sebi's consent term norms

In the last week of May, Indian securities market regulator tinkered with its consent term rules. I contributed an editorial on it, for the newspaper I work for, immediately after that.

Here is what I wrote in the editorial:

Old wine in a new bottle

By modifying its consent mechanism guidelines has Sebi really tightened it to protect the marketplace?

Did the securities market regulator, Securities and Exchange Board of India, just get tough with market offenders through the modifications it made in its its consent mechanism? The changes announced by Sebi on Friday, at first reading, surely indicate measures which tighten the whole consent process. But, on closer scrutiny, one can not fail to notice a few loopholes, including new ones, which could still offer escape routes to offenders. Sebi's move to modify the consent mechansim has probably occurred due to complaints in the past about the liberal manner in which Sebi was settling cases of all sizes and hues through consent orders. To many, the consent orders were less driven with the primary objective of de-clogging the regulatory enforcement system of vast number of cases. The high number of cases settled under the consent order mechanism and the high value of these consent settlements were increasingly giving the impression that it was Sebi, and not the investors and the marketplace, which was truly enjoying the benefits of the mechanism. As per Sebi's last-available annual report for the financial year 2010-11, it settled 185 cases in FY11 and collected Rs 71 crore by way of settlement charges. In the two years prior to that, it had settled 363 consent applications for Rs 49 crore in FY10 and 440 consent applications for Rs 37 crore. From the time the guidelines for the consent order mechanism was laid down in April 2007 and the consent orders started flowing from October of that year, to the end of FY11, Sebi had raked in a total of Rs 160 crore in consent settlement charges. This sum is many times over what Sebi has collected in 15 long years, from FY96 to FY11, through monetary penalties under its regular adjudication route. Even then the benefit of doubt was being given to Sebi since it indeed regulates a vast number of intermediaries spanning several areas of regulation and consent mechanism looked like a good way to speed up the handling of numerous violations which happen as a result of this huge regulatory jurisdiction. It is, therefore, welcome that Sebi on its own decided to tighten the consent mechanism. Excluding insider trading cases, serious fraudulent and unfair trade practices cases, front-running cases, failure to redress investor grievances and a few other types of cases, from the scope of consent orders will help in curbing the reckless manner in which offenders were using Sebi's consent mechanism to just pay up without legal admission of guilt. Further, reducing the scope of the consent mechanism to apply only in cases where the investigation or the inspection is fully complete. However, doubts arise to the effectiveness of these changes when one compares it with the earlier consent mechansm guidelines. The modified norms have a big loophole as Sebi's May 25 circular which details the modifications states immediately after the list of exclusion of offences from consent mechanism, "notwithstanding anything contained in this circular, based on the facts and circumstances of the case, the HPAC (external high powered committee)/Panel of WTMs (whole-time board members of Sebi) may settle any of the defaults listed above." Further, the new exclusion of serious fraudulent cases which substantial losses to investors from consent terms is not exactly new. The earlier guidelines required the HPAC to consider "the amount of investors' harm" before granting a consent order. Further, the earlier norms allowed consent orders to be passed at any stage after cause of violation but also said that in the event of a serious and intentional violation the consent process should not be completed till the fact finding process is completed by way of investigation. Are the modified norms, therefore, merely cosmetic in nature?