Law relating to the Securities and Exchange Board of India (Settlement Proceedings) Regulations 2018

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Sanjay Buch
Crawford Bayley & Co, Mumbai
sanjay_buch@crawfordbayley.com

Devanshi Nanavati
Crawford Bayley & Co, Mumbai
devanshi.nanavati@crawfordbayley.com

Background

In 2007 and for the very first time, the Securities and Exchange Board of India (SEBI) introduced a settlement mechanism for violation of securities laws in India, vide its circular. The object of the said circular was to allow, in certain cases, a settlement of a violation of securities laws, by a consensus between the offender and SEBI, whereby both parties would derive benefit therefrom and would serve the interests of the market.

Subsequently, in 2012, SEBI issued another circular clarifying that certain serious offences (inter alia, insider trading, serious fraudulent and unfair trade practices and front running) would fall outside the purview of the said settlement mechanism. With a view to introduce the certainty of legal enforceability in the settlement mechanism, which was set in motion by way of a circular, SEBI framed a new regime in 2014 – the SEBI (Settlement of Administrative and Civil Proceedings) Regulations 2014 (‘2014 Regulations’). However, the mechanism under the 2014 Regulations was very stringent in terms of the offences that could be settled and suffered from lack of clarity and predictability in determination of an application for settlement.

In order to combat the pitfalls in the 2014 Regulations, SEBI set up a High-Level Committee under the chairmanship of Justice Anil R Dave, which, in its report published on 10 August 2018, suggested revisions in the 2014 Regulations for the purpose of improving the existing mechanism. On receipt of public comments on this, SEBI approved the framing of the SEBI (Settlement Proceedings) Regulations 2018 (‘Settlement Regulations’) which replaced the 2014 Regulations with effect from 1 January 2019.

Essential features and provisions in law

The Settlement Regulations broadened the scope of laws falling under the purview of the settlement mechanism. Under the 2014 Regulations, settlement proceedings could be initiated only with regard to the SEBI Act 1992, the Securities (Regulation) Act 1956 and the Depositories Act 1996. Presently, under the Settlement Regulations, in addition to the aforesaid laws, settlement proceedings can also be initiated with regard to ‘the relevant provisions of any other law to the extent it is administered by the Board and relevant rules and regulations made thereunder.’ This is reflected in the definition of ‘securities laws’ under Regulation 2(1)(e) of the Settlement Regulations.

Additionally, the definition of ‘specified proceedings’, provided under Regulation 2(1)(f), has also been expanded to allow the settlement mechanism to be employed not only in respect of proceedings which may be so initiated, but also in respect of those which are pending before SEBI or any other forum, for violation of securities laws.

The application process for the purpose of initiating settlement proceedings has been detailed under Regulation 3, whereby persons against whom any specified proceedings have been initiated, are pending or may be initiated, may make an application to SEBI in the form specified in Part-A, accompanying an application fee prescribed in Part-B and requisite undertakings and waivers specified in Part-C of Schedule-I. Such an applicant is mandated to make full and true disclosures in his application with regard to the alleged defaults and, in the event that such an application does not conform to the requirements of the Settlement Regulations, the same would be returned to the applicant, whereupon the applicant would be required to revise the application accordingly within a period of 15 days.

Regulation 4 mandates an application for initiating settlement proceedings, with respect to any specified proceeding pending before SEBI, to be filed within a period of 60 days from the date of service of the show cause notice, failing which, SEBI would not consider such an application. However, relief has been provided, in case an application is not made within the said period of 60 days but before the expiry of 120 days, wherein SEBI may consider such an application if it is satisfied that there was sufficient cause for not filing the same within the said period and must be accompanied with the prescribed fee, which would subject to an escalation of 25 per cent. It may be relevant to note that this requirement would not be applicable to proceedings pending before the Securities Appellate Tribunal or any other court.

A caution has been provided under Regulation 5, whereby, no application for settlement would be considered, in the event that:

• an earlier application in regard to the same alleged default has been rejected;
• the audit, inspection, investigation or inquiry for any cause of action is incomplete, other an application involving confidentiality; or
• monies due under an order issued under securities laws are required to be recovered.

Moreover, SEBI may refuse to settle any specified proceeding, if it opines that the alleged default has market-wide impact; caused loss to a large number of investors; or affected the integrity of the market, or in the event that the applicant is a wilful defaulter, fugitive economic offender or has defaulted in payment of any fees or penalty imposed under securities laws.

Regulation 9 provides that the settlement terms may include a settlement amount and/or non-monetary terms, as specified under Schedule II. The non-monetary terms that may be a part of the settlement terms, inter alia, include the suspension or cessation of business activities for a specified period; exit from management; lock-in of securities; disgorgement on account of the action or inaction of the applicant; or submit to enhanced internal audit and reporting requirements. The Settlement Regulations have portrayed transparency in the process, by disclosing therein that the settlement amount would be credited to the Consolidated Fund of India, the application fee and legal costs would be credited to SEBI General Fund and the amount of profits made or losses avoided by the applicant that may be disgorged as a part of the settlement terms would be credited to the Investor Protection and Education Fund.

In order to arrive at the settlement terms in accordance with the Settlement Regulations, several factors may be considered, which have been provided under Schedule-II. The said factors may, inter alia, include the following:

• conduct of the applicant during the specified proceeding, investigation, inspection or audit;
• the role played by the applicant in case the alleged default is committed by a group of persons;
• nature, gravity and impact of alleged defaults;
• whether any other proceeding against the applicant for non-compliance of securities laws is pending or concluded;
• the extent of harm and/or loss to the investors’ and/or gains made by the applicant;
• processes that have been introduced since the alleged default to minimise future defaults or lapses;
• compliance schedule proposed by the applicant;
• economic benefits accruing to any person from the non-compliance or delayed compliance;
• conditions which are necessary to deter future non-compliance by the same or another person;
• satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them;
• any other enforcement action that has been taken against the applicant for the same violation; or
• any other factors necessary in the facts and circumstances of the case.

Under the Settlement Regulations, SEBI is also empowered to constitute a High-Powered Advisory Committee for the purpose of considering and recommending the terms of settlement, which shall consist of a judicial member, who has been a judge of the Supreme Court or a High Court, and three external experts having expertise in securities market.

The Settlement Regulations has also made a provision for a summary settlement mechanism under Regulation 16, whereby, before initiating any specified proceeding, SEBI may issue a notice of summary settlement in the format in Part-A of Schedule-III, calling upon the notified party to file a settlement application and submit the settlement amount or furnish an undertaking or comply with the other non-monetary terms, specified in the summary settlement notice. Such a notice may be sent, in respect of specified proceedings which are to be initiated, in case of:

• delayed disclosures, including filing of returns, report or other document;
• non-disclosure in relation to companies exclusively listed on regional stock exchanges which have exited;
• disclosures not made in the specified formats;
• delayed compliance of any of the requirements of law or directions issued by the Board; or
• such other defaults as may be determined by the Board.

Upon receipt of such a notice, the notified party may, within 30 days thereof:

• file a settlement application in the form specified in Part-A along with the prescribed application fee as specified in Part-B and the undertakings and waivers as specified in Part-C of Schedule-I;
• remit the settlement amount specified in the notice;
• comply or undertake to comply with other non-monetary terms specified in the notice; and
• seek rectification of the calculation of the settlement amount in the notice, at the time of filing the settlement application. In all such cases, the decision of SEBI shall be final and remittance shall be done within 30 days from the date of receipt of the decision of SEBI.

SEBI shall pass an order of settlement under Regulation 23, upon being satisfied with the remittance of the settlement amount and non-monetary undertaking provided.

As and by way of Regulation 19, SEBI has also introduced the concept of settlement of the proceedings with confidentiality. This privilege of confidentiality has been provided to such applicants who agree to provide substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or on-going, against any other person in respect of a violation of securities laws.

A savings clause under Regulation 34 has been introduced, in accordance with which, notice of settlement issued as well as applications filed and pending under the 2014 Regulations shall be deemed to have been filed and dealt with under the Settlement Regulations. Additionally, all settlement orders passed under the 2014 Regulations would be deemed to have been passed under the Settlement Regulations.

Schedule-I pertains to the application form and mandatory ancillaries thereto, which would be required to be filled in and submitted for the purpose of settlement proceedings. Perusal of Schedule-I shows that SEBI has been mindful of incorporating a detailed and transparent process, whereby persons who are desirous of initiating settlement proceedings are, at the outset, made aware of the compliances that would be required for the purpose thereof.

SEBI has also, by virtue of Schedule-II, categorically provided the factors that would be material for consideration in the process of arriving at the settlement terms. The guidelines provided under Schedule-II deal with the application process and the calculation of the settlement amount. It also lays down the step-by-step process which would be adopted during the settlement proceedings. The provision of such detailed guidelines for calculation of the settlement amount is clearly indicative of the fact that a due process would be followed for arriving at such settlement amount and no arbitrariness would be involved in the same.

Important recent orders passed under the Settlement Regulations

In the matter of Sharepro Services (I) Private Limited

In this case,^[1] transfers were allegedly approved without proper documents in violation of provisions of the Listing Agreement read with Regulation 103 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015. SEBI had issued a show cause notice to the applicant. Thereafter, by an application filed in January 2020, the applicant proposed to settle the proceedings and accordingly filed a settlement application. In accordance with the provisions of the Settlement Regulations, proceedings were carried out for arriving at a settlement amount, which was proposed and settled at INR 4,621,875 by the High-Powered Advisory Committee and pursuantly approved by the panel of Whole Time Members of SEBI. The Applicant remitted the said amount and the matter was disposed of on the settlement terms pursuant to the Settlement Regulations.

In the matter of Bombay Burmah Trading Corporation Limited

In this case,^[2] one of the promoters of the Applicant was charged for a criminal offence and sentenced to a two-year jail term, the execution whereof, later came to be suspended for a period of five years. However, it was alleged that despite having become aware of the same, the applicant failed to make disclosures thereof, in violation of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015. Accordingly, adjudication proceedings were initiated against the applicant by issuance of show cause notice. Thereafter, the applicant filed a settlement application, proposing to settle the pending adjudication proceedings, which came to be considered by the High-Powered Advisory Committee, which proposed and recommended a settlement amount of INR 2,167,500, in accordance with the Settlement Regulations. The proposal was accepted by the panel of Whole Time Members of SEBI. The applicant remitted the said amount and the matter was disposed of on the settlement terms pursuant to the Settlement Regulations.

In the matter of Mr Ness Wadia

In this case,^[3] the applicant, a promoter and non-executive director of three listed companies, and a promoter and managing director of another listed company, was charged for a criminal offence and sentenced to a two-year jail term, the execution whereof, later came to be suspended for a period of five years. However, it was alleged that he failed to make timely disclosures of the same to the said companies, in violation of the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015. Accordingly, SEBI initiated adjudication proceedings against the applicant by virtue of show cause notice. Thereafter, the applicant filed a settlement application and upon being considered by the High-Powered Advisory Committee and further approved by the panel of Whole Time Members of SEBI, the settlement amount was fixed at INR 2,342,750, in accordance with the guidelines laid down by the Settlement Regulations. The applicant remitted the said amount and the matter was disposed of on the settlement terms pursuant to the Settlement Regulations.

Our views

We believe that SEBI has made substantial efforts to introduce a well-devised settlement regime in the securities market by virtue of the Settlement Regulations, which permits the notified party to settle violations pertaining to securities law without admitting the finding of fact and conclusions of law. The said condition makes settlement under the Settlement Regulations different from compounding.

These Regulations have caused the creation of a simplified and smooth-functioning settlement mechanism in the country, which is beneficial in saving both SEBI and market players from time-consuming and expensive litigation and which also serves the interests of justice, at the same time. In our experience, the regulatory authorities have been complaisant while dealing with cases under the Settlement Regulations. The Settlement Regulations provide a route to conserve resources and management’s time and focus on continuing to strive for the business operations. It also enables entities to focus on investor’s value creation instead of expending energy on the regulatory proceedings.