SEBI Revises Consent Process

While Rajat Gupta, ex-board member of Goldman Sachs is facing the trial by fire on insider trading charges in US, Stock Exchange Board of India (SEBI) has tightened the screws on the consent process for stock market manipulations and offences.

SEBI last week revised the earlier rules passed in March 2007. Some of the critical features of the revised consent process are:

1. Face the Music

Certain defaults including insider trading, front running, failure to make an open offer, redress investor grievances and respond to the summons issued by SEBI are excluded from the consent process. The defaults falling in the category of fraudulent and unfair trade practices, which in the opinion of SEBI are very serious and/or have caused substantial losses to the investors, shall also not be consented.”

The details are below:-

SEBI shall not settle the defaults listed below:
i. Insider trading i.e. violation of Regulation 3 and 4 of the SEBI (Prohibition of Insider Trading)Regulations, 1992;

ii. Serious fraudulent and unfair trade practices which, in the opinion of the Board, cause substantial losses to investors and/or affects their rights, especially retail investors and small shareholders or have or may have market wide impact, except those defaults where the entity makes good the losses due to the investors;

iii. Failure to make the open offer (except where the entity agrees to make the open offer or if in the opinion of the Board, the open offer is not beneficial to the shareholders and / or the case is referred for adjudication);

iv. Front-running; for the purpose of this circular, front running means usage of non public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options
contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change;

v. Defaults relating to manipulation of net asset value or other mutual funds defaults where the actions of the asset management company (AMC)/ mutual fund (MF)/sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of the Board;

vi. Failure to redress investor grievances(except cases where the issue involved is only of delayed redressal);

vii. Failure to make such disclosures under the ICDR and Debt Securities Regulations, which in the opinion of the Board, materially affect the right of the investors Non-compliance of summons issued by SEBI;

ix. Non compliance of an order passed by the Adjudicating Officer (AO), Designated Member (DM) or Whole Time Member (WTM);

x. Any other default by an applicant who continues to be non-compliant with any order passed by the (AO) or (DM) or (WTM).”

This means that where SEBI considers breach of law or listing guidelines, the companies, investment managers, brokers etc. won’t be able to pay a fine and get away with it. Previously, on such charges, SEBI allowed them to pay the fine while not admitting guilt and sometimes by voluntarily agreeing to debar from the  from stock markets. Now without being allowed to go through the consent process, the organizations and persons alleged to have committed the above-mentioned acts will have to go through a legal process for criminal offences except in some exceptional cases. SEBI has allowed itself some room for maneuverability for some cases. In regular cases, now an organization can go through the consent process only for small technical breaches.

2. One Time Lucky

No consent application shall be considered, if any violation is committed within a period of two years from the date of any consent order. However, if the applicant has already obtained more than two consent orders, no consent application shall be considered for a period of three years from the date of the last order.”

Hence, this clause allows leeway once only in a couple of years. If an organization has already gone through a consent process, it is not going to get away easily without some criminal charges the next time round. The practice of organizations to claim a mistake has been made every year whenever they get caught will have to stop.

Closing Thoughts

The rules are good. SEBI is finally gearing itself to govern and regulate the stock markets properly. This move in the long-run will build investor confidence and dissuade asset managers, brokers and organizations from indulging in malpractices. Reliance Industries has an ongoing case for insider trading, along with a couple of other banks for front running and stock market manipulations. Reliance has appealed to the Bombay Courts to be allowed to go through the consent order process available before as it’s case is  from 2007.

The method SEBI chooses to deal with the older cases, will decide the fate of many organizations. It appears the organizations are worried, and that for regulators is a good strategy. The last high profile case of consent was of Anil Ambani group in which the group paid a Rs 50 crore (USD 8.93 million ) fine. Hence, in all likelihood the organizations with pending cases will either have to pay high fees or face criminal charges.

References:

  1. Streamlining of Consent Process
  2. Modified Consent Process Circular
  3. Reliance Industries moves Bombay High Court on new consent order rules
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