Sebi proposes major overhaul of settlement rules; fast-track route for cases up to ₹10 lakh

The Securities and Exchange Board of India (Sebi) has proposed a major revamp of its settlement framework to make enforcement settlements simpler, quicker and more predictable.

The market regulator has suggested replacing the existing Sebi (Settlement Proceedings) Regulations, 2018, with a new framework. The proposals include removing an additional 20% settlement charge in certain cases involving multiple proceedings and introducing a fast-track mechanism for settlements of up to ₹10 lakh.

Key changes proposed by Sebi

• 20% additional charge to be removed: Sebi has proposed eliminating the additional 20% settlement amount currently applicable when multiple enforcement proceedings involving the same noticees are settled together.
• Fast-track settlement up to ₹10 lakh: Cases involving settlement amounts of up to ₹10 lakh would not require a meeting of the High Powered Advisory Committee (HPAC).
• Simpler approval process: Under the proposed fast-track route, cases would move from the Internal Committee directly to a panel of Whole Time Members.
• Existing summary process retained: The current summary settlement mechanism for specified violations would remain in effect under the proposed fast-track framework.
• Settlement order after payment: Once the applicant makes the required payment, the competent authority handling the proceedings will pass the settlement order. If no proceedings are pending, the order would be issued by the panel of Whole Time Members.

Settlement amounts could become more predictable

Sebi's proposals follow consultations with stakeholders and an analysis of settlement applications filed during the past two years.

The regulator found that when settlement applications were rejected or withdrawn and enforcement proceedings subsequently resulted in penalties, the settlement amounts originally proposed were, on average, approximately 8 times the penalties ultimately imposed.

Under the proposed framework, Sebi expects this ratio to fall to about four times.

The regulator said the revised approach would continue to maintain deterrence while making the settlement mechanism more attractive to applicants.

New method to calculate settlement amounts

Sebi has proposed linking settlement amounts to the minimum penalty prescribed under securities laws.

• Different multipliers would apply depending on the applicant's category.
• Wrongful gains and investor losses would not be included in the base settlement amount.
• Such gains or losses would continue to be recovered separately through disgorgement.

The regulator has also proposed clearer rules for determining the number of defaults.

Changes in counting defaults

Under the proposed system:

• The base amount would be calculated for each default count and then aggregated.
• It would not be calculated separately for every individual legal provision allegedly violated.
• Multiple failures involving event-based disclosures arising from a single event would be treated as one default.

Sebi also wants to increase the maximum number of mitigating factors that can be considered from three to five.

Additional mitigating circumstances could include a change in the control or management of a corporate entity and the applicant's status as an independent director.

Proposed changes to disgorgement interest

Sebi has proposed a revised mechanism for calculating interest on disgorgement amounts.

• Where no final order has been passed, interest will be charged at 9% per annum from the transaction date until the settlement application is filed.
• Where a final order has already been issued, interest would be charged at 9% annually from the transaction date until the date of the final order.
• After the final order, the rate would increase to 12% annually until the settlement application is filed.
• No additional interest would be charged on the interest component itself.

For cases involving a large number of transactions, where calculating interest separately for each transaction date is difficult, Sebi has proposed using a weighted annual average and calculating interest from the midpoint of the relevant year.

More time is proposed for settlement applications

Sebi has also proposed extending the current 60-day deadline for filing settlement applications in pending proceedings.

At present, applicants are required to submit a settlement application within 60 days of receiving a show-cause notice.

The regulator said this period may not provide sufficient time for corporates and entities based outside India, particularly those that need additional time to make decisions due to complex organisational structures or overseas operations.

Sebi has invited public comments on the proposed changes until September 4.