Saturday, October 26, 2013

SEBI issues draft settlement Regulations for comments

SEBI Act and related laws were amended recently to provide specific legal backing for settlement by consent orders. The background of this and some issues were discussed here (which post has reference to earlier posts and other links too). One point made was that the new law requires that such settlement should be on basis of Regulations that are prescribed.

SEBI has now issued a consultation paper giving also draft Regulations. It may be recollected that Guidelines are already in place as issued in 2012, replacing the Guidelines issued in 2007. But since the new law requires Regulations, these draft Regulations will pave way for the final version to be notified. SEBI has invited comments to be sent latest by 30th October 2013.

The draft Regulations on first impression are, like old wine in new bottle, the existing Guidelines in form of Regulations in terms of structure and broad outline, though there are several points of note, some of which are highlighted below.

The draft Regulations provide that the terms of settlement and certain related matters shall be provided through Guidelines. Thus, there will be flexibility since the Guidelines can be more easily changed from time to time. It is quite possible that the existing Guidelines may be re-issued without substantial changes, except removing those portions that are already incorporated in the Regulations.

A curious three level approval procedure has been laid down with SEBI having elaborate say in the matter of approving/rejecting settlement. Firstly, the application for settlement will go to the Internal Committee (IC) of SEBI. It would finalise the settlement terms giving a chance to the applicant to submit revised terms. It may of course reject the application outright at this stage if the nature of violation is of such a specified nature or otherwise if the settlement terms are not acceptable. If otherwise acceptable, the application is forwarded to the independent High Powered Advisory Committee (HPAC), which, after possibly another round of revision of terms, will give its recommendations. However, interestingly, whatever the recommendation of HPAC maybe, the SEBI Panel (not the IC) has an option to accept or reject it. In other words, even if HPAC accepts the proposal, SEBI may reject it. And vice-versa.  It can also ask the IC to consider a revision of settlement terms and gives its fresh recommendations and begin the procedure all over again.

An interesting question will be whether an order rejecting an application can be appealed before the Securities Appellate Tribunal. Prima facie, the answer seems to be yes. In that case, what will be more interesting would be the role of SAT – whether it can only require SEBI to reconsider it, whether it can give guidelines for making the order holding some part of the order to be wrong, or whether it can even settle the terms itself?

The cooling period for an application for another settlement is two years. But this period of two years commences not from the date of last default, but from the date of last settlement order. This effectively vastly increases the practical gap between two defaults that can be settled. Further, an applicant can, in one lifetime, can make only two settlements.

If a criminal complaint has been filed under specified provisions for the default, then an application cannot be made.

A fees of Rs. 5000 would have to be paid with the application, which appears to be non-refundable irrespective of the outcome of the application.

There are other ambiguous and even seemingly contradictory provisions in the Regulations. However, one awaits the final Regulations and revised Guidelines for the final framework of this law that has helped curbed prolonged litigation, even as the settlement process becomes more complicated, discretionary and non-transparent.

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