Securities Laws

On 9th January 2014, SEBI has notified the final Regulations for settlement of violations of various securities laws. A better set of provisions have replaced the earlier ones which have stronger base in law, but are complex. These new settlement terms are more certain now and leave lesser discretion for the authorities. The author discusses the importance of settlement route, the scheme of the Regulations and also, highlights some issues relating to the same.

Background

SEBI has notified, after consultations, trials and errors, on 9th January 2014, the final Regulations for settlement of violations of various securities laws. This culminates a long journey since 2007 when the first Guidelines were issued, then revised in 2011 and then, after certain changes to SEBI Act and other statutes, finally made formal and detailed Regulations.

Importance of settlement route to cure violations The importance of settlement proceedings lies in the fact that, on the one hand, the securities laws have become exceedingly elaborate and complex. On the other hand, the powers of SEBI to punish in various ways violations have only increased. A Supreme Court decision in Shriram Mutual Fund’s case (AIR 2006 SC 2287) is regularly relied on, mistakenly to some extent in my view, to take a view that penalty has to follow any violation. This mens rea, intention, etc. do not have to be established. For most persons associated with securities markets, the punishment is not just the penalty but the prolonged and legal costly proceedings. In comparison, the procedure of settlement is quick, relatively cheap and generally taint-free. Indeed, the settlement mechanism of SEBI compares quite favorably in many ways with corresponding settlement mechanism under other laws. However, with the passage of time the simple mechanism of the original 2007 Guidelines have inevitably become complex.

While the Regulations are largely an improved version of the Guidelines of 2011, which have been briefly discussed earlier in this column, it would be necessary to summarise the scheme of the Regulations here and highlight some issues.

At the outset, however, it is important to mention the reason why formal Regulations had to be issued and why the Guidelines were not found sufficient. A public interest litigation has been filed in Delhi High Court questioning the power of SEBI to settle violations under the Guidelines. The concern that exists is that the cases settled from 2007 till date may get affected if the Court gives any adverse decision. To alleviate this concern, the SEBI Act and other statutes were amended by a recent ordinance to empower SEBI to formulate regulations permitting settlement of cases.

Scheme of the Regulations The procedure remains broadly the same as under the original Guidelines of 2007. Any person who faces or could face charges for having violated any of the specified securities laws can apply to SEBI for settlement. An independent high power advisory committee (HPAC) would consider the application and clear the same for acceptance and the settled amount paid. In such case, no further proceedings would be taken in respect of such violations. If rejected, the proceedings may be initiated or continued.

However, there are several changes from the 2007 Guidelines and there are other aspects that need discussion too.

There is a three-step formal procedure for consent now. The application would be first placed before an internal committee of SEBI which will examine it in light of the Regulations, ask for further documents and call for personal appearance by the applicant (personally and/or through authorised representative). If the settlement can be finalised at this stage, the application would be forwarded to the HPAC which will then examine it and if required remit it back to the internal committee for reconsideration. Once the settlement is finalised and recommended by the HPAC, it goes to a Panel of two Whole-time Members of SEBI. Here again, if the Panel disagrees with the settlement, it may send the matter back to the Internal Committee where it starts all over again. Or, it may simply reject the application. However, if it finds the settlement to be in order, the applicant would be informed within seven days. Thereafter, the applicant would have to pay the amount of settlement and a final and formal order would be issued.

It may appear that considerable to and fro may arise between the three authorities set up to consider the application. However, it is likely, as seen from past experience, that, except where the matter involved is sensitive/serious or some other important factors/ complexities are involved, the process ought to be smooth and fast. It is likely that the recommendation of the internal committee would be accepted by the HPAC and similarly also accepted by the Panel. Alternatively, it may be rejected by the HPAC and that would be the end of the matter. This is even more likely considering, as also discussed later herein, that the settlement terms are more certain now and have considerably less discretion.

Which violations can be settled? Generally, any violation of the securities laws can be settled. However, a few violations have been stated as generally not capable of being settled. For example, insider trading violations as a rule cannot be settled. Serious cases of market manipulation, frauds, front running, etc. also generally cannot be settled. Non-settling of investor grievances, non compliance of SEBI notices/summons, etc. are some such others. However, the applicant can still apply in such a case where it feels there are reasons enough to make an exception and in case the reasons are found to be adequate, the case may be settled.

Settlement through monetary and non-monetary means Normally, the settlement is by offering a sum in money. However, depending upon the violation and circumstances involved, the settlement may also be through a monetary and/or settlement in kind. Thus, the applicant may offer (or may be asked to offer) settlement some another manner. For example, he may agree not to close his business for a specified period of time and/or remove a certain person from management, profits unjustly made may be disgorged. If accepted these would become part of the settlement terms.

However, unlike the monetary settlement amount, which has detailed formula for calculation that reduces discretion and arbitrariness, the settlement non-monetary settlement has no such formula.

Considerations for settlement

Stage at which settlement is applied for

One of the fundamental principles of settlement is that the more the applicant saves SEBI time and efforts in the actual proceedings, the better the terms of settlement he would be eligible to. Thus, the formula for determination of settlement amount provides for two important qualitative fac-tors. Firstly, how early the applicant comes forward for settlement. For example, a person who waits till the last moment till a formal adverse order is passed against him for settlement has made SEBI go through the whole process. On the other hand is a person as soon as he becomes aware of the violation, comes forward on his own and makes an application for settlement. Considering this, the Regulations lay down factors that would decrease or increase the amount of settlement based on at which stage of the proceedings that the applicant comes forward.

Another factor is past orders against the applicant, for which also a multiplying factor is provided, for determination of the settlement amount.

Repetitive settlements

Repetitive applications for settlements are not al-lowed. The settlement process is not to encourage/ condone frequent violators because otherwise, the sanctity and respect of the law may be disregarded. Thus, an applicant cannot make another application for settlement within 24 months of an earlier settlement. Further, if, in the 36 months preceding the application, two settlement orders have been passed for the applicant, the application cannot be made.

Strangely, this bar is applicable even for non-similar violations. For example, a violation of a disclosure requirement and a violation of a more serious nature are both treated the same. Ideally, repetitive violations of the same type ought to have been barred.

Rejected application

The information submitted or representation sub-mitted by an applicant in an application cannot be used as evidence before any Court/Tribunal, in case the application is rejected. However, this does not apply where the settlement order is revoked or withdrawn in specified cases. In any case, it appears that information independently collected may still be evidence.

Time limit for making of application

The application for settlement has to be made within sixty days of the receipt of a show cause notice.

Retrospective application

A clause that may sound like a transitional one but is intended to resolve a nagging problem is Regula-tion 1(2) . It provides that the Regulations shall be deemed to have come into force from 20th April 2007. It appears that it aims at giving legitimacy to settlement orders and proceedings prior to the notification of these Regulations. As stated earlier, a matter is pending before the Delhi High Court as to whether SEBI has powers to settle proceedings through Guidelines issued on 20th April 2007 (revised in 2011). An Ordinance was recently notified which inserted a new section 15JB in the SEBI Act, also with retrospective effect from 20th April 2007, stating that cases may be settled in accordance with Regulations issued in this behalf. The present Regulations are thus issued in this context. The retrospective effect of these provisions/Regulations is, in my view, legally uncertain. One will have to see, however, how the Delhi High Court views the matter, considering also the fact that hundreds of settlements have already taken places and proceedings closed.

Conclusion

The settlement procedure now is speedy but com-plicated. Serious violations are unlikely to be settled though in some cases may be settled if the circumstances demand with perhaps higher settlement amount. The revised formulae provides for higher settlement amounts as compared to earlier settle-ment amounts seen in practice. This discourages the assumption that violations would be settled as easily. The certainty of amounts is helpful as the party can weigh carefully whether the proceedings ought to be settled. The fact that the party continues to have the option not to admit the violation also helps considering also the fact that often settlements are carried out to buy peace and reduce the efforts involved in settlement. All in all, a better set of provisions have replaced the earlier ones with stronger base in law, certainty though at the cost of being complex.