SEBI: Consent Orders And Compounding Of Offences
SEBI refers to “Securities Exchange Board of India” which was first established in the year 1988 as a non-statutory body for regulating the securities market. It became an autonomous body in 1992, when the SEBI Act was passed by the Indian Parliament and more powers were given through an ordinance. Since then it regulates the market through its independent powers.
Objectives of SEBI:
As an entity in the market, SEBI works with the following objectives:
1. In order to develop the securities market in India.
2. To promote Investors Interest.
3. To make rules and regulations for the securities market in India.
Under the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956 (SCRA) and the
Depositories Act, 1996, SEBI pursues two streams of enforcement actions i.e.
* Criminal actions
Civil actions are those which include issuing directions such as remedial orders, cease and desist orders, suspension or cancellation of certificate of registration and imposition of monetary penalty under the respective statutes and action pursued or defended in a court of law/tribunal.
Criminal action involves initiating prosecution proceedings against violators by filing complaint before a criminal court.
Consent Order means an order that settles administrative or civil proceedings between the regulator and a person (Party) who may prima facie be found to have violated securities laws. It may settle all issues or reserve an issue or claim, but it must precisely state what issues or claims are being reserved. A Consent Order may or may not include a determination that a violation has occurred.
The concept of consent orders has been derived from the success of the US Securities and Exchange Commission (USSEC) in resolving the dispute among different entities. USSEC settles over 90% of administrative / civil cases by way of consent orders. It can also slap penalties on defaulters without taking recourse to long drawn litigation in courts.
The main objective of these consent orders is to reduce the regulatory costs which can further help in saving time and effort of Securities Exchange Board of India, which was earlier consumed to pursue enforcement actions.
Another main objective of consent orders is to provide flexibility of wider array of enforcement actions to achieve the twin goals of an appropriate sanction and deterance without resorting to a long drawn litigation before SEBI / Tribunal / Courts.
Procedure (where adjudication proceedings are pending):
1. If the party against whom an adjudication proceeding is pending proposes passing of a consent order, the proposal may be referred to a high powered Committee consisting of a retired judge of a High Court and two other external experts.
2. The Committee will consider the proposal of consent, requisite waivers by the party, the facts and circumstances of the case, material available on records and take into account the factors and guidance. Where the Committee finds the terms for passing a consent order inadequate, it may ask the party to revise the consent terms.
3. The consent terms finalized by the Committee and agreed to by the party shall be forwarded to the Adjudication Officer for passing a suitable order in line with the consent terms.
Procedure (in other cases):
1. Any person (party) who is notified or who has reasonable grounds to believe that a civil/ administrative proceeding may or will be instituted against him/her, or any party to a proceeding already instituted, may, at any time, propose in writing along with requisite waivers for an offer of consent.
2. Any person (party) who is notified or who has reasonable ground to believe that a criminal proceeding may or will be instituted against it, may, before filing a criminal complaint by SEBI before any criminal court, propose in writing along with requisite waivers for consent.
3. The Committee will consider the proposal of consent, requisite waivers by the party, the facts and circumstances of the case, material available on record and take into account the factors and guidance. Where the Committee finds the terms for passing a consent order inadequate, it may ask the party to revise the consent terms. If the Committee agrees with the proposal, suitable consent terms shall be recommended to a panel of two Whole Time Members, who may pass a suitable order in view of the recommendation of the Committee.
• The consent order shall be binding on the party and in cases where the party undertakes any compliances, it has to comply with the same.
• If the party fails to comply with the consent orders it may lead to the following:-
Invite appropriate action under the respective statute against the party, Revival of the pending administrative / civil action.
Compounding Of Offences:
Compounding of offences is a process whereby an accused pays compounding charges in lien of undergoing consequences of prosecution.
Section 24A of the SEBI Act, 1992 permits compounding of offences by the court where prosecution proceedings are pending. Compounding of Offence can take place after filing criminal complaint with SEBI. It can cover appropriate prosecution cases filed by SEBI before criminal courts. Any person who is notified that a proceeding will be initiated against him or any party to a proceeding already initiated/ instituted can propose in writing for the settlement.
The main objective of compounding of offences is to avoid the difficult and lengthy process of criminal prosecution and further save time, cost and mental agony.
Consequences of non-acceptance:
• If HPAC rejects the proposal, the person making the offer shall be notified of the same and the offer of settlement shall be deemed to be withdrawn.
• The rejected offer shall not constitute a part of the record in any proceeding against the person making the offer, provided, however, that rejection of an offer of settlement does not affect the continued validity of waivers.
• SEBI and the party will be free to resort to legal recourse as may be available to them under law and neither SEBI nor the Party would be entitled to use any information relating to the settlement process in such proceedings.
• Any proceeding which had been kept in abeyance pending the consent process will begin from the stage at which it was kept in abeyance.
Settlement before Securities Appellate Tribunal / Courts:
Where a matter is pending before SAT/Court, the same consent process will be undertaken and the draft consent terms recommended by the Committee and approved by the panel of two Whole Time Members will be filed before the SAT / Court. The SAT/Court may if found fit, pass an order in terms of the consent terms and subject to such further terms as the SAT/Court may find appropriate in the facts and circumstances of the case.
Factors to be considered for consent:
While considering the proposal of consent from any party, the Committee shall have due regard to the objective of the respective statute, the interests of investors and securities market and factors including but not limited to the following, where-ever applicable:
i. Intentional violation of rules.
ii. Party’s conduct in the investigation and disclosure of full facts.
iii. Presence of Gravity of charge (fraud, market manipulation or insider trading).
iv. History of non-compliance of the violator.
v. Whether there were circumstances beyond the control of the party.
vi. Violation is technical and/or minor in nature and whether violation warrants penalty.
vii. Consideration of the amount of investors’ harm or party’s gain.
viii. Processes which have been introduced since the violation to minimize future violations / lapses.
ix. Compliance schedule proposed by the party.
x. Economic benefits accruing to a party from delayed or avoided compliance.
xi. Conditions necessary to deter future non-compliance by the same or another party.
xii. Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them.
xiii. Compliance of the civil enforcement action by the accused.
xiv. Party has undergone any other regulatory enforcement action for same violation.
xv. Any other factors necessary in the facts and circumstances of the case
Name of Party: Mr. Shantanu Prakash,
Promoter & Director of Educomp Solutions Ltd
Date:7 June, 2011
Rule Violated: Regulation 13(4) read with 13 (5) of the SEBI (Prohibition of Insider Trading) Regulations 1992(“Insider Trading Regulations”).
Facts: Mr. Prakash transferred 50,000 shares of Educomp Solutions Ltd to his wife, but failed to make disclosures to the company as required by Insider Trading Regulations following which, adjudication proceedings were initiated against him. Mr. Prakash paid an amount of Rs.3,00,000 towards settlement charges.
Decision: The proceedings were disposed off.
Conditions for the Decision:
• Passing of this order is without prejudice to the right of SEBI to take enforcement actions including commencing / reopening of the pending proceedings against the Noticee, if SEBI finds that:
(a) Any representations made by the noticee in the consent proceedings are subsequently discovered to be untrue.
(b) The Noticee has breached any of the clauses/conditions of the undertakings/waivers filed during the current consent proceedings.
With consent orders and compounding of offences, SEBI has made its work easier by saving its time, effort, money and agony. The decisions taken have become easy and less time consuming.
The author can be reached at: firstname.lastname@example.org
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