SEBI publishes report on settlement mechanisms, seeks public comments

Varun Marwah

The Securities and Exchange Board of India (SEBI) has come out with a report on Settlement Mechanisms under securities laws, and is now seeking public comments on the same.

A High Level Committee was set up under the Chairmanship of Justice Anil R Dave, former judge of the Supreme Court of India.

The committee comprised advocate Pratap Venugopal (Member) and the core team of SEBI consisting of Ananta Barua (Whole Time Member), Babitha Rayadu (Chief General Manager), G Vijayakrishnan (General Manager), L Kajio Mao (Assistant General Manager) and Chaudhary Suraj (Manager).

Settlement for securities laws violations was introduced in India in 2007. In order to factor in various issues and elements in its enforcement mechanism, SEBI created a system in 2012 to pursue a quantifiable settlement mechanism that took the form of the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014.

There are several types of proceedings which the SEBI can initiate – civil-quasi judicial proceedings, criminal proceedings, settlement/compounding and recovery. This Report attempts to revamp the settlement proceedings. Most recommendations made in the Report are an attempt at avoiding forum shopping by applicants and resultant delays in enforcement.

The following changes have been proposed under the Report:

1. Amendment to definition of ‘securities laws’ under Settlement Regulations to include other laws by which the SEBI can administer civil and administrative proceedings. Currently, it only includes proceedings initiated under the SEBI Act, the SCRA, the Depositories Act, and the rules and regulations made thereunder. This way, powers given to SEBI under the Companies Act will also be recognised.

2. Recommending a more arduous approach, the Committee has proposed that no application for settlement should be entertained after hearing commences or after 120 days have passed since its filing with the Board. Further, it has been recommended that 25% of the settlement amount per annum be increased for filing after 60 days (of service of notice), as opposed to the current 5%.

3. The Committee has also recommended that an application for settlement shall not be filed for the same alleged default again, if the earlier application was rejected (currently it is allowed under ‘exceptional circumstances’). It has also recommended that the cooling off period of 24 months after a settlement order should not be applied if the application is with regard to a different cause of action.

4. Currently, defaults involving insider trading and fraudulent activities are not allowed to be settled. The Committee has recommended that proceedings relating to fraud (including insider trading, front-running and misstatements in offer documents) may be settled depending on the facts and circumstances of each case.

5. The Committee records that the present practice – which gives the applicant an option to withdraw a settlement application – is unwarranted. In order to curb such practice, it has been recommended that such application may be considered subject to an increase of at least 50% over the settlement amount otherwise payable.

6. The Committee has also recommended that despite pendency of settlement application, there may be cases where it is necessary to initiate proceedings to issue interim directions to protect interest of investors and maintain market integrity. It has, to that extent, recommended that the Settlement Regulations be amended to do away with the stay of such other proceedings.

7. Apart from structural changes to the High Powered Advisory Committee (HPAC), the Committee has recommended insertion of provisions which allow recusal by members of HPAC (due to conflict of interest) and the resultant manner for taking decisions.

8. The Committee has recommended that a Notice of Settlement (not summary settlement) for defaults other than the ones already covered, be included. The Committee recommends that the applicant will have to make the application for settlement within 15 days from the date of receipt of the settlement notice.

9. Adopting learnings from the US Securities Exchange Commission and the Competition Commission of India, the Committee has recommended insertion of confidentiality provisions for settlement proceedings.

Read the report:

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