Sebi Streamlines Settlement Procedures

Regulations provide for settlement of the cases where proceedings have been or are yet to be initiated, while the cases where prosecution has been initiated are compoundable by the concerned court.

The regulator has now issued a guidance note for greater clarity on the cases that can be settled, while changes have also been made for expediting the compoundable matters as suggested by the special Sebi court, a senior official said.

Several prosecution cases filed by Sebi are pending before the special court in Mumbai and many of the accused are ready to compound the cases. The court had asked Sebi to adopt an alternative mechanism for expeditious approval for compounding of cases and ensure faster recovery of penalties.

Accordingly, Sebi has modified an internal circular to allow applications relating to offense of non-payment of penalty to be processed by the Prosecution Division of Sebi's Enforcement Department, if the accused agrees to pay penalty with 12 per cent interest per annum and the legal charges.

All other cases would continue to go to the High Powered Advisory Committee (HPAC) and the Panel of Whole Time Members. Sebi has also issued a guidance note in view of certain doubts raised on the interpretation of the provision relating to non-settlement of cases involving 'fraudulent and unfair trade practices' that the regulator considers to be serious in nature, having market-wide impact or having caused substantial losses to investors, especially small shareholders.

The move may reduce the administrative burden on the Securities and Exchange Board of India (Sebi) and also pave the way for the settlement for some old cases.

As per the guidance note, the purpose of the norms "is not to prohibit the settlements in respect of all kinds of fraudulent and unfair trade practices (and) the general rule shall be settlement of such defaults with appropriate terms and rejection in exceptional cases".

On "serious violation" and violations involving a market-wide impact or substantial losses to investors, Sebi has given detailed clarifications on how to deal such cases.

Sebi has further said that the seriousness of the default should be decided after taking into account "the weight and sufficiency of the evidence" as well, and not merely on the bass of the seriousness of the levelled charges.

The violation would be considered to have "market-wide impact" would be those defaults that have a bearing on the securities markets as a whole and not just on securities of the concerned company and its investors.

Sebi would also examine the "qualitative and quantitative impact on rights of investors, including the number of complaints received, especially from retail investors and small shareholders".

In cases where violation is found to be "serious" and also involves market-wide impact or substantial losses to investors, a settlement application can be considered only if the applicant "has made or intends to make good the losses due to the investors to the satisfaction of Sebi".

The applicant would also have to furnish an undertaking that "for limited purpose of settling administrative and civil proceedings which the board alone is competent to initiate under the securities laws, and for no other purposes, be shall be deemed to have admitted his guilt".

Sebi, however, clarified that the guidance note does not modify its power to reject an application or to consider an application under these regulations, nor does it give any applicant the right to seek settlement.

In the consent settlement process, the entity facing a probe by Sebi is subjected to certain fees and restrictions without admission or denial of alleged irregularities, and the regulator thereafter drops its charges and the investigations with a caveat that all disclosures made to it are correct.

The case can still be re-opened if some new facts come up later.