The recent decision of the Securities and Exchange Board of India to revise the consent order guidelines should be welcomed. Not the least because these guidelines are about five years old and circumstances might have changed drastically since its introduction. But also because it has been applied to cases of violations that are grave enough to warrant a more robust response from the Regulator than a mere tap on the wrist. SEBI has accepted over 1,000 applications for settlement via this mode between fiscal year 2008 and 2011, and Rs 188 crore was collected towards settlement and other administrative charges during this period. The Securities Exchange Commission of the US, whose consent model SEBI has drawn from, settles over 90 per cent of administrative and civil cases through consent orders. There is however a consensus, globally, that the guilty have got away very lightly in many of these settlements. The consent order passed in January last year by SEBI in the case of Mr Anil Ambani and companies in his group is a case in point. The offences were grave and SEBI's own internal guidelines would have warranted it to abjure the path of disposal via the consent route. Yet, the terms of the settlement were such that the applicants were allowed to get away by paying Rs 50 crore as fine and a temporary ban from trading in securities. Not only has this stoked a feeling of discontent among the investing public, but also the miniscule penalty may embolden market participants to view it as part of the cost of running a business while contemplating future transgressions of the law.
The regulation needs to spell out clearly the charges that fall outside the purview of this mechanism. Certain offences are too serious to be disposed of with a mere penalty, a temporary ban from undertaking certain activities, etc. These could include fraud, where the intention is to deceive other investors and violate existing laws. Such offences might have to be tried in a criminal court of law and the guilty might even need imprisonment. Besides, offences such as market manipulation and insider trading, that disrupt functioning of stock market and erode the credibility of the regulatory system, should not be granted a reprieve with consent orders. Offenders who engage in repeated violations need to be kept out.
The regulation also needs to spell out clearly the guidelines for charging penalty. This could be linked to the market capitalisation of the offending company, since larger the company's market capitalisation, the greater the number of investors who are likely to be affected by the company's misdoings. The consent order also needs to be more elaborate in spelling out the charges, the investigation and the findings. The shareholders in the applicant company have the right to know the contours of the offence, so that they can decide whether to stay invested or to exit. Finally, the change in regulation should be prospective and not retrospective. We don't need to stir another hornet's nest.