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Settling down

25 May 2012 By Jeff Glekin

India’s market regulator may remove the option to settle serious cases like insider trading without admitting guilt. That could lead to even less enforcement from the Securities and Exchange Board of India than at present. But if it hardens SEBI’s resolve to land a high-profile conviction, such self-denying ordnance may be worth it.

The Indian consent order process is modelled on the U.S. system although in SEBI’s case settlements have become the norm. SEBI has only been around since 1992. Yet the lack of any major conviction in two decades weakens its credibility. Perhaps that’s why it wants to close off the settlement route for more severe transgressions. The regulator is to announce the changes within weeks, according to the Financial Express.

Settlements are generally a good thing. They allow quick and pragmatic decisions to be taken without the expense and risk of a legal process. The fines involved can be pretty big – take the record $10 million settlement secured in January 2011 with the tycoon Anil Ambani’s Reliance Group. But the ability to settle leaves the regulator vulnerable to political pressure to do so. The financial element also potentially distorts decision making.

Problems with the consent process have to be weighed against the alternatives. The legal system in India is notoriously snail paced and open to corruption. On the other side of the ledger, it has the advantage of transparency. The evidence presented, the reasoning and the decision are all open to scrutiny. Consent orders are dealt with behind closed doors.

Cutting off the settlement avenue for big offences could in the short term see even less punishment meted out given the hurdles to securing a successful prosecution. SEBI risks getting mired in a string of litigation which ultimately proves unsuccessful.

But as things stand, settlements risk being seen as a no more than cost of doing business. Just one landmark conviction for SEBI would resonate and have a lasting deterrent effect. Reform is worth a try.


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