Good News for Market Manipulators: SEBI Will Settle Most Cases

SEBI said it seeks to clarify the interpretation of the 2014 regulation and wants to allow settlement as a rule.

The logo of the Securities and Exchange Board of India (SEBI), India’s market regulator, is seen on the facade of its head office building in Mumbai. (Photo: Reuters)

Market regulator Securities and Exchange Board of India (SEBI) has diluted its stance of refusing to settle cases involving unfair and fraudulent practices.

In 2012, SEBI Chairman UK Sinha decided that it will not give consent to settle certain capital market violations. Ten offence categories, including unfair and fraudulent practices and front-running, were put on a negative list in the consent guidelines. In 2014, the guidelines were formalised into regulation. Two years later, SEBI, under the same chief, has changed its mind.

In the agenda note circulated for its 19 May board meeting, SEBI said it seeks to clarify the interpretation of the 2014 regulation and wants to allow settlement as a general rule, rejecting only exceptional cases.

It is hereby clarified that the purpose of sub-clause (b) of clause (2) of Regulation 5 is not to prohibit the settlements in respect of all kinds of fraudulent and unfair trade practices, the general rule shall be settlement of such defaults, with appropriate terms and rejection in exceptional cases.

SEBI Board Agenda Document

After that board meeting, SEBI announced a change in the interpretation of the settlement regulations, but it did not reveal details. The board meeting agenda document, released recently, makes it clear that SEBI has now opened the door to settling almost all cases involving fraudulent and unfair practices and front-running.

According to the document, the market regulator will assess the role played by the applicant in committing the fraud and also the subsequent action taken by the applicant in cooperating with the investigation agencies before deciding upon proceeding with the settlement. It further said that SEBI will look at the evidence against the applicant and not merely the charges or show cause framed against the applicant by any investigating authority as the deciding factor.

The board meeting agenda document said settlements in these offence categories will be the norm, except in the case of ‘serious’ violations and any other violations that cause market-wide impact or loss to the retail and small shareholders.

There, too, SEBI has placed a caveat – if a settlement applicant falls in the ‘exceptional’ category but agrees to make good the losses to the satisfaction of SEBI, then it will allow the applicant to settle subject to the undertaking that the settlement will be ‘for the limited purpose of settling administrative and civil proceedings which the Board alone is competent to initiate under the securities laws, and for no other purpose, he shall be deemed to have admitted his guilt before the Board’.

It is not clear if this change in interpretation of the regulation will apply with retrospective effect. But this change of heart is justified by SEBI as a means to reduce litigation and use regulatory resources more efficiently.