Mar 21, 2017

Settlement process: Sebi has tightened regulations to ensure quicker default resolutions

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Deepika Vijay Sawhney
The author is partner, Securities Law & Transaction Advisory, Corporate Professionals Advisors & Advocates

The Securities and Exchange Board of India’s (Sebi’s) amended regulations for the settlement of administrative and civil proceedings came into effect on February 27. The series of amendments are aimed at streamlining and strengthening the overall settlement process.

Among the key changes, a settlement notice indicating the substance of charges and probable actions may be issued before the issuance of a formal show-cause notice, except in those cases that have been excluded from the ambit of settlement. Further, the settlement notice will only be an indication of probable enforcement action and the board will have the power to modify the settlement amount.

Streamlining the procedures and time-lines, it is clarified that a panel of whole-time members can consider a settlement application if it is satisfied that there was sufficient cause for not filing it within the specified time-period, and it is accompanied with an application for condonation of delay and non-refundable fees. However, the delay in the filing of applications will attract higher settlement charges by way of additional interest. Under the revised norms, the market regulator now has the power to levy simple interest at the rate of 6% in cases where settlement applications are filed after the specified time-lines.It is now also provided that rejected or withdrawn applications can be refiled in deserving cases, subject to payment of additional fees and interest.

According to new regulations, the settlement amount, once agreed, has to be deposited within the stipulated period. If the settlement fee is not paid within 15 calendar days from the date of receipt of demand notice, the payment period can only be extended by the panel of whole-time members. Moreover, such a period cannot be extended beyond the 90th calendar day from the receipt of demand notice. Any payment beyond 30 days shall also be subject to additional interest at the rate of 6% per annum from the date of receipt of demand notice until the date of payment of settlement amount. For cases wherein payment is not made within the stipulated time or extended time, applications shall be rejected.

The application filed voluntarily before the issuance of any settlement or show-cause notice will now get benefit of a still lower proceeding conversion factor (PCF) of 0.65, which is otherwise 0.85 in cases where show-cause notice is issued or 0.75 where pre-show-cause, settlement notice is issued. Thus, in the event of voluntary or suo motu applications, the indicative amount arrived at will stand reduced by 35%.

In the wake of increasing burden on Sebi’s enforcement wing, it is evident that the new regulations attempt at achieving equilibrium between encouraging the ‘settlement route’ to resolve non-grave defaults in the securities market and strengthening the existing settlement processes.

In addition, the amendments provide an additional incentive for voluntary or suo motu consent applications as indicative settlement amounts will be reduced by 35%.

The provision of settlement notice has also been introduced to encourage settlement of defaults by following the procedure under these regulations rather than prolonged adjudications and investigation proceedings. As a relaxation, the indicative amount filed in such cases will be brought down by 25% as against reduction of 15% in cases where the applications are filed post-issuance of show-cause notices. However, it needs to be clarified whether such settlement notices will be sent in all consent cases or will Sebi exercise its discretion?

By introducing benefit of 35% in suo motu references, the provisions to consider rejected/withdrawn cases have increased opportunities for settlement of defaults and may result in more settlement applications flowing in the office of the regulator, which can bring a sigh of relief for its burdened enforcement and adjudication wing.

The amended regulations have introduced sturdier provisions with respect to the period of filing of applications and payment of settlement amounts, and have thus brought more clarity in the extant norms.

In addition, the introduction of 6% simple interest on settlement amount in the event of delay in filing, as well as delay of payment, streamlines the settlement process.

These amendments were long-awaited as they rationalise the settlement process and target faster resolution of defaults. However, considering the current position wherein it takes more than one year on an average for settlement of a matter, Sebi may have to push its settlement division to ensure time-bound and effective disposal of applications.

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