Settlement and compounding have become entrenched features of India’s regulatory and penal landscape. From securities law to foreign exchange and company law, these mechanisms aim to expedite resolution and ease the burden on adjudicatory bodies. Yet, across statutes, one common omission persists: there is no statutory requirement for the person seeking settlement to be given access to the material on which the alleged violation is based. This omission renders settlement proceedings, regardless of the statute, an exception to a foundational tenet of natural justice: the right to know the case against oneself.

Settlement and compounding are designed for administrative efficiency. Regulators often prefer negotiated closure over protracted enforcement. While this principle is not inherently problematic, the lack of procedural transparency is. Unlike formal adjudication, where noticees are entitled to the allegations and supporting material, settlement proceedings offer no such assurance. Applicants must decide whether to settle without access to the investigative findings or the evidentiary basis of the alleged violation.

The principle of audi alteram partem, the right to be heard, necessarily includes the right to know the material relied upon by the authority. In State Bank of India v. Jah Developers Pvt. Ltd. (2019) 6 SCC 787, the Supreme Court harmonized the Master Circular on Wilful Defaulters with natural justice, mandating the timely disclosure of committee orders and reasoned decisions.

This reflects the Court’s consistent view: where administrative or quasi-judicial decisions entail civil consequences, affected parties must be given full notice of the factual and evidentiary basis. Settlement proceedings, however, operate outside this framework.

Under Regulation 5 of the SEBI (Settlement Proceedings) Regulations, 2018, a settlement application may be filed only after the investigation is complete, implying a concluded factual record. Yet, the applicant has no right to inspect or receive the investigation report. In practice, SEBI treats these reports as internal documents. Applicants are typically provided only a summary of allegations or the show-cause notice, creating a structural imbalance.

In T Takano v. SEBI (2022) 8 SCC 162, the Supreme Court rejected SEBI’s claim that its investigation report was exempt from disclosure. The Court held:

“The appellant has a right to disclosure of the material relevant to the proceedings initiated against him… The disclosure of material serves a threefold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings and enhancing the transparency of the investigatory bodies and judicial institutions. The duty to disclose the material which forms the basis of the show cause notice is founded on the principles of natural justice.”

This principle, though articulated in the context of adjudication, applies equally to settlement, where the decision to compromise hinges on understanding the allegations.

In Ashok Dayabhai Shah v. SEBI, 2023 SCC OnLine Bom 2602, the Bombay High Court reaffirmed Takano, holding that, absent privilege or statutory bar, relevant documents must be disclosed to satisfy natural justice. Similarly, in Milind Patel v. Union Bank of India (2024) 251 Comp Cas 1, the Court emphasized symmetrical access to all relevant material, not just relied-upon documents, to ensure fairness.

These rulings underscore that disclosure is not merely about outcome accuracy but about procedural integrity.

Under the Foreign Exchange Management Act, 1999, compounding is administrative. The applicant submits a request; the authority determines the compounding amount based on internal criteria. However, the FEMA Compounding Rules and circulars do not require disclosure of investigative findings. Orders often cite the contravention and amount payable without revealing the evidentiary basis. Unlike SEBI, there is no judicial precedent under FEMA recognizing a right to disclosure, leaving the process opaque and inconsistent with natural justice.

Section 441 of the Companies Act, 2013, permits compounding of offences by the NCLT, Regional Director. However, applicants are not entitled to inspection of investigation reports under Sections 206–212, even when proceedings stem from SFIO inquiries. The compounding authority relies on undisclosed regulatory findings, leaving applicants unable to make informed decisions.

Across statutes, settlement and compounding regimes operate as systemic exceptions to natural justice. In adjudication, the right to notice and disclosure is well established. But in settlement, these safeguards are diluted, justified on the ground that settlement is voluntary. Yet voluntariness without knowledge is illusory. Consent to settle, without knowing the case, amounts to compelled compliance.

This design flaw is pervasive, from SEBI and FEMA to the Companies Act, Income Tax, Customs, and even the Competition Act’s nascent settlement mechanisms. All rely on internal assessments not shared with the applicant.

Disclosure can be balanced with confidentiality. Material may be shared with redactions or subject to confidentiality undertakings. Takano itself acknowledged this:

“…The respondents can withhold disclosure of those sections of the report which deal with third-party personal information and strategic information bearing upon the stable and orderly functioning of the securities market.”

Extending this principle to all settlement frameworks would enhance fairness without undermining regulatory efficiency.

The rise of settlement and compounding reflects a shift from punitive enforcement to negotiated resolution. But in doing so, regulators have carved out these regimes as exceptions to natural justice. Applicants are invited to settle without ever seeing the material that forms the basis of the accusation.

The Supreme Court’s reasoning in Takano and Jah Developers, and the Bombay High Court’s rulings in Ashok Dayabhai Shah and Milind Patel, affirm that disclosure is a non-derogable element of fairness. These principles must extend beyond formal adjudication.

It is time for every settlement and compounding statute to expressly incorporate the applicant’s right to inspect the material basis of the alleged violation. Only then can settlement be truly voluntary and truly just.

About the authors: Akshaya Bhansali is Managing Partner and Pulkit Lodha is an Associate at Mindspright Legal.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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