Abhimanyu Bhattacharya | Aparna Bagree
The Securities and Exchange Board of India’s (SEBI) settlement mechanism for administrative and civil proceedings has been an evolving one. The last iteration of regulations announced in 2014 introduced a mathematical and transparent process of calculating the settlement amount. This has largely been effective.
As Justice AR Dave committee, which was set-up to review this mechanism, noted, there is a perception that regulations discourage settlement of defaults relating to insider trading, fraudulent trading and open offers. The regulations also didn’t quantify all factors relevant to the settlement, with some being left to the discretion of various committees.
It is in this context that the recommendations of the Dave panel could go far in not only expanding the applicability and scope of the settlement mechanism but also bolstering its efficiency.
Expanding the scope of settlement
The committee has recommended that application of the consent mechanism should cover provisions under any law to the extent it is administered by SEBI. Current regulations limit the applicability to securities laws, which includes only the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996.
The committee recommended that the settlement mechanism should not be used as a platform to settle matters, which in the opinion of SEBI, have an impact on investors. While it noted that the absence of a clear process to compute gains and losses in serious matters made settlement difficult, it observed that the list of defaults, which cannot be settled, should be made principle based, such that the proceedings related to fraud (including insider trading, front-running) can be settled depending on facts of each case.
However, the committee has recommended proceedings with respect to a wilful defaulter, a fugitive economic offender and a defaulter in relation to any fee due or penalty under securities laws should not be settled. These amendments are a positive development as they expand the application of the settlement mechanism and ease the burden on adjudication and judicial proceedings.
The committee has also recommended that regulations should permit a settlement scheme, which would enable SEBI to deal with various defaulters who may constitute a certain class of persons. Regularisation schemes have been used in the past to settle matters with respect to classes of persons such as stockbrokers. Introduction of such settlement schemes will enable SEBI to resolve matters relating to large groups expeditiously.
The push against forum shopping
The settlement mechanism currently permits an application to be filed within 60 days from the date of service of the show cause notice. However, an application filed after 60 days can be considered by a SEBI panel provided that the settlement amount will be increased by 6 percent per annum from the last date of filing the application.
The committee noted that the mechanism has been subject to forum shopping strategies by applicants and delaying civil or administrative proceedings. It has recommended a limitation period for filing a settlement application. An application for settlement cannot be filed 120 days from the last date for filing the application or after the first date fixed for oral hearing, whichever is earlier. In case an application is filed after 60 days from the date of service of the show cause notice, then the settlement amount will be increased by 25 percent per annum.
At present, a settlement application cannot be filed if the alleged default has been committed within a period of 24 months from the date of the last settlement order issued to the applicant. An application cannot be filed for the same alleged default again, if the earlier application was rejected, except in exceptional circumstances.
In order to prevent forum shopping, the committee has proposed to remove the ‘exceptional circumstances’ clause.
It also recommended that a cooling period after a settlement order should not be applied if the application is with regard to a different cause of action. The committee has also suggested that a settlement application should not be entertained pending completion of an investigation, audit or inquiry unless it assists in completion of the investigation.
The current regulations permit an applicant to withdraw their application at any time prior to the communication of the settlement decision. The applicant cannot make another application in relation to the same default. However, the second application may be considered, subject to payment of additional fees and/or interest on the settlement amount.
The committee has recommended that the second application should be considered subject to an increase of at least 50 percent of the settlement amount. The recommendations will hopefully dissuade the misuse of the settlement mechanism and that in turn will help in increase the efficacy of this process.
Steps towards efficiency
The current framework for settlement keeps civil and administrative proceedings alive when a settlement application is filed, except that the final order is not issued until the settlement application is decided. However, where a settlement application is filed prior to the commencement of proceedings, then such proceedings are not initiated until there is a final decision on the settlement application.
The committee said it may be necessary to initiate proceedings to issue interim directions to protect investors and maintain the integrity of the market. It has recommended that the regulations should be clarified to this effect.
In cases where a proceeding has been initiated against several persons, it has recommended that where a settlement application is filed by one person, proceedings against the other persons should continue.
The committee has also recommended that the regulations should provide for issuance of notice of settlement prior to issuance of a show cause notice for certain defaults. If a settlement application is not filed within 15 days from the date of the notice, SEBI can initiate relevant proceedings. The committee has also recommended that in the event of the settlement order being revoked on account of non-compliance with the terms of the order or not making true disclosure, the settlement amount paid will not be refunded to the applicant.
The committee has not proposed any change to the formula for calculation of the settlement amount, but certain changes have been recommended which include guidelines for reduction of the indicative amount in case of an applicant seeking a confidential settlement and the benchmark amount should consider the repetitive nature of the default, where applicable. The steps recommended by the committee are essentially to bolster the process and endeavour to deliver a robust settlement mechanism. These steps attempt to account for certain underlying realities for the adjudication proceedings and the nature of disputes in the securities market.
Stretching the regulatory arm towards cooperation
An important recommendation from the committee has been to suggest a provision for settlement with confidentiality. Currently, all settlement orders contain details of the applicant and are published on SEBI’s website.
The committee noted that the Competition Commission of India (CCI) has regulations which deal with the manner of receiving information for defaulters who are willing to co-operate against other participants of a cartel.
They also provide for reduced penalty while retaining the confidentiality to the information provider. Accordingly, the committee has recommended that provisions similar to the CCI regulations should be included in the settlement mechanism regulations. It has clarified that the confidential settlement process is available to an applicant who is alleged to be in serious violation of securities laws and willing to assist SEBI against her accomplices.
In conclusion, a review of the settlement mechanism was necessary to improve the efficacy of the 2014 regulations and keeping in mind the realities of the Indian securities market. The Dave committee’s recommendations provide a clear path to bolster and improve the efficiency of settlement mechanism.Abhimanyu Bhattacharya is partner and Aparna Bagree is associate, at Khaitan & Co. Views expressed are personal.