Resolution of cases through the ‘settlement route’ is gaining momentum in the securities market ever since market regulator Sebi notified new consent rules in February to help prevent more litigation. The list of highprofile cases using the consent rule in the last few months includes proceedings against Citibank, BNP Paribas, and Infosys.
Under the new consent rules, even serious market violations, such as front-running and insider-trading, are eligible to be settled provided the breaches didn’t have a market-wide impact.
Through consent, an entity in violation of securities laws can settle the violation without either admitting to or denying any wrongdoing. Such entities are, however, required to pay a one-time fee, and Sebi has steeply hiked the formulae for calculating the consent fees under the new rules.
In a case pertaining to Citibank, for instance, one of the bank’s relationship managers allegedly carried out a fraudulent scheme offering certain customers of the bank investment plans that promised high returns, and collected authorizations from them. The manager later transferred the money into accounts related to his family. Sebi settled this violation with Citibank in April, imposing a fee of ₹4.5 crore.
Similarly, Infosys paid ₹35 lakh in February to settle a case pertaining to the severance payment made to its ex-chief financial officer (CFO) Rajiv Bansal.
Recently, Sebi settled the case of incorrect reporting pertaining to participatory notes (p-notes) issued by BNP Paribas and Goldman Sachs by imposing a total penalty of ₹75 lakh. Angel Broking settled a case in July where Sebi found brokerage was using the funds of clients having positive balance to pay for pay-in obligations of clients with negative balance. The brokerage paid fees of ₹31 lakh.
“The viability of the consent route has increased substantially since the introduction of the Settlement Regulations, which, unlike the previous regime, permits settlement of serious offences such as insider trading or market manipulation,” said Tomu Francis, partner, Khaitan & Co. “Further, provisions contained in the new rules pertaining to summary settlement have also made the route more attractive to errant market participants, intermediaries and listed entities, which can be seen from the number of summary settlement orders passed by Sebi in the recent past.”
But smaller entities have turned wary due to the steep rise in fees, say lawyers. In case of simple violations such as delayed disclosure, average settlement fee has gone up to ₹5 lakh from ₹2 lakh.
“Sebi applies the formula for calculation of settlement fees mechanically and leaves no room for applicants to reduce the amount based on the facts of the case,” said Anil Choudhary, partner, Finsec Law Advisors. “Although Sebi has been provided the discretionary powers to reduce the settlement amount, it is being rarely used under the current regime, which affects the ability of genuine small-time market participants to settle the matter.”
Source- Economic Times.