Regulator quantifies settlement for consent orders

K. Raghavendra Rao S. Shanker Mumbai | Updated on November 12, 2019

New methodology ends ambiguity in arriving at final amount

Stock market regulator SEBI has quantified the levy of penalty for offences that could be settled through the consent route.

The earlier SEBI circular of April 2007, did not disclose the methodology to calculate penalty.

Instead, the onus was on the applicant to suggest consent terms. It would then be evaluated by SEBI's high-powered advisory committee and placed for approval before the panel of whole-time members.

The current methodology does away with the ambiguity in terms of arriving at the settlement amount.

SEBI has provided a mathematical basis to arrive at the settlement amount. It enables applicants to propose the consent terms.

Lists out types

SEBI has defined the type of offence under heads such as fraudulent and unfair trade practices, failure to disclose, insider trading, violation of code of conduct and default under open offer.

The impact of these offences is categorised under major, minor, serious or miscellaneous to be treated accordingly.

The provisions take into the profile of the applicant such as intermediary, promoter, financier, whole director/ chairman, other directors/ key management personnel, listed companies, front or dummy entity, key operator, FII or its sub account and lead managers, besides asset management companies.

Base amount fixed

Base amounts are assigned to every category of offence according to the category of the applicant.

If an intermediary abets fraudulent and unfair trade practice, the ‘offence' attracts a base amount of Rs 15 lakh or 1.5 per cent of gross traded value, whichever is higher. In the case of a promoter, the base amount charged becomes Rs 1 crore or 0.5 per cent of his stake in the company including convertibles whichever is higher.

Applicant need to furnish a monetary amount called ‘indicative amount' in addition to other directives while seeking consent.

The indicative amount is a sum total of legal costs and benchmark amounts.

The ‘Benchmark Amount' depends on ‘Proceeding Conversion Factor' (PCF or stage of proceeding), such as pre-issue to show-cause notice and on all orders and regulatory directions issued to the applicant (called Regulatory Action Factor).

RAF & indicative amount

The regulatory action factor (RAF) is the sum total of earlier orders against the applicant and value of order or direction for which the consent application is filed.

The RAF is lower for first time offenders and lower categories of offences.

The indicative amount is then calculated as follows.

Indicative Amount = (PCF+RAF) x benchmark amount + legal costs. Benchmark amount is the sum of ‘base values' multiplied by the applicable amount.

SEBI has assigned the ‘base values' for nature of default, volume and price change for the default, time value of illegal gains (interest cost) and the reputation risk.

It is the profit made or loss avoided by the applicant.

If the base amount is higher than the profit made and loss avoided it is taken as the applicable amount.


If a promoter applies for consent after receiving show-cause notice for a first time for fraudulent and unfair trade practice.

Assume he has been let off with a warning for an earlier offence and the current offence would attract a three-year debar.

He has committed the current offence two years ago for trading 15 per cent in his liquid scrip whose price changed 30 per cent consequent to which the highest market value of his holding went up to Rs 650 crore.

The base amount will be Rs 3.25 crore (0.5 per cent of his stake) and the applicable amount in this case.

For arriving at the benchmark amount, the base amount will be multiplied by a factor of 1.83.

This 1.83 is arrived at by assigning base value of 1.35 for the default, 0.15 for scrip volume, 0.15 for percentage of price change and 0.18 for time value of illegal gains.

The benchmark amount = Rs 5.95 crore (Rs 3.25 crore x1.83).

PCF = 0.85, RAF = 0.015 (for earlier warning) + 0.3 (for value of current order)

As Indicative Amount = (PCF +RAF) x benchmark amount+ legal cost

Indicative Amount = (0.85+0.315) x Rs 5.95 crore + legal cost = Rs 6.93 crore + legal cost.



Published on June 01, 2012

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