SEBI’s complex formula for settlement by consent – some concerns

The recent
amendments to the guidelines/circular relating to Consent Orders were discussed
here earlier. The latter more detailed guidelines provide for determination of the “Indicative Amount” (leading to final
Settlement Amount) and some thoughts on them are shared here. These Guidelines
provide very elaborate mathematical formula to cover a variety of violations,
facts and the alleged culprits.
trying to quantify as much as possible this Indicative Amount, SEBI has tried
to meet the criticism that the settlement process was arbitrary and – as some people
alleged, though without substantiating it – even at times corrupt. Settlement
was indeed done earlier at differing amounts for similar violations. The published
Consent Orders did not reveal the detailed facts, the wrong doing allegations
or the reasoning involved in arriving at the settlement amount and this made
the process uncertain for an applicant.
SEBI has not merely tried to make the process transparent and quantifiable but
made the quantification rational too. It has used factors that are relevant to
the violation in determining the settlement amount. For example, in case of
allegations of price manipulation, the turnover carried out by parties as
percentage of market turnover, the price movements, etc. are made part of the
formula. Again, where the allegation is of not making an open offer, the amount
of open offer is taken as basis. Even the time value of the profits made is
taken into account by adding interest.
The background
of the person who has allegedly committed the wrong is also now factored in and
a minimum Indicative Amount appropriately given. Promoters, for example, face a
higher penalty if they are allegedly involved in price manipulation.
earlier a person comes forward for settlement, the lower the Indicative Amount
and this is done by assigning weights for each step in the litigation process.
In fact, if one comes after making an appeal against an Order of SEBI, then
there is an extra premium/cost to be paid.
commendable quantification comes at the cost of making the whole process very complicated.
Earlier, the process was exceedingly simple and it was common for parties to
do-it-yourself the consent application for violations that were not serious. In
fact, many professional advisors even refused to handle such cases. Now, taking
help of professional advisors seems unavoidable.
however, that the Indicative Amount arrived at by the formula is not final and
the settlement will not necessarily take place at the amount arrived at as per
this formula. The Guidelines give considerable discretion for SEBI to settle at
a higher or lower amount or not settle at all. In fact, there are so many such
“back doors” open that one may wonder whether there can still be arbitrariness
in the process. This is particularly because even the amended Guidelines still do
not require much details of the settlement process to be given. We will have to
see how the new Orders come, though I personally do not think SEBI will go far
beyond the Indicative Amount as per formula in most cases and there will be
definitely specific reasons – even if not expressed in the Consent Order – for
such departure.
while discussing the very detailed formula and its countless parameters would
be a subject by itself, some areas of concern are worth highlighting.
is effectively a minimum Indicative Amount of Rs. 2 lakhs for first timers –
meaning someone coming for settlement for the first time. For second time and
onwards, it is at least Rs. 5 lakhs. We have seen earlier that the settlement
amount in numerous cases has been in 5 figures, i.e., less than Rs. 1 lakh.
Even SEBI’s orders in several cases levy such penalty. Of course, SEBI has
powers to levy almost sky high amount of penalties but obviously that is to
cover the most extreme of cases. On appeal, the SAT also has reduced penalties
to such lower amounts. Question is whether such minimum amounts are justified?
SEBI’s contention often has been that Consent Order help in the alleged
violator going taint free and thus he should pay a cost.
on this, it may be remembered that there is restriction now on repetitive consent
settlement. An alleged default (unless minor) committed within two years of a
consent order cannot be settled. If the applicant has obtained more than two
consent orders, then he cannot apply for consent for three years from the last consent
order. In contrast, the Reserve Bank of India compounding regulations restrict
repetitive compounding only if the default is of a similar nature. However, SEBI
has put an absolute bar.
can be also seen from the formula, for several types of violations, there are
even higher minimum Indicative Amounts provided. A person charged for financing
a transaction of price manipulation has to face a minimum settlement amount of
Rs. 15 lakhs, irrespective of the amount financed. Promoters even having a
slight connection with price manipulation will have to pay at least Rs. 1
crore. A Promoter of a typical listed company with 50% holding who files his
annual disclosure of holdings even one day late under the Takeover Regulations
faces a minimum penalty of Rs. 15 lakhs. And so on.
practice, not just the Consent Orders but even adjudication orders after
following due process do not see such high amounts. Thus, parties may feel
dissuaded from coming forward and settle in many cases.
there is another concern. Assuming that parties do not opt for settlement
through consent orders and allow the adjudication or other process to full take
place. In such a case, will the penalties be at least such
minimum amount? One argument could be that, yes, the adjudication process which
proves the violation should be higher than such minimum amount. At the stage of
settlement, the violation is not proved and hence, settlement could be at lower
price but not if the violation is proved. Moreover, the party has made SEBI go
through the effort of proving the violation and hence even to cover the costs
and efforts of SEBI, the penalty should be higher.
view is that the settlement process and adjudication process should be kept as
independent as possible and the settlement amount and the penalty under the
respective process should be arrived at independently. The object of settlement
is to cut short the proceedings and no full opportunity in law is provided to
the applicant. The objective is to only have a prima facie look at the facts
gathered in the investigation and make a judgment. Considering that now a
formula is provided now, even the amount is to be determined objectively.
factors for adjudication and levy of penalty are different. The violation would
first need to be proved. There may be mitigating factors that maybe relevant
for determining the quantum of penalty. Factors like repetitive nature of
default, gains made or losses caused, etc. are considered. Each adjudication
order would be thus different because facts would be different. Thus, on a
certain set of facts, even a Promoter alleged to be connected with a price
manipulation  will not face a minimum
penalty of Rs. 1 crore but could pay much less. Also, obviously, if the
allegation is not proved, there will not be any penalty at all. 
One would have to see how the amended Scheme is applied in practice. While the earlier Scheme was simple – it was actually too simplistic and there were concerns that it was arbitrary and misapplied in many cases. The new Scheme seems to go in the other extreme and now there are concerns whether it will defeat the whole purpose in many cases and make parties prefer litigation as a rule.

About the author

CA Jayant Thakur

1 comment

  • The legislature, in its wisdom has chosen not to prescribe any minimum penalty under SEBI Act (as is done under certain other legal provisions). Therefore, in my view, it would be impermissible to treat the minimum settlement amount as per the Consent Guidelines as the minimum penalty amount as well. It would amount to SEBI indirectly adding a supervening provision to the Act.

    Also, I do not think that the settlement and adjudication process can be independent. One major advantage of consent mechanism is faster and surer recovery of penalty amount, so while deciding on the SA, SEBI needs to look at the possible penalty that may get imposed if the litigation is carried successfully and discount for the probability of SEBI’s failure to prove the charges. This can be done by looking at the penalty amount imposed at SAT level in comparable cases. Therefore, prescribing a minimum SA seems to be anomalous. If there’s no minimum penalty prescribed for adjudicated matters, there should be none for SA.

    -Mangesh Patwardhan

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