The Securities and Exchange Board of India (SEBI) has just revamped the settlement mechanism for violation of securities laws which had been first introduced in 2007 and subsequently revised in 2014 as SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014
. These regulations allowed SEBI to initiate various types of proceedings such as criminal proceedings, civil-quasi-judicial proceedings, settlement or compounding and recovery.
Besides providing more clarity and eliminating some discrepancies in the existing mechanism, The Settlement Regulations, 2018 have come up with 8 material changes.
1. Redefining 'Securities Laws' and the 'Specified Proceedings'
The most important change is widening the scope of the laws covered under the proceedings which earlier included the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. The new mechanism says all other laws administered by SEBI shall be covered by the new regulations. Also, Settlement Regulations, 2014 only included proceedings initiated by SEBI. The new regulations include proceedings which are pending before SEBI or any other forum.
2. Non-acceptance of Settlement Proposal for Proceedings Pending before the Court or Tribunal
Under the Settlement Regulations, 2014, any person intending to dispose of any proceedings under securities laws which were pending before the tribunal or a court, where SEBI was involved , could also file the settlement application. Also, the applicant who has applied for compounding of an offence before a court for the same cause of action related to the specified proceedings was also permitted to make an application under the regulations. However, such provisions with respect to the applications made before the court or tribunal have now been done away with under the new regulations.
3. Consideration of the Settlement Applications
Under the new regulations, SEBI may itself consider the settlement applications, if it is satisfied that there was sufficient cause for not filing it within the specified period, which were earlier considered by the panel of whole-time members. Also, there is no such requirement to accompany an application for condonation of delay. The provisions have not only altered the settlement amount but also provided that such delayed applications would not be considered if filed after 120 calendar days from the expiry of the period specified.
4. Altering the Scope of Settlement
The Settlement Regulations, 2018, to a certain extent, may be construed as widening the scope of settlement by considering the applications where the alleged default was committed within a period of 24 calendar months from the date of the last settlement order. Having said that, it is also pertinent to note that SEBI may not consider any such specified proceedings, wherein the alleged default tends to -
i. Have a market-wide impact,
ii. Cause losses to a large number of investors, or
iii. Affect the integrity of the market.
Further, the scope of settlement of specified proceedings 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. Whereas the earlier regulations provided that breach of laws governing insider trading, fraudulent and unfair trade practices shall not be considered for settlement, the new regulations provide that in order to refuse a settlement application, SEBI shall take into consideration the three parameters mentioned as above. Therefore, violation of laws pertaining to insider trading, fraudulent and unfair trade practices not having market-wide impact (such as front-running, mis-selling to an investor, violation of internal code of conduct in insider trading) or where third-party interests are not involved, shall now be considered for settlement under the said regulations.
5. Constitution and Working of the High Powered Advisory Committee
The constitution of the high powered advisory committee (HPAC), which earlier consisted of a retired judge of the High Court, may also include a judicial member who has been the judge of the Supreme Court. The HPAC meetings can be through video linkage. There has been further specification by introducing a specified procedure to provide clarity on the working of the HPAC.
6. Notice of settlement
The regulations provide a new format under Schedule II of the regulations, which pertains to the settlement notice to be issued by SEBI prior to the issuance of the show cause notice in order to provide the noticee an opportunity to file a settlement application within 15 calendar days from the date of receipt of the settlement notice.
7. Settlement with confidentiality
Consistent with international practices, SEBI has introduced the concept of settlement of the proceedings in confidentiality. As per the regulations, such privilege of confidentiality shall be provided to 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."
However, the application shall be considered only in cases which prior to or pending investigation, inspection, inquiry or audit. The regulations provide the specified contents in Schedule IV, which has been specifically included for furnishing all the relevant disclosures, information and evidence relating to the commission of any violation of securities laws.
8. New concept—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 be deemed to be a settlement order under the regulations.
(The writer works in the Corporate Law Division Vinod Kothari & Company)