India’s stock market regulator has done the right thing in removing the option to settle serious cases of market abuse like insider trading. The Securities and Exchange Board of India’s new regime now has a real incentive to secure hard convictions. The change won’t be smooth – but that’s not all bad news.
SEBI’s detractors argue that the reform effectively passes the buck to a snail-paced and corrupt legal system. That’s unfair. The legal system is by no means perfect, but in recent important cases it has proved to be robust and fairly speedy. The Supreme Court’s Vodafone and 2G rulings this year have been both tough and timely.
Under the old system, settlements risked being seen as a no more than cost of doing business. They involve no admission of guilt. But just one landmark prosecution for SEBI would have a lasting deterrent effect. And the potential to settle cases has left SEBI vulnerable to political and financial pressure to do so. Last June, SEBI’s former deputy wrote a remarkably anguished letter to the prime minister claiming that SEBI’s chairman was being pressured by the finance ministry to go easy on powerful corporate groups under investigation by the regulator.
But the reform, while well flagged, has created some confusion. How are the new norms to be applied to active cases such as the one against Mukesh Ambani’s Reliance, which dates back to 2007? The case concerns alleged breaches in connection with the sale of shares in the erstwhile Reliance Petroleum. Reliance has reportedly twice attempted to settle the case by consent, only to be rebuffed by SEBI. Are these probes subject to the new or the old regime?
One option which the regulator should consider is to create a window, say for three months, to allow parties under investigation to make final settlement offers. SEBI need not agree, and there could be a rather unseemly dash. But it would at least close the door firmly on the old system. And it would also create a strong incentive for the parties to make SEBI juicy offers that it would be hard to refuse.