The spotlight was on the ‘consent order’ mechanism recently when the country’s largest bourse, the NSE, offered to settle the colocation imbroglio through this route. Other large institutions and companies have also used this channel to get away from long-drawn administrative proceedings.
What is it?
This route for speeding the settlement process has been successfully used by the US SEC quite effectively over the years. Impressed by the SEC’s success, the SEBI also issued rules for consent mechanism in 2007.
Through this channel, the market regulator and the party that is alleged to have violated the rule arrive at a mutual agreement, doing away with the need for administrative proceedings. Any party that believes civil or administrative proceedings is likely to be initiated against it, can write to the Enforcement Department of SEBI proposing the manner in which the issue is to be settled.
A party which has already received notification about a possible criminal proceeding can also propose to settle through the consent mechanism. The proposal is then referred to a high-powered panel. The committee could ask the party to revise the terms, if it finds that the terms are inadequate given the issue.
There were a flurry of requests in the years immediately after the introduction, with over 600 applications received in the first three years. The acceptance was also very high initially, with 428 applications, accounting for 64 per cent, settled in 2008-09. But the numbers have whittled down over the years with 177 applications in 2015-16 and just 108 applications in 2014-15. SEBI had amended the laws governing this process in 2012, leaving out serious offences such as insider trading, front running, failure to make an open offer and redress investor grievances from the purview of consent mechanism. This might have dampened the fervor.
Why is it important?
The consent order mechanism helps the parties involved save time and cost. The regulator can send a strong signal to other wrong-doers by imposing a fat fine and impose other punishments such as ban from accessing the secondary and primary market for a certain period. The party that is accused gets away with its reputation intact as there is no need to accept or deny the charge under this route. Using this route provides predictability of outcome to the alleged violator.
For instance, in the consent order passed against Reliance Infrastructure, Reliance Natural Resources and five of their directors, including Anil Ambani, the case was settled for a fee of ₹50 crore and commitments from the companies not to invest in the secondary market for two years. The directors were not allowed to transact in the secondary market for a year.
Why should I care?
You might decry this channel as it lets the guilty go away lightly. But considering the number of innocents who have also undergone undue hassles due to our snail-paced judicial system, a quick and effective route that provides a closure might not be that bad.
It does not affect small investors directly, but if a company that you have invested in, is trying to settle the issue through the consent route, you might want to learn a little more about it.
With the regulator able to raise extra resources through this route and also saving expenses, it should be able to spend more on investor awareness and in sprucing up the surveillance. This will help stock markets as a whole
The bottomline
Consent is cool, everywhere.
(The article first appeared in The Hindu BusinessLine.)