On August 10, 2018, the Securities and Exchange Board of India (SEBI) published a report (Report) of the High Level Committee under the Chairmanship of Justice A. R. Dave (Retd.) (Committee). The Report has made recommendations to revamp the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (Regulations).

As and when amended, this will mark the fourth avatar of the consent process, first introduced by SEBI through a circular way back in 2007 (remodelled substantially in 2012) and then reincarnated as delegated legislation in 2014. The Report has taken into account SEBI’s experience with this mechanism in the past few years as well as evolving market trends.

Snapshot of the Report

  • Limitation on the time for filing a settlement application: Currently, an applicant is given 60 days from the date of service of the show cause notice to file a settlement application and SEBI has the discretion to accept applications made after this, subject to there being sufficient cause for a delay as well as payment of interest. The Report now recommends the introduction of a hard cap of 120 days from the expiry of the above-mentioned 60 days or after the first date fixed for oral hearing, whichever is earlier. Effectively, SEBI’s power to condone delay of filing a settlement application is now restricted to a delay of a maximum of 120 days.
  • Settling with confidentiality: Taking cue from the Securities and Exchange Commission in the United States, the Financial Conduct Authority (FCA) in the UK and the Competition Commission of India (Lesser Penalty) Regulations, 2009 in India, the Report proposes to introduce a mechanism whereby any individual possessing information about a securities law violation can apply to SEBI for a confidential settlement order in return for their co-operation with SEBI’s investigations and adjudication process. SEBI will take into account the public interest, role played by the applicant in holding the perpetrator accountable, and the extent to which the information/ testimony of the applicant was instrumental, etc. before settling the matter under this mechanism.
  • Settlement in cases of serious offences: Currently, serious offences like insider trading, fraudulent and unfair trade practices, failure to make an open offer and manipulative practices by market intermediaries cannot be settled. In one of the major proposed changes, the Report recommends introducing a principle-based approach giving SEBI the power to settle any application based on analysis of the impact of the violation on the market, the number of people impacted and the effect on market integrity.

Scope for a Further Upgrade?

  • Introduce more flexibility to file for consent: The Committee’s recommendation to limit the time within which a consent application can be filed is driven by a bona fide purpose, i.e., to dissuade delayed filings and avoid forum shopping by parties. That said, this suggestion is a departure from the overall scheme prescribed for calculating the indicative settlement amount, which envisages that consent can be filed across different stages of proceedings. This suggestion, if adopted, may have the unintended consequence of creating more burden and pressure on the regulator to ensure that there are no delays in communications with noticees, inspections are scheduled in a timely and efficient manner etc to ensure that the parties are not prejudiced. It may be beneficial for SEBI to retain some flexibility taking into account the regulatory burden of investigations and proceedings.
  • Make you an Offer that you can’t Refuse- the Settlement Notice quandary: The Report recommends that SEBI should be empowered to issue a settlement notice, with prima facie observations on securities market violations, stating that “probable proceedings” may be initiated and also granting parties an opportunity to file for consent. However, it has also been suggested that not accepting the above SEBI offer at this stage would mean that parties will not be able to avail themselves of the consent option until an order is issued. Putting an embargo on future applications after the issue of the show cause notice may defeat the purpose of the Regulations given that a noticee will necessarily have to go through the SEBI proceedings, even if they decide to settle the violation based on the information made available under the show cause notice. . This will pose continuous challenges if the settlement notices become the norm going forward and are used to accelerate decision-making and may make the route non-viable.
  • Clarify the legal status of a “consent order”: Presently, some confusion prevails today on the exact nature of a settlement order and whether it should be treated as a “penalty”, “regulatory action” or an “adverse order” against the applicant. This becomes particularly critical while evaluating the fit and proper status of individuals, making applications and disclosures to sector regulators, especially overseas. It will be useful for the Regulations, when amended now, to confirm the status of these orders under law and introduce a separate provision, to the effect that all orders issued under these Regulations will not qualify as an adverse order or a regulatory action, unless otherwise stated specifically in the order itself.
  • Allow for partial settlements: In the United Kingdom, the FCA allows any entity to enter into a focused settlement agreement if the regulator and the entity agree on some issues but disagree on others. In such cases, the issues on which the FCA and the entity agree, are settled, and the remaining issues can undergo the adjudication process. The entity receives a small discount on the penalty imposed and thus, does not have to undergo unnecessary litigation for issues it does not want to dispute.

Given the increasing sophistication of the market intermediaries in the Indian securities market, SEBI may consider introducing a similar, more nuanced settlement mechanism that would appeal to a greater variety of different entities allowing them to approach settlement in the manner most suited to the given facts of individual situations, including allowing for partial settlements.

Conclusion

Over the past decade, the consent framework has generated considerable debate, both legal and moral, on its overall usefulness, efficacy and its broader, systemic impact on the conduct of market participants. However, this Report does well to not delve into these issues and, in doing so, implicitly reinforces the need for an alternative to remain available in a market where legal remedy can be time consuming for all parties.

As the regulator of a market with such diverse investor demographics, SEBI has, for the past 25 years, had the unenviable task of formulating and adjudicating on a one-size-fits-all legal framework, one that it has executed with a great degree of success. Across this formidable regulatory architecture, the consent guidelines have always stood out as the right balance between a rule and principle-based approach, which allows SEBI to exercise discretion, but within a carefully circumscribed perimeter of do’s and don’ts.

This Committee’s efforts are indeed encouraging and their desire to evolve and adapt to global standards will only enhance the usefulness of this conciliatory route. However, to see its intent through to its stated objectives, it will be important for SEBI to evaluate the gaps in the proposed changes in the Regulations and assess the impact of all these changes, to ensure that the consent route emerges as a legitimate and holistic alternative, allowing for expeditious relief as well as complementing an effective enforcement system.