INTRODUCTION
Settlement Proceedings in relation to violation of provisions in
securities laws have been conducted under a mechanism by the Securities
Exchange Board of India (“SEBI”) since 2007. The last legislation on
settlement proceedings was stipulated by SEBI in 2014.
The said regulations apart from giving SEBI other powers of initiating
proceedings on its own, also gave it the power to initiate settlement
proceedings.
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 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 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. 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.
Therefore, a committee was set up by SEBI
under the Chairmanship of Justice Anil Dave
Committee (“Committee”) , former judge of the Supreme Court of India
which came out with a report on Settlement Mechanisms under securities laws
which attempts to revamp the settlement proceedings.
Thereafter, on requisite consideration on the public
comments, the changes to settlement mechanism were agreed upon
by SEBI in its Board Meeting held on Tuesday, 18thSeptember, 2018
which henceforth approved the framing of
Securities and Exchange Board of India
(Settlement Proceedings) Regulations, 2018 (“Settlement
Regulations, 2018”) which replaced the
SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014
(“Settlement Regulations, 2014”) vide the notification dated 30th November,
2018 The said regulations shall come into effect from 1st January, 2019. The
Settlement Regulations are the first piece of legislation in securities laws in
India solely created for the purpose of regulating settlements in cases.
“SECURITIES LAWS” AND “SPECIFIED PROCEEDINGS”
RE-DEFINED
The most important change that has been brought vide Settlement Regulations,
2018 is widening the scope of
the laws covered under the proceedings.
Securities Laws under the previous SEBI regulations on settlement proceedings had only given scope to the SEBI Contract
(Regulations) Act, 1956 and Depositories Act, 1996. These regulations widen the
scope by defining “Securities Laws” as:
“securities laws” means the Act, the Securities
Contract (Regulations) Act, 1956 (42 of 1956), the Depositories Act,1996 (22 of
1996), the relevant provisions of any other law to the extent it is
administered by the Board and the relevant rules and regulations made
thereunder;
By adding “any other law”, the Settlement
Regulations provide for the inclusion of other laws as well in relation to
securities laws. This clause has widely increased the ambit of applicable laws
to these regulations.
Further, “specified proceedings” in the Settlement
Regulations have been defined as:
“specified proceedings” means the proceedings that
may be initiated by the Board or have been initiated and are pending before the
Board or any other forum, for the violation of securities laws, under Section
11, Section 11B, Section 11D, sub-Section (3) of Section 12 or Section 15-I of
the Act or Section 12A or Section 23-I of the Securities Contracts
(Regulation)Act, 1956 or Section 19 or Section 19H of the Depositories Act,
1996, as the case may be;
The definition provides for scope to cases which
are pending before the SEBI Board or any other forum which is an effective tool
to quantify settlement proceedings. The scope of pending cases has been
re-iterated in further regulations of the Settlement Regulations.
LIMITING THE SCOPE OF SETTLEMENT PROCEEDINGS
There are provisions in the new Settlement
Regulations which deny settlement proceedings to certain categories of
individuals under Chapter III which talks about the scope of settlement
proceedings. Regulation 5 (2) lays down factors affecting which an alleged
default will not come under the scope:
(2) The Board may not settle any specified
proceeding, if it is of the opinion that the alleged default, –
1.
has market wide impact,
2.
caused losses to a large number of investors, or
3.
affected the integrity of the market.
Further, the
scope of settlement of specified proceedings which shall be taken into
consideration has also been narrowed
to the extent that any application made by a
wilful defaulter, a fugitive
economic offender or a person who has defaulted in
payment of any fees due or
penalty imposed under securities
laws shall not be
considered by SEBI.
The earlier regulations provided that breach of
laws governing insider trading, fraudulent and unfair trade practices shall not
be considered for settlement. However, in the Settlement Regulations, the scope
of the settlement has been limited to non-triggering of the above factors.
WITHDRAWAL OF APPLICATION
Before communication of the decision by the panel
members an application can be withdrawn by the applicant. Further, when an
application is withdrawn by the applicant, then, he is not permitted to make
another application in respect of the same default.
CONCEPT OF SETTLEMENT SCHEMES
The Settlement Regulations, 2018
have introduced a new term called “settlement schemes”. SEBI shall
specify the procedure and terms of settlement of specified
proceedings under a settlement scheme for any class of persons involved in
respect of any similar defaults specified.
A settlement order issued under
such a settlement scheme shall deemed to be a settlement
order under the regulations.
CONFIDENTIALITY
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”.
CONCLUSION
The Settlement Regulations have changed
and improved the mechanism for settlement proceedings in securities laws in the
country. Settlement Regulations 2018 has 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.
The SEBI has revisited the complete
mechanism in order to strengthen
its procedures with respect to the
settlement of proceedings pertaining to the defaults under the securities laws.
However, 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. 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.
This Article has been Compiled by Swati
Garg (Senior Associate)
You can direct your queries or comments
to the author at Swati@factumlegal.com
Disclaimer-
The contents of this article should not
be construed as legal opinion. This article is intended to provide a general
guide to the subject matter. Specialist advice should be sought about your
specific circumstances. We expressly disclaim any financial or other
responsibility arising due to any action taken by any person on the basis of
this article.
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