Can consent orders be appealed against? — can rejection of consent application be appealed against?

As readers are aware, violations
of securities laws can not only result in serious penal consequences but
the process of investigation and punishment itself is long and costly
for both sides. The stigma of having violated securities laws and having
suffered penal consequences also tarnishes the record of a person. In
the United States, the system of plea bargaining is said to result in
90% of cases being settled through that route. A similar scheme was
introduced in India by SEBI in April, 2007. A person who has been
alleged to have violated securities laws or even if he expected that he
would be so charged, could approach SEBI and offer terms of settlement.
An independent committee (called “High Powered Advisory Committee”) was
set up, headed by a retired Judge of the High Court. The time to settle
the matter (or for rejection of such application) was usually very
short, often only a few months. Importantly, the person charged with
violations did not have to plead guilty.

SEBI’s power to settle questioned
Numerous
matters have already been settled by this process. These Guidelines
were further revised substantially in 2012. In the meantime, a petition
was filed before the Delhi High Court questioning power of SEBI to
settle violations through the consent mechanism. It appears that this
petition is still pending disposal.

Retrospective amendment of the law
Seemingly
to pre-empt the issue whether SEBI has such powers, an Ordinance has
been passed amending the SEBI Act and related statutes. The Ordinance
has made several provisions. Firstly, it gave explicit powers to SEBI to
settle such matters by consent. Secondly, it provided that such matters
shall be settled in accordance with Regulations. Formalising the
process of settlement by Regulations instead of Guidelines was perhaps
intended to give additional legal sanctity. Thirdly, and most
importantly, the amendments were given retrospective effect. This was
clearly intended to overcome any concern that SEBI did not have any
authority. Now, this Ordinance has been put to a test and we have a
pronouncement on one aspect of these provisions.

Decision of SAT
The
Securities Appellate Tribunal (“SAT ”), in Reliance’s case, has now
considered an issue arising out of the amendments made by that
Ordinance, and Regulations issued pursuant thereto. The essential
question was whether an appeal can lie against an order of SEBI
rejecting an application for Consent Order. SAT has held that, under the
amended law, such applicant has absolutely no right of appeal.

Allegations in the case
The
allegations in the case under consideration were as follows. Reliance
was accused to have carried out certain transactions in the stock market
in connivance with certain other persons. Illegal profits of Rs. 513.12
crore were alleged to have thereby been made. In a preceding show cause
notice, allegations of insider trading were also made. However, these
were later dropped.

The matter took several turns before it came
before SAT . A show cause notice was issued for which an application
for settlement by consent was made. This application was rejected. A
fresh show cause notice was issued. Reliance asked for documents in
connection with the show cause notice which were refused by SEBI. An
appeal was filed. Application for consent was also filed. In the
meantime, though SEBI had consistently maintained that the demand for
documents by Reliance was unjustified, it provided copies of the
requirement documents. However, shortly after providing such documents
and though Reliance sought time to examine the voluminous documents,
SEBI rejected the application for consent on the ground that the matter
could not be settled through consent. This was on the ground that the
matter fell into the category specified in the Guidelines of serious
fraudulent/unfair trade practices that could not be settled.

While
this was going on, and the appeal before the SAT was pending, the
Ordinance, as discussed earlier, was passed and the law was changed
retrospectively. In the background of all this, SAT passed the order as
discussed earlier.

SAT holds that amended law absolutely bars appeals
The
distinction between the earlier law and the law amended by the
Ordinance as explained by SAT is worth emphasising. The earlier section
relating to consent orders was contained in section 15T(2) of the SEBI
Act. It barred appeal against an order made “with the consent of the
parties.” This would have left orders rejecting application for consent
appealable. The Ordinance omitted Section 15T(2) with retrospective
effect from 20th April, 2007 and inserted section 15JB from same date.
Section 15JB barred appeal “against any order” under that section
dealing with application for consent orders. SAT thus held that, in view
of such retrospective amendment, even the SEBI’s order rejecting the
consent application was not appealable.

Adverse observations by SAT
Though
the SAT dismissed the appeal, it made several adverse observations
while giving the ruling. The following few important ones are worth
noting.

a) It said that SEBI was wrong in delaying matter for
years not giving documents required by the applicant on various grounds,
and thereafter providing the documents to the applicant.

b) It
also said that SEBI was wrong in denying adequate opportunity to the
applicant to present its case. SEBI gave, after a long delay, voluminous
documents desired by the applicant. However, without giving time to
examine such documents as desired by applicant, it passed an ex-parte
order rejecting the application.

c) SEBI’s argument that the
consent application was not maintainable because it fell within a
restricted category was also not accepted by SAT , since this ought to
have been known to SEBI from inception. Even more so since SEBI still
had discretion to consider, on facts, cases falling in such categories.

Despite
these observations, SAT effectively said that its hands were tied by
the amendments which had retrospective effect and barred appeal against
any order.

Possible future Scenario
It appears almost
certain, particularly considering the stakes involved (as mentioned
earlier, the allegation is that illegal gains of Rs. 513.12 crores were
made), that the Order of SAT would be appealed against before the
Supreme Court. Many more grounds may also be raised before the Supreme
Court including the vires of the amendments, whether they give unbridled
powers to SEBI, whether SEBI need not observe rules of natural justice
while considering such applications, etc. In particular, it is also
possible that the retrospective amendment itself could be questioned,
particularly since it takes away right of appeal even in existing cases.
The adverse observations of SAT most certainly would come to aid of the
applicant.

Hopefully, assuming the appeal is made, the supreme Court will also resolve other issues relating to mechanism of consent orders and those arising out of the retrospective amendments.  the  Court  may  decide  once  and  for  all whether seBi has powers, under the earlier law and the amended  law,  of  passing  Consent  orders.  this  ruling may also thus clear the air on whether Consent orders passed till now are valid in law. it may be particularly recollected that the earlier law did  not  have  specific and clear provisions empowering SEBI to pass consent orders. the amended law, though it did give such powers, had raised fresh concerns as discussed in earlier posts.

Apart from such basic issues, it is submitted that even otherwise the  ruling  of  sat  that  the  orders  relating  to consent application are wholly non-appealable is questionable. the law provides for several pre-conditions and procedures subject to which the consent order may be passed. further, the principles of natural justice would in any case have to be followed. such order would also have  to  be  in  accordance  with  regulations  made.  the order of seBi would, it is respectfully submitted, thus    be questionable on several grounds. it is submitted that sat’s  blanket  denial  of  such  grounds  of  questioning  in appeal of such orders is not correct.

Thus,  it  would  be  interesting  to  watch  the  progress  of this  case. the  journey  would  surely  be  long. assuming the order of sat is appealed against, the matter could be restored back to SEBI for fresh consideration of the application for consent. the outcome of such proceedings themselves could be matter of appeal.

Even if the appeal is rejected (or not made), the matter would go back to SEBI for considering the allegations on merits, which could go into a fresh round of appeals.

Conclusion – Whether Consent Settlement Mechanism will lose its Meaning?
An observation in passing is worth making. Consent orders can be compared with arbitration. Like arbitration, Consent orders too are meant for speeding up and even substituting litigation. as in arbitration, appeals are barred in Consent orders too. however, if even Consent orders end up in prolonged litigation instead of speeding it up, then the purpose is defeated. and thus, the classic and oftquoted words of lament of the supreme Court (in Guru Nanak Foundation vs. Rattan Singh & Sons) could apply to consent orders too:-

“Interminable, time consuming, complex and expensive court procedures impelled jurists to search for an alternative forum, less formal, more effective and speedy for resolution of disputes avoiding procedure claptrap and this lead them to arbitration act 1940. the way in which the proceedings under the act are conducted and without exception challenged in courts has made lawyers laugh and legal philosophers weep. experience shows  and law reports bear testimony that the proceedings under the act have become highly technical, accompanied by unending prolixity at every stage, providing a legal trap to the unwary. an informal forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the courts been clothed with legalese of unforeseen complexity.”