SEBI Invites Public Comment On HLC Report That Recommends Against Settlement For Serious, Willful Defaults [Read Report]

The Securities and Exchange Board of India (SEBI) on Monday invited public comments on the ‘Report on the Settlement Mechanism’ submitted by a high-level committee (HLC) that has recommended against making settlement procedure a means of forum shopping and adopting a more arduous approach to ensure that certain serious violations/defaults should not be settled as the settlement regulations must not become a platform where applicants may willfully violate securities laws knowing that it may be settled.

The high-level committee was constituted by the SEBI under the chairmanship of Justice AR Dave (Retd) to review the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 and the enforcement mechanism of SEBI and to suggest suitable recommendations. It examined the 2014 regulations and took into account developments in domestic and foreign jurisdictions. The committee submitted its report to the SEBI on August 10. Justice AR Dave (Retd) was assisted by Pratap Venugopal, Advocate on Record, Supreme Court, as a member of the committee in this task.

The HLC, while reviewing the existing regulations, came across the following inadequacies which it felt hindered the application of the existing settlement regulations:

1. Sub-regulation (2) of Regulation 5 was perceived to discourage the settlement of certain matters deemed to be too important, i.e., defaults relating to insider trading, serious fraudulent and unfair trading, open offer, etc.


2. There was no explicit guidance to deal with cases where settlement along with the composition of corresponding matters or only composition was required to be done.

“The Committee is of the opinion that under the present regulations, contravention of the provisions of the Companies Act, in so far as they are administered by the Board, may be settled so long as they have been invoked in a civil and administrative proceeding under the securities laws. Accordingly, the Committee recommends that ‘the provisions of any other law to the extent it is administered by the Board’, be included in the definition of ‘securities laws’ to enable settlement of the same,” the report said.

Settlement amount to be up by 25pc beyond limitation period of 60 days

The HLC also noted that at present, a settlement application may be filed within 60 days from the date of service of the notice to show cause or supplementary notice to show cause. However, an application filed after 60 days may be considered by a panel of whole time members, provided that in such delayed applications, the settlement amount payable by the applicant is increased by a rate of six percent per annum from the last date of filing the application.

The committee opined that “a more arduous approach ought to be adopted to ensure that only genuine applications are filed and the settlement process is not adopted as a means of forum shopping and delaying civil and administrative proceedings. To ensure and safeguard the settlement process from such possible unwarranted practices, the Committee recommends a limitation period for filing a settlement application. Accordingly, the Committee recommends that no application should be considered by the Board after the hearing is to commence or a period of 120 days from the last date for filing an application as specified in Regulation 4(1) of the existing settlement regulations. Further, the Committee recommends that where an application is filed after 60 days and is considered by the Board, the settlement amount otherwise payable by the applicant shall be increased by twenty-five percent per annum.”

The committee also believed that the settlement process should not be used as a platform for forum shopping.

It recommended that an application shall not be filed for the same alleged default again if the earlier application was rejected. Such a step will ensure that the settlement process is taken seriously by an applicant. Further, the committee believes that this recommendation would ensure that the board’s time will not be misused or wasted by nongenuine applications.

 Serious defaults ought not to be settled

The committee noted that the existing regulations were drafted with the objective that certain serious violations/defaults should not be settled as the settlement regulations must not become a platform where applicants may willfully violate the securities laws knowing that it may be settled. It was felt that cases involving certain defaults of a serious nature or impacting investors ought not to be settled and such restriction must be expressly stated in the regulations.

It said in the absence of a clear manner of quantifying gains made and losses caused, it is difficult to obtain a fair settlement in serious matters. The power to reject an application without it being referred to the internal committee or high-powered advisory committee exists with the panel of whole time members.

“Since the interest of the investors should be protected, applications with respect to specified proceedings that may or have had an impact on investors should be considered only after the applicant has refunded or made good the losses due to the investors, to the satisfaction of the Board. However, the Committee feels that the broad list of defaults which cannot be settled can be made principle based in view of the Committee’s ongoing exercise for quantification of gains and loss to enable the Board to arrive at a fair settlement which will take into account the interest of investors. Thus, 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,” it recommended.

Comments can be submitted by email to settlementdop@sebi.gov.in or via letter addressed to Vijayakrishnan G, General Manager Legal Affairs Department, Division of Policy Securities and Exchange Board of India SEBI Bhavan, Plot No. C4-A, "G" Block, Bandra Kurla Complex, Bandra (East), Mumbai -400 051, latest by September 1, 2018.