Settlement Proceedings in relation to violation of provisions in securities laws have been conducted under a mechanism by the Securities Exchange Board of India (“SEBI”) since 2007. The last legislation on settlement proceedings was stipulated by SEBI in 2014. The said regulations apart from giving SEBI other powers of initiating proceedings on its own, also gave it the power to initiate settlement proceedings.
However, over a period, certain loopholes were noticed within the functioning of SEBI and the settlement regulations which hindered its effective implementation. It was noticed that certain applicants were prevented from settling securities violation in cases where they have settled too many applications within a specific period or have repeatedly attempted to settle the same offence, and the Settlement Regulations placed restrictions on certain categories of serious offences which could not be settled via consent mechanism including default relating to trading, failures to make an open offer, and serious fraudulent and unfair trade practices. Another major drawback was a lack of transparency in the system of calculating settlement amount, which brought in unpredictability in calculation of profit and loss.
Therefore, a committee was set up by SEBI under  the  Chairmanship  of Justice Anil Dave Committee (“Committee”) , former judge of the Supreme Court of India which came out with a report on Settlement Mechanisms under securities laws which attempts to revamp the settlement proceedings. Thereafter,    on    requisite    consideration    on    the    public comments,  the  changes  to  settlement  mechanism  were  agreed  upon by SEBI  in  its Board   Meeting   held   on   Tuesday,   18thSeptember,   2018 which henceforth approved  the  framing  of Securities  and  Exchange  Board  of  India (Settlement Proceedings)  Regulations,  2018 (“Settlement Regulations, 2018”) which replaced the SEBI  (Settlement  of  Administrative  and  Civil  Proceedings)  Regulations,  2014 (“Settlement Regulations, 2014”) vide the notification dated 30th November, 2018 The said regulations shall come into effect from 1st January, 2019. The Settlement Regulations are the first piece of legislation in securities laws in India solely created for the purpose of regulating settlements in cases.
The most important change that has been brought vide Settlement Regulations, 2018  is  widening  the  scope  of the  laws  covered  under  the  proceedings. Securities Laws under the previous SEBI regulations on settlement proceedings had only given scope to the SEBI Contract (Regulations) Act, 1956 and Depositories Act, 1996. These regulations widen the scope by defining “Securities Laws” as:
“securities laws” means the Act, the Securities Contract (Regulations) Act, 1956 (42 of 1956), the Depositories Act,1996 (22 of 1996), the relevant provisions of any other law to the extent it is administered by the Board and the relevant rules and regulations made thereunder;
By adding “any other law”, the Settlement Regulations provide for the inclusion of other laws as well in relation to securities laws. This clause has widely increased the ambit of applicable laws to these regulations.
Further, “specified proceedings” in the Settlement Regulations have been defined as:
“specified proceedings” means the proceedings that may be initiated by the Board or have been initiated and are pending before the Board or any other forum, for the violation of securities laws, under Section 11, Section 11B, Section 11D, sub-Section (3) of Section 12 or Section 15-I of the Act or Section 12A or Section 23-I of the Securities Contracts (Regulation)Act, 1956 or Section 19 or Section 19H of the Depositories Act, 1996, as the case may be;

The definition provides for scope to cases which are pending before the SEBI Board or any other forum which is an effective tool to quantify settlement proceedings. The scope of pending cases has been re-iterated in further regulations of the Settlement Regulations.
There are provisions in the new Settlement Regulations which deny settlement proceedings to certain categories of individuals under Chapter III which talks about the scope of settlement proceedings. Regulation 5 (2) lays down factors affecting which an alleged default will not come under the scope:

(2) The Board may not settle any specified proceeding, if it is of the opinion that the alleged default, –
1.      has market wide impact,
2.      caused losses to a large number of investors, or
3.      affected 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.

The earlier regulations provided that breach of laws governing insider trading, fraudulent and unfair trade practices shall not be considered for settlement. However, in the Settlement Regulations, the scope of the settlement has been limited to non-triggering of the above factors.
Before communication of the decision by the panel members an application can be withdrawn by the applicant. Further, when an application is withdrawn by the applicant, then, he is not permitted to make another application in respect of the same default.
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.
To keep up with the development in consent mechanism globally, the Settlement Regulations 2018 have also introduced the concept of settlement of the proceedings in confidentiality. The regulations accord privilege of confidentiality 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”.
The Settlement Regulations have changed and improved the mechanism for settlement proceedings in securities laws in the country. Settlement Regulations 2018 has bolster the consent mechanism and reduce the administrative burden while also ensuring that casual defaulters and perpetrators of serious offences are not given leeway under the mechanism. 

The 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. However, there are certain critical aspects on which the regulations are mute. For instance, the definitions of “market-wide impact” and “large number of investors” in the regulations still remain subject to the SEBI’s discretion. It is important that the SEBI clarifies these issues to ensure that the settlement mechanism emerges as a holistic approach allowing for a speedy relief in comparison to its time consuming alternatives.
This Article has been Compiled by Swati Garg (Senior Associate)
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The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

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