SEBI Allows Settlement Of Fraud Cases, But With Riders

The market regulator on Tuesday eased its consent mechanism that allows settlement of cases by paying a penalty without admitting or denying guilt as it looks to reduce a backlog of disputes.

The Securities and Exchange Board of India relaxed the mechanism to bar only serious cases, Chairman Ajay Tyagi said at a press conference after the regulator’s board meeting in Mumbai. Frauds involving small amounts will be eligible for settlement, he said.

“SEBI has many such small cases. We sought the help of a retired Supreme Court judge to get guidance on how to move in this issue,” Tyagi said.

While Tyagi and SEBI statement didn’t give other details, a person aware of the development told BloombergQuint requesting anonymity that cases of insider trading will also be allowed to be settled, as suggested by a panel headed by Justice AR Dave.

The relaxation by the regulator comes with these riders:

• Consent would not be allowed if default has a market-wide impact, loss to investors or affects the integrity of the market.
• Settlement would not be allowed if entity is a wilful defaulter or fugitive economic offender.
• The applicant would need to comply with SEBI’s orders and directions.

The current criticism was about lack of uniformity in SEBI’s settlement mechanism, Sumit Agrawal, a securities lawyer and founding partner at RegStreet Law Advisors, told BloombergQuint. “It needs to be seen whether the new norms will address that. Some criteria would need to be provided when the regulator applies its discretion in allowing settlement.”

It’s also not clear if eased norms will have an impact on the unfair access allegedly granted by the National Stock Exchange to high-speed traders as the regulator in its investigations so far has not concluded if these had a “market wide impact”.

No Second Chances

SEBI’s existing consent framework allows applicants to make more than one attempt to settle a matter even after the application has been rejected. The regulator has put an end to the practice.

Confidentiality

Existing consent framework didn’t allow confidentiality to parties which may have been involved in violation of securities laws and are willing to assist the regulator in investigation. The SEBI board, according to the regulator’s statement, accepted the Dave panel’s proposal on allowing confidentiality.

“The confidentiality clause is a page from the playbook of Competition Commission of India,” Abhimanyu Bhattacharya, partner at Khaitan and Co., said. “It’s a positive approach in closed key cases particularly ones related to insider trading.”

This is akin to providing protection to an approver under Section 306 of Code of Criminal Procedure in divergence with the concept of whistleblower, he said. “Other financial regulators such as Competition Commission use this approach for detecting cartelisation and finding monopolistic abuse.”