Compounding of Offences & consent Orders- Study X

What is a Consent Order?

Consent Order means an order settling administrative or civil proceedings
between the regulator and a person (Party) who may prima facie be found
to have violated securities laws. It may settle all issues or reserve an issue
or claim, but it must precisely state what issues or claims are being
reserved. A Consent Order may or may not include a determination that a
violation has occurred.
Compounding Means
Compounding means that the accused the complainant have come to
terms the disputre between the parties has been settled amicably
ad!usted by agreement the complianant agrees not to prosecut the
accused. "he accused and the complainant then ma#e a !oint application to
court that the parties have come to term the case may not be proceeded
with
What is Compounding of Offence?
Compounding is a process whereby an accused pays compounding charges
in lieu of undergoing conse$uences of prosecution.

What are Administrative/Civil enforcement actions?
Administrative%Civil enforcement actions include issuing directions,
suspension orcancellation of certificate of registration, imposition of
monetary penalty, pursuing suits and appeals in Courts and &ecurities
Appellate "ribunal (&A").
What is rosecution?
'iling of criminal complaints before various criminal courts by &()I for
violation of provisions of securities laws which may lead to imprisonment
and% or fine.
What is the o!"ective of Consent Order?
Consent Order provides fle*ibility of wider array of enforcement and
remedial actions which will achieve the twin goals of an appropriate
sanction, remedy and deterrance without resorting to litigation, lengthy
proceedings and conse$uent delays.

What is the o!"ective of Compounding of Offence?
Compounding of offence allows the accused to avoid a lengthy process of
criminal prosecution, which would save cost, time, mental agony, etc in
return for payment of compounding charges.

#oes S$%& have po'er to pass consent orders?
The Parliament of India has recognised SEBIs powers to pass an order with
consent of the parties. This will of the Parliament is clear from the words of
Section 15T of the SEBI Act 1992. Section 15T2! of the SEBI Act reads as
"nder#$15T 2! %o appeal shall lie to the Sec"rities Appellate Tri&"nal from an
order made
(a) by the )oard on and after the commencement of the
&ecurities +aws (&econd Amendment) Act, ,---.
(b) by an ad!udicating officer,with the Consent of the parties./
"hus, the Parliament in its wisdom has recogni0ed that &()I and its
authori0ed delegate have power to pass consent orders. &imilarly, courts
have well recogni0ed inherent powers to settle a case before them on an
application made by the parties.
&s compounding of an offence permitted?
&ection 12A of &()I Act permits compounding of offences by the court
where prosecution proceedings are pending.
What (ind of offences/cases can !e compounded or consented?
Consent Orders can be passed in respect of all types of enforcement or
remedial actions including administrative proceedings and civil actions e.g.
proceedings under &ections ,,, ,,A(,)(b), ,,) and ,,3 of &()I Act or
under (n$uiry Proceedings 4egulations or Ad!udication 4ules or e$uivalent
proceedings under the &ecurities Contracts (4egulation) Act ,-56,
3epositories Act ,--6 and other civil matters pending before &A"%courts.
Compounding of offence can cover appropriate prosecution cases filed by
&()I before the criminal courts.
Who can see( settlement of proceedings through consent order and
compounding?
Any person who is notified that a proceeding may or will be
initiated%instituted against him%her, or any party to a proceeding already
initiated%instituted, may, at any time, propose in writing for settlement.
What factors 'ill !e ta(en into consideration for the purpose of passing
Consent Order/ Compounding of offence?
A) 'ollowing factors, which are only indicative, may be ta#en into consideration
for the purpose of passing Consent Orders and also in the conte*t of
compounding of offences under the respective statute7
,. 8hether violation is intentional.
1. Party9s conduct in the investigation and disclosure of full facts.
:. ;ravity of charge i.e. charge li#e fraud, mar#et manipulation or
insider trading
2. <istory of non=compliance. ;ood trac# record of the violator i.e. it
had not been found guilty of similar or serious violations in the past.
5. 8hether there were circumstances beyond the control of the party
6. >iolation is technical and%or minor in nature and whether violation
warrants penalty.
?. Consideration of the amount of investors9 harm or party9s gain.
@. Processes which have been introduced since the violation to
minimi0e future violations%lapses.
-. Compliance schedule proposed by the party
,A. (conomic benefits accruing to a party from delayed or avoided
compliance.
,,. Conditions where necessary to deter future non=compliance by the
same or another party.
,1. &atisfaction of claim of investors regarding payment of money due to
them or delivery of securities to them.
,:. Compliance of the civil enforcement action by the accused.
,2. Party has undergone any other regulatory enforcement action for the
same violation.
,5. Any other factors necessary in the facts and circumstances of the
case.
At 'hat stage can Consent Orders !e passed?
Consent Order can be passed at any stage where probable cause of
violation has been found. In the event of a serious and intentional
violation, the process cannot be completed till the fact finding process is
completed whether by way of investigation or otherwise.
*o' 'ill a person propose to consent or compound a violation/offence?
A person can ma#e an application proposing administrative%civil consent by
writing to the B3ivision of 4egulatory Action, (nforcement 3epartment9 at
&()I9s Cumbai address. 8here compounding is proposed by a party, such
application may be made to the court and a copy can be addressed to the
D3ivision of Prosecution, (nforcement 3epartment/ at &()I9s Cumbai
address. (addresses givenat the bottom of this document).
At 'hat stage Compounding of Offence can ta(e place?
At any stage after filing criminal complaint by &()I. 8here a criminal
complaint has not yet been filed but is envisaged, the process for consent
orders will be followed rather than the one for compounding.
What are the principal terms and conditions of Consent Order and
Compounding of offence?
Consent orders are passed by Competent Authority%&A"%Court where
proceedings are pending, sub!ect to the party ta#ing remedial action and
on such further consent terms including consent bars or consent penalties
as the Competent Authority%&A"%Court where proceedings are
pending, may find appropriate in the facts and circumstances of the case.
Consent orders can be passed either a) admitting guilt or b) without
admitting or denying guilt. 8here an order is passed without admitting or
denying guilt, such person shall never represent subse$uently that he%she
is not guilty. In the event such a representation is made, the enforcement
process may be reopened. &imilar appropriate terms will be sought by &()I
from Court where the prosecution is pending.
What is the process for passing consent orders/ compounding of
offences?
8hen the proposal of settlement is submitted by the party, it will be
e*amined by a high powered Committee headed by a retired high court
!udge. 8here the Committee finds the terms for passing a consent order
inade$uate, it may as# the party to revise the consent terms. "hereafter,
the Committee will submit its views%recommendations to the Ad!udicating
Officer%Competent Authority where proceedings are pending for passing
consent order. "he above procedure and factors and waivers shall be
applied for considering the proposals of composition of offences under the
&()I Act, &C4A and the 3epositories Act, ,--6, wherever applicable. Any
party who wishes to compound an offence shall file an appropriate
application before the court where complaint is pending with a copy
addressed to the Prosecution 3ivision, (nforcement 3epartment
of &()I9s Cumbai office which will forward the application% re$uest to be
placed before the highpowered Committee. "he terms of compounding as
recommended by the Committee and approved by the Competent Authority
would be placed before the court by the Prosecution 3ivision by way of
written submissions or application, as appropriate, for passing orders as
the court deems fit. 8here a matter is pending before &A"%Court, the same
consent process will be underta#en and the draft consent terms
recommended by the Committee and approved by the Competent Authority
will be filed before the &A"% Court. "he &A"%Court may, if found fit, pass an
order in terms of the consent terms and sub!ect to such further terms as
the &A"% Court may find appropriate in the facts and circumstances of the
case.
Will S$%& o!tain 'aivers 'hile passing the Consent Order?
Ees, while considering the proposal of the Party, &()I will obtain a waiver
from the Party of ta#ing any legal proceedings against &()I concerning any
of the issues covered by the consent order.
"he Party shall waive7
,. all hearings pursuant to the statutory provisions under which
the proceeding is to be or has been instituted.
1. the filing of proposed findings of fact and conclusions of law.
:. proceedings before the )oard or any officer.
2. all post=hearing procedures. and
5. Appeal%review before%by &A"%court.
)y submitting an offer of settlement the Party shall further waive7
a. such provisions of the 4egulations or other re$uirements of law
as may be construed to prevent any officer of &()I from
participating in the preparation of, or advising the Competent
Authority as to, any order, opinion, finding of fact, or conclusion of
law to be entered pursuant to the offer. and
b. any right to claim bias or pre!udgment by &()I based on the
consideration of or discussions concerning settlement of all or any
part of the internal proceeding.

In addition, if the Party violates the consent order subse$uently, the party
shall waive a plea of limitation for reopening the case.
Similar appropriate wai'ers will &e so"ght &( SEBI from the acc"sed &efore )o"rt
where the prosec"tion is pending.
When 'ill final acceptance of any offer of settlement/Compounding come
in to effect?
"he final acceptance of any offer of settlement%Compounding will come in
to effect only upon the Competent Authority%&A"%Court passing the consent
order%Compounding order.
What will be the procedure after passing Consent Orders?
"he consent order will be published through press release and would be put
on &()I website. In cases where a Party underta#es compliances, it has to
comply with the same as per agreed schedule.
Whether the party has to pay any compounding/settlement charges for
mitigating the violation?
Ees. 3epending upon the facts and circumustances of the case, gravity of
alleged violation, interest of investors and the securities mar#et and
deterent affect, amount payable by a party will be decided. In pending
prosecution cases and cases pending before &A"%courts, the party is also
liable to pay legal e*penses incurred by &()I.
Whether S$%& can consent+ if the enforcement order 'as already passed
and appeal is pending !efore Securities Appellate ,ri!unal/ Court?
8here a matter is already in &A"%Court, the same consent process will be
underta#en and the draft consent terms will be filed before the &A"%Court
with an appropriate prayer to consider the terms of the consent and
sub!ect to such further terms as the &A"%Court may find appropriate in the
facts and circumstances of the case.
What 'ill !e the remedies availa!le 'ith S$%&+ if the Consent Order is
violated !y a party?
'ailure to obey consent orders would invite appropriate action, including for
violating &()I orders, besides revival of the pending action. In this conte*t
any proceeding which had been #ept in abeyance pending the consent
process will begin from such stage at which it was suspended.
What 'ill !e the conse-uences of non-acceptance?
If &()I re!ects the offer of settlement, the person ma#ing the offer shall be
notified of the same and the offer of settlement shall be deemed to
be withdrawn. "he re!ected offer shall not constitute a part of the record in
any proceeding against the person ma#ing the offer, provided, however,
that re!ection of an offer of settlement does not affect the continued
validity of waivers. &()I and the Party will be free to resort to legal
recourse as may be available to them under law and neither &()I nor the
Party would be entitled to use any information relating to the settlement
process in such proceedings. In cases where &()I is not inclined to accept
&ettlement%Compounding of offence, &()I would file its ob!ections before
&A"%Court for consideration.
.oreign $/change Management Act 0.$MA1+ 2333
compounding of contravention
What is meant !y contravention and compounding of contravention?
Contravention is a breach of the provisions of the 'oreign (*change
Canagement Act ('(CA), ,--- and rules% regulations% notification% orders%
directions% circulars issued there under. Compounding refers to the process of
voluntarily admitting the contravention, pleading guilty and see#ing redressal.
"he 4eserve )an# is empowered to compound any contraventions as defined
under section ,:

of '(CA, ,--- e*cept the contravention under section :(a)
ibid, for a specified sum after offering an opportunity of personal hearing to
the contravener. It is a voluntary process in which an individual or a corporate
see#s compounding of an admitted contravention. It provides comfort to any
person who contravenes any provisions of '(CA, ,--- Fe*cept section :(a) of
the ActG by minimi0ing transaction costs. 8illful, malafide and fraudulent
transactions are, however, viewed seriously, which will not be compounded by
the 4eserve )an#.
Who can apply for compounding?
Any person who contravenes any provision of the '(CA, ,--- Fe*cept section
:(a)G or contravenes any rule, regulation, notification, direction or order
issued in e*ercise of the powers under this Act or contravenes any condition
sub!ect to which an authori0ation is issued by the 4eserve )an#, can apply for
compounding to the 4eserve )an#. Applications see#ing compounding of
contraventions under section :(a) of '(CA, ,--- may be submitted to the
3irectorate of (nforcement.
When should one apply for compounding?
8hen a person is made aware of the contravention of the provisions of '(CA,
,--- by the 4eserve )an# or the 'oreign Investment Promotion )oard ('IP))
or any other statutory authority or the auditors or by any other means,
she%he may apply for compounding. One can also ma#e an application for
compounding, suo moto, on becoming aware of the contravention.
What is the procedure for applying for compounding?
"he form given should be with the appropriate anne*ure to the A.P.(3I4
&eries) Circular Ho. 56 dated Iune 1@, 1A,A issued by the 4eserve )an# of
India, can be used for applying for compounding. "he same can also be
downloaded from the 4eserve )an#9s website. 'urther the documents as
mentioned in A.P.(3I4) circular nos. 5? and 1A dated 3ecember ,:, 1A,, and
August ,1, 1A,: respectively should also be submitted along with the
application.
Are any fees re-uired to !e paid for see(ing compounding?
Ees. "he application in the prescribed format along with necessary documents
and a demand draft for 4s. 5AAA%= (4upees five thousand only) drawn in
favour of the D4eserve )an# of India/ should be sent to the 4eserve )an# of
India while sending the re$uest for compounding.
What are the details re-uired to !e filled in the application form?
Along with the application in the prescribed format, the applicant may also
furnish the details as per the Anne*es= relating '3I, (C), O3I, the A.P. (3I4
&eries) Circular Ho. 5? dated 3ecember ,:, 1A,, and A.P. (3I4 &eries)
Circular Ho. 1A dated August ,1, 1A,:) along with an underta#ing that they
are not under investigation of any agency such as 3O(, C)I, etc., a copy of
the Cemorandum of Association and latest audited balance sheet while
applying for compounding of contraventions under '(CA, ,---
Compounding of Offences 4nder companies Act 2356
%enefits of compounding7
In case of prosecution for an offence in a criminal court, the accused has to
appear before the Cagistrate at every hearing and an advocate needs to be
engaged for appearing before the criminal court. 'urther court proceedings
are time consuming and e*pensive. <owever, in case of compounding under
the Act , the accused need not appear personally and can be discharged on
payment of composition fee which cannot be more than the ma*imum fine
leviable under the relevant provision. It has been clarified by the 3CA vide
circular dated 1@=2=,--: that compounding of offence does not amount to
conviction by a court of law and the prohibition contained in paragraph (,)(a)
of &chedule JIII to the Act does not apply.
Which offences under Companies Act 2356 can !e compounded?
Offences under various &ections of Companies Act ,-56 (Bthe Act9) can be
classified into following five categories7
a) Offences punishable with fine only.
b) Offences punishable with fine or imprisonment.
c) Offences punishable with fine or imprisonment or
both.
d) Offences punishable with imprisonment only.
e) Offences punishable with imprisonment and also
with fine.
As per &ection 61,A of the Act, offences committed by a company or any
officer thereof under the above first three categories are compoundable
whereas offences under remaining two categories are not compoundable.
'urther, offences under other Acts li#e (mployees9 Provident 'unds Cisc.
Provisions Act ,-51 or (mployees9 &tate Insurance Act ,-2@ cannot be
compounded under &ection 61,A of Companies Act.
Offences committed by persons other than a company or its officers (li#e
trustees, li$uidators, contributories etc.) cannot be compounded under the
Act.
Which offences are not compounda!le?
i) Offences under &ections 5@A(5), 5@A(6)(a)(i)
(ii), 5@A(,A), 5@AA(-) relating to
acceptance of deposits
ii) &ection 6@A(i)7 Personation for ac$uisition etc.
of shares.
iii) &ection ?:(1))7 'ailure to ma#e payment
within 6 months from the e*piry of the @
th
day.
iv) &ection @AA(:)(a) (b)7 'ailure to comply
with &ection @AA.
v) &ection ,A@=I(2)(a)7 Contravention of
&ections ,A@) or ,A@3.
vi) &ection ,,67 Personation of shareholder
vii) &ection ,,?C(5)7 3efault in complying with
order of "ribunal.
viii) &ection ,5:)(:)(b)7 3eclaration by a trustee
as stated in &ection ,5:(:)(b).
i*) &ection 1A?7 Hot distributing dividend within
:A days.
*) &ection 1A-A(@)7 'ailure to comply with
&ection 1A-A.
*i) &ection 16-(,,)7 Contravention of &ection
16-(,A).
*ii) &ection 1-:A(5)(b)7 Political contribution
made contrary to &ection 1-:A
*iii) &ection 226A7 'ailure of directors and other
officers to complete the boo#s of account and
get them audited upto date of winding up
order made by "ribunal and submitted to
"ribunal.
*iv) &ection 52A7 'rauds by officers in relation to
winding up.
*v) &ection 52,(,)7 'ailure to maintain proper
boo#s of account in relation to winding up.
*vi) &ection 5@,KC(1)7 'ailure to furnish
information relating to Producer Company.
*vii) &ection 615(2)7 'ailure on the part of a
shareholder to pay compensation.
*viii) &ection 61@7 'alse statements as mentioned
therein.
*i*) &ection 61-7 'alse evidence given as stated
therein.
**) &ection 6:A(1)7 8rongful withholding of
property.
Whether second offence can !e compounded?
If a person has already compounded an offence, he is not eligible to apply for
compounding a similar offence for a period of : years from the date of
compounding the first offence. <owever, any second or subse$uent offence
committed after the e*piry of a period of : years from the date on which the
offence was previously compounded shall be deemed to be a first offence.
Who can ma(e an application for compounding?
&ection 61,A(,) of the Act provides that a company or an officer thereof who
has committed or who is alleged to have committed an offence can apply for
compounding the offence. &ection 5 of the Act defines the term Bofficer who
is in default9. It has been held that a compounding application by persons
who were not officers in default was to be re!ected. Amadhi Investments
Ltd., re. (1AA-) -5 &C+ 15571AA-) ,2- Com Cases 6,? (C+)).
When can an application for compounding !e made?
Application for compounding of offence can be made before or after institution
of any prosecution. 3efault should be made good before filing application.
In case prosecution is instituted, the case can be compounded before the
sentence is pronounced.
Which authority has the po'er to compound an offence?
"he offence can be compounded by the 4egional 3irector (43) where the
ma*imum amount of fine is upto 4s.5A,AAA%= and by the Company +aw )oard
(C+)) where the ma*imum amount of fine e*ceeds 4s.5A,AAA%=.
What is the amount of composition fee paya!le for compounding the
offence?
"he amount that may be specified by the authority to be paid for
compounding of offence cannot e*ceed ma*imum amount of fine that may be
imposed for the offence under the relevant provisions of the Act. 'urther, the
sum, if any, paid by way of additional fee under &ection 6,,(1) shall be
deducted from the amount specified for compounding of the offence. "he
amount should be decided #eeping in view factors li#e the nature of the
offence, financial position of the company, continuation of the default,
intention etc.
What is the procedure for ma(ing an application for compounding of an
offence under the Act?
"he company or the officers thereof can file online application for
compounding of an offence to the 4egistrar of Companies in e='orm 6, who
will forward the same to the 43%C+) togetherwith his comments thereon.
"he application should state the circumstances leading to the alleged offence
and whether the default was made good before or at the time of ma#ing the
application. &eparate application should be filed by each officer even for the
same offence. "he application should be accompanied by Power of attorney
for memorandum of appearance in 'orm 5 of C+) 4egulations, affidavit
verifying the content, detailed application as per the 4egulations, copy of
Cemorandum Articles of Association, copy of )alance &heet and &tatement
of Profit +oss etc. As per general circular Ho.,2%1A,1 dated 1,=6=1A,1
issued by CCA, filing fee should be paid as per Companies ('ees on
Application) 4ules ,---.
What is the procedure after ma(ing application for compounding of
offence?
An opportunity of oral hearing is provided to the company, its officers in
default, the 4egistrar or any other complainant by the compounding authority
#eeping in view principles of natural !ustice. After hearing all concerned, the
authority shall pass an order specifying the amount to be credited to the
Central ;overnment account for compounding the offence which should be
paid togetherwith e='orm 1,. &ection 61,A(:) of the Act provides that where
an offence is compounded before or after the institution of any prosecution,
intimation thereof should be given to the 4egistrar within ? days from the
date on which the offence is so compounded in e='orm 1, alongwith copy of
order and resolution passed by )oard of 3irectors of the company. If the
order is made after institution of any prosecution, 4egistrar should bring the
same in writing to the notice of the court where the prosecution is pending,
and on such notice the company or its officers in default shall be discharged
by the court.
Can directors of a company under li-uidation ma(e compounding
application?
"he 3CA vide circular dated 6=:=1AA1 has clarified that in view of the
provisions of &ection 226 read with &ection 61,A of the Act, there is no legal
bar for composition of offence under &ection 61,A. &ection 226 does not bar
criminal proceedings against the directors of the company for any offence
under the Act and the offences are compoundable. 8here the penal
provisions provide for proceedings against the companies also and if the
offences are compoundable, compounding will not be permissible against the
company in view of provisions of &ection 226 of the Act.
Whether application for compounding of offence !e re"ected !y the
authority?
"he power to compound an offence under &ection 61,A of the Act is
discretionary one and the authority can re!ect the application if the default is
not made good FGeneral Produce Company Ltd. Re (,--2) @, Comp Cas 5?A
C+)7 (,--2) 2 Comp +I --G.
Whether the authority has po'er to issue directions?
"he authority can also issue directions for filing any document, return etc.
with the 4egistrar within the period specified in the order alongwith the filing
fee and the additional fee payable under &ection 6,,. 'ailure to comply with
such directions is punishable and is compoundable only with the permission of
the court. Any officer or other employee of the company who fails to comply
with any such order shall be punishable with imprisonment for a term which
may e*tend to 6 months, or with fine not e*ceeding 4s.5A,AAA%= or with both.
What are the effects of compounding?
If the offence is compounded before institution of prosecution, it would act as
a bar to institution of any prosecution against the offender by the 4egistrar or
by a shareholder or by any person authorised by the ;overnment in relation
to that offence. <owever, mere submission of the application for
compounding does not operate as a bar for launching prosecution. If the
offence is compounded after institution of prosecution and such composition is
brought to the notice of the court by the 4egistrar in writing, the company or
its officer in default shall be discharged. 8here the offence falls within the
purview of &ection 61,A(6)(a), i.e. offence which can be compounded only
with the permission of the court, the composition thereof shall have the effect
of an ac$uittal of the accused as per &ection :1A)(@) of CrPC. In S.
Viswanathan v. State of erala F,---G ,,: &"C ,@1 (Ler.) it was held that the
department cannot reopen the matter on the ground that the actual
suppression was much higher.
&n 'hich cases court8s permission is re-uired for compounding of
offences?
&ection 61,A(6)(a) of the Act provides that offence which is punishable under
the Act with imprisonment or fine, or with both, shall be compoundable with
the permission of the Court in accordance with the procedure laid down in the
CrPC for compounding of offences. &ub=section (?) provides that no offence
specified in the &ection shall be compounded e*cept under and in accordance
with the provisions of the &ection. In the case of VLS !inance Ltd. v. "nion of
India # $rs. 3ecided on ,A
th
Cay 1A,: the &upreme Court has held that
powers of the Central ;overnment to compound offence under sub=section (,)
and sub=section (?) of &ection 61,A are parallel powers and permission of
court is not re$uired when compounding is done by Company +aw )oard.
What is the procedure for compounding under CrC?
In case a prosecution is pending before the "rial Court, procedure under CrPC
needs to be followed. &ection :1A of CrPC deals with compounding of
offences. "he complainant or the in!ured person can ma#e application to the
"rial Court. Parties themselves agree on the composition amount without any
say of the court. "he accused should appear before the "rial Court and may
engage an advocate. "rial court9s permission is re$uired for compounding and
on compounding the accused gets ac$uitted.
Who has to pay compounding fee?
It has been clarified by the 3CA vide its circular dated 1@=2=,--: that in the
case of a company composition fee shall be paid from its funds. <owever, the
directors%officers in default should pay the composition fee from their
personal funds.
Whether an appeal can !e filed against the order for compounding of
offence?
&ection 612) provides that notwithstanding anything contained in the CrPC
appeal can be filed by the Central ;overnment from an order of ac$uittal
passed by any court other than a <igh Court.