From the regulator’s perspective, the consent order provides a timely outcome to a matter where investigation is likely to have prolonged for an extended period of time and where the regulator may not necessarily foresee high chances of success. In this regard, offences in the secondary markets such as insider trading and market manipulation are indeed onerous to establish. However, the downside of such a settlement is an inherent lack of transparency because it eliminates the opportunity to the regulator to delve into the detailed appreciation of the facts and circumstances of the case. In this case too, SEBI’s order is devoid of any detailed discussion of the allegations or the manner in which it arrived at the terms of the order. In that sense, it is impossible to say with precision whether the measure of sanctions imposed in a consent or settlement order is commensurate with the violations involved. In some jurisdictions, this difficulty is dealt with by having a court of law examining the terms of settlement independently to determine its fairness in the circumstances, and courts have on occasion rejected terms of settlements by regulators. However, in the context of consent orders of SEBI, there is no such automatic independent determination, unless the order is separately challenged.
SEBI’s Consent Order in the Reliance ADAG Case
On January 14, 2011, SEBI passed a consent order in the matter relating to shares of Reliance Communications Limited (RCL). SEBI had earlier initiated investigations into transactions entered into by two companies within the ADA group of companies, being Reliance Infrastructure Limited (RIL) and Reliance Natural Resources Limited (RNRL), and some of their officers on the ground that loans taken by them through external commercial borrowings (ECB) were used to invest in the shares of RCL. The investigations were initiated to examine possible violations of the SEBI Act and relevant Regulations (including those pertaining to fraudulent and unfair trade practices in securities).
The latest consent order has been passed on the basis of an offer made by the companies and their officers to whom notices had been issued by SEBI. The noticees have paid a settlement amount of Rs. 50 crores (approx. USD 11 million), which is billed as the largest settlement amount in actions of violation of securities laws in India. In addition, the companies and officers are barred from investing in the stock markets for certain periods of time, and the companies are required to implement a policy of rotation of statutory auditors (an aspect that is not generally mandatory for listed companies in India).