Last week, a US District Court judge rejected a $285-million settlement by the US stock market regulator (SEC) with Citigroup. In India, an entrepreneur Mr Deepak Khosla challenged SEBI's consent order system itself two months ago in the Delhi High Court. The case is due for hearing on January 31, 2012.

Legal experts say these happenings reflect public concern about the opaque manner in which corporate offenders are settling cases with securities regulators. What is irksome in particular is that the settlement amounts appear to be disproportionately small compared with the gains that people feel these corporations must have been made from the violations.

The US court's ruling in the SEC-Citigroup case is against a particular settlement. In India, the PIL is generic and the settlement system itself is being challenged, says Mr Sandeep Parekh, founder and head of Finsec Law Advisors. Although nobody has yet challenged a particular consent order by SEBI in a court of law in India, Mr Parekh feels it is quite likely that this could happen. “A court or an even an individual can always challenge a consent order. This could happen some time, after all, we are a litigious country, second only to the US.”

Mr Parekh has always held that the consent order process is not transparent. “The final order does not even clearly mention what the allegation was in the first place,” he says.

In the US, the SEC had accused Citigroup of selling mortgage-linked collaterised debt obligation in 2007 as the housing sector was beginning to crumble, and at the same time betting against, it causing more than $700 million of investor losses. The judge, who rejected the proposed settlement between SEC and Citigroup, reportedly remarked that the settlement amount is pocket change to an organisation as large as Citigroup. He also said that several firms were considering such fines as the “cost of doing business.”

Apparently such settlements require approval by a federal judge in the US. In India, the Supreme Court has taken cognisance of the consent process in the case of SEBI vs UBS Securities. The regulator had taken the case to the Supreme Court. But the Court disposed of the case after the two parties said they had decided to settle the matter on consent terms on payment of Rs 50 lakh by UBS Securities. UBS had been investigated for its alleged role in the stock market crash of May 2004.

Domestically too there is a feeling in several quarters that many offenders have got off lightly through the consent process, says a regulatory expert. Many of the accused in the 2003-2005 IPO scam have settled through consent with SEBI. This is a case in which scores of operators opened benami demat accounts and cornered IPO shares reserved for retail investors, to sell them at a profit later.

One criticism of this system is that settlements are made without admission or denial of guilt by the accused, and the facts of the case are never really known. Therefore, whether the settlement is in the public interest or not cannot be gauged at all. In the SEC-Citigroup case, the judge remarked that if the court not be a “handmaiden” to a “settlement privately negotiated on the basis of unknown facts.”

In India too the consent system has come in for criticism from some members of the judiciary including Mr Justice J S Verma, former Chief Justice of the Supreme Court. Repeat offences and cases where SEBI has found prima facie evidence of fraud have also been settled.

In fact, Mr Khosla's PIL challenges SEBI's consent order mechanism by saying that it is not backed by any statute but by only a circular issued by SEBI in 2007.

If knocking down of settlement cases by Courts is happening in the US, it could happen in India too, said a legal expert.

kripram@thehindu.co.in