The Securities and Exchange Board of India (Sebi) has proposed a significant overhaul of its settlement framework aimed at making enforcement settlements simpler, faster and more predictable.
The market regulator has proposed replacing the existing Sebi (Settlement Proceedings) Regulations, 2018, with a new framework. Among the key proposals are the removal of an additional 20 per cent settlement charge in certain cases involving multiple proceedings and the introduction of a fast-track mechanism for settlements involving amounts of up to Rs 10 lakh.
Key changes proposed by Sebi
- Removal of 20 per cent additional charge: Sebi has proposed scrapping the additional 20 per cent settlement amount currently levied when multiple enforcement proceedings involving the same noticees are settled together.
- Fast-track settlement for amounts up to Rs 10 lakh: Cases involving settlement amounts of up to Rs 10 lakh would not require a meeting of the High Powered Advisory Committee (HPAC).
- Simplified approval process: Under the proposed fast-track mechanism, cases would move directly from the Internal Committee to a panel of Whole Time Members.
- Existing summary process to continue: The current summary settlement mechanism for specified violations would continue under the proposed fast-track framework.
- Settlement order after payment: After the applicant makes the required payment, the competent authority handling the proceedings would issue 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.
Consultations with stakeholders
Sebi’s proposals come after consultations with stakeholders and an analysis of settlement applications filed over 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The regulator found that when settlement applications were rejected or withdrawn, and enforcement proceedings subsequently resulted in penalties, the settlement amounts initially proposed were, on average, around eight times higher than the penalties eventually imposed.
Under the proposed framework, Sebi expects this ratio to decline to around four times.
The regulator said the revised approach would continue to ensure deterrence while making the settlement mechanism more appealing to applicants.
New method to calculate settlement amounts
Sebi has proposed a new method for determining settlement amounts by linking them to the minimum penalty prescribed under securities laws.
- Different multipliers based on applicant category: Different multipliers would be applied depending on the category of the applicant.
- Wrongful gains and investor losses excluded: Wrongful gains and losses suffered by investors would not form part of the base settlement amount.
- Separate recovery through disgorgement: Such wrongful gains or investor losses would continue to be recovered separately through disgorgement.
The regulator has also proposed clearer rules to determine the number of defaults.
Changes in counting defaults
Under the proposed framework:
- Defaults to be aggregated: The base amount would be calculated for each default count and then aggregated.
- No separate calculation for each provision: The amount would not be calculated separately for every individual legal provision allegedly violated.
- Single event, one default: Multiple failures involving event-based disclosures arising from a single event would be treated as one default.
Sebi has also proposed increasing the maximum number of mitigating factors that can be considered from three to five.
The additional mitigating circumstances could include a change in the control or management of a corporate entity, as well as 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.
- No final order passed: Interest would be charged at 9 per cent per annum from the transaction date until the settlement application is filed.
- Final order already issued: Interest would be charged at 9 per cent annually from the transaction date until the date of the final order.
- Higher rate after final order: Following the final order, the interest rate would increase to 12 per cent annually until the settlement application is filed.
- No interest on interest: No additional interest would be levied on the interest component itself.
For cases involving a large number of transactions, where calculating interest separately from 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 proposed for settlement applications
Sebi has also proposed extending the existing 60-day deadline for filing settlement applications in pending proceedings.
Currently, applicants are required to submit a settlement application within 60 days of receiving a show-cause notice.
Sebi has invited public comments on the proposed changes until September 4.
