Sebi's New Settlement Rules Aim to Boost Recovery in Fund Diversion Cases

The Securities and Exchange Board of India (Sebi) has introduced significant revisions to its settlement framework, with the objective of improving the recovery of misappropriated funds and safeguarding shareholder interests in matters involving financial misrepresentation and diversion of assets. These reforms are intended to reduce lengthy legal proceedings and enable faster resolution of such disputes.

During its recent board meeting, Sebi approved the Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) Regulations, 2026. The new regulations introduce several notable changes, including a defined formula for calculating settlement amounts, distinct treatment for wrongful gains, the introduction of a fast-track settlement process for certain cases, and broader access to the settlement mechanism. Although the regulations have been approved, they are yet to be formally notified and will come into effect 30 days after notification.

Sebi Chairman Tuhin Kanta Pandey emphasized that protecting investors goes beyond merely recovering settlement sums. He pointed out that disgorgement of ill-gotten gains and the imposition of Remedial and Regulatory Terms (RRT), where applicable, are critical components of the process. "If money has been siphoned off, it must be returned first. That is non-negotiable," Pandey stated. He further clarified that settlements do not imply admission or denial of guilt but do impose financial consequences on the parties involved.

One of the key features of the updated regulations is linking the settlement amount to a multiple of the penalty that would have otherwise been imposed. This approach aims to make settlements more predictable and fair. Additionally, Sebi will issue a settlement notice prior to a show-cause notice, providing entities with a 60-day period to submit their application for settlement.

Regarding disclosures, Kamlesh Chandra Varshney, whole-time member of Sebi, explained that companies are currently required to disclose receipt of a show-cause notice. However, since the settlement notice is a separate procedural step, its disclosure obligation remains under review. "We will examine that particular aspect," he said.

Varshney also highlighted how the updated settlement process could accelerate the return of funds to investors. "Often, cases linger in courts, leaving the company's status uncertain. Our approach aims to recover money promptly, along with interest. Meanwhile, Remedial and Regulatory Terms will still apply. This ensures that shareholders benefit as the recovered money is reinvested in the company," he explained.

Legal experts have drawn parallels between Sebi’s new settlement notice and the US Securities and Exchange Commission’s Wells process, which invites responses to proposed charges. Sumit Agrawal, founder and managing partner of Regstreet Law Advisors, noted that while the US version primarily seeks a response, Sebi’s notice serves as an invitation to settle before formal proceedings begin.

Agrawal pointed out that the existing regulations had a summary settlement option for specific violations, which the new rules replace with a fast-track settlement route. He also urged Sebi to clarify whether listed companies must disclose receipt of a pre-show-cause notice settlement invitation, since current listing rules treat certain regulatory actions as material events. Such clarity would benefit both companies and investors.

Globally, regulatory bodies often resolve enforcement cases, including those involving financial misrepresentation, through negotiated settlements. Sebi’s revised regulations reflect a move toward this practice, aiming to resolve disputes efficiently while ensuring accountability.

The new framework also introduces a one-time 90-day window for entities that either missed previous settlement opportunities or had their applications rejected, withdrawn, or returned under the 2018 regulations. This option carries a 20 percent additional payment on the calculated settlement amount and applies only to ongoing proceedings.

These changes come at a time when regulatory authorities across markets are focusing on enhancing investor protection and improving enforcement mechanisms to maintain market integrity. Sebi’s efforts to revamp its settlement process could lead to more timely recoveries of diverted funds and stronger safeguards for shareholders, reinforcing confidence in India’s securities market.