Reliance ADAG consent order

by Shubho Roy and Pratik Datta.

The SEBI Consent order under discussion has garnered wide media attention. The total settlement amount sounds very large. Certainly, it is the largest `settlement amounts' ever collected by SEBI. One could argue that the settlement amount is large enough to deter such behaviour and prevent recurrence. However, if we are skeptical about the functioning of any government agency (as we all should be) we have to wonder. Whenever you consider the size of a fine, the most important thing to remember is that it is always relative. US$150 million sounds like a large amount for a fine. If I were to tell you that this is the total fine Union Carbide paid for the bhopal gas disaster, it does not seem very large.

The traditional method of enforcing laws/regulations in most regulators is through an enforcement action. The regulator sets up an investigation, collects evidence and then places it before an adjudicating body. The adjudicating body then gives the opposite party an opportunity to defend its actions. After both parties are heard, the adjudicating authority is required to record its decision along with the reasons for arriving at such a decision. This process is long and requires large amount of resources to be spent by all parties involved. In most cases the decision of the adjudicating body can be challenged in a court of law. This leads to another round of litigation and delays. Despite these drawbacks the judicial process has one important facet: transparency. The evidence presented, the reasoning and the decision are all open to scrutiny. Any person can look at the facts and decide whether the decision was fair or not. Consent orders are not the same. They function differently.

How do consent orders work? Going by the existing SEBI href="http://www.sebi.gov.in/circulars/2007/CirEFD2007001.pdf">regulations:

1. The concerned entity offers the terms for a settlement, by itself, to SEBI.
   
   
2. This offer is considered and debated amongst an Internal Committee (IC) of Division Chiefs of SEBI.
   
   
3. If the IC accepts the terms it is forwarded to the High Powered Advisory Committee (HPAC) which is headed by a former judge of a High Court and other wise men.
   
   
4. The HPAC considers the terms and recommends whether they should be accepted, declined or modified.
   
   
5. Two Whole Time Members of SEBI take the final decision.

These different bodies are created to prevent collusion between the officials of SEBI and the entity offering the terms of settlement. The system is quite similar to the system of consent orders used by the Securities and Exchanges Commission (SEC) in the United States.

On one hand, it appears that SEBI has imported global best practices. At the same time, it is important to remain skeptical about this area. Global best practices often do not work when mechanically transplanted: each institutional arrangement needs to be analysed from scratch, with an aim of understanding how incentives and maximisation generate behaviour under Indian conditions.

The actions that SEBI has taken in the recent months show strong signs of integrity and a tough approach towards wrongdoing irrespective of the size and nature of the entities involved. However, consent orders by their very nature are dependent on other strong institutions. These include reasonable anti-corruption agencies and a general faith in the system of governance. Each of us will have to decided whether in the Indian context the system set up for consent orders can be considered safe or not. Consent orders are a positive part of the present environment, but at the same time all of us must apply the maximal skepticism in watching how consent orders are being produced.