SEBI internal study finds consent order system completely arbitrary

An internal study commissioned by the new SEBI chairman found what Moneylife alone has been saying: total subjectivity in the way whole-time members have been passing consent orders

Among the many things that UK Sinha, Chairman of the Securities and Exchange Board of India (SEBI) has thought fit to report in his 13-page letter to the Union finance secretary (dated 8th July), is a plan to review the consent order system. Under SEBI's current consent order system, those charged with specific violations are let off by paying a settlement charge without admitting or denying guilt.

The consent order system is another debatable import from the US markets. The logic was that monetary penalties are the biggest deterrents to financial crimes and when coupled with the embarrassment of the charges being published on the regulators' website, this would act as a sufficient check. India has perverted the system in two ways. First, there was no attempt to link the seriousness of charges to the amount paid. Worse, some wrongdoers were repeatedly let off for the same violations with either paltry penalties under the consent terms or a mere "administrative warning".

Moneylife has exposed these dubious 'administrative warnings', which find no place in the SEBI Act or its regulations. In the past three years, under the chairmanship of CB Bhave, these have been freely issued by SEBI's whole-time members (WTMs). SEBI has not bothered to answer our questions regarding the issue of these orders, although a SEBI director has promised to raise them at the regulators' board in the near future. Meanwhile, let's look at Mr UK Sinha's plans. We reproduce the section verbatim: "for the first time in the history of SEBI, I asked a research study to be done analyzing the orders passed by Whole Time Members (WTMs) and Adjudicating Officers.

"We found that in cases of orders passed by WTMs in similar type of cases, while one member had passed orders for suspension in 8% of the cases, another one has done it in 0.5% of the cases and the third member has passed suspension in 25% of the cases.

"Similarly, debarment order has been passed in 50% of the cases by one member, 75% of the cases by the second member and 0.4% of the cases by the third member. The quantum of suspension orders passed also varies vastly from member to member. In quantum of debarment orders, it varies from 50% to 1/3rd to 1/6th when the period of debarment of 2 to 5 years is calculated.

"In cases of corporates making misleading announcements, debarment has varied from 6 months to 2 years to 5 years.

"Similarly in orders passed by adjudicating officers, there is a wide variation. For non-compliance of summons cases, the amount has varied from Rs1 lakh to Rs20 lakh. Mr Sinha points out that, "It must be underscored, however, that different cases may have different facts and circumstances and a uniform slab cannot be prescribed but a wide variation unaccompanied by sufficient reasons gives the impressions to the outside world about arbitrariness and subjectivity. I have emphasized that the same should be avoided and quasi-judicial officers should be sensitive about the outcome and the need to maintain equal treatment in similar cases. Any good enforcement action must have some element of predictability with regard to similar cases based on quantum and degree of offence".

Mr Sinha goes on to say that there is a "prevailing perception" that consent orders passed by SEBI are "subjective" and "provide an escape route to offenders and the quality of orders is not high and is not transparent".

Well, Moneylife has certainly been saying this, and we have been alone in this regard. Mr Sinha then says, "while I have publicly defended the decisions of consent proceedings which are legal and as per law… I do feel that there is a need to bring in uniformity and consistency." He has advised SEBI executives to "have more clarity on when consent orders can be passed or cannot be passed, how to improve the quality of orders, how to improve drafting and to provide training to our officers so that the quality of their orders can improve". He also says that while his efforts have been appreciated by some of the staff members, his views and study may not have "gone well with everybody in the organization".
Moneylife has written regularly on the arbitrariness of consent orders and administrative warnings, even as the rest of the media has glossed over this, while singing praises of the previous regime. 

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1 decade ago

Dr Vaibhav Dhoka
1 decade ago
CONSENT orders are sham.It is levying PENALTY at 99.99% discount.In no where in the universe such discount is available.Consent orders have STINK of corruption.Therefore everyone must support ANNA for JANLOKPAL when it will also be flooded with complaints against SEBI by investors.SEBI should come out with white paper on Investors Grievance Forum the money spent on it and how efficiently it handled Investors grievance/or helped Brokers?
Nagesh KiniFCA
1 decade ago
All consent orders, settlements and debarments, administrative warnings etc by any name should be reopened and examined de novo. After all SEBI is a Regulator and not a Settlement Commission. Now is the time for the watch dog to bite real hard and not merely growl.
The consents/settlements meant to dispense speedy remedies have been grossly abused.
To ensure that it means business and convey the message depending upon the severity of the irregularity the maximum penalty laid down has to be imposed not on the legal entities but the Directors of the offenders in their personal capacities beginning with ADA, may be debarment for life.
The Hindu Business Line reports that the there has been no response to MCA queries seekingt information from RIL and SEBI on subsidiarization and de-subsidiarization of 123 companies. Since the RIL accounts for 2010-11 are signed, sealed and delivered the Statutory Auditors and Co. Secretaries who have signed compliance Reports ought to be brought in the loop and their regulating Institutes directed to issue notices for their members' lapses.
Our offenders with big names are getting away lightly. When SEC can fine PwC $25m in Satyam what stops SEBI?
1 decade ago
In terms of the original, High Powered Committee consisting of three independent persons was to decide on consent terms.

But in practise, for the reasons best known to SEBI Board, this High Powered Committee is now termed as High Powered Advisory Committee and the consent terms are worked by SEBI officials only leading to the arbitrariness/ arms twisting methods in its implementation as now observed by Moneylife.

In the public interest and to give transparency, SEBI should be made to periodically publish reports giving various information which Moneylife can suggest.
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