The Hindu Business Line : There is a trigger behind the mercies

A CONVICT in gaol was once interviewed by a press reporter, who asked him how long his term was and what his charge was. The convict replied, " Two year and there is no charge — everything is free." Something totally different has happened to companies that accepted an `Amnesty Scheme' framed by the market watchdog, the Securities and Exchange Board of India (SEBI) in 2002.

The scheme was launched by SEBI to permit companies and their promoters to regularise defaults and delays in filing of documents, particularly with reference to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The scheme was fancifully named the SEBI Regularisation Scheme 2002, for non-compliance with Regulations 6 and 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997.

As against the Rs 5,000 per day that the SEBI Act, 1992 authorised SEBI to levy, the scheme fixed a soft penalty of Rs 10,000 for various types of defaults.

In case the offence involved non-disclosure by the promoters or the persons in control, the penalty was Rs 10,000 for each year or for each record date.

Depending on the type of offence, the scheme was operational from October 2002 to December 2002/January 2003. A la the famous monotone of Marlon Brando in `The Godfather', companies thought that this was an offer that they could not refuse. Quite a few companies gleefully accepted this scheme and paid up.

Another offer-cum-letter?

Two years down the line, the wheel seems to have turned full circle. It is reported that a trigger-happy SEBI is busy issuing a document strangely called "order-cum-offer letter" to companies for delayed filing of documents.

This document gives companies a month's time to accept the offence and pay up a sum as penalty which is nowhere near the level imposed by the Amnesty Scheme.

The letter signs off with the usual punch line that says that regular proceedings will be initiated if one does not comply with this offer letter.

Just to rub salt into the wounds, the penalties proposed are at current-day rates and not the ones prevalent at the time the offence or the delay in filing was committed. This could take SEBI to the courts via the Securities Appellate Tribunal (SAT) since SEBI is trying to redefine the law here.

No appeal?

Apart from the above, there seem to be two problems with the letter. A right of appeal has not been offered to the company concerned which would be making a mockery of the doctrine of natural justice.

India Inc has coined a new term for companies that are formed not with an intention to be run as such — vanishing companies.

While the letter may be meant for such companies, dispatching this to every and any type of company and more so, companies that complied with the Scheme, seems unnecessary.

The Amnesty Scheme also did not contain the comforting clause that states that no further action would be taken on companies that complied with the scheme, which is typically found in schemes of this nature.

Instead, the scheme says that after its expiry, SEBI may have to initiate appropriate action against defaulting persons and companies, which may result in heavy penalties against such persons and companies as per the provisions of the SEBI Act. While SEBI could take protection under this, it may not stand legal scrutiny.

Watchdog or bloodhound?

For companies that have accepted the Amnesty Scheme, SEBI should withdraw the letter and drop any proceedings that they intend to initiate.

Nobody would object to SEBI punishing the vanishing tribe, although by definition these companies would be the most hard to find and penalise.

SEBI seems to have made everything free for companies that paid Rs 10,000 but only for a period of two years. For markets, SEBI should continue to remain a watchdog rather than turn into a bloodhound.

(The author is a Hyderabad-based chartered accountant.)

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