Friday, September 20, 2013

Ambiguity regarding Consent Settlements - whether resolved?

Readers may recollect that the legal basis of settlement by Consent Orders by SEBI has been questioned before the Delhi High Court. Recently, an Ordinance ("First Ordinance") had been notified which amended the SEBI Act apparently with the intention to provide specific provisions in the form of Section 15JB for settlement by Consent Orders, both past and future (similar amendments have been made to the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996). I had written a post pointing out that the amendments suffered from a technical defect and certain ambiguities. A reader has kindly drawn attention to a new provision in the Securities Laws (Amendment) Second Ordinance, 2013 ("Second Ordinance") which further deals with these issues. The question is whether this provision resolves the issue before the Delhi High Court and/or the points raised in my post. It appears that they do not. The new provision is reproduced below for ready reference (emphasis supplied):-

"34A. Any act or thing done or purporting to have been done under the principal Act, in respect of calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board and in respect of settlement of administrative and civil proceedings, shall, for all purposes, be deemed to be valid and effective as if the amendments made to the principal Act had been in force at all material times. " 

In other words, the amendments made by the Ordinance relating to settlement effectively are being given retrospective effect. Will it make any difference? 

Firstly, insertion of 15JB, the new provision dealing specifically with settlement, was already given retrospective effect by the First Ordinance. This continues under the Second Ordinance. 

Secondly, Section 15T(2) dealing with earlier provisions relating to settlement by consent was omitted with prospective effect under the First Ordinance. Under Section 34A of the Second Ordinance, it can arguably that this omission is with retrospective effect (presumably, it will override Section 1(2) of the Second Ordinance which states that unless otherwise provided, the amendments will come into effect from 18th July 2013). Thus, Section 15T(2) which was supposedly the basis of settlement by consent orders will not be available for past consent orders. The validity of consent orders would thus be governed by Section 15JB.

However, and thirdly, the basic issue raised in my post was that Section 15JB requires that settlement should be in accordance with Regulations made in this regard. No such Regulations have been made. Hence, future consent orders may arguably cannot be made until Regulations are issued for this purpose.

Indeed, arguably, even past Consent Orders may suffer from a fresh defect. If Section 15T(2) is indeed omitted with retrospective effect, the only basis of settlement by Consent Orders would be Section 15JB. That section, as explained earlier, requires that settlement should be in accordance with Regulations made. In absence of such Regulations, therefore, past consent orders would not be technically legal under Section 15JB as retrospectively inserted.

Hopefully, this issue will be resolved in the Bill to enact the Ordinance. One would also watch with interest the wording of the Regulations when they are notified under Section 15JB. Finally, it will also have to be seen whether the Delhi High Court treats the lack of Regulations as a fatal defect or whether it considers the Guidelines as sufficient and substantive compliance.

1 comment:

Anonymous said...

before the SEBI ICDR regulations were notified in 2009, the regime relating to issue of securities were governed by guidelines issued by SEBI.(DIP Guidelines)This is despite the fact that Section 11A of the SEBI Act mandates SEBI to specify, by regulations matters relating to issue of capital, transfer of securities.
Further, the SC in the SAHARA matter had held that DIP guidelines have statutory force.

therefore I see no infirmity in SEBI settling cases under the 2012 guidelines even after the promulgation of the ordinance.