In 2007, SEBI issued a Circularcontaining guidelines for consent orders and composition of offences on matters involving violations of securities laws. This was also accompanied by a detailed set of FAQs.
Since then, SEBI has issued several consent orders, including in some high profile cases. Due to criticism that the consent order mechanism was operated in an ad hoc manner and lacked transparency (matters which were also briefly discussed on this Blog), SEBI undertook the task of streamlining the system. Consequently, SEBI has, “[o]n the basis of experience gained and with the purpose of providing more clarity on its scope and applicability”, modifiedthe Circular of 2007. A press release containing the salient features of the amended Circular is contained here.
The most significant change is that SEBI has introduced several exclusions to the operation of the consent order process. In other words, the consent order mechanism will not be available in case the violations involve specific categories, including the following:
- Insider trading;
- Serious fraudulent and unfair trading practices;
- Failure to make an open offer under the takeover regulations;
- Front running;
- Manipulation of net asset value or other serious mutual fund defaults;
- Failure to address investor grievances; and
- Failure to make disclosures in offer documents that materially affect the rights of investors.
There is also a residual category where the applicant can be denied the consent order mechanism for any other type of default if that applicant is non-compliant with any order passed by SEBI against it.
It appears that SEBI’s objective is to exclude serious types of violations listed above at the outset rather than to leave the discretion to the various authorities managing the consent order process. This introduces objectivity and transparency in the process, which were arguably missing in the erstwhile guidelines. However, this also has the effect of substantially limiting the scope of the consent order mechanism to minor offences that are technical in nature and do not substantially affect investor rights. In such circumstances, alleged violators in serious cases may be unable to resort to the consent order mechanism and will be compelled to go through the entire enforcement process. SEBI has nevertheless retained some leeway by providing that “[n]otwithstanding anything contained in this circular, based on the facts and circumstances of the case, the [High Powered Advisory Committee]/Panel of [Whole Time Members] may settle any of the defaults listed above”. In the ultimate analysis, the above serious violations are not altogether excluded absolutely, but the authorities under the consent order process will have to exercise discretion and justify the existence of circumstances as to why a settlement may be permitted in a given case where such serious violation is involved.
The process has been made stringent in other ways as well. For example, if a violation has been made within two years from the date of any consent order, then a consent application may not be entertained for such violation. Further, an applicant who has already obtained two consent orders may not apply for another within three years from the last order. There is also a time limit for filing consent applications, which is 60 days from the service of show cause notice to the applicant.
While the reforms will have the effect of streamlining the process and making it more transparent, it is also likely to substantially reduce the availability of the process to persons who have been charged with securities law violations. The key outcome of the reforms appears to be that the consent order process will now be largely available for minor technical violations, but not for the more serious ones.