SEBI Settlement Overhaul May Boost Recoveries in Fund-Diversion Cases

Sebi’s New Settlement Regulations Aim to Enhance Fund Recovery and Protect Investors

The Securities and Exchange Board of India (Sebi) is set to implement new settlement regulations that could significantly improve the recovery of diverted funds in cases of financial misconduct.

Key Changes in Settlement Regulations

In a recent board meeting, Sebi approved the Sebi (Settlement of Administrative and Civil Proceedings) Regulations, 2026, which introduce several key changes. These include a new formula for calculating settlement amounts, the separate treatment of wrongful gains, and provisions for fast-track settlements in specific cases. The regulations are expected to come into effect 30 days after their notification.

Sebi Chairman Tuhin Kanta Pandey emphasized that protecting investor interests involves more than just determining the settlement amount. He highlighted the importance of disgorgement—returning ill-gotten gains—and the imposition of Remedial and Regulatory Terms (RRT) when applicable. “If there is a siphoning of money, it should come back first. That is non-negotiable,” he stated, underscoring the regulator’s commitment to ensuring that shareholders are compensated.

Facilitating Quicker Recoveries

The new regulations are designed to expedite the recovery process, allowing entities a 60-day window to file settlement applications following the issuance of a settlement notice. This notice precedes a show-cause notice, potentially allowing companies to resolve issues more swiftly and avoid protracted legal battles. As a result, shareholders could see funds returned to the company more quickly, along with accrued interest.

Kamlesh Chandra Varshney, a whole-time member of Sebi, noted that while companies are required to disclose show-cause notices, the necessity for disclosure of settlement notices remains ambiguous. This clarity is crucial for companies and investors alike, as it affects transparency and the flow of information in the market.

Inspiration from Global Practices

Legal experts, including Sumit Agrawal of Regstreet Law Advisors, have pointed out that the settlement notice process draws inspiration from the US Wells process. However, while the US model invites responses to proposed charges, Sebi’s approach allows for settlement discussions before formal charges are laid out. This could lead to a more amicable resolution of disputes.

Agrawal also highlighted that the new regulations include a one-time 90-day window for entities that did not apply under previous regulations, allowing them to settle cases pending against them at an additional cost. This provision aims to encourage more companies to come forward and resolve their issues, thereby enhancing overall compliance.

Key Highlights

• The new Sebi regulations aim to improve recovery of diverted funds in financial misconduct cases.
• Settlement amounts will be calculated using a defined formula, with RRT imposed where applicable.
• Entities will have a 60-day window to file settlement applications after receiving a settlement notice.
• The regulations include a one-time 90-day window for previous applicants to settle pending cases.
• Legal experts note that the new process is inspired by the US Wells process, promoting quicker resolutions.

Investor Note: The overhaul of Sebi’s settlement regulations is a significant step towards enhancing investor protection and expediting the recovery of misappropriated funds. Investors should monitor how these changes are implemented and their impact on corporate governance and accountability in the Indian market.