SEBI Revisits the Settlement Mechanism

[Ambika Mehrotra is a Manager in the Corporate Law Services Division of Vinod Kothari & Company]

Background to the SEBI Settlement Mechanism

The settlement mechanism for violation of laws related to securities had been introduced in India in 2007. Further, in order to factor in various issues and aspects relating to its enforcement mechanism, the Securities and Exchange Board of India (‘SEBI’) framed a system to pursue a quantifiable settlement mechanism that took the form of the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (“Settlement Regulations, 2014”). Under these Regulations, SEBI can initiate various types of proceedings such as criminal proceedings, civil-quasi judicial proceedings, settlement or compounding and recovery. Thus, in order to avoid forum shopping by applicants and resultant delays in the enforcement, a High Level Committee was set up under the Chairmanship of Justice Anil R Dave, a former judge of the Supreme Court of India, which came out with a report on settlement mechanisms under securities laws that attempts to revamp the settlement proceedings. Thereafter, on requisite consideration of public comments, the changes to settlement mechanism were agreed upon by SEBI in its board meeting held on 18 September 2018 which approved the framing of the Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations, 2018”) which replaced the Settlement Regulations, 2014 by way of a notification dated 30 November 2018. The said Regulations shall come into effect from 1 January 2019.

Besides providing better clarity and eliminating the prevailing discrepancies in the existing mechanism, the Settlement Regulations, 2018 have come up with certain material changes in the prevailing settlement mechanism under SEBI. The post therefore intends to summarize the salient features of the said Regulations.

Redefining “Securities Laws” and the “Specified Proceedings” initiated with respect to the same

The most important change that has been brought in under the Settlement Regulations, 2018 is a widening of the scope of the laws covered under the proceedings which earlier provided for the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. They now also include within their ambit the relevant provisions of any other laws to the extent they are administered by SEBI, which thereby provides that all other laws wherein any of the provisions are governed by SEBI shall be covered by the said Regulations. Also, the Settlement Regulations, 2014 only included the proceedings initiated by SEBI which has been clarified by the Settlement Regulations, 2018 to provide that the specified proceedings for the violation of securities laws shall not only include the proceedings that may be have been so initiated but also those which are still pending before SEBI or any other forum. 

Non acceptance of settlement proposal for proceedings pending before the court or tribunal

Under the Settlement Regulations, 2014 any person intending to dispose of any proceedings under securities laws which were pending before the tribunal or a court, wherein the SEBI was involved could also file the settlement application. Also, the applicant who has applied for compounding of an offence before a court for the same cause of action related to the specified proceedings was also permitted to make an application under the said regulations in respect of the specified proceedings. However, such provisions with respect to the applications made before the court or tribunal have now been done away with under the new Regulations.

Consideration of the settlement applications

Under the new regulations SEBI may itself consider the settlement applications, if it is satisfied that there was sufficient cause for not filing it within the specified period which were earlier sufficient if considered by the panel of whole time members. Also, there is no such requirement to accompany an application for condonation of delay in the said cases. Herein, the provisions have not only altered the settlement amount but also provided that such delayed applications would not be considered if filed after 120 calendar days from the expiry of the period specified.

Altering the scope of settlement

The Settlement Regulations, 2018 to a certain extent may be construed as widening the scope of settlement by considering the applications where the alleged default was committed within a period of 24 calendar months from the date of the last settlement order. Having said that, it is also pertinent to note that SEBI may not consider any such specified proceedings wherein the alleged default tends to: (i) have a market wide impact, (ii) cause losses to a large number of investors, or (iii) affect the integrity of the market.

Further, the scope of settlement of specified proceedings which shall be taken into consideration has also been narrowed to the extent that any application made by a wilful defaulter, a fugitive economic offender or a person who has defaulted in payment of any fees due or penalty imposed under securities laws shall not be considered by SEBI. Whereas, the earlier regulations provided that breach of laws governing insider trading, fraudulent and unfair trade practices shall not be considered for settlement, the new regulations evidently provide that in order to refuse a settlement application SEBI shall take into consideration the three parameters mentioned as above. Therefore, violation of laws pertaining to insider trading, fraudulent and unfair trade practices not having market wide impact (such as front running, mis-selling to an investor, violation of internal code of conduct in insider trading) or where third-party interests are not involved, shall now be considered for settlement under the said regulations.

Constitution and working of the High Powered Advisory Committee

The constitution of the High Powered Advisory Committee (“HPAC”) which earlier consisted of a retired judge of the High Court may also include a judicial member who has been the judge of the Supreme Court in place of the same and the meetings of the members of the HPAC shall include meeting through audio-video electronic means or through the medium of electronic video linkage. Also, as a means of internal fortification, there has been further specification by introducing a specified procedure to provide a clarity on the working of the HPAC.

Notice of settlement

The regulations also provide a new format under Schedule II of the regulations which pertains to the settlement notice to be issued by SEBI prior to the issuance of the show cause notice in order to provide the noticee an opportunity to file a settlement application within 15 calendar days from the date of receipt of the settlement notice.

Settlement with confidentiality

To keep pace with the securities regulators globally, SEBI has also introduced the concept of settlement of the proceedings in confidentiality. As observed time and again, most of the provisions in SEBI have been adopted from US laws. The insertion of provisions dealing with confidentiality have been adopted though an understanding from the US Securities Exchange Commission and the Competition Commission of India. According to the regulations, such privilege of confidentiality shall be provided to such applicants who agree 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”. However, the application herein shall be considered only in cases prior to or pending investigation, inspection, inquiry or audit. The regulations provide the specified contents in Schedule IV, which has been specifically included for furnishing all the relevant disclosures, information and evidence relating to the commission of any violation of securities laws.

Concept of settlement schemes

The Settlement Regulations, 2018 have introduced a new term called “settlement schemes”. SEBI shall specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme shall deemed to be a settlement order under the regulations.

Conclusion

Considering the revised framework under the Settlement Regulations, 2018, one may analyze the intent behind the same which is timely settlement of proceedings related to securities laws and majorly preventing its negative impact on the market and investors. Accordingly, SEBI has revisited the complete mechanism in order to strengthen its procedures with respect to the settlement of proceedings pertaining to the defaults under the securities laws not only by involving the provisions of confidentiality but also including stricter norms while dealing with such settlement applications and proceedings which apparently state defaults. In light of the same, such casual defaulters and other perpetrators of serious offences deteriorating the market at large shall not be assisted with the provisions under the settlement mechanism.

– Ambika Mehrotra