Friday, October 12, 2012

How final are Consent Orders? Can further action be taken even for settled matters?

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.

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.

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.

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Arun Jain was guilty of insider trading when shares were sold by a company promoted by him and while in possession of unpublished price sensitive information.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.

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.

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.

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.

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.

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:-

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.’

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”.

Consider 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.”

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.

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.

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.

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.

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):-

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.”

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%.”

The 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).”

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?

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. 


vswami said...

The contesting party , as may well be imagined, invariably goes by dictat of prudence, founded on common sense, more often than not guided by independent legal advice, decides, agrees and gives his consent to have any such matter settled only on the premise that the proceedings initiated would, once for all be concluded, with no frills left knowingly or otherwise. In a case where the proceedings relate to more than one "cause of action" as envisaged, is it not incumbent upon the concerned authority not to initiate proceedings, and even after having initiated but before the signing of a consent order examine diligently and ensure that the consent order would be final so as to fully cover all possible avenues /gamuts ? Otherwise, the very purpose of the authority conceding to a 'settlement' in its profound sense would be rendered a mockery; thereby , offend every one of the governing facets , including the fundamental principles of 'jurisprudence'- not excluding the so called ideological principles of natural justice. In this view of the matter, in one's conviction, also the wisdom or rationale behind the amended guidelines of 2012 is highly questionable in law.

Last not but not least, the other question as to whether SEBI, as a mere regulatory authority, has acted within its limited powers, in conceiving of and bringing in the amended guidelines thereby keep open the Pandora's Box to eternity / infinity , is, itself, liable to be hotly debated.

In the given context, it may not be inappropriate to refer to a recently published article (TOI) - Law and disorder.

Adding comments (in borrowed words):

We, as a nation, have some fine qualities but a sense of the value of time is not one of them. Perhaps, there are historical reasons. Ancient India had evolved the concepts of eternity and infinity. So what do years wasted in a litigation matter against the backdrop of eternity. Believing in incarnation, what does it matter if you waste this life. You will have many more lives in which to make good.

Our cases drag on over a length of time which makes eternity intelligible.

The law may or may not be an ass but is certainly a snail; cases proceed at a pace as unduly slow in a community of snails.

Justice has to be blind but I see no reason why it should also be lame; here it just hobbles along, barely able to walk.>

(A narration from Palkhivala’s published speech (1987) - The Judiciary and the Legal Profession,
the Book- We, the Nation THE LOST DECADES)

No need to specially add: Now, Over To The Legal Pundits for deliberations!

vswami said...


In responding to the FSLRC on its approach paper (ref. the Blaug -
FSLRC invites comments on approach paper),in the comments / representations as are to be sent, it might be in the fitness
of things to specially cover , among others, the unsavory examples like the amended guidelines issued by SEBI.

What needs to be forcefully
underscored is that certain assumptions in the Report , such as in paragraph 40 therein, are prima facie not wholly true or well founded. For instance, pinpoint that, even the oldest of the common law enactment called
the Indian Contract Act has not "stood the test of time", 8but
has come to be put to a shockingly obnoxious / severe test.

Anonymous said...

The Order says, "the action u/s 11 and 11B & Reg 11 of PIT was "contemplated" and "decided" during 2005." Is there any proof of this that was conveyed to the insider?

Even if it has been so, can we say that the regulator had acted in a bona fide manner at the time of the "Consensus" in 2008?

Jayant Thakur, CA said...


It is difficult to know from the Order conclusively whether the party was conveyed that further action under other provisions was contemplated. However, the following sentences seem to indicate that the party was not informed:-

"This show cause notice was not under section 11, 11B of the SEBI Act read with regulation 11 of PIT Regulations. Though the proceedings under section 11B were also decided and contemplated in 2005, no show cause notice with regard to the same was issued till December 26, 2011 when the present SCN was issued."

vswami said...

"The Order says, "the action u/s 11 and 11B & Reg 11 of PIT was "contemplated" and "decided" during 2005."
If so, does not any inquiry or doubt whether or not the contesting party had a notice thereof, in any case, pales into insignificance or irrelevance? To put it differently, if one were to act as 'devil's advocate', perhaps, SEBI, it could vehemently be urged, is on a weak wicket. The very fact that, the authority did not pursue those other possible charges it had in mind but nonetheless went ahead with the 'settlement' in the form it was concluded, it would appear, might defeat its own case. May be, known common pleas / doctrines like 'holding out'/ 'necessary implication', so on, pressed into service, and come to the rescue of the 'insider(s)'.
The foregoing rejoinder is simply intended as additional input, with a view to inciting and eliciting other possible views, improved in any manner, from the better informed legal fraternity.

Anonymous said...

Isn't Insider Trading out of the scope of SEBI's Consent Order mechanism now?

vswami said...

The article published in BS as far back as in May,- "Sebi won't settle insider trading through consent", is seen to give that impression. It refers to also other 'serious offenses', not only 'insider trading'. But, there is certainly a grave doubt left on the effective /cut-off date. Further, one has difficulty in appreciating what then is the purport or big idea in issuance by SEBI of the 'revised guidelines'; which have given rise to a unpalatable controversy, in the context of the given ‘insider’ case. Unless, they are supposed to apply only to disputes already pending; not those to arise afresh from any particular date. Hopefully, the CA ,the author of the Post can be expected to be equipped with a plausible explanation!

Jayant Thakur, CA said...


Thanks for inputs.

The amended Guidelines dated 25th May 2012 (link given in article) provide for a negative list of violations which are not permitted to be settled, after these new guidelines come into effect. This list includes specified violations of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Para 1 reads as under:-

"1. SEBI shall not settle the defaults listed below:

i. Insider trading i.e. violation of Regulation 3 and 4 of the SEBI(Prohibition of Insider
Trading)Regulations, 1992;"

However, SEBI seems to have kept a window open for settlement of even these violations by saying:-

"Notwithstanding anything contained in this circular, based on the facts and circumstances of the case, the HPAC/Panel of WTMs may settle any of the defaults listed above."

The "cut-off" date for the amended guidelines is specified in the Guidelines in the following manner, in paragraph 20:-

"20. This Circular shall come into force with immediate effect. All new applications and pending applications as on the date of this circular, except cases where the consent terms have been received from the applicant for placing before the HPAC or cases pending at any stage thereafter, shall be dealt in accordance with this circular."