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Securities and Exchange Board of India (SEBI) offers a settlement mechanism as an alternative to prolonged adjudicatory proceedings for resolving violations of securities laws. The Settlement Regulations issued by SEBI allows applicants to settle potential enforcement actions by filing a settlement application, paying a settlement amount and, in some cases, agreeing to non-monetary terms.
Steps in settlement process
The terms of settlement are discussed between SEBI and the applicant in a meeting with the Internal Committee (IC) of SEBI. The proposed settlement terms are then placed before the High Powered Advisory Committee (HPAC) and the recommendations of the HPAC are placed before a panel of Whole Time Members (WTM) of SEBI, who accept or reject the terms of settlement. On acceptance of the settlement terms by the panel of WTMs, the applicant is issued a notice of demand for payment of the settlement amount and a payment of the settlement amount, the settlement order is issued by SEBI. The entire process ordinarily takes around 3-5 months. While designed to be a tool to reduce protracted disputes, concerns have emerged regarding its effectiveness and fairness.
SEBI’s discretionary power in fixing settlement amount
The Settlement Regulations prescribe a formula to calculate the settlement amount, basis several factors: a base amount (BA) for each violation type, base values (BV) that account for aggravating and mitigating factors, a Proceeding Conversion Factor (PCF) based on the application stage, and a Regulatory Action Factor (RAF) for past regulatory actions.
The final amount is calculated as (BV x BA) x (PCF + RAF). However, SEBI may recommend a higher amount, considering the facts and circumstances of the case and the gravity of the charges. In one instance, the final amount was increased on the basis of the status of the applicant, and the intention of SEBI to propose an amount that would act as a deterrent for the market.
Observations on the settlement approach
Today, there are a few challenges that affect the functioning of the settlement process. It has been observed that SEBI often applies BVs that may be only tangentially relevant to the case facts, resulting in higher settlement amounts. The settlement formula was introduced by SEBI to provide objectivity and predictability in deducing the settlement amount, and to curb the level of discretion given earlier to SEBI officers which sometimes led to absurdly high amounts for rather trivial violations.
SEBI has also introduced a Settlement Calculator feature on its website to guide users to arrive at an indicative settlement amount. To anyone familiar with the website feature, SEBI’s discretion is primarily exercised in calculating the BV. Each BV is in the range of 0.2 – 0.3, and every additional BV increases the final amount by around 25 percent. Thus, each BV is a significant hike in the amount, and SEBI seems to want to include as many as possible. Further, SEBI is often unwilling to negotiate the contentious BVs during IC meetings, stating that the amount had been recommended in similar cases by the HPAC, before whom the proposed settlement terms are placed.
In our analysis of settlement orders passed in the last few years, we have noticed the increasing tendency of SEBI to impose non-monetary settlement terms, such as undertakings of compliance, holding an officer in default and recovering the settlement amount from them, and voluntary undertaking to be debarred from the securities market for a fixed period, amongst others.
In some cases, SEBI has imposed a non-monetary term when the show cause notice which was being settled itself only sought to impose a penalty and not pass any directions, leading to a situation where the terms of settlement were more stringent than the terms of adjudication and went beyond the scope of the show cause notice. Further, the settlement orders earlier only listed the provisions alleged to be violated by the applicant and a cursory overview of the matter. Now however, recent settlement orders read much like adjudication orders with details about the applicant, such as the name of their employers and facts of the show cause notice and SEBI’s findings in the matter, stopping just short of an official finding of fault. After this exposition, the settlement orders usually make a noting that the proceedings are being settled by the applicants “without admitting or denying of the findings of fact and conclusions of law.”
The impact of the above observations is also seen in SEBI’s annual report for FY2023-24, which highlights certain important aspects regarding the settlement mechanism:
| Year | 2022-23 | 2023-24 |
| Pending at the Beginning of the Period | 221 | 137 |
| No. of Settlement Applications Received | 386 | 434 |
| No. of Applications Disposed of by Passing Orders | 185 | 114 |
| No. of Applications Rejected/ Withdrawn/Returned | 285 | 169 |
| Pending at the End of the Period | 137 | 289 |
| Settlement Amount (in crores) | 125.6 | 94.5 |
SEBI received 434 applications for settlement in FY2023-24, but only 114 applications were settled, while 169 applications were either returned, rejected, or withdrawn. The high rejection/withdrawal rate may be due, among other reasons, to many applicants finding the settlement terms unacceptable. Further, the number of pending settlement applications increased from 137 at the end of FY2022-23 to 289 at the end of FY2023-24. The increasing number of pending applications may suggest a lack of efficiency or understaffing of the settlement division, but such numbers are unlikely to comfort those who believed that settlements are a viable alternative to litigations.
Conclusion
To ensure the SEBI settlement mechanism fulfils its intended purpose, it is crucial to address the identified shortcomings. By refining the calculation of settlement amounts to avoid excessive penalties, ensuring transparency and fairness in the application of non-monetary terms, and streamlining the settlement process to reduce pending applications, SEBI can enhance the effectiveness of this mechanism. Additionally, it is important to limit the disclosure of detailed facts in settlement orders to protect the reputation of applicants, as these orders are often picked up by the media.
It is also worth noting that in many cases, applicants file a settlement application to prolong and delay the adjudication of the show cause notice and SEBI should be lauded for effectively disposing of such settlement applications, ensuring that the process remains efficient and fair. Ultimately, a well-functioning settlement system will not only provide a viable alternative to litigation but also reinforce trust in the regulatory framework, promoting a more robust and fair financial market.