One of the most industrious departments of the Securities and Exchange Board of India (SEBI) is the one that handles consent applications. It received 666 applications in 2008-09, which is equal to the total applications since the consent process was introduced, and this does not include all the applications received and cleared—fast and furiously—from March 2009 to December 2009.
SEBI’s annual report details a seemingly robust process of disposing of consent applications which are cleared by an internal committee, put before a High Power Advisory Committee (HPAC) headed by a retired High Court judge and orders are finally passed by a two-member bench of SEBI’s whole-time directors. For applications made through the adjudication route, or those pending before courts or the Securities Appellate Tribunal, the HPAC’s recommendations are placed before them.
While the process appears robust, it is, in fact, riddled with subjectivity; the process of arriving at the consent amount is non-transparent and the final orders are erratic—some are sketchy two-pagers with no detail about the alleged wrongdoing nor any attempt to link the settlement to the penalty prescribed under the relevant Section under which action was contemplated. A few, however, are detailed and include an element of disgorgement.
Consequently, despite more than 1,280 applications (until March 2009) leading to over a thousand orders, there is no attempt to build case histories or precedents or to provide the information in a searchable database that will allow investors to check the background of market intermediaries. This is especially ironical, given that chairman CB Bhave has long experience in building and running large databases.
In January 2009, I wrote that an internal committee of junior officials makes most of the decisions. Our prodding led to an internal circular that prescribed a revised procedure for dealing with consent applications which, for the first time, said that applications would be numbered and maintained in a computerised database. Even this basic norm was apparently not followed until January 2009. A summary of the procedure is now given in the annual report which also says that, in matters pending before the Securities Appellate Tribunal or the courts, the consent terms are placed before them for appropriate orders.
But the prior process is still vague, with the result that the whole process is ruled by a few junior officials and a set of lawyers who now enjoy a reputation of being able to ‘swing’ the best consent deals with SEBI. Naturally, there are a number of questions about the credibility of the consent process. Answers received under the Right to Information (RTI) Act only add to the confusion rather than resolve it. Consider this:
• According to SEBI rules, an application would be put up to the HPAC even if the applicant disagrees with the internal committee on the amount payable.
• However, in response to an RTI query, one learns that 22 cases were rejected by SEBI’s whole-time members (WTMs) themselves without bothering to refer them to the HPAC. We learn that this has changed only since January 2009.
• Under the rules, if the HPAC does not recommend a case for settlement "on the terms proposed by the applicant," it would revert to the operational department to resume proceedings against the applicant. This sometimes provides another escape route, as happened with the Zee group in the Ketan Parekh case. Zee had offered a compensation of Rs5 crore, while SEBI’s internal committee demanded that it pay at least Rs20 crore, given the gravity of the scam that led to the collapse of two banks. When the matter was reverted to the operational department, SEBI’s then WTM let the group off with a simple warning. And SEBI remained a silent witness to this travesty.
• SEBI’s annual report says that of the 666 applications received in 2008-09, 428 were disposed of and 236 rejected. There isn’t even a line to explain the broad criteria for rejection. SEBI says it collected Rs44 crore through the consent route until March 2009.
• SEBI says that the consent process looks at settling issues "without going into the legality, merits of the case, etc." Yet, in response to the same query, it also claims that the HPAC keeps in mind the facts, circumstances and seriousness of the case while deciding the settlement amount.
However, this is not evident in the final orders issued by SEBI’s WTMs or adjudicating officers. Most often, the orders are sketchy and do not even bother to outline the charges against the applicant. Consequently, an investor is clueless about the gravity of wrongdoing. But, sometimes, the orders are detailed and indicate an element of disgorgement in arriving at the settlement fee. Needless to say, it is usually those orders where the penalties are paltry that are most opaque. It is hard to believe that senior SEBI officials do not realise that such orders violate the spirit of the settlement/consent provisions because there is no way to check if the consent terms are even in line with the penalty prescribed for the offences being investigated.
Take a random example. Viral Mewada of Aditya Infosoft Limited was investigated for fraudulent and unfair trade practices. SEBI’s WTMs disposed of the case in a few brief paragraphs and a jumble of Sections that do not outline Mr Mewada’s activities.
The philosophy behind consent orders is that the regulator avoids long-drawn litigation and permits the wrongdoer not to admit guilt on the condition that the consent order will put out details of the charges against the person/entity in the public domain and the financial cost would be high enough to act as a deterrent. Instead, SEBI’s consent orders are seen as a quick escape mechanism for anyone who is caught violating market regulations and the amount paid would depend on the skills of the lawyer who negotiates the settlement. Sucheta Dalal is the Consulting Editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal @yahoo.com