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SEBI sweetens the deal for settlement applications

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Reduces base amount cost to ₹10 lakh from ₹15 lakh earlier for consent route mechanism

In order to make ‘settlement of offenses’ through consent orders more attractive, the Securities and Exchanges Board of India (SEBI) has sweetened the deal by reducing the cost. The regulator has reduced the benchmark settlement amount for each count of violation to ₹10 lakh from the earlier ₹15 lakh. The reduction in cost is significant considering that the base amount is multiplied by the number of violations of each section of the SEBI Act to arrive at a final figure depending on the nature of the offences and gains made.

What is SEBI trying to achieve?

Experts told BusinessLine that SEBI intends to push for a settlement of violations through consent to cut down on long-drawn court cases. Of late, a noticeably large number of violations where SEBI has passed orders are being challenged in the Securities and Appellate Tribunal (SAT), and many times the order goes against the regulator.

Under the new norms, the alleged wrongdoers will have to seek a settlement through consent within 60 days of show cause notice being issued to them by SEBI. It is another way that will induce the alleged accused to quickly move for settlement, experts said.

So far, SEBI gave an additional 120 days’ time to the wrongdoers over the 60 days period for filing settlement applications. The only caveat was that they had to pay 25 per cent additional amount if they extended time. Each year, SEBI collects hundreds of crores through settlement orders, which also involves high profile cases of insider trading.

Mixed reactions

“These amendments will change the way SEBI approaches various settlement cases. Earlier, the regulator was criticised for irrationally high amount it charged for settlement of cases (example matters involving Rakesh Jhunjhunwala settlement, InterGlobe Aviation, Piramal AIF etc.). Reducing the factors of the formula to arrive at the settlement amount is a welcome measure. However, increasing the discretion in view of the incontestable nature of settlement orders needs a policy rethink,” said Sumit Agrawal, Managing Partner, Regstreet Law Advisors, and a former SEBI officer.

“Honest people will benefit but collar offenders will use it as a swivel door,” said a former SEBI official. By the incontestable nature of settlement orders, one means that as of now SEBI does not allow the parties involved to challenge in courts the rejection of any of the consent applications. Similarly, the rules say a third party cannot even challenge those orders where SEBI has accepted consent settlement applications. Simply, the settlement of offences through consent mechanism is strictly left to SEBI’s discretion and the regulator relies on a committee that holds sway on acceptance and rejection of applications.

Although SEBI has borrowed its concept of settlement from the Securities and Exchange Commission, it is yet to allow lawyers and legal enthusiasts to research the grounds on which a rejection of settlement can be challenged, as is done in the US frequently. With regard to SEBI, it is still now clear as to how or in what category the defaults by promoters and controlling shareholders are going to be settled, Agrawal said.