Promoters found guilty under fraudulent and unfair trade practices (FUTP) will have to shell out at least Rs 1 crore to settle the charges under the new consent process.
The Securities and Exchange Board of India (Sebi) revamped the consent mechanism on Friday, where it has set a base amount for settling various stock market-related violations.
The base penalty set to be charged for promoters found guilty of violating FUTP code of conduct will be Rs 1 crore or 0.5 per cent of the market value of their holding in the company, whichever is higher. The holdings will also include any convertible warrants or options.
| RATE CARD | |
| Applicant | Base amount |
| Promoters | Rs 1 crore or 0.5% of their holdings in the company |
| Chairman or whole-time members | Rs 25 lakh or 0.5% of their holding |
| Other directors or key managerial personnel | Rs 10 lakh |
| FII proprietary sub-account | Rs 35 lakh or 0.005% of the total assets under custody |
| Lead manager | 1% of the issue size handled |
| AMC | Rs 25 lakh or 0.1% of net worth or 0.001% of the AUM |
| Intermediaries | Rs 15 lakh or 1.5% of the gross fraudulent trades executed |
| Note: Base amount for settling cases of fraudulent and unfair trade practices Source: Sebi | |
Meanwhile, whole-time directors or the chairman of a company will be charged the higher amount of between Rs 25 lakh and 0.5 per cent of their holding, while the base penalty for independent directors and other key personnels is set at Rs 10 lakh. A merchant banker, guilty of fraudulent practice, will have to pay one per cent of the issue size handled by him, while other intermediaries associated with the issue will attract a penalty of 0.25 per cent of the issue size.
The minimum benchmark amount for foreign institutional investors’ proprietary sub-account is Rs 35 lakh or 0.005 per cent of the total assets under custody, whichever is higher. However, that for an asset management company (AMC) is the highest of Rs 25 lakh or 0.001 per cent of the assets under management or 0.1 per cent of the net worth. Sebi has said the fine will have to borne by the AMC and should not be passed on to its schemes.
“The idea of having a benchmark amount may help defaulters know the approximate penalty beforehand and game the system. Hopefully, over a period of time, the process gets refined to become more stringent and less liberal. A penalty not known beforehand can by itself be a good deterrent,” said Shriram Subramanian, founder and managing director (MD), InGovern Research Services.
“By setting benchmark rates, Sebi is trying to remove arbitrariness from the consent process and be more transparent,” said Amit Tandon, founder and MD of Institutional Investor Advisory Services (IIAS). The new formula-driven framework is aimed at bringing consistency and uniformity in the settlement of cases through the consent process. An internal assessment done by Sebi last year, had shown there was inconsistency while charging violators with similar offences under consent.
Under the new mechanism, an indicative amount — an approximate penalty to settle the offence through consent — will be arrived at by multiplying the benchmark amount with Proceeding Conversion Factor (PCF) and Regulatory Action Factor (RAF). PCF will depend on the stage of the proceeding when the consent application is made, while the RAF will be arrived at depending on all orders and regulatory directions issued to the applicant.
Sebi has said that its high-powered advisory committee or whole-time members will arrive at a final settlement amount in cases where the formulae for calculating the indicative amount cannot be adapted.
