India: Regulatory Untouchability Should Be Shunned

Last Updated: 6 November 2012
Article by Somasekhar Sundaresan

Political untouchability has found its way into the regulatory system too. New guidelines notified by the Securities and Exchange Board of India ("SEBI") for settlement of regulatory disputes contain a long list of market abuse defaults that shall not be settled by SEBI.

The new guidelines explicitly begin by saying that SEBI "shall not" settle ten types of defaults. Funnily, at the end of the list of defaults, the guidelines hasten to tuck in the following fine print: "Notwithstanding anything contained in this circular, based on the facts and circumstances of the case, [SEBI] may settle any of the defaults listed above."

In the current national environment, indeed, this is a political statement – the media has picked up the "right noises" about SEBI having curbed its own ability to settle disputes relating to "serious allegations". Yet, the truth is SEBI may indeed settle any dispute of any nature.

Insider trading allegations ranks highest in the list of anathema for settlement. Fraudulent and unfair trade practices rank next. The approach can truly backfire and lead to unintended consequences. First, insider trading has been elevated to the status of the most heinous securities law misdemeanors. This very precept is questionable. Insider trading enforcement is, by definition, lop-sided – only those who actually transact in securities when in possession of unpublished price-sensitive information can be attacked. Those who refrain from selling securities on getting possession of unpublished positive information, and those who refrain from buying securities on getting possession of unpublished adverse information, can never be detected and punished.

Worse, by elevating insider trading to the most serious of offences in the eyes of SEBI, the standard of proof that the regulator would have to bring to bear has been heightened. It is settled law that the more serious the nature of the violation alleged, the greater the standard of proof necessary to bring home the charge, even if the charge is not leveled in criminal proceedings.

Second, market abuse proceedings constitute a huge majority of all the proceedings ever initiated by SEBI. If they cannot ordinarily be settled, it would as good as saying that nothing may be ordinarily settled.

Of course, SEBI has reserved the right to settle such cases too, but that would only mean that senior officers of SEBI would have to exercise positive discretion to act outside the ordinary course, and justify that circumstances warrant deviation from the norm.

Such norms are a product of playing to the gallery in the current national environment, where any alleged infraction of a regulatory requirement is seen as morally reprehensible. The same national environment entails filing of new public interest litigation every day by over-zealous "patriots" claiming to be the last men standing between India's future and devastation (some of them truly believe in and invest themselves in this delusion).

 Every time there is an exercise of discretion to settle such "serious" allegations in order to prevent wasteful expenditure in pursuing cases that SEBI cannot really win in a court of law, SEBI would get accused of having sold itself out to market interests. Worse, if SEBI persists with the case and loses in the courts, its majesty would only lose sheen.

Untouchability is left to politics. Regulatory untouchability – making some types of allegations incapable of ordinarily being settled – would burden the notice accused of a "serious violation" with having to undergo the pain of proving himself innocent.

Exoneration after litigation of five to ten years can still kill a man's psyche. Having to face proceedings, even if he were willing to settle for less would help SEBI retain its majesty. It may also force SEBI to refrain from initiating action in serious cases on the ground that it is not confident of securing an eventual win.

Alternately, it may make SEBI make trigger-happy and chase even cases it cannot win, leaving the unpopular role of setting its actions aside to the judiciary. Indian movies are replete with stereotypical imagery of the policeman going all out to dispense "justice" on his own, with occasional frustrations inflicted on him by the judiciary.

The universal reality is that every type of alleged violation should be capable of being settled – it is only the terms of settlement that would make the decision appropriate or inappropriate. Insecurity about the quality of governance, should not lead to implementing a system where one need not govern at all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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