SEBI Proposes To Make Its Settlement Regime More Meaningful
With an aim to harmonise settlement terms with the specific nature and gravity of violations, the Securities and Exchange Board of India has proposed several changes to its regulations.
The consultation paper has identified ten key areas where the settlement regulations need refinement.
"Certain parameters, especially in respect of certain types of violations/ entities could be reviewed and timelines may be further revised so as to provide a meaningful and effective alternate to enforcement processes initiated by SEBI." - Consultation Paper
Here are the top proposals put forth by the market regulator:
Reduced Time Period To Apply For Settlement
Currently, there's a 180-window to apply for settlement once a show-cause notice is received. 60 days are given upfront while an additional 120 days can be availed by applicants after paying 25% over and above the regular settlement amount.
SEBI has observed that applicants apply for settlement towards the end of this time frame which hampers expeditious disposal of the enforcement proceedings.
So, it has proposed that the total time frame for filing the application for settlement may be fixed at 60 days.
This window would provide the applicant adequate time to apply for settlement and also align the regulations with the objective for which they were framed, i.e. as an effective alternative enforcement policy.SEBI Consultation Paper
Rationalising Disclosure Violations
Currently, the determination of settlement amount for disclosure violations under the Takeover Code and Insider Trading Regulations is based on the amount of undisclosed shareholding and the delay in disclosing the same.
For violations under the Takeover Regulations, the base amount ranges from Rs 2 lakh to Rs 20 lakh. For Insider Trading Regulations, it's Rs 2.5 lakh to Rs 25 lakh. Also, each count of disclosure violation adds up, leading to a higher indicative settlement amount.
These amounts are considered to be incommensurate with the nature of violations, SEBI has said.
"There could be cases where one large order by the entity is spread over a period for execution. Presently, the base amount adds up to each count of disclosure violation leading to a higher indicative settlement amount."
And so, the regulator has proposed to rationalise the base amount to Rs 2 lakh to Rs 11 lakh.
With the introduction of system driven disclosures, base amounts should be rationalised to reflect the evolving nature of the regulatory landscape, it has said.
Multiple Mitigating, Aggravating Factors Can Be Applied
The current regulations provide for certain mitigating, aggravating, deliberate and reckless factors which can be taken into account while arriving at the settlement amount.
For instance level of participation in default, proactive and exceptional cooperation during investigation, acceptance of responsibility and acknowledgement of misconduct etc.
SEBI has observed that multiple mitigating or aggravating factors are applicable to a single case. But the current scheme allows the application of such factors only once, even if many exist.
For instance, an applicant qualifying for the benefit under five factors in the mitigating factors will have the base value reduced only once, even though the five qualifying factors are applied to the facts of the case.
And so, SEBI has proposed that mitigating, aggravating, deliberate and reckless factors may be applied separately, based on the facts and circumstances of the case, subject to a maximum limit of three.
Harmonising Settlement And Judicial Proceedings
A case may have multiple entities involved, some of which may opt for settlement and other for judicial proceedings.
To ensure impartial determination while maintaining the regulatory distinction between the settlement proceedings and the enforcement proceedings, a new guideline is proposed.
As per this, the internal committee, the High Powered Advisory Committee or panel of whole-time members may consider judicial orders against any other entity in the same investigation while determining the settlement terms.
Settlement Amount To Be Based On Role In Default
Under the current regulations, settlement terms for individuals versus companies are determined differently.
SEBI has proposed a change in approach. Settlement terms may be made based on the role attributable to the applicant in the alleged offence, it has stated.
The regulator has pointed out that peripheral entities, namely dummy directors, mule account holders, etc. are often persons from economically weaker sections of the society and they act as name lenders to the main perpetrators in a case. Similarly, layering of funds is also done using bank accounts of such persons or entities without their active knowledge.
And so, it has proposed to create a distinction between the peripheral and non-peripheral entities, with higher settlement terms for the latter.
Stakeholders have been given a deadline of Oct. 14 to share their comments with SEBI.