Tighter timelines are welcome, but transparency is needed on the rationale for consent decisions
It has been 15 years since the Securities Exchange Board of India’s (SEBI’s) consent mechanism for settling securities market offences was mooted and four years since it was codified into the SEBI (Settlement Proceedings) Regulations in 2018. It is, therefore, apt that the regulator has decided to review and propose refinements to the regulations through a discussion paper. Given that the consent mechanism allows market participants to negotiate a monetary settlement in lieu of penal proceedings without admitting guilt, it is good that the screws are sought to be tightened on the process.
Tweaks have been proposed to nearly a dozen procedural aspects of settlement, of which three are significant. The first pertains to shortening the rather relaxed timeline allowed for market participants served with show-cause notices to apply for settlement. Present regulations allow those served a show-cause notice an additional 120 days after receiving it, on top of a 60-day initial period, to apply for a settlement, provided they agree to an extra payment. The paper proposes to do away with this unnecessary leeway, fixing the deadline at 60 days. This should prevent violators from delaying settlements. The time given to pay up settlement proceeds is being cut short to 30 days instead of 90. Two, to nudge market participants to file for settlement at the early stages of proceedings, the settlement amount is proposed to be reduced based on timing. This should help the consent mechanism better achieve its core objective of reducing SEBI’s case-load. Three, the settlement amounts are presently based on the status of the violators. For the same instance of fraud, an individual may be allowed to settle for ₹15 lakh while a company may need to shell out ₹1 crore. The paper logically argues that settlement amounts should be based on culpability instead of identity. Dummy directors, ‘mule’ accounts and individuals with inactive bank accounts are often scapegoats in market fraud as it notes, but sifting actual perpetrators from such front entities may prove tough in practice.
Procedural matters apart, discretionary powers enjoyed by SEBI to accept or reject offers for settlement remain a grey area. The regulations allow SEBI to reject settlement offers when a violation has market-wide impact, causes losses to investors or involves repeat offenders. But these principles can be subject to varying interpretation. One must commend SEBI for throwing out the last hour consent application from NSE in the co-location case or from Franklin Templeton on its debt schemes, as these cases had market-wide ramifications. But it is harder to explain why mutual fund officials and corporate honchos have been allowed to settle front-running and insider trading cases through this mechanism, though these are serious market offences requiring deterrence. To render the consent mechanism more credible, SEBI needs to transparently disclose its criteria for accepting or rejecting settlement offers and strive to better codify these into law.