OP. ED.

Interest republicae ut sit finis litium, meaning it is in the interest of the State that there should be an end to litigation. In pursuance of this objective, the Indian legal regime adopted various alternative forms of adjudicatory mechanism. The capital market regulator, Securities and Exchange Board of India (hereinafter referred as ‘SEBI’) introduced the consent mechanism efficacy of which has been discussed in this article.

Concept

The Code of Civil Procedure, 1908 and the Criminal Procedure Code, 1973 enumerate concepts of ‘compromise’ and ‘compounding of offences’ respectively. Similarly, under Section 15-JB[1] of the Securities and Exchange Board of India Act, 1992 is vested with the power to settle cases of securities law violation in the capital market. The idea was adopted from the success of its US counterpart, the Securities and Exchange Commission. Initially, the consent mechanism was proposed vide circular, Circular No. EFD/ED/Cir-1/2007 that enumerated the Guidelines for Consent Orders, introduced in 2007. The mechanism has evolved over the past years to take the form of the Settlement Regulations, 2018.[2]

The consent mechanism may be defined as “a proceeding in which the regulator and the alleged violator, may at any stage of the proceeding negotiate a settlement in lieu of administrative/civil proceeding, in the process saving cost, time and efforts for the parties involved. The mechanism does not require admission or denial of findings.”

Interpreting settlement orders

To test the proposition in respect of the success of this mechanism, a few cases of settlement have been analysed. The vital question that arises is “Where the interest of investors is at stake, is settlement a viable solution?”

The recent settlement order passed by SEBI in the matter of HDFC AMC (hereinafter referred to as ‘the applicant’) provides insight to the above question. The applicant was served with a show-cause notice for violation of the SEBI (Mutual Funds) Regulations, 1996.  The applicant had invested in the debt instruments of Essel group of companies through its various mutual fund schemes. As per the show-cause notice, the investment made did not adhere to the (Mutual Funds) Regulations, 1996 as it failed to maintain proper due diligence that led to the loss of the unit-holders. In furtherance of the notice, the applicant filed a settlement application with SEBI and the High Powered Committee (constituted under the Settlement Regulations, 2018) agreed to settle the matter. As a part of the settlement terms, the applicant ensured that the unit-holders were compensated along with redressal of their complaints. Further, it was agreed that the settlement amount would be paid by the funds of the applicant.

Certainly, the above order was in the interest of the investors and the regulator. The alleged violations were committed in May 2019, and within a span of a year, the settlement process has been concluded. Settlement in the present case indeed served as an expeditious solution contrary to the prolonged administrative/legal proceedings.

One major concern that has hindered the growth of the settlement mechanism is the conundrum surrounding the settlement of serious offences like insider trading and fraudulent unfair trade practices. It is pertinent to note here that such offences were a part of the initial guidelines issued under the circular in 2007. Subsequently, the amended Settlement Regulations, 2014 removed serious offences based on the severity of such offences. However, the Committee set up under the chairmanship of Justice Dave that drafted the Settlement Regulations, 2018, undertook an alternative approach by vesting discretion with the Board to decide based on facts and circumstances of each case than make it principle based by creating an absolute bar to settle such offences.

The question that requires attention is that “Has the discretion vested with the Board regarding the nature of offences to be settled been exercised wisely by it?”

On observation of previously adjudicated cases that have been settled, it was noticed that only those cases where market interests and market impact was limited and loss to the investors was minuscule, were taken through the settlement route. In  Abhay Gandhi and Kiran Abhay Gandhi, the CEO of Ranbaxy Laboratories Limited, was charged under the  Prohibition of Insider Trading Regulations, 2015[3] for selling shares while in possession of Unpublished Price Sensitive Information, the matter was settled by remitting an amount of Rs Thirty-five lakhs, that would have been evaluated considering the profit made by the applicants, the multiplier for deciding penalty as provided in  Chapter VI[4] of the Settlement Proceedings Regulations, 2018.    

Settlement – An Antidote to Litigation?

On considering the above proposition, it raises two further questions.

1. Will SEBI in all cases allow the settlement process?

2. Is the settlement mechanism a full proof mechanism where the interests of SEBI, stakeholders and investors can be balanced?

To answer the former, the essential grounds for the basis of the settlement are laid down exhaustively under the purview of Regulation 10 of the Settlement Regulations, 2018. The Board established under Section 5 of the Act may reject matters for settlement that have a wide impact on investors, are repetitive in their defaults or the person making the application is a wilful defaulter. SEBI has adopted a stringent approach in accepting applications for Consent Orders. For instance, NSE was alleged to have deals with brokers and unduly favouring and assisting them in unauthorised trading, and it applied for settlement. SEBI rejected the NSE settlement application and ordered disgorgement by asking them to pay over INR 1000 Crores.

After the infamous IL&FS scam where credit rating agencies were under the scanner for not changing the credit rating of the instruments before the default, SEBI based on a reasoned order categorically stated that the matter involved wide market impact including an adverse effect on the interest of the investors thereby questioned the integrity of the market, and rejected ICRA’s application for settlement.   

To answer the latter, no mechanism can be a panacea, it comes with its fragilities. In the author’s opinion, the biggest drawback of this mechanism is that it may undermine the problem which may in a certain point of time be the tip of the iceberg. To illustrate, in the case of Yes Bank, it was charged for violating the disclosure norms prescribed in Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, that required the disclosure of material information.

Yes Bank as per the settlement order made selective disclosure of divergence and partially concealed the report the issued by RBI and its settlement then, concluded the matter but all those along with a gamut of other issues including a liquidity crisis and failure of the corporate governance bounced back together and led to its collapse. Therefore, in certain cases, it may not be possible for the regulator to see through and understand the actual reasons behind the violation, divergence. 

The way ahead

The increasing role of the consent mechanism can be witnessed from the fact that an average of ten settlement orders were passed in the year 2019. It is evident that the Settlement Regulations, 2019 have ushered a fresh air in the arena of ‘Consent Orders’. Certain key features of the regulations are that transparency is ensured by vesting limited discretion with the Board. The penalty payable by the applicant is derived based on a comprehensive multiplier on consideration of the number of defaults, the stage of proceedings along with the stage at which settlement is introduced. It will not be a misnomer to say that capital market regulations in India have evolved tremendously along with the market and provided an effective adjudication process that serves the need of the hour. In cases where all three chords of prompt action, investor interest, and effective enforcement are struck, it is only then the underlying objective of consent orders will be achieved in its essence.


*Legal professional, with an avid interest in Securities Law and previously worked with KPMG as a part of the Forensic Investigation Team.

[1] Section 15-JB, Securities and Exchange Board of India Act, 1992    

[2] Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018

[3] The SEBI (Prohibition of Insider Trading) Regulations, 2015 

[4] Ch. VI, SEBI (Settlement Proceedings) Regulations, 2018  

Hot Off The PressNews

Supreme Court: The Court has sought Centre’s response on a PIL seeking direction from the Government to immediately restore high-speed internet  services and fixed landline phone services across all hospitals and medical establishments in Jammu and Kashmir. A bench headed by Chief Justice Ranjan Gogoi issued a notice to the Centre and tagged the matter along with other related pleas in connection with the Kashmir issue.

On September 11, an advocate named Satya Mitra had filed the plea on behalf of doctor Sameer Kaul and one Salim Jahangeer Kirmani. The petition also sought direction to the central government to desist and refrain in future from blocking or suspending internet and fixed landline phone services in hospitals and medical establishments, along with mobile phone services of doctors and other staff members working in hospitals and medical establishments in Jammu and Kashmir.

The court sent to constitution bench a plea filed by Kashmir Times Executive Editor Anuradha Bhasin seeking the removal of communication blockade in Jammu and Kashmir after the abrogation of provisions under Article 370 and free movement of journalists in the region.

On August 13, Bhasin had moved the plea, claiming Kashmir Times was not published owing to the curbs on communication services and movement. She had alleged that a bar was put on journalists’ rights provided under the different provisions of the Constitution.
The court also sent to constitution bench a PIL filed by child rights expert Enakshi Ganguly and Professor Shanta Sinha, alleging illegal detention of children in Jammu and Kashmir in the wake of abrogation of Article 370.

The court will commence hearing on the pleas relating to Article 370 from Tuesday.

On August 5, the Centre had abrogated Articles 370 and 35A of the Indian Constitution and the Parliament had passed the Jammu and Kashmir (Reorganisation) Act, 2019, bifurcating the former state into two Union Territories – Jammu and Kashmir and Kashmir) with legislature and Ladakh without one. Following this, a batch of petitions was filed in the top court challenging the
move.

(Source: ANI)


More from Supreme Court on Article 370

SC seeks report from J&K HC CJ on claims about people being unable to approach HC

SC asks Central govt to restore normalcy in Jammu & Kashmir

5-judge bench to begin hearing in plea challenging J&K Reorganisation Bill from tomorrow

Won’t rush into passing any direction on removal of restrictions on the media in J&K: SC

No urgent hearing on plea challenging J&K Reorganisation Bill

Also read

Parliament passes the J&K Reorganisation Bill, 2019!

The Jammu and Kashmir Reservation (Amendment) Bill, 2019– What it says?

Rajya Sabha approves the Jammu and Kashmir Reservation (Second Amendment) Bill, 2019!

Jammu and Kashmir Reorganisation (Amendment) Bill, 2019 — Passed by Rajya Sabha; Formation of J&K as a Union Territory!

Hot Off The PressNews

Supreme Court: Terming as “very very serious” the claim that people are finding it difficult to approach the Jammu and Kashmir High Court, the 3-judge bench of bench of Ranjan Gogoi, CJ and S A Bobde and S A Nazeer, JJ has decided to verify it by asking the Chief Justice there to “forthwith” submit a report in this regard.

“If you are saying so, we are bound to take serious note of it. Tell us why it is very difficult for people to approach the high court. Is anybody stopping the people from going to high court? Then it is a very very serious issue,”

The Court said that it will verify the claim after senior advocate Huzefa Ahmadi appearing for two child rights activists claimed that it is very difficult for the people in the state to access the high court there.

The CJI said he would himself visit Srinagar, if required, and he would also speak to the chief justice of high court about this.

“It is stated by Huzefa Ahmadi, senior counsel for the petitioners, that access to the high court of Jammu and Kashmir is seriously affected by the present situation in the state. We request the chief justice of the high court to submit a report on the above issue forthwith,”

Taking note of Ahmadi’s submissions, the CJI said, “You are saying that you cannot go to the high court. We have called for a report from Chief Justice of the high court. If required, I will myself go there.” He further said:

“We must know if there is denial of access to justice. I will personally talk to the chief justice of the high court after this matter is over because what you have said is very very serious thing.”

The bench warned however that if the allegations are found to be incorrect then the petitioners should be ready to face the consequences.

The Court was considering a public interest litigation (PIL) seeking the Supreme Court’s intervention on the issue of detention of children in Kashmir. During the hearing, the bench referred to the prayer made in the petition and said that petitioners have themselves said that children be produced before the juvenile justice committee of the high court. Ahmadi, however, said it is very difficult to approach the high court in the state.

Solicitor General Tushar Mehta, appearing for Jammu and Kashmir, told the bench that all the courts in the state are functioning and even the Lok Adalats have been conducted there. When Mehta said that he wanted to make statement in the court on the issue, the bench said,

“We do not want anybody to make any statement. We will look into it. If people are not able to approach the high court, then we will have to look into it.”

The petition has been filed by child rights activists Enakshi Ganguly and Professor Shanta Sinha against the alleged illegal detention of children in Jammu and Kashmir in the wake of revocation of Article 370 and bifurcation of state. The plea has contended that all persons below the age of 18 years who have been detained be identified through an age census. Seeking directions that illegally detained children be produced before the Juvenile Justice Committee of the high court, the plea has also sought compensation from them.

Last month, Parliament had passed the Jammu and Kashmir (Reorganization) Act, 2019, bifurcating the state into two Union Territories — Jammu and Kashmir with legislature and Ladakh without it. Following this, a batch of petitions were filed in the top court challenging it.

(Source: PTI)


Also read:

Parliament passes the J&K Reorganisation Bill, 2019!

The Jammu and Kashmir Reservation (Amendment) Bill, 2019– What it says?

Rajya Sabha approves the Jammu and Kashmir Reservation (Second Amendment) Bill, 2019!

Jammu and Kashmir Reorganisation (Amendment) Bill, 2019 — Passed by Rajya Sabha; Formation of J&K as a Union Territory!

Case BriefsHigh Courts

Orissa High Court: A Single Judge Bench of Dr A.K. Rath, J., allowed the petition which challenged the order of the trial court whereunder the application of the plaintiffs filed under Order 1 Rule 10 CPC to implead the wife of Defendant 1 was rejected.

The facts of the case were that the plaintiffs-petitioners had instituted the suit for permanent injunction and recovery of possession impleading the wife of the defendant as Defendant 2.

The contention of Mr A.P. Bose, Advocate for the petitioners, was that a part of the suit land had been alienated to the wife of the defendant. The said fact came to the knowledge of the plaintiffs after the written statement was filed. The hearing of the suit had not begun. The intervenor was a necessary party to the suit.

The counsel for defendants Mr S. Udgata, submitted that the written statement was filed in the year 2011. But then, the petition for impleadment was filed after a gap of five years. The intervenor was neither necessary nor proper party to the suit.

The Court relied on the case of Razia Begum v. Sahebzadi Anwar Begum, AIR 1958 SC 886, wherein the Apex Court had held that it is firmly established as a result of judicial decisions that in order that a person may be added as a party to a suit, he should have a direct interest in the subject matter of the litigation whether it raises questions relating to movable or immovable property. The suit scheduled land had been alienated to the wife of the defendant. In view of the same, the intervenor was a necessary party to the suit thus the petition was allowed. [Ramesh Chandra Sahoo v. Ranjit Kumar Singh, 2018 SCC OnLine Ori 436, decided on 19-12-2018]

Case BriefsForeign Courts

Constitutional Court of South Africa: A Single Judge Bench comprising of Mogoeng, CJ. Dlodlo, Goliath, Petse, AJ, Froneman, Jafta, Khampepe, Madlanga, and Theron, JJ., unanimously granted the applicants rescission in terms of the Uniform Rules of Court and granted leave to intervene to applicants in the trial.

This application was filed for leave to appeal against an order of Supreme Court Appeal where a refusal of rescission and dismissal of an application for leave to intervene by the High Court of South Africa was upheld. The issue before the Court was whether rescission and leave to intervene should have been granted.

Facts of the case are that a group of individuals acquired a company to use the same as a vehicle for commercial opportunities for the benefit of black people. Applicants were shareholders of this company. The company was converted into a public company in order to open up the shareholding to more than 50 persons. It was renamed NC Housing Services and Development Co. Ltd. Due to failure to file annual company returns ROC removed the name of the company from companies register. Later company wanted to sell its major asset for which they applied for re-registration and were subsequently re-registered. A dispute arose between the applicants and the second and third respondents, regarding the proportion of shares owned by the various shareholders.

The respondent filed an application in High Court against the company where the matter was referred to Trial. High Court held that the shareholders could not have been a party in trial as they could not have personally fought the case as they were representative directors. Supreme Court of Appeal held that although the applicants had been participating in the proceedings both as directors and as shareholders, the resolution passed by them barred them from participating in the litigation due to their failure to have set aside the above resolution.

Therefore, this Constitutional Court held that when an individual shareholder is presented as “shareholder” in court proceedings, he becomes party in the litigation in his personal capacity. Orders of the Supreme Court of Appeal and High Court of South Africa were set aside. Court granted rescission in terms of the Uniform Rules of Court and leave to appeal to intervene in the trial. [Morudi v. NC Housing Services and Development Co. Ltd. , (2018) ZACC 32, dated 25-09-2018]

Case BriefsSupreme Court

Supreme Court: Abhay Manohar Sapre, J. speaking for himself and his brother Judge Uday U. Lalit, gave judgment in a civil appeal arising out of matrimonial dispute whereby the appellant challenged the decree of divorce passed by family court and affirmed by High Court of Jharkhand.

The appellant-wife was married to the respondent-husband, and they had a daughter born out of the wedlock who was of marriageable age. The parties married in 1997, but their relations were not cordial from soon after the marriage. This led to the filing of a divorce petition by the husband against the wife on grounds of cruelty and desertion. The Family Judge dissolved the marriage and the decree was confirmed by the High Court.  Aggrieved thus, present appeal was filed by the wife.

The Supreme Court heard the parties and perused the record. It was noted that the parties were living separately for more than a decade. All attempts to conciliation through mediation had failed. There was absolutely no chance of them living together to continue their marital life.  While referring to Naveen Kohli v. Neelu Kohli, (2006) 4 SCC 558 and Sanghamitra Ghosh v. Kajal Kumar Ghosh, (2007) 2 SCC 220, the Court held that in order to ensure that parties may live peacefully in future and their daughter would be settled properly, a quietus must be given to all litigation between the parties. Consistent with the broad consensus arrived at between the parties, the Court directed the husband to pay Rs 10 lakhs towards permanent alimony and maintenance to the appellant and the daughter. [Manju Kumari Singh v. Avinash Kumar Singh,2018 SCC OnLine SC 739, dated 25-07-2018]

Case BriefsForeign Courts

Supreme Court of Canada: While considering the issue regarding the powers of investigation of the syndic that whether the assistant syndic of the Chambre de l’assurance de dommages (the syndic) was empowered to demand from the Insurer the production of documents subject to litigation privilege, for inspection, the Bench of McLachlin C.J. and Abella, Cromwell, Moldaver, Karakatsanis, Wagner, Gascon, Côté and Brown, JJ., held that Section 337 of the Act Respecting the Distribution of Financial Products and Services is a general production provision that does not specifically indicate that the production must include records for which privilege is claimed, thereby not abrogating litigation privilege attached to a document. It was further observed that, “Although litigation privilege is distinguishable from solicitor-client privilege, it is nevertheless a class privilege and gives rise to a presumption of inadmissibility for a class of communications, namely those whose dominant purpose is preparation for litigation. Thus, any document that meets the conditions for the application of litigation privilege will be protected by immunity from disclosure unless the case is one to which one of the exceptions to that privilege applies.”

In the instant case, the appellant, an assistant syndic of the Chambre de l’assurance de dommages asked the respondent to send her a complete copy of its claim file with respect to one of its insured. The syndic based this request on Section 337 of the Act Respecting the Distribution of Financial Products and Services (ADFPS). However the insurer expressed its inability to present certain documents, citing that they were either covered by solicitor- client privilege or by litigation- privilege. The appellant contended that the aforesaid provision is sufficient to lift the privilege, because it created an obligation to produce ‘any document’.

Perusing a plethora of case laws on the development of law of litigation privilege in Canada, the Court referred to its previous decision in Blank v. Canada (Minister of Justice), 2006 SCC OnLine Can SC 39 : 2006 SCC 39, to highlight the present position vis-à-vis litigation privilege, which states that solicitor-client privilege and litigation privilege are distinct. However that Court observed that, “litigation privilege is subject to clearly defined exceptions, not to a case-by-case balancing test. In the context of privileges, the exercise of balancing competing interests is associated with case-by-case privileges, not class privileges. The exceptions that apply to solicitor-client privilege are all applicable to litigation privilege. These include the exceptions relating to public safety, to the innocence of the accused and to criminal communications.” It was further stated that litigation privilege can be asserted against third parties, including third party investigators who have a duty of confidentiality, therefore the insurer can very well assert the litigation privilege against the syndic, which cannot be lifted by Section 337 of ADFPS. [Lizotte v. Aviva Insurance Company of Canada, 2016 SCC OnLine Can SC 35 : [2016] SCC 52, decided on 25.11.2016]

Case BriefsSupreme Court

Supreme Court: Stating that the virus of seeking adjournments needs to be controlled in order to avoid the abuse of the process of law, the bench of Dipak Misra and R. F. Nariman, JJ said that such act causes colossal insult to justice and to the concept of speedy disposal of civil litigation.

In a suit relating to recovery of possession, the examination- in-chief continued for long and the matter was adjourned seven times. The defendant sought adjournment after adjournment for cross-examination on some pretext or the other as if it was his right to seek adjournment on any ground whatsoever and on any circumstance. The Court said that a counsel appearing for a litigant has to have institutional responsibility and the professional ethics decries such practice. It was further reiterated that it is desirable that the recording of evidence should be continuous and followed by arguments and decision thereon within a reasonable time. That apart, the Courts should also constantly endeavour to follow such a time schedule so that the purpose of amendments brought in the Code of Civil Procedure are not defeated.

Quoting the saying of Gita “Awake! Arise! Oh Partha” for guidance of trial courts, the Court said that in the cases where the Judges are little proactive and refuse to accede to the requests of unnecessary adjournments, the litigants deploy all sorts of methods in protracting the litigation and it is not surprising that civil disputes drag on and on. The misplaced sympathy and indulgence by the appellate and revisional courts compound the malady further. The Court, hence, directed the defendant to deposit Rs, 50, 000 to the State Legal Service Authority, Karnataka within 8 weeks of this order and it was further made clear that if the amount is not deposited, the right of defence to examine its witnesses shall stand foreclosed. [Gayathri v. M. Girish, 2016 SCC OnLine SC 744, decided on 27.07.2016]