Sebi's consent route to ease pending case load yields success in FY18

The total number of market violations settled through consent mechanism doubles in FY18

Markets regulator Securities and Exchange Board of India (Sebi) settled double the number of cases through the so-called consent mechanism in 2017-18, compared to the previous fiscal. According to data, Sebi resolved 200 cases through the consent route last fiscal as against 103 in 2016-17. The amount earned by Sebi as settlement fees also saw a more than two-fold increase to Rs 300 million in FY18, compared to Rs 135 million in FY17.

Legal experts say the regulator is opting for the consent route to resolve several smaller and relatively less serious matters in order to avoid piling up cases. The consent mechanism is the process under which an alleged wrongdoer can settle a violation with Sebi without admitting or denying the guilt. The settlement involves penal action, which could be fees, a market ban, or both. Over the years, the importance of the consent route has gone up as it helps cut down on time and conserves resources for tedious litigations.

Market experts say there are several cases pending before Sebi where the amount of alleged unlawful gains could be less than Rs 500,000.

One of the biggest impediments for extensive use of the consent mechanism has been the exclusion of serious violations from the purview. For instance, insider trading or front-running, which have market-wide impact, cannot be resolved through the consent mechanism. More than half of the investigations taken up by Sebi are either market manipulation or insider trading cases, most of which cannot be resolved through the consent process.

“Consent mechanism is an effective way for Sebi to reduce the burden of pending cases. The resources of Sebi would be insufficient to prosecute every violation. Sebi should consider using the consent route for even the serious offences by imposing exemplary penalty,” said Sandeep Parekh, founder, Finsec Law Advisors.

Sebi had initially come up with a circular for settling cases through the consent mechanism in 2007. The circular talked about the basic procedure that needed to be adopted for consent. According to the original 2007 circular, any type of market manipulation could be settled through consent. However, in 2011, Sebi faced backlash for settling particular cases through this route.

This prompted Sebi to reconsider its stance on the consent process. In 2012, the regulator came up with a new circular, which said serious violations like insider trading, fraudulent and unfair trade practices that have a market-wide impact, failure to make open offers, and front-running, were all excluded from the consent process.

This led to a steep fall in the cases resolved under consent. In the preceding two years, the regulator had resolved nearly a 1,000 cases through consent process, even collecting settlement fees to a tune of over Rs 1 billion. In 2014, it enacted a regulation termed Settlement of Administrative and Civil Proceedings to give more legal sanctity to the consent framework.