Sebi to ease settlement, compounding rules to fast-track cases

Markets regulator Sebi today decided to simplify its settlement and compounding norms to ensure faster closure of cases where accused entities are ready to pay up and make good the losses suffered by investors.
Sebi regulations provide for settlement of the cases where proceedings have been or are yet to be initiated while the cases where prosecution has been initiated are compoundable by the court concerned.
However, the number of settlements has come down sharply in recent past as certain provisions were making it difficult for the applications to be considered for consent settlement, leading to calls for simplification of the norms.

Some of the major cases where settlement pleas have been rejected in the past include those involving corporate giants like Reliance Industries and it is expected that the simplification of norms, approved by Sebi's board today, would help clear those cases as well.
Besides, the compounding procedure was considered to be time-consuming due to various procedural delays under the existing rules and they have also been eased now.
The simplified set of norms would now allow entities under probe for 'serious violations' in capital markets to seek settlement of the case, provided they agree to make good the losses suffered by the investors to Sebi's satisfaction.

This would also apply for defaults with "market-wide impact" or involving significant losses to investors.

After its board meeting, Sebi said Settlement Regulations were formulated primarily to settle minor and technical violations not having wider impact on the market so that enforcement is concentrated on major and significant cases.
"During 2015-16, the number of settlement cases has come down putting pressure on the enforcement system," Sebi said while adding that an analysis showed that there were certain doubts on the interpretation of some provisions.
Consequently, an internal guidance note was issued in March clarifying the doubts so that more serious and substantial cases are only taken up for enforcement action.

Now, the board has approved incorporation of this guidance note in the Settlement Regulations, which clarify that defaults having a bearing on the securities market as a whole and not just the listed security and its investors may be considered to have a market-wide impact.
"The assessment of facts and circumstances while deciding the seriousness of the default in relation to an applicant shall take into account the weight and the sufficiency of the evidence," Sebi said.
In the consent settlement process, the entity facing a probe by Sebi is subjected to certain fees and restrictions without admission or denial of alleged irregularities, and the regulator thereafter drops its charges and the investigations with a caveat that all disclosures made to it are correct. The case can still be re-opened if some new facts come up later.

In dealing with prosecution cases for non-payment of
penalty, where compounding request has been filed and where full fine with interest is paid, the simplification is in the procedure for disposing of these matters.
Several prosecution cases filed by Sebi are pending before the special court in Mumbai and many of the accused are ready to compound the cases. The court had asked Sebi to adopt an alternative mechanism for expeditious approval for compounding of cases and ensure faster recovery of penalties.
Accordingly, Sebi has modified an internal circular to allow applications relating to offence of non-payment of penalty to be processed by the Prosecution Division of Sebi's Enforcement Department, if the accused agrees to pay penalty with 12 per cent interest per annum and the legal charges.

All other cases would continue to go to the High-Powered Advisory Committee (HPAC) and the Panel of Whole-Time Members.
Sebi has also issued a guidance note in view of certain doubts raised on the interpretation of the provision relating to non-settlement of cases involving 'fraudulent and unfair trade practices' that the regulator considers to be serious in nature, having market-wide impact or having caused substantial losses to investors, especially small shareholders.
The move may reduce the administrative burden on the Securities and Exchange Board of India (Sebi) and also pave the way for the settlement for some old cases.
As per the guidance note, the purpose of the norms "is not to prohibit the settlements in respect of all kinds of fraudulent and unfair trade practices (and) the general rule shall be settlement of such defaults with appropriate terms and rejection in exceptional cases".

On "serious violation" and those involving a market-wide impact or substantial losses to investors, Sebi has given detailed clarifications on how to deal with such cases.
Sebi has further said the seriousness of the default should be decided after taking into account "the weight and sufficiency of the evidence" as well, and not merely on the bass of the seriousness of the levelled charges.
The violation would be considered to have "market-wide impact" in case those defaults have a bearing on the securities markets as a whole and not just on securities of the company concerned and its investors.
Sebi would also examine the "qualitative and quantitative impact on rights of investors, including the number of complaints received, especially from retail investors and small shareholders".

In cases where violation is found to be "serious" and also involves market-wide impact or substantial losses to investors, a settlement application can be considered only if the applicant "has made or intends to make good the losses due to the investors to the satisfaction of Sebi".
The applicant would have to furnish an undertaking that "for limited purpose of settling administrative and civil proceedings which the board alone is competent to initiate under the securities laws, and for no other purposes, (the entity) shall be deemed to have admitted his guilt."
Sebi, however, clarified that the guidance note does not modify its power to reject an application or to consider an application under these regulations, nor does it give any applicant the right to seek settlement.