Earlier this month, Sebi held meetings with law firms and market participants to seek feedback on its settlement mechanism. Participants said the regulator’s goal was to make the process simpler, faster, and more accessible by allowing parties to voluntarily settle cases rather than await regulatory action. Sebi’s actions could have an impact on pending settlement applications, which rose to 703 in FY24 from 434 in FY23 and 386 in FY22.
Lawyers flagged several recurring issues at the meeting. They said Sebi’s approach of adding base amounts for every charge, even for a single violation, sharply raised overall settlement costs. Many also criticised the inclusion of unrelated base values, arguing that they artificially inflated the total amount.
Another concern was that the internal committee often imposed non-monetary conditions such as market bans, even when the original notice mentioned only monetary penalties. Lawyers said this was beyond the committee’s scope.
They also objected to Sebi’s requirement that companies declare an ‘officer in default’ as a settlement term, even though settlements are approved without an admission of guilt. Experts said this undermined the principle that settlement shouldn’t suggest wrongdoing.
Some participants also questioned the inclusion of a 12% interest charge on disgorgement amounts – sum of money a wrongdoer is legally forced to give up because they obtained it illegally or unethically – which is not specified in Sebi’s regulations.
Calls for standardisation
A major concern raised at the meetings was around the wide discretion Sebi has in deciding settlement sums. Although there is a formula for calculating settlements (including base amounts, conversion and regulatory action factors), Sebi can still impose larger amounts at its discretion. The regulator’s multi-tiered process includes an internal committee of senior officials, a high-powered advisory panel with retired judges and market specialists, and final approval by Sebi’s whole-time members.
Lawyers said large settlement sums often discourage applicants, and that some parties prefer to seek interim relief or face adjudication rather than opt for settlement, given the large amounts sought. “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,” said Abhiraj Arora, former Sebi officer and partner at Saraf and Partners, a law firm.
In one front-running case, an individual with unlawful gains of about ₹28 lakh faced a settlement in which his sister was asked to pay ₹72 lakh (settlement amount plus disgorgement sum and interest) and he was asked to pay ₹47 lakh (settlement amount).
In another case involving 14 entities, the total unlawful gain was less than ₹40 lakh for 10 entities, but their settlement amount totalled ₹44 lakh. The indicative settlement amount for all entities was ₹6.8 crore against total unlawful gains of around ₹3 crore.
Lawyers also cited a failed settlement involving Reliance Industries Ltd (RIL) in 2020. Although Sebi proposed ₹3,000 crore, Reliance countered with ₹1,000 crore. The settlement failed, and Sebi later imposed a penalty of just ₹25 crore.
The case, dating back to 2007, involved allegedly manipulative trades in the shares of the erstwhile subsidiary Reliance Petroleum Ltd (RPL), which later merged with RIL. Sebi alleged that RIL used agents to engage in fraudulent transactions in both the cash and futures segments before selling a stake in RPL.
“For high-stakes violations, the proposed settlement amount can be so high that entities would rather face adjudication,” said Sidharth Kumar, former Sebi officer and senior associate at law firm BTG Advaya.
Non-monetary penalties
Beyond costs, lawyers criticised several procedural aspects of Sebi’s settlement rules. A major contention was the imposition of non-monetary penalties such as market bans by the internal committee, even when not part of the original notice. Another contentious practice is the requirement that intermediaries declare an officer in default despite no admission of guilt, which lawyers said undermines the spirit of settlement.
Akshaya Bhansali, managing partner at Mindspright Legal, said, “Applicants aren’t supplied with investigative material, leaving them unable to make informed representations. The approach to naming lenders lacks uniformity, while mitigating factors are applied subjectively across committees.”
Bhansali added that inconsistencies persist in calculating the interest on disgorgement amounts. “Sometimes interest is levied from the moment of violation, sometimes from the close of the probe period. Clear guidance is required,” he said.
Sebi has invited written suggestions from law firms, which will be discussed later this month before the consultation paper is finalised. One of the anticipated suggestions concerns the power of the internal committees. Lawyers said Sebi seldom negotiates base values during internal committee meetings, raising doubts about flexibility in negotiating the base settlement amount.
Queries sent to Sebi remained unanswered.
One-sided process
The regulator’s multi-tiered approval chain, from internal committees to high-powered advisory panels (HPACs) and whole time members (WTMs), has also drawn criticism.
Kumar explained that while parties can present their case to the internal committee, they lack access to HPAC, which only hears Sebi’s side. “This undermines principles of natural justice. Only in rare, high-stakes matters does HPAC interact with applicants,” he said.
WTMs can also veto HPAC decisions and send cases back to restart the process, prolonging resolution. “Ideally, rejected cases should be remanded back to HPAC for reconsideration,” Kumar added.
Lawyers also said settlement orders, even those issued by adjudicating officers, were often cryptic, providing little insight into Sebi’s calculations or rationale. “While confidentiality concerns are valid, a balance can be struck, as seen in NCLT’s merger orders, where non-confidential details are publicly accessible. Since settlement amounts go to the Consolidated Fund of India (CFI), Sebi must ensure there is no arbitrage between adjudication and settlement and that public funds are protected,” he said.
Bhansali added that a lack of a clear formula for multi-regulatory violations, such as simultaneous breaches of listing obligations and disclosure requirements (LODR) and takeover norms, leaves applicants in the dark about their exposure.
“If these issues are resolved, the process will become far more transparent, allowing applicants to negotiate key terms rather than accept them as fait accompli,” Bhansali said.
