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.
Strengthening fair market access
Besides the Dave consultation committee’s report on consent, Sebi is gathering feedback on recommendations made by T K Vishwanathan-headed committee on fair market access. The committee has proposed measures to include improvement in surveillance, investigation and enforcement mechanisms. While a proposal to give Sebi powers to intercept phone calls has grabbed headlines, the committee has made several suggestions to strengthen the existing security market provisions. As per an analysis by law firm Cyril Amarchand Mangaldas, following are some of the key proposals in the report:
Trading based on ‘verifiable financial sources
’: Amount of trading an investor can undertake should be proportional to the investor’s verifiable income. This measure is to grapple with the problem of mule accounts or front entities
Introduction of a provision in the Sebi Act to clarify the regulator’s powers to take steps for misstatement in the financial statement that impact investors. Currently, frauds relating to financial statements, book of accounts trigger action only under the Companies Act
Separate code for listed companies and unlisted intermediaries
: The committee suggested an overhaul of the code of conduct in terms of insider trading rules. Currently, listed companies and unlisted market intermediaries follow the same conduct
Sharing information for due diligence:
The board of directors of the target company should be required to opine that the sharing of price-sensitive information for due diligence is in the best interest of the company. This is a change from the current form, which requires the board to opine if the proposed transaction, is in the best interest of the company
Definition of unpublished price sensitive information (UPSI)
: Revising the definition of UPSI to exclude reference to “material events in accordance with the listing agreement” since a material event may not essentially be UPSI
Definition of ‘dealing in securities’: Amend the definition of ‘dealing in securities’ to cover indirect participants whose action influences the investor decisions