REJECTION OF CONSENT APPLICATION UNDER SEBI LAWS

A consent order under SEBI laws is a mechanism where a person or entity accused of violating securities laws can settle the matter with the Securities and Exchange Board of India (‘SEBI’ for short) without admitting or denying the violations. This allows for a faster resolution than traditional litigation, saving time and resources for both SEBI and the alleged violator. Consent orders offer flexibility in enforcement actions, allowing for appropriate sanctions and deterrents. 

An alleged violator can apply for a consent order at any stage of the proceedings. The high-powered committee reviews the application based on specific criteria. If the committee finds the initial proposal insufficient, it may ask for revisions. Once the committee and the applicant agree on the terms, the order is forwarded to the appropriate authority for finalization. 

The Parliament of India has recognised the powers of SEBI to pass consent orders under the SEBI Act and the Depositories Act. This will of the Parliament is apparent from Section 15T of the SEBI Act 1992 and section 23A of the Depositories Act. Consent orders cannot be construed as waiver of statutory powers by the Board. The Board always has the right to proceed for appropriate action if it cannot achieve its objectives through a consent order.  Consent Order may be passed at any stage after probable cause of violation has been found. However, in the event of a serious and intentional violation, the process should not be completed till the fact-finding process is completed whether by way of investigation or otherwise.

If the Committee believes that the proposal of consent is not commensurate with the violation or the factors mentioned above are not satisfied or the waivers are not given, it may decline to consider the proposal of the party. In such an event, the Board and the party will both be free to resort to legal recourse as may be available to them under the law.

In Hetal Rajesh Patel Versus The Securities and Exchange Board of India - 2025 (7) TMI 647 - BOMBAY HIGH COURT, SEBI, during the year 2009, initiated an investigation into the trading of scripts of RTS Power Corporation Limited for the period from 01.09.2008 to 11.02.2009. The petitioner has also involved in the said trading during the impugned period.

Certain buy-side stockbrokers in the RTS scrip filed Suit No. 3022 of 2009 in the Bombay High Court seeking to annul certain RTS trades. Relief is also sought in terms of restraint on pay-outs to the sell side parties, refund of the amounts paid by the stockbrokers, and other related relief. The Petitioner and Respondent herein are Defendants in the said suit.

On 11.05.2012, Bombay Stock Exchange was directed by the Court to take the amount in the escrow account and to deposit the same into fixed deposits. The same may be renewed from time to time. On 15.12.2015 the Court directed to deposit the above said fixed deposits with the Court and directed the Senior Master of the Court to renew the said deposits from time to time until an order was passed by the Court.  

On 05.06.2009 an ad-interim ex-parte order was passed in which the petitioner was restrained from buying, selling or dealing in securities and directed the Bombay Stock Exchange to withhold pay-outs in respect of the trading in the scrip. The said order was confirmed on 26.10.2009.

After that SEBI issued show cause notices to the petitioner under Section 11 and 11B of the SEBI Act for the alleged fraud in the trading of RTS scrip. On 08.12.2010, SEBI issued another show cause notice to the petitioner for imposition of penalty on the petitioner.  The show cause notice also indicated that the petitioner may apply for consent order. The petitioner opted for the same on 04.03.2011.  The petitioner offered to pay Rs.25 lakhs and an abstention from dealing in securities for a period of three years. The Petitioner stated that this was on the understanding that the payout of Rs.3.45 crore claimed by the petitioner as a sell-side client in respect of the trades would be released to the petitioner on passing of the Consent Order.

The application of the petitioner was referred to High Powered Advisory Committee.  The said committee submitted its report. SEBI, vide their communication dated 24.02.2012, agreed to the terms of the consent order offered by the petitioner. The petitioner made the payment of Rs.25 lakhs to SEBI on 07.03.2012.

Since no consent order was passed by SEBI, the petitioner requested SEBI to pass the consent order. SEBI, on 11.05.2012 directed the petitioner to appear before the meeting of the Internal Committee. The petitioner disputed the validity of this procedure, contending that the settlement had been accepted by the respondent and the settlement amount paid by the petitioner. On 27.06.2014 SEBI rejected the consent order on the ground that the consent application in view of the orders of this Court in the pending suit and representations received from Stockbrokers. SEBI also returned the demand draft for Rs.25 lakhs paid by the petitioner, to the petitioner.

The petitioner challenged the rejection order of SEBI before the High Court. An order dated 16.04.2015 was passed by the Court in which, ad-interim relief was granted in terms of prayer staying the operation of the impugned communication dated 27.06.2014. An order was also passed by the Court on 27.10.2020 in which the petition of the petitioner was admitted. The order also directed the petitioner to participate and co-operate in the adjudication proceedings pursuant to the Show Cause Notices dated 29.10.2010 and 08.12.2010. It was further directed that the final orders passed in the adjudication proceedings qua the petitioner would not be enforced till the final disposal of the present petition.

The Adjudicating Authority, after hearing the petitioner on the show cause notice dated 08.12.2010, imposed a penalty of Rs.10 lakhs on the petitioner on 18.06.2021. The Whole Time Director of SEBI, on 27.10.2021 passed an order on the Show Cause Notice dated 29.10.2010, inter alia, debarring the petitioner from buying, selling or dealing in securities for a further period of two years from the date of the order.

The High Court heard the submissions of the parties and passed the following orders-

• The petitioner agrees and undertakes to furnish a fresh Pay Order of Rs. 25,00,000/- to the respondent on or before 25.07.2025 towards the settlement charges mentioned in the respondent’s letter dated 24.02.2012;
• The petitioner undertakes to the High Court that she has not bought, sold or dealt in securities since the dates of issuance of the Show Cause Notices to her, and has therefore satisfied the requirement of being debarred from doing so for a period of 3 years as set out in the terms of consent. The petitioner shall hereafter be at liberty to access the capital markets and/or deal in securities forthwith.
• The respondent undertakes to the Court that it shall pass a Consent Order allowing the Consent Application, subject to the modifications, within a period of 2 weeks from the date of receipt of the Pay Order.
• Upon the passing of the Consent Order, the proceedings initiated under the said Show Cause Notices shall stand settled and the Orders dated 18.06.2021 and 27.10.2021 passed by SEBI shall not be enforced against the petitioner.
• The Consent Order neither absolves nor incriminates the petitioner of any offence or violation of the SEBI Act and/ or SEBI Regulations.
• All issues and matters arising in the pending Suit No. 3022 of 2009 filed by Network Stock Broking Private Limited and others (subsequently transferred to the City Civil Court and renumbered as Suit No. 1343 of 2024) shall be decided by the Court on their own merits, uninfluenced by the passing of the Consent Order by SEBI and /or the Orders dated 18.06.2021 and 27.10.2021 above in so far as they apply to the petitioner. This will include the issue as to whether the amount of Rs.3,44,62,569/- claimed by the petitioner or any part thereof may be paid over to the petitioner and the petitioner shall be at liberty to apply to the City Civil Court for release of the amount of Rs. 3,44,62,569/- or part thereof which are presently deposited under the orders dated 11.05.2012 and 15.12.2015 or such other reliefs as are open to it to claim in accordance with law. All rights and contentions of all parties in the suit are kept open in that regard.