Companies may soon be able to settle violations related to siphoning off of funds and misrepresentation of their financial statements, if they bring back the money so diverted and make adequate disclosures, according to a review of settlement norms suggested by the capital markets regulator.
As of now, companies cannot apply to settle such violations, which fall under Section 5(2) of the Settlement Proceedings Regulations.
In a consultation paper to review the settlement norms, the Securities and Exchange Board of India (SEBI) said: “In such cases, bringing back the funds diverted to the company and proper disclosure about misrepresentation to investors, are the key issues which if addressed would alter the decision matrix.”
Disclosures related to these violations will then need to be made in the financial statements and/or the stock exchanges, depending on their impact on past or future financial statements. These disclosures can be made without admitting or denying the facts and conclusions of the law.
When the siphoned off money is being returned, it will have to be done along with interest from the date of the contravention to the date of filing the settlement application, the consultation paper said.
The paper also suggested several other important changes, such as changing the method of calculating the settlement amount, doing away with non-monetary terms in almost all settlement proceedings, setting up a fast-track mechanism for violations that attract a settlement amount of Rs 10 lakh, clubbing several defaults as one, allowing an entity to file a settlement application even after a previous application was rejected, and extending the deadline for submitting the settlement application.
Non-monetary terms
The paper has suggested doing away with non-monetary terms, such as the resignation of a company’s directors or ensuring that a particular internal procedure is put in place to settle nearly all adjudication proceedings. The only exception would be where the violation is disclosure-related.
That said, non-monetary terms such as voluntary debarment and voluntary suspension from the securities market may be retained depending on the gravity of the violation, the applicant’s role as a leader of the illegal activity and the applicant being a repeat defaulter.
Defaults clubbed as one
If a default is repetitive, then several counts of defaults may be clubbed into one.
For example, if a person does several trades on one piece of unpublished price-sensitive information (UPSI), then each trade is counted as a default. Similarly, if an advertisement or corporate disclosure contains several misleading statements, instead of treating each statement as a default, all the false statements made in a single advertisement will be considered one default. Also, if multiple trades were done across a time period to manipulate the price of a scrip, all the trades will be clubbed as one default instead of each trade counting as a default.
Other proposals
An applicant may be allowed to file a settlement application even if a previous such application was rejected, if the case is still pending before SEBI. This will be allowed, with additional charges applied, if there is a change in the situation which warranted the rejection earlier.
Currently, it is 60 days from the date of serving a show-cause notice. Since this could be too little time for corporate bodies or those residing out of India, it may be extended to 90 days, the consultation paper said.