RIL Moves HC on New Consent Order Rules Wants to settle insider trading charges via consent

Reliance Industries (RIL) has approached the Bombay High Court, urging that it be allowed to settle insider trading allegations under a set of regulations that were recently discarded by market regulator Sebi. 

India's largest private sector company by revenues has approached the court in an effort to try and ensure that it has the option of settling the case through a negotiated or consent process in line with the earlier rules, said two people familiar with the matter. Last week, Sebi promulgated new rules that exclude relatively serious offences such as insider trading, front-running, serious frauds and unfair trade practices from the consent process. 

Sebi is investigating RIL for insider trading allegations linked to some transactions in 2007. Previous attempts, when the old regulations were in place, to settle the matter through the consent process have failed. The court is yet to hear the case and has not issued any notice. 

Consent orders are negotiated settlements between the regulator and alleged securities law offenders, in which the latter pays a monetary penalty called a consent fee. The settlement often involves a voluntary debarment from the capital markets and comes without admission or denial of guilt. RIL had not responded to queries seeking comment at the time the story was filed. 

The last high-profile case in which a negotiated settlement was reached involved the Reliance group headed by Anil Ambani. The telecom-to-power conglomerate's chairman and four of its senior officials paid . 50 crore — the highest settlement fee — and were barred from investing in the capital markets for one year. Sebi Twice Rejected RIL's Application 

That case relates to alleged routing of funds raised overseas to the stock markets in 2007. 

The latest development comes at a time Sebi is set to go ahead with enforcement proceedings — quasi-judicial proceedings that will result in determination of innocence or guilt — in a number of high-profile cases that are outside the ambit of the consent process, according to the new norms. These include the insider trading case against RIL; a case of alleged front-running by some officials of HDFC Asset management, one of India's largest mutual funds in terms of assets under management; and another case against HSBC for its role in a financing arrangement linked to alleged manipulation of stock prices of listed entities of the Adani Group, according to people with direct knowledge of the proceedings. 

Sebi has earlier twice rejected RIL's application for settling the case through the consent order route, after the company offered to pay what officials dealing with the case considered paltry amounts. The case dates to 2007, when a few entities allegedly connected to Reliance Industries sold a 4.1% stake of Reliance Petroleum for . 4,023 crore. To prevent a slump in the Reliance Petroleum stock, the shares were first sold in the futures market and then in cash, leading to a profit of over . 500 crore. 

A top official in Sebi said the new consent norms were unique to India. The new rules will help eliminate subjectivity and ensure greater consistency with the introduction of a formula to compute fines. While the earlier model was on the lines of the settlement mechanism followed by the US Securities and Exchange Commission, the revamped rules were entirely indigenous. 

The regulator is learnt to have consulted some of the top legal brains in the country before framing the new rules. 

Supreme Court advocate Amit Agarwal said the new circular did not quell the grievance that the settlement process was non-transparent and arbitrary. 

The circular, issued with the objective of providing more clarity on scope and applicability of the consent mechanism, on one hand substantially reduces the scope of settlement by classifying specified defaults as non-negotiable, but at the same time, leaves a window for settlement of the very same defaults, he says. 

MS Sahoo, advocate and former whole-time member of Sebi, said the new framework was old wine in new bottle. It allows settlement of all kinds of defaults, subject to discretion of the authorities. 

Sebi will use discretion initially to deny consent settlement in serious cases while the high-powered panel and whole-time members will use discretion subsequently to allow consent in those very cases, he says. "A formula, however, robust and comprehensive it may be, can't capture all possible factors. If the evidence available is such that the probability of conviction is negligible, the delinquent would never settle the default for the formula-driven amount. As a consequence, only the defaults with substantial evidence would be settled under consent while those with inadequate evidence would be adjudicated on merit. If no formula is used in adjudication where there is application of mind by one person only, it is not necessary to use a formula in consent settlement which passes through three committees and application of mind by at least nine persons, including a justice and two whole-time members." Sahoo says.