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SEBI overhauls consent scheme

By Natasha Garg

The initial framework for consent orders by Securities and Exchange Board of India (“SEBI”) was set out in SEBI Circular No. EFD/ED/Cir.-01/2007 of 20th April 2007. In recent times, the SEBI’s consent orders were criticised for lack of transparency and that at times, serious violators walked away by paying a small penalty, which was miniscule compared to the nature of the breach or the profit made through such acts. In order to further streamline the consent process by adding more clarity and transparency on the scope, applicability and procedure of Consent Orders, SEBI has recently amended the Consent Scheme vide Circular No. CIR/EFD/1/2012 dated 25th May, 2012, the salient features of the modified circular are discussed in this write-up.    

Genre of matters    

The previous position of the SEBI has remained that consent was permissible in violations under Sections 11, 11B, 11D, 12(3) and 15I of SEBI Act and such equivalent proceedings under the Securities (Contracts) Regulation Act, 1956. However,  serious violations that  have caused substantial losses to the investors like insider trading, front running, failure to make an open offer, fraudulent and unfair trade practices, failure to redress investor grievances and respond to the summons issued by SEBI, among others, have been excluded from the consent process.  However, SEBI has retained a discretionary power to settle even such serious breaches, based on the facts and circumstances of each case.      

Frequency of violations      

In order to act as a strong deterrent for repeat offenders, consent will be denied for the second breach of the same violation within 2 years of the consent order and after two consent orders, a cooling off period of three years has been prescribed before any further consent applications are considered.         

Scope and timing of consent      

SEBI has also changed its policy of entertaining consent applications before completion of any investigation/ inspection. This new explicit power enables SEBI to protect the market with an interim order even though it suspends passing of a final order. This is a positive development as it enables SEBI to pro-actively protect the market without waiting for the entire procedure to be completed. Another development in the consent scheme is in respect of proceedings pending before SEBI. The new guidelines mandate that no consent application can now be considered if filed after sixty days from the date of service of show cause notice.      

Speedy disposal of consent application      

In order to speed up the process, SEBI must now dispose of the consent application expeditiously preferably within a period of six months from the date of registration of the consent application. Also, in case of rejection of the consent application, no subsequent application with respect to the same default shall be considered by SEBI at any stage thereafter.      

High level of transparency      

Lastly and perhaps the most important change is the higher level of disclosure imposed upon SEBI itself in respect of its orders. The new rules impose an obligation upon SEBI to spell out in its orders - the alleged misconduct, legal provisions alleged to have been violated, facts and circumstances of the case and the consent terms. In fact, SEBI has been required to go a step further and open these proceedings to RTI enquiry, after a gap of six months.      

[The author is an Associate, Corporate Division, Lakshmikumaran & Sridharan, New Delhi]
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