proceedings (which were kept at abeyance) are initiated again..Imagine a fictitious (though plausible) situation where a young small-sized public listed company fails to intimate to the stock exchanges the details of shares acquired by its shareholder over 2 percent. Such information is furnished by a shareholder to the target company and the target company in turn is required to inform to the stock exchange(s) where its shares are listed, as required under the SEBI’s Regulation on Acquisition of Shares and Takeover Code. In the extant example, the company just inadvertently failed to disclose to the relevant stock exchange(s) about the disclosure on account of inexperience and lack of knowledge. Instead of the company going through a lengthy and an expensive route of absolving itself for an inadvertent non-disclosure, it could adopt the consent proceeding mechanism whereby it and the SEBI’s consent committee could amicably arrive at consent terms and put the matter to rest..Thus, the mechanism of consent proceedings is speedy and an effective manner of resolving disputes with SEBI, where the violation is petty in nature, without mens rea and which has not resulted in market manipulation or otherwise prejudiced investors’ rights..Guidelines 8 and 9 of the Circular, broadly spells the procedure to be followed for consent orders. Guideline 8 provides for “Procedure for consent orders where Adjudication Proceedings” are pending and Guideline 9 provide for procedure for consent in other cases..Consent proceeding is initiated by the party by first filing its consent proposal in the prescribed form, along with the required supporting documents. The proposal is first considered by SEBI’s internal committee (IC). If the proposal is prima facie agreeable to the IC, the same is then put forth to the High Powered Committee (HPC). HPC may either accept or reject the terms of consent. It is pertinent to note that the proposal accepted by IC does not mean that the same would also be accepted by the HPC. Once the terms of consent is agreed by HPC, only then the consent terms is forwarded to the Adjudicating Officer for passing of suitable order..Consent proceeding despite deserving its share of bouquets, is also entitled to brickbats. It deserves bouquets for:.Considerably reducing the time, money and the hassles involved in litigation;Contributing in reducing piling up of litigation between SEBI and capital market participants.Not attaching any stigma to the applicant as the terms of consent are arrived at without admitting or denial of violation.Being inexpensive, simple and uncomplicated.….and brickbats for the following reasons:.Consent mechanism could be used as an easy route by the violators to get away by paying a sum without accepting or denying their guilt. Hence the regulators and the world at large would never know whether the “alleged violation” was indeed genuine and a thought after one or a mere lackadaisical/innocent lapse. However, whilst considering a consent application, as per clause 11 of the Circular, the Committee inter alia is required to take into account violation is intentional, gravity of the charge and history of non compliance of the applicant. .The second issue on which the Consent Order Mechanism is frowned upon is the aspect of uniformity. There are no defined parameters or guidelines prescribed (even if there are, the same is not in public domain) for deciding consent terms. It is decided on a case to case basis, which gives absolute discretion to the IC and HPC. Thus an applicant has no idea whatsoever, when it makes an application, as to what is the proper amount payable or other terms that ought to be proposed to the IC / HPC, which would be apt and acceptable to them in light of the alleged violation..Whilst on uniformity, experience has shown different viewpoints within SEBI itself on the same ‘cause of action’ (purported wronging). For example, IC may suggest a huge sum of money as consent fees for settlement and if the said sum is not acceptable the pending proceeding (before Adjudicating Officer or WTM) which was kept at abeyance pending the consent proceedings, get restarted. In the revived quasi judicial proceedings, the charged delinquent may not get any penalty or may get penalized for a much lesser amount than that was proposed by the IC..Thirdly the facet of transparency irks the applicants too. Reason being, the applicant is not given any opportunity to make a representation to the HPC. It is the IC who puts forth applicant’s proposal to HPC. Hence, there is always a lurking doubt as to whether the IC has made an appropriate representation to the HPC, which is the final deciding authority..On a harmonious and a holistic reading of the Circular it seems that India today has a fairly apt and a dexterous law in place. What is lacking is proper and judicious implementation of the same. Only when there is proper execution and transparent implementation of the Circular, in letter and in spirit, that the true intent and objective with which the legislature framed and introduced the Circular would be met..Consent proceedings of SEBI can be made further more robust and efficacious by:.Laying down some parameters for arriving at terms of consent;Written communication from HPC and IC for rejecting the consent proposal, which should be made available to the applicant. Alternatively, the applicant be allowed to make a representation to HPC, which is the final decision making authority;Not treating consent proceedings akin to investigating or adjudicating proceedings. Hence the atmosphere ought to be amiable and that of arriving at a settlement as opposed to fact finding process and/or ostensible case of superior position..Prachi is an advocate practicing with the Chambers of Corporate Attorneys, a law firm based in Mumbai. She primarily practices in stock market and capital market related matters. She can be contacted at prachi@ccalex.com. Rushab Shah assisted the author who interned at Chambers of Corporate Attorneys.