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.
“SECURITIES LAWS” AND “SPECIFIED PROCEEDINGS” RE-DEFINED
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.
LIMITING THE SCOPE OF SETTLEMENT PROCEEDINGS
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.
WITHDRAWAL OF APPLICATION
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.
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.
The Settlement Regulations have changed and improved the mechanism for settlement proceedings in securities laws in the country.
This Article has been Compiled by Swati Garg (Senior Associate)
You can direct your queries or comments to the author at Swati@factumlegal.com
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