The author is a 3rd year student of ILS, Law College.
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[i]. 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, to quantify the number of settlement cases more, a committee was set up by SEBI as the Justice Anil Dave Committee (“Committee”). The committee submitted its report in December, 2017 pursuant to which the SEBI notified the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations”) on 30thNovember, 2018 which are effective since 1stJanuary, 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. These regulations provide for new scope in different factors of settlement proceedings and if implemented properly, is quite beneficial for the entire procedure. This article will discuss and review certain key highlights of the Settlement Regulations which provide for wider scope and sophisticated methods in settlement proceedings.
“Securities Laws” and “Specified Proceedings” re-defined
Securities Laws under the previous SEBI regulations on settlement proceedings[ii]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;[iii]
By adding “any other law”, the Settlement Regulations provide for the inclusion of other laws as well in relation to securities laws. There is an explicit recommendation of the Committee in the draft Settlement Regulations to include the contravention of the provisions of any other law (such as Companies Act, 2013) to the extent it is administered by the Board within the definition of ‘securities laws’ in the regulations, in order to settle any matter under the securities laws.[iv]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;[v]
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. The Settlement Regulations have further 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.[vi]
Also, the terms of settlement may include monetary or non-monetary terms or a combination of the two. This is given under Chapter IV of the Settlement Regulations.[vii]Non-monetary terms may include suspension or cessation of business activities for a specified period, disgorgement on account of the action or inaction of the applicant, exit from the management of the company, submit to enhanced internal audit and reporting requirements, locking – in securities, etc.[viii]
The Settlement Regulations provide for the scope of seeking confidentiality on the proceedings before the SEBI Board. The Committee recommendations in the draft regulations provide for a chapter similar to the practices of securities regulators globally and that provided in the Competition Commission of India (Lesser Penalty) Regulations, 2009 for “settlement with confidentiality” to any person that provides material assistance to the Board in its fact-finding process and proceedings.[ix]The said provisions are given under Chapter IX of the Settlement Regulations. These lay down the factors essential to the entitlement of confidentiality and the procedure thereof.
As observed time and again, most of the provisions in SEBI have been adopted from US laws. The insertion of provisions dealing with confidentiality have been adopted though an understanding from the US Securities Exchange Commission and the Competition Commission of India. According to the regulations, such privilege of confidentiality shall be provided 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”. However, the application herein shall be considered only in cases prior to or pending investigation, inspection, inquiry or audit.[x]
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, –
- has market wide impact,
- caused losses to a large number of investors, or
Similar restriction is provided for where the applicant is a wilful defaulter, a fugitive economic offender or has defaulted in payment of any fees due or penalty imposed under securities laws.[xii]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.
Also, the Settlement Regulations also restrict applications where an earlier application with regards to the same alleged default had already been rejected.[xiii]These further limits the scope of the settlement proceedings and such provisions were not present in the previous regulations.
The Settlement Regulations have changed and improved the mechanism for settlement proceedings in securities laws in the country. Overall, the regulations have increased the ambit of the settlement proceedings to quantify and reduce the time of disposing off of cases. There are various forward and just steps adopted by SEBI which should prove beneficial to a lot of parties in securities laws. In principle, habitual offenders and perpetrators of grave offences that affect the sentiments of the market at large should not be given the opportunity of settlement. Restrictions which are placed on the basis of recommendations of the Committee seem to be fair and acceptable. Further, these regulations are in consonance with the recent Companies Act, 2013 amendments which gives SEBI the power to regulate listed companies. Such steps cover loop-holes and improve the overall functioning and efficiency of the corporate legal sector.
[iv]Clause 4.1.3, Draft Securities and Exchange Board of India (Settlement Proceedings) Regulations 2018 to provide for settlement of proceedings pursuant to Justice Anil R. Dave Committee Report on Settlement Mechanism, https://www.sebi.gov.in/sebi_data/meetingfiles/oct-2018/1539575888668_1.pdf
[viii]Subhayu Sen, Introduction Of The SEBI (Settlement Proceedings) Regulations, 2018, http://www.mondaq.com/india/x/762028/Securities/Introduction+Of+The+SEBI+Settlement+Proceedings+Regulations+2018
[ix]Clause 4.1.1, Draft Securities and Exchange Board of India (Settlement Proceedings) Regulations 2018 to provide for settlement of proceedings pursuant to Justice Anil R. Dave Committee Report on Settlement Mechanism, https://www.sebi.gov.in/sebi_data/meetingfiles/oct-2018/1539575888668_1.pdf