The Securities and Exchange Board of India (SEBI) has initiated a comprehensive overhaul of its settlement regulations, aiming to address mounting concerns about disproportionately high penalties and inflexible non-monetary terms that have drawn criticism from market participants.
Feedback Sessions Highlight Key Concerns
Earlier this month, SEBI conducted crucial meetings with law firms and various market stakeholders to gather feedback on its current settlement mechanism. The regulator's objective is to create a more streamlined, efficient, and accessible process that encourages voluntary settlements rather than prolonged regulatory battles.
The number of pending settlement applications has seen a significant increase, rising to 703 in FY24 from 434 in FY23 and 386 in FY22, highlighting the growing need for reform in this area.
Major Issues Identified by Legal Experts
Legal professionals participating in the discussions raised several critical concerns. They pointed out that SEBI's practice of adding base amounts for every charge, even for single violations, substantially inflates overall settlement costs. Many lawyers also criticized the inclusion of unrelated base values that artificially increase the total settlement amount.
Another significant issue involves the imposition of non-monetary penalties such as market bans by internal committees, even when the original notice mentioned only monetary penalties. Legal experts argue this exceeds the committee's authorized scope.
The requirement for companies to declare an 'officer in default' as a settlement condition has also drawn objections, particularly since settlements are approved without any admission of guilt. This practice, according to experts, undermines the fundamental principle that settlement shouldn't imply wrongdoing.
Calls for Standardization and Transparency
A primary concern emerging from the discussions revolves around the extensive discretion SEBI exercises in determining settlement amounts. Although a formal calculation formula exists, the regulator retains authority to impose larger amounts at its discretion.
Abhiraj Arora, former SEBI officer and partner at Saraf and Partners, noted that "the settlement framework may require greater balance. There appears to be a misalignment between the scale of the settlement amount proposed and the corresponding penalties imposed later."
Several case examples illustrate the severity of the problem. In one front-running case, an individual with unlawful gains of approximately ₹28 lakh faced a settlement where his sister was asked to pay ₹72 lakh while he was directed to pay ₹47 lakh. In another instance involving 14 entities, the total unlawful gain was less than ₹40 lakh for 10 entities, yet their combined settlement amount reached ₹44 lakh.
The failed Reliance Industries Ltd settlement from 2020 serves as a prominent example. While SEBI proposed ₹3,000 crore, Reliance countered with ₹1,000 crore. The settlement ultimately failed, and SEBI later imposed a penalty of only ₹25 crore for the 2007 case involving allegedly manipulative trades in Reliance Petroleum Ltd shares.
Procedural Challenges and Recommendations
Beyond financial concerns, lawyers identified several procedural issues with SEBI's current approach. Akshaya Bhansali, managing partner at Mindspright Legal, highlighted that "applicants aren't supplied with investigative material, leaving them unable to make informed representations."
The multi-tiered approval process has also faced criticism for lacking transparency. Sidharth Kumar, former SEBI officer and senior associate at BTG Advaya, explained that while parties can present their case to internal committees, they lack access to high-powered advisory panels that only hear SEBI's perspective.
SEBI has invited written suggestions from law firms, which will be discussed later this month before finalizing the consultation paper expected by year-end. The anticipated reforms aim to create a more balanced, predictable, and transparent settlement process that encourages voluntary compliance while maintaining regulatory effectiveness.
