Keeping consent under wraps

Sebi’s rules for confidential consent settlement must not compromise on corporate governance norms, say experts

Sebi’s rules for confidential consent settlement must not compromise on corporate governance norms, say experts.

The report by a committee, appointed by the Securities and Exchange Board of India (Sebi), on overhauling the ‘consent mechanism’ has triggered a debate among market participants and legal experts. The committee, headed by former Supreme Court Judge Anil Dave, which submitted its report earlier this month, has made recommendations, such as limiting the time for filing a consent application and a cap on the number of times the application can be filed, to broaden the applicability of the consent framework.

However, some of the proposals, such as consent by confidentiality and settlement with a lesser punishment, are gathering opposing views. The recommendation to allow consent with confidentiality is among the key innovative change suggested by the committee whereby Sebi’s board can decide to keep details of certain cases confidential. Further, the committee has said the data of such confidential settlements are also protected under Section 8 of the Right to Information Act, and hence such information need not be disclosed even through the RTI Act.

Further, the committee has recommended Sebi to issue a general order directing any individual in possession of such documents from disclosing them. Such stringent provisions could face serious legal scrutiny if the case involves larger public interest. This gag order provision was recommended so that confidential consent documents will not be leaked or circulated.

“The confidentiality clause has been crafted to get in whistle-blowers who themselves may have been part of the violations. There is a public good in getting such people to blow the whistle in return for confidential treatment,” says Sandeep Parekh, founder, Finsec Law Advisors.

However, not all legal experts are on the same page. “The proposed confidentiality clause will not be in the interest of investors at large. For effective running of capital markets, transparency and disclosures are key essentials,” notes Pavan Kumar Vijay, founder, Corporate Professionals. Vijay’s argument is allowing the defaults to be settled without investors and the public being aware of the same would raise governance issues. “The confidentiality consent could have similar provisions to that of Sebi’s Informal Guidance Scheme wherein confidentiality lapses after 90 days,” he suggests.

Another key recommendation of the panel is pertaining to the scope of the consent mechanism. The panel has suggested that Sebi could take up a consent application even before the audit or probe is complete. Applicability of this provision can be only in cases where the consent itself helps in the audit or in cases where the confidentiality has been sought. Legal experts are divided on whether consent should be allowed before the regulator’s investigation is completed. “The concept of completion of the investigation, particularly where facts are complex, has been the norm since 2007 and must continue. The regulator can never settle a case if it doesn’t know the facts and the extent of the violations,” says Parekh.

There is a counter-argument that admission of a consent application should not be linked to the investigation status. “The committee ought to have noticed that even today Sebi issues show cause notices in some cases without completing the probe. If a show cause notice is issued, it should be capable of being settled,” says Somasekhar Sundaresan, independent counsel.

The committee has also suggested measures akin to the United States’ ‘approver’ framework wherein an offender can expect a lenient sentence in exchange for vital information.

The committee has recommended a principle-based approach for the consent mechanism. Currently, serious market violations, such as insider trading, cannot be settled through consent. The committee has recommended that even in cases where an entity is accused of insider trading or front-running, the consent window could be kept open, provided the accused has taken satisfactory remedial action. This includes actions such as returning of investors’ money and disgorging unlawful gains. Others feel strengthening the consent mechanism would help reduce the excess case burden on Sebi. There are over 1,000 cases pending with Sebi and over half of them are more than two years old. “For the backlog of pending cases to be reduced, nearly all cases must have consent. Serious cases may attract either higher penal amounts or even other actions, like debarring from the industry,” adds Parekh.

The panel has suggested that even in cases where an entity is accused of insider trading, the consent window could be kept open