Regulation of Consent Mechanism: An analysis of the latest SEBI (Settlement Proceedings) Regulations
[Riya Gupta is a fifth-year student at Jindal Global Law School.]
The Securities and Exchange Board of India (SEBI) introduced a settlement mechanism for violation of securities laws in India in the year 2007. Later, in 2014, the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (Settlement Regulations 2014) were notified with the view to bringing in certainty of legal enforceability in the system.
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 (a) 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 (b) 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. Even though SEBI in certain circumstances could look into such serious violations, the invocation of such power was infrequent and restricted to fewer violations involving failures to make open offers under the SEBI. 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.
Owing to these pitfalls in the settlement mechanism, a High-Level Committee was set up under the Chairmanship of Justice Anil R Dave who came out with a report in order to revamp the settlement proceedings. After the requisite consideration on the public comments received, the SEBI approved framing of the Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018 (Settlement Regulations 2018), which replaced the Settlement Regulations 2014 and have come into effect from January 1, 2019.
This article will attempt to analyse the Settlement Regulations 2018, which has brought in certain material changes to the existing settlement mechanism. Are these changes beneficial or are they too stringent on the applicants? Further, are there certain aspects on which the revised regulations are still mute? The article will comment upon the same.
The New Settlement Regulations 2018
The most significant change brought in vide the Settlement Regulations 2018 is the expansion of the scope of settlement mechanism by revisiting the definition of "securities laws" and "specified proceedings". "Securities laws" now also include within their ambit the "relevant provisions of any other law to the extent they are administered by SEBI". This is in contrast to the Settlement Regulations 2014 wherein violations of the provisions of the Companies Act, 2013 pertaining to public offer and debentures by listed companies were not amenable to consent mechanism and were restricted to violation of specific securities laws. The change is beneficial since it attempts to increase settlements rather than resorting to full blown investigations. Further, the definition of "specified proceedings" for the violation of securities laws shall now include not only the proceedings that may have been so initiated but also those which are still pending before SEBI or any other forum.
Apart from bringing clarity in the provisions, the regulations have also introduced certain stringent procedures on the time period for filing applications. Under the Settlement Regulations 2018, an applicant cannot file for the alleged default again if the earlier application was rejected. Further, to ensure that only genuine applications are filed, a more stringent limitation period for filing the application has been introduced. Accordingly, as per the revised regulations, no application will be considered by the SEBI after hearing or after a period of 120 days from the last date of filing an application. In case an application is filed after the passage of 60 days, the settlement amount payable by the applicant is to be increased by twenty five percent per annum.
The latest regulations also permit applicants to withdraw their application at any time prior to the communication of the settlement decision. But by doing so, the applicant will be debarred to make a second application with respect to the same default. It is expected that this provision will not only save time but will also dissuade misuse of the mechanism.
While introduction of such stern provisions is significant considering it will eliminate forum shopping, it is bound to increase regulatory burden and pressure on the authorities to ensure that there is no delay in communication of notices and that inspections are scheduled in an efficient manner. Also, such changes are in departure from the existing overall scheme of the consent mechanism itself, which envisages that consent can be filed across different stages of proceedings. Thus, even though the revised regulations will reduce administrative burden, they will definitely prove to be harsh on the applicants.
Initially, the settlement mechanism was not envisaged to settle serious offences. The Settlement Regulation 2018 does away with this lacuna by widening the scope of settlement to include serious offences pertaining to insider trading, and fraudulent and unfair trade practices, amenable to settlement on a case-to-case basis. This provision will prove to be specifically beneficial to applicants such as Reliance Industries Limited, whose consent application alleging fraud and unfair practice relating to the shares of Reliance Petroleum Limited has been rejected several times owing to exclusion of such serious offences from the consent process. However, SEBI may still refuse to settle any specified proceeding if it is of the opinion that the alleged default has market wide impact, caused loss to a large number of investors or has affected integrity of the market.
Further, to keep up with the development in consent mechanism globally, the Settlement Regulations 2018 have also introduced the concept of settlement of the proceedings in confidentiality. The regulations accord privilege of confidentiality to such 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”. While settling any matter under this mechanism, SEBI will take into account public interest and the extent to which the information/testimony was instrumental.
In contrast to its lengthy procedure, SEBI has now introduced a new mechanism for summary settlement of certain proceedings. Under the revised regulations, SEBI can issue a notice calling upon the noticee to file a consent application even before the initiation of the specific proceedings. The notice would contain prima facie observations on securities market violations stating that "probable proceedings" may be initiated. On receipt of such notice, the noticee would be given an opportunity to file for consent mechanism within 15 days, remit the specific amount and comply with the non-monetary terms. The provision is laudable as it allows the parties to avoid the cumbersome and lengthy procedure by enabling them to settle the dispute prior to receipt of a detailed show cause notice. However, it is relevant to note that not accepting the SEBI’s offer at this stage would mean that parties would be debarred from filing for settlement until the specific proceedings against them stand concluded. While such a provision will prevent frivolous applications, it will also defeat the purpose of the settlement regulations since the applicant will have to go through the SEBI proceeding even if they decide to settle via consent before.
It is undisputed that the latest Settlement Regulations 2018 will bolster the consent mechanism and reduce the administrative burden while also ensuring that casual defaulters and perpetrators of serious offences are not given leeway under the mechanism.
However, the SEBI must be cautious of the fact that norms pertaining to stringent time period and absence of a second chance to file for consent mechanism should not become too harsh on the applicants who genuinely wish to resolve their case via the consent mechanism.
Lastly, there are certain critical aspects on which the regulations are mute. For instance, the definitions of "market-wide impact" and "large number of investors" in the regulations still remain subject to the SEBI’s discretion. Further, there is no clarity on whether a settlement order is to be treated as a penalty, a regulatory action or an adverse order against the applicant. It is important that the SEBI clarifies these issues to ensure that the settlement mechanism emerges as a holistic approach allowing for a speedy relief in comparison to its time consuming alternatives.
 Circular No. EFD/ED/Cir-1/2012 dated 25 May 2012.
 SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 dated 9 January 2014.
 Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018 dated 30 November 2018 (Settlement Regulations 2018)
 Settlement Regulations 2018, Chapter I, Regulation 2(1)(e).
 Ibid, Chapter I, Regulation 2(1)(f).
 Ibid, Chapter III, Regulation 5(1)(a).
 Ibid, Chapter II, Regulation 4.
 Ibid, Chapter III, Regulation 7.
 Ibid, Chapter III, Regulation 5(2).
 Chapter IX, Regulation 19, Settlement Regulations 2018.
 Chapter VII, Regulation 18(1), Settlement Regulations 2018.
 Chapter III, Regulation 5(2)(i), Settlement Regulations 2018.
 Chapter III, Regulation 5(2)(ii), Settlement Regulations 2018.