A high-level committee under the chairmanship of Justice A. R Dave (retd.) (“Committee”) has reviewed the enforcement and settlement mechanism of SEBI and suggested changes to the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (“Settlement Regulations”). The Committee submitted its report on August 10, 2018 (“Report”) along with a proposal for replacing the Settlement Regulations with the new SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2018 (“NewSettlement Regulations”). The primary objective of the Committee was to enhance settlement as a tool of enforcement and to address concerns regarding accountability and responsibility in a more cost-effective, less time-consuming manner. Here are some key takeaways from the Report and the New Settlement Regulations.
Broader applicability:
The Committee proposes that the settlement mechanism of SEBI should be applicable to all laws administered by SEBI as opposed to a limited set of laws. This will make SEBI’s settlement mechanism comprehensive towards all issues that arise under the securities laws of the country.
Limitations on settlement:
Certain serious violations (such as those involving fraud, insider trading, front-running, misstatements in offer documents, etc.) are often excluded from settlement as the ability to settle may lead to a moral hazard and encourage willful violations. At present, the Settlement Regulations provide a broad list of violations which cannot be settled. However, the Committee felt that the determination of defaults which cannot be settled should be made principle-based (depending on the facts and circumstances of each case) as opposed to a blanket ban on settlement. The test would consider whether an alleged default (a) has market wide impact, (b) has caused losses to a large number of investors, or (c) affected the integrity of the market. Nevertheless, settlement of serious violations would be subject to various conditions. The Committee has also proposed a limitation period for filing a settlement application to avoid forum shopping and to encourage timely resolution.
Efficiency:
Recommendations have been made with respect to increasing the efficiency of the settlement process by clarifying the interplay between and the effect of a settlement application on ongoing proceedings and the Committee emphasized the need for issuing interim directions to protect the interests of investors and maintain the integrity of the securities market, irrespective of a settlement application.
Confidentiality:
Currently, the Settlement Regulation do not have a provision for settlement with confidentiality. The Committee has recommended a provision for settlement with confidentiality. As per the Committee, confidentiality would be multi-faceted and depend on the nature of assistance provided to SEBI.
The Report has highlighted some of the major shortfalls of the Settlement Regulations and the New Settlement Regulations are a positive step towards a robust settlement mechanism which would facilitate adequate sanction and deterrence without long drawn litigation.
