SEBI’s Order
in case of Arun Jain debarring him for 2 years for insider trading is a little disturbing.
It questions the perceived sanctity and finality of consent orders and whether
settlement by consent settles all actions possible for a
particular act or omission. Or whether, even after settlement and payment of
settlement amount, SEBI may yet take action under another set of provisions. Applicants
for Consent Orders may now feel uncertain whether and how to apply for a consent order.
in case of Arun Jain debarring him for 2 years for insider trading is a little disturbing.
It questions the perceived sanctity and finality of consent orders and whether
settlement by consent settles all actions possible for a
particular act or omission. Or whether, even after settlement and payment of
settlement amount, SEBI may yet take action under another set of provisions. Applicants
for Consent Orders may now feel uncertain whether and how to apply for a consent order.
Adjudication
proceedings were initiated against Arun Jain in 2005 for alleged insider
trading. Against these proceedings (with a short detour to the High Court
against such proceedings) he applied for consent order. A consent order
was duly passed in 2008 (under the Guidelines of 2007, amended recently, as
discussed later) for a settlement amount of Rs. 7,00,000.
proceedings were initiated against Arun Jain in 2005 for alleged insider
trading. Against these proceedings (with a short detour to the High Court
against such proceedings) he applied for consent order. A consent order
was duly passed in 2008 (under the Guidelines of 2007, amended recently, as
discussed later) for a settlement amount of Rs. 7,00,000.
In the
normal course, that would have been the end of the matter. However, in December
2011, a show cause notice (SCN) was issued against him for the same matter of
violation of insider trading regulations. However, this time, the SCN was for
issuing directions under Sections 11, 11B and 11(4) of the SEBI Act read with Regulation 11 of
the Insider trading Regulations. The directions, the SCN stated, could be in
the form of debarring him in various manners as specified. Rejecting the
contentions, inter alia, of Arun Jain that the matter was already settled by Consent
Order, SEBI debarred him for a period of two years from buying/selling
securities, etc.
normal course, that would have been the end of the matter. However, in December
2011, a show cause notice (SCN) was issued against him for the same matter of
violation of insider trading regulations. However, this time, the SCN was for
issuing directions under Sections 11, 11B and 11(4) of the SEBI Act read with Regulation 11 of
the Insider trading Regulations. The directions, the SCN stated, could be in
the form of debarring him in various manners as specified. Rejecting the
contentions, inter alia, of Arun Jain that the matter was already settled by Consent
Order, SEBI debarred him for a period of two years from buying/selling
securities, etc.
The merits
of the case are not discussed here and for this purpose, let us assume that
Arun Jain was guilty of insider trading when shares were sold by a company promoted by him and while in possession
of unpublished price sensitive information. Though a possibly valid point, the
issue whether the violation was serious in nature and therefore deserved more
punishment than the amount settled through the Consent Order is also not
discussed here.
of the case are not discussed here and for this purpose, let us assume that
Arun Jain was guilty of insider trading when shares were sold by a company promoted by him and while in possession
of unpublished price sensitive information. Though a possibly valid point, the
issue whether the violation was serious in nature and therefore deserved more
punishment than the amount settled through the Consent Order is also not
discussed here.
The
assumption that parties often seem to have, and which assumption now seems
fallacious, is that consent orders are generally an end of the matter in terms
of all actions that SEBI may
take in respect of a particular act or omission. The Order shows that SEBI
would – if it deems fit – take action again under other provisions where
available. It appears that it may even prosecute the party for the same
violation.
assumption that parties often seem to have, and which assumption now seems
fallacious, is that consent orders are generally an end of the matter in terms
of all actions that SEBI may
take in respect of a particular act or omission. The Order shows that SEBI
would – if it deems fit – take action again under other provisions where
available. It appears that it may even prosecute the party for the same
violation.
It cannot
be denied that SEBI does have powers to initiate multiple and sequential
proceedings for the same act/omissions. A particular act/omission may be
punishable under different Regulations as a different type of violation and a
particular act/omission may also attract multiple type of actions too.
be denied that SEBI does have powers to initiate multiple and sequential
proceedings for the same act/omissions. A particular act/omission may be
punishable under different Regulations as a different type of violation and a
particular act/omission may also attract multiple type of actions too.
SEBI can –
as in the present case of insider trading – initiate adjudication proceedings
for levy of monetary penalty, proceedings for debarment and even prosecution
proceedings. Such proceedings need not necessarily be parallel or in the same
SCN and can be sequential. It may be expected that each proceeding would take
into account the punishment already meted out by other proceeding for the same
matter but it cannot normally be denied that SEBI does not have powers to initiate
multiple proceedings and punish the party in multiple forms.
as in the present case of insider trading – initiate adjudication proceedings
for levy of monetary penalty, proceedings for debarment and even prosecution
proceedings. Such proceedings need not necessarily be parallel or in the same
SCN and can be sequential. It may be expected that each proceeding would take
into account the punishment already meted out by other proceeding for the same
matter but it cannot normally be denied that SEBI does not have powers to initiate
multiple proceedings and punish the party in multiple forms.
However,
often, the party assumes that settlement through a consent order would be end
of the matter. He would offer and agree to a settlement amount assuming that
this is a one-time settlement for all actions that are possible. Also, even
though, strictly speaking, settlement of prosecution proceedings would be by
way of compounding, the implicit assumption often in minds of the party is that
a consent order would mean end of the matter. And thus, not only other
proceedings for the same action, but even prosecution would not be initiated.
often, the party assumes that settlement through a consent order would be end
of the matter. He would offer and agree to a settlement amount assuming that
this is a one-time settlement for all actions that are possible. Also, even
though, strictly speaking, settlement of prosecution proceedings would be by
way of compounding, the implicit assumption often in minds of the party is that
a consent order would mean end of the matter. And thus, not only other
proceedings for the same action, but even prosecution would not be initiated.
This
assumption is not wholly without basis. For example, the applicant is required
to give the following statement as part of the prescribed undertaking form as
part of the application for Consent Order:-
assumption is not wholly without basis. For example, the applicant is required
to give the following statement as part of the prescribed undertaking form as
part of the application for Consent Order:-
“The
Order passed pursuant to this application shall conclude any/all disciplinary
action that SEBI could bring against, us for the conduct (cause of action) set
forth in this application.’
Order passed pursuant to this application shall conclude any/all disciplinary
action that SEBI could bring against, us for the conduct (cause of action) set
forth in this application.’
Thus,
arguably, the whole basis of making of the application for Consent Order and
the Consent Order itself is on the understanding that “any/all disciplinary
action” that SEBI could bring for the conduct/cause of action shall be “concluded”.
arguably, the whole basis of making of the application for Consent Order and
the Consent Order itself is on the understanding that “any/all disciplinary
action” that SEBI could bring for the conduct/cause of action shall be “concluded”.
Consider
this further statement that the undertaking form also contains:-
this further statement that the undertaking form also contains:-
“Any plea
of limitation for reopening the case, if I violate/do not comply with the
consent order subsequently, and SEBI shall be free to take any enforcement
action including initiation of adjudication/prosecution proceedings against me
for such violation/non compliance of the consent order.”
of limitation for reopening the case, if I violate/do not comply with the
consent order subsequently, and SEBI shall be free to take any enforcement
action including initiation of adjudication/prosecution proceedings against me
for such violation/non compliance of the consent order.”
Thus,
again, the applicant has some basis in assuming that only if he violates the
terms of the Consent Order, that the settled proceedings and further
proceedings can be initiated.
again, the applicant has some basis in assuming that only if he violates the
terms of the Consent Order, that the settled proceedings and further
proceedings can be initiated.
Thus, the applicant
party does seem to have a reasonable basis even in law to expect that the
Consent Order shall conclude actions that SEBI may take for a particular cause
of action.
party does seem to have a reasonable basis even in law to expect that the
Consent Order shall conclude actions that SEBI may take for a particular cause
of action.
Of course,
as often debated, the basis of Consent Orders, unfortunately, is not wholly
satisfactory in law. For example, except by way of generally providing for
settlement by consent and that too in not very clear and exhaustive terms, the
parent enactments such as SEBI Act, SCRA and Depositories Act do not lay down
the consequences of a settlement through a consent order. Thus, in theory, it
becomes a case by case settlement.
as often debated, the basis of Consent Orders, unfortunately, is not wholly
satisfactory in law. For example, except by way of generally providing for
settlement by consent and that too in not very clear and exhaustive terms, the
parent enactments such as SEBI Act, SCRA and Depositories Act do not lay down
the consequences of a settlement through a consent order. Thus, in theory, it
becomes a case by case settlement.
It can be
expected that a party, who is already facing multiple proceedings for the same
matter, would either apply for consent for all proceedings or none at all. However,
he does not expect that proceeding of one nature would be initiated at the
first stage and he settles the same through consent order and then it is followed
by yet another proceeding and perhaps thereafter even by prosecution.
expected that a party, who is already facing multiple proceedings for the same
matter, would either apply for consent for all proceedings or none at all. However,
he does not expect that proceeding of one nature would be initiated at the
first stage and he settles the same through consent order and then it is followed
by yet another proceeding and perhaps thereafter even by prosecution.
While the
above was under the Guidelines for Consent Order of 2007, SEBI has issued amended Guidelines in May 2012. The
revised Guidelines are little more explicit on the matter of multiple
proceedings and their settlement, it seems that the concern that the order in
Arun Jain’s case raises may still arise in the minds of applicant parties.
Consider the following extracts from the 2012 Guidelines (emphasis supplied):-
above was under the Guidelines for Consent Order of 2007, SEBI has issued amended Guidelines in May 2012. The
revised Guidelines are little more explicit on the matter of multiple
proceedings and their settlement, it seems that the concern that the order in
Arun Jain’s case raises may still arise in the minds of applicant parties.
Consider the following extracts from the 2012 Guidelines (emphasis supplied):-
“One
application may be considered
for a single proceeding or multiple proceedings arising from the same cause of
action but in no case, shall one application be considered for multiple
proceedings arising from different causes of action.”
application may be considered
for a single proceeding or multiple proceedings arising from the same cause of
action but in no case, shall one application be considered for multiple
proceedings arising from different causes of action.”
“In
case, more than one proceeding arising from the same cause of action has been
initiated against the applicant, the IA shall be increased by 15%.”
case, more than one proceeding arising from the same cause of action has been
initiated against the applicant, the IA shall be increased by 15%.”
The
undertaking under the revised Guidelines also contains a similar clause:-
undertaking under the revised Guidelines also contains a similar clause:-
“6. The
Order passed pursuant to this application shall conclude any/all disciplinary
action the SEBI could bring against me/us for the conduct (cause of action) set
forth in this application (SCN).”
Order passed pursuant to this application shall conclude any/all disciplinary
action the SEBI could bring against me/us for the conduct (cause of action) set
forth in this application (SCN).”
Thus, the
concern would still remain. For example, if a SCN for adjudication is issued
for an alleged violation and settled, can yet another SCN and/or prosecution be
issued and punishment meted out?
concern would still remain. For example, if a SCN for adjudication is issued
for an alleged violation and settled, can yet another SCN and/or prosecution be
issued and punishment meted out?
The
present Order and stance of SEBI is worrisome for parties seeking to apply for
consent orders in the future and even for pending applications. Of course, it may make the parties more alert and
they may insist on comprehensive settlement where all possible consequential
actions that SEBI could take are covered by such settlement or none at all.
present Order and stance of SEBI is worrisome for parties seeking to apply for
consent orders in the future and even for pending applications. Of course, it may make the parties more alert and
they may insist on comprehensive settlement where all possible consequential
actions that SEBI could take are covered by such settlement or none at all.