Securities Law

SEBI’s Settlement Regulations 2018: Balancing Efficacy and Pragmatism

The Securities and Exchange Board of India (“SEBI”) has introduced the SEBI (Settlement Proceedings) Regulations, 2018 (“2018 Regulations”) to replace the extant SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (“2014 Regulations”). The 2018 Regulations have have come into force from 1stJanuary 2019 and are meant to add to and evolve the SEBI’s settlement framework so as to improve the existing processes and also act as an enabler for ease of doing business in the growing securities market. This article seeks to analyze the substantial developments brought forth by the 2018 Regulations.

 

Background

SEBI had first put forth a consent mechanism for the settlement of offences under securities law in 2007 by way of a circular, with the intent to save time and expenses of legal proceedings and expediting resolution. The idea was that in certain cases, it would serve SEBI and in turn, the market better to settle a violation of securities laws by consensus between the offender and SEBI, both deriving benefit from such an arrangement, without sacrificing on deterrence. This Circular followed a liberal approach comparable to major securities jurisdictions around the world. However, in 2012, SEBI issued another circular to keep out certain serious offences like insider trading, serious fraudulent and unfair trade practices (“FUTP”), front running, etc.

However, due to lack of clarity and having questionable authority, being merely a circular, this mechanism was replaced in lieu of the 2014 Regulations. While the 2014 Regulations were vested with the requisite authority, the same mechanism was very stringent in terms of the offences that fell under the ambit of settlement, excluding most regular offences, in an approach that was heavily criticized in the securities market for being too conservative. Further, the 2014 framework suffered with lack of clarity and predictability in determination of an application for settlement.

SEBI had constituted a High-Level Committee (“HLC”) under the Chairmanship of Justice A. R Dave (retired Judge of the Hon’ble Supreme Court of India). This Committee in its report dated 10th August 2018, had submitted that the scheme of the present Regulations be revised for the purpose of improving the existing processes and also act as an enabler for ease of doing business in the growing securities market. On the basis of this Report and after considering comments from the public, SEBI introduced the SEBI (Settlement Proceedings) Regulations, 2018 vide notification dated 30thNovember 2018.

 

Substantial Developments 

  1. Redefining “securities laws” & “specified proceedings”

As one of the primary changes to the settlement regime, the 2018 Regulation has expanded the realm of laws falling under the ambit of settlement. Previously, settlement proceedings were only possible with regard to the SEBI Act, the Securities (Regulation) Act, 1956 and the Depositories Act, 1996. Now, the 2018 Regulation stipulates that beyond the abovementioned laws, settlement proceedings can also be taken up with regard to ‘the relevant provisions of any other law to the extent it is administered by SEBI’[1].

According to the HLC, the rationale of this development was that even under the powers vested on SEBI under the Companies Act, 2013, SEBI should have the discretion to settle matters before it. Further, the amendment clarifies that under “specified proceedings”, SEBI is empowered to settle proceedings which may have been or have been initiated and are pending before any forum, for the violation of securities laws[2]. This expands the scope of the settlement mechanism to beyond pure securities laws in a pragmatic exercise.

  1. Limitations for Filing a Settlement Application

The 2018 Regulations have set out a limitation of 60 + 120 days on the filing of a settlement application where, though an application has to be filed within 60 days from the date of service of notice or supplementary SCNs, such an application may even be filed after this period subject to an upper limit of 120 days beyond the expiry the first 60 days[3]. SEBI may consider the delay in application only if it is satisfied that there is sufficient cause for not filing the application within the specified period. Further, even though an application may be filed after the first 60 days, the same would lead to an increase in the settlement amount by 25 percent[4].

  1. Evolving the Scope of Settlements

The 2018 Regulations have greatly expanded the scope of SEBI’s settlement regime in the following ways:

  • The previous prohibition on consideration of a settlement application where an offence has been committed within 24 months from the last settlement order, has been removed.
  • The blanket bar on settlement of certain offences like insider trading, front-running, FUTPs, etc., has now been removed. A new limitation has now been put into place which stipulates that SEBI may not consider an application for settlement in cases where the offence has, (i) a market wide impact, (ii) caused losses to large number of investors, or (iii) affected the integrity of the market[5]. This is a substantial and welcome departure from the past overly restrictive standard under the 2014 Regulations, and allows for a much-needed discretion in the hands of SEBI to engage in the value judgement of the severity offences vis-à-vis settlement of these offences.
  • Having said that, SEBI may not settle specified proceedings where the applicant is a wilful defaulter, a fugitive economic offender or has defaulted in payment of any fees due or penalty imposed under securities laws[6].
  1. Settlement with Confidentiality

Settling with confidentiality is an important aspect of the regulatory framework of the Securities and Exchange Commission of the US, Financial Conduct Authority in the UK and the Competition Commission of India among many other authorities. The same has finally been introduced by SEBI in the 2018 Regulations. It has thus been stipulated that SEBI may extend the benefit of confidentiality to an applicant in return for admitting (i) for the limited purpose of settlement of specified proceedings to be initiated and (ii) agreeing to “provide substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws”[7]. This has been made subject to certain conditions of equity and good measure between SEBI and the applicant for confidential settlement. However, the said confidentiality may be superseded in cases where (i) the same is required by law, (ii) the applicant has agreed to such disclosure in writing or (iii) there has been a public disclosure by the applicant[8].

The HLC has clarified that a whistleblower is not a person guilty of any violation of securities laws and therefore the question of settlement does not arise in such instances. Only a person guilty of a serious violation of securities laws and willing to give assistance to the Board against his accomplices may apply under Chapter IX.

  1. Settlement Notice

A new concept of a “settlement notice” has been introduced under the 2018 Regulations. It has been provided that a settlement notice may be issued in the format provided under Part B of Schedule III to the Regulations indicating the substance of the probable charges and enforcement actions before the issuance of a show cause notice by SEBI[9]. In such a case, the noticee is allowed 15 days to settle the matter before the Issue of the SCN. However, this provision does not apply to cases of Summary Settlement under Chapter VII of the Regulations. The HLC has drawn a distinction between the summary settlements and settlement notice in introducing this concept[10].

It must be noted that where the noticee does not file a settlement application within the stipulated 15 days in reply to the settlement notice, the specified proceedings shall begin and thereafter, the noticee shall only be permitted to file for settlement of the offence in respect of the proceedings pending before a Court or tribunal, after conclusion of the proceedings before the Adjudicating Officer or the Board, as the case may be[11]. This seems to be a measure to impute procedural classification and limitations to the settlement notice in a bid to make the offering of a settlement notice more appealing to the noticee. This should lead to a further rise in settlement of offences.

While it is a welcome move, this provision follows a take it or leave it approach. Firstly, the stipulated reply period of 15 days may be too short for a fair and reasonable consideration by the noticee as to whether or not to engage in settlement proceedings with regard to the offence. Secondly, in cases where noticee wishes to later settle the offence on the basis of the information put forth under the SCN, he is precluded from the same till the conclusion of the proceedings before the AO or SEBI. This may, in turn, lead to delays in the settlement mechanism owing to wastage of time and resources in conducting proceedings in cases where the noticee already wishes to settle after the issue of the SCN.

  1. Settlement Scheme

The 2018 Regulations have introduced a measure for SEBI to undertake a settlement scheme for any class of persons involved in respect of any similar specified defaults. Such an order under a settlement scheme is deemed to be a settlement order under the 2018 Regulations.

  1. Interim Directions

The 2018 Regulations explicitly stipulate that the filing of an application shall not prohibit the initiation of any proceedings, in so far as may be deemed necessary for the purpose of issuance of interim civil and administrative directions to protect the interests of investors and to maintain the integrity of the securities markets[12].

 

Conclusion

It can be concluded that SEBI has taken a substantial step in furthering the settlement regime in the securities market by introducing the 2018 Settlement Regulations. This new settlement framework has introduced various provisions that further the object of the settlements that are, saving of time and resources in cases where it falls in the interest of the market and SEBI to settle the offence rather than to incur the monetary and time expenditure from the both sides of the specified proceedings. Though the additions like confidential settlements and settlement notice are very welcome, they are reactionary and belated. The implementation of a successful settlement regime in the securities market had previously been hindered by the 2014 Regulations by casting out offences like insider trading, FUTPs, front running, etc. from the net of settlements. This lapse has now been set right under the 2018 Regulations. That being said, the 2018 Regulations have put forth a new blanket bar on settlement with willful defaulters, fugitive economic offenders and defaulter of fees or fines under securities laws. The 2018 Regulations are an exercise in balancing efficacy and pragmatism and as such should lead to a substantial development in SEBI’s settlement regime.


Endnotes:

[1]SEBI (Settlement Proceedings) Regulations, 2018, Regulation 2(e).

[2]Ibid, Regulation 2(f)

[3]Ibid, Regulation 4(1) and Second Proviso to Regulation 4(2).

[4]Ibid, Proviso to Regulation 4(2).

[5]Ibid, Regulation 5(2).

[6]Ibid,Regulation 5(4).

[7]Ibid,Regulation 19(1).

[8]Ibid, Proviso to Regulation 22.

[9]Ibid, Regulation 18.

[10]High Level Committee Report on the Settlement Mechanism, p 44.

[11]Ibid, Regulation 18(3).

[12]Ibid, Proviso to Regulation 8(2).

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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