The new consent order guidelines released by the Securities and Exchange Board of India, or Sebi, should address some loopholes in the treatment of serious offences by the market regulator. The new norms list 10 offences, including charges of insider trading, front-running, serious frauds and so on, which can no longer be easily settled via consent. Offenders could be open to more serious penalties including larger fines and disgorgement orders. The consent mechanism can also no longer apply without the completion of a full investigation of the facts in any case. A consent order allows the settlement of a possible violation, by imposing a monetary penalty, which is paid by the defendant without legal admission of guilt. It is designed to avoid putting extra pressure on over-burdened judicial and regulatory processes. Under the old consent order guidelines, Sebi could impose a penalty of up to three times the profit allegedly made through manipulative activity.
The new norms address perceptions that consent orders have sometimes been inconsistent and non-transparent. Investors allege that cynical managements often abused the system to commit offences, followed by appealing for a consent order, paying a fine and escaping the full legal consequences. However, despite the new guidelines, Sebi’s high-powered advisory committee (HPAC) and its panel of whole-time members still possess discretionary powers to treat specific offences under the consent mechanism. So defending parties could still look for this route out of trouble by appealing to the HPAC. But the HPAC also has greater latitude in terms of the penalties it may impose, and in terms of ordering disgorgements.
Prominent applications under the old system include a 2007 case of insider trading involving Reliance Industries Limited (RIL), a case of alleged price manipulation involving the Adani group, and front-running charges against some employees of HDFC Asset Management. In the past, the market regulator has received substantial revenues by way of settlement charges under the consent mechanism. Between April 2007, when the mechanism was introduced, and March 2011, the regulator’s financial reports show that it received over Rs 150 crore in settlement charges in over 1,000 processed consent orders. In 2010-11 alone, it settled 185 cases and collected Rs 70 crore in settlement charges. The largest-ever charge imposed via consent order was of Rs 50 crore levied on the Anil Dhirubhai Ambani Group, a decision that has attracted fresh attention following last week’s conviction of a bank official in London; the most recent order was a fine of Rs 10 lakh imposed on Educomp in mid-May. Will the new system lead to more transparency and consistency? Or will it merely lead to a large number of appeals to the HPAC to use its discretionary powers? The perception of manipulation can be as deleterious in its effect on market action as actual manipulation. What the market regulator, therefore, needs to ensure is greater consistency and transparency in the treatment of serious market-related offences. While efforts should be made so that the regulatory mechanism isn’t overloaded, the new guidelines cannot be allowed to end up being cosmetic in their effect.