A securities market regulator is like a traffic policeman. His duty is to ensure that the roads are safe, and indiscretions are fined. But this is not to be attained by clearing the roads of all traffic or by bringing traffic to a standstill. |
In the securities market, most actions by the Securities and Exchange Board of India (Sebi) have been in the form of putting market intermediaries out of business""either forever, or for harsh long periods, requiring actionees to appeal Sebi orders. |
A via media is a must. And that has to necessarily take the form of plea bargaining. This needs not only enabling law, but also the right regulatory attitude. |
During the last round of substantial amendments to the the Securities and Exchange Board of India Act, 1992 ("the Act"), in October 2002, an attempt was made to permit compounding of securities offences, concomitant with the enhancement of quantum of penalty under the Act. |
However, this was still-born. Section 24A was brought in to permit the judicial forum conducting proceedings, to compound offences, so long as the offence was not punishable with imprisonment in any form. The draftsmen frustratingly failed to notice that Section 24 makes every offence under the Act punishable with imprisonment. |
Under the earlier chairman, Sebi had started a home-grown system of plea bargaining. It would accept a sum of Rs 5 lakh (the maximum penalty for most offences prior to October 2002), and drop proceedings. |
However, there was a lack of consistency. In several proceedings, such unilateral payments were accepted. In a few, they were rejected outright. In some proceedings, such offers were turned down, and eventually, penalties of a lower quantum were graciously imposed. |
In the past few days, Sebi has adopted a new and more ingenious method""but one which is fraught with unfair risk for the actionees. Several persons have received notices from Sebi for admitted petty violations, but with pre-determined terms of "consent" unilaterally dictated by Sebi. |
According to Sebi, since Section 15T prevents an appeal against any Sebi order made "with the consent of the parties", the law enables the making of penalty orders by consent. |
However, being unilateral prescriptions by Sebi, such orders are not products of negotiated consent. Not being appealable, without an element of bargaining, such consent orders would be unfair and coercive. |
Curiously, the standardised consent terms that Sebi sends out, do not contain any promise from Sebi that it would not prosecute or initiate any other proceedings under the Act for the same offence (the law permits this). In some cases, the notices do not even spell out the specific offences proposed to be covered by consent. |
In mature markets, attorneys for the regulator and the actionees sit around the table, bargain and thrash out the consent terms. Negotiating with an actionee involves no moral or reputation risk for the regulator. |
However, on the actionee, it not only inflicts monetary damage, but also fastens a stigma of having settled a potential conviction. Therefore, while Sebi's latest attempt at settling regulatory action is indeed welcome, it falls well short of inspiring the market's confidence. |
TAILPIECE: In the otherwise dull and grey world of writing prohibition orders, Sebi's wholetime member TM Nagarajan has brought in some welcome colour with his literary skills. |
Dismissing a market intermediary's defence about how he was only "taken into custody" and not "arrested", a recent Sebi order states: "The difference between the two descriptions is no more than that between 'Tweedledum' and 'Tweedledee'." |
John Byrom, the 18th century English poet who first coined the phrase, would indeed be proud. However, Lewis Caroll's 'Through the Looking Glass', which truly popularised Tweedledum and Tweedledee, has equally inspired the Supreme Court with Humpty and Dumpty. |
According to the court, regulatory powers should be exercised with sobriety since "not all the King's horses and all the King's men" can ever salvage the stigma and taint wrongly inflicted. |
(The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own) |