Securities and Exchange Board of India puts consent order process on hold for now
November, 21st 2011
Market regulator Securities and Exchange Board of India has put its practice of issuing consent orders on hold till a petition in the Delhi High Court is disposed of.
Three people with direct knowledge of the development said that the regulator is going slow on the consent order after the court last month said that the process is subject to the final decision on a petition challenging the use of consent orders. Deepak Khosla, an entrepreneur, had challenged the legal validity of consent orders before the Delhi High Court in September.
It is learnt that Sebi has not taken up any case after the petition was filed. "To be on the safe side, no action on the consent process is happening," said a person familiar with the regulator's thinking. He clarified that there was no stay on the process. The case is likely to come up for hearing on January 31.
Consent applications are similar to out-of-court settlements used to settle disputes with securities law offenders. The settlement terms, which may include a monetary penalty or a voluntary ban from the securities markets, are negotiated between the regulator and the accused. However, the orders do not prevent Sebi from reopening the case any time it wants to investigate further.
Securities law experts say the decision will delay several cases, including Reliance Industries' application for a possible settlement in an insider trading case.
"This decisional paralysis can be overcome through the physiotherapy of a clarification from the court as to the fact that those parties who had approached Sebi prior to the petition being filed, and who have either received their orders or have their applications pending cannot be made subject to a reopening of the closure attained in their proceedings through orders or be subjected to any adverse interference on their conduct through the act of filing a consent application, subject to the outcome of the proceedings," said Vijayendra Pratap Singh, partner, Amarchand & Mangaldas & Suresh A Shroff & Co.
"If such cases are not protected it would result in unscrambling a scrambled egg inasmuch as concluded matters would suddenly stand opened with the right to file a challenge against orders, in case the consent took place post an adjudication, having lapsed or where such an admission through the filing of a consent application may violate the right against self-incrimination enshrined in law as the consent process does not allow a party to disown the act," Singh said.
While consent orders have been criticised for giving the wrongdoer the opportunity to buy peace, and for being too lenient, the regulator is said to be looking at plugging the loopholes to ensure consistency.
"Sebi is in the process of tightening the consent mechanism and there are various issues. For example, whatever we prescribe should be within the norm of legal scrutiny and whatever we prescribe has to be fair and equitable," Sebi chairman UK Sinha told ET NOW, this paper's business television channel in an interview.
He denied the claim that Sebi does not have powers to issue these orders.
Lawyers say the court may consider the date of its order as a cut-off to safeguard prior filings and orders and ensure that parties seeking consent thereafter do so with prejudice and notice of the court's order.