[Sambit Rath is a 5th year B.A. LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow]
In recent years, the Securities and Exchange Board of India’s (“SEBI”) settlement mechanism has come under renewed scrutiny, with judicial observations on its legal implications and debates surrounding the mechanism’s transparency and proportionality. At its core, the settlement mechanism (akin to the concept of compounding) allows regulatory proceedings to be resolved without adjudication on merits. Once enforcement action is initiated, an alleged violator may apply to settle the proceedings under the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations”). If approved by SEBI, the proceedings are disposed of on agreed terms, typically involving a monetary payment and, in some cases, non-monetary undertakings, without any finding of guilt and usually without admissions. This framework reflects a deliberate regulatory choice to ensure compliance, conserve adjudicatory resources, and avoid protracted litigation in a complex and rapidly evolving market.
By 2025, settlement orders have become a visible and recurring feature of securities enforcement. It functions alongside adjudication as a routine enforcement pathway, shaping how regulatory consequences are imposed in practice. This highlights the importance of examining the internal logic of settlement, including how discretion is exercised, how outcomes are determined, and what settlement ultimately accomplishes.
This article examines the state of SEBI’s settlement mechanism through a structural lens. It identifies core issues relating to discretionary authority, opacity, and proportionality, before separately analysing the legal limits of settlement as a form of regulatory closure. It then briefly situates these issues in light of recent legislative developments and concludes by outlining modest but institutionally realistic reforms.
Unaccountable Settlement Discretion: Structural Opacity, Proportionality, and Regulatory Signalling
The monetary penalty aspect of SEBI’s settlement mechanism, also known as the Settlement Amount (“SA”), has two sides to it. On one hand, the Settlement Regulations establish a detailed framework for computing an Indicative Amount (“IA”) through schedule II. This framework relies on a structured formula that accounts for the stage of settlement, the nature of the alleged violation, prior regulatory history, and the extent of gain or loss. SEBI has even operationalised this structure through a publicly accessible beta settlement calculator, which can be used by market participants to get a general idea of the IA for their case, reinforcing the impression that settlement outcomes are grounded in objective computation.
On the other hand, the same regulations deliberately preserve wide discretion. Regulation 10 provides that the factors listed in schedule II “may be considered” and are “including but not limited to” those enumerated. Schedule II itself defines the SA as the amount “finally approved by the Panel of Whole Time Members.” As a matter of statutory interpretation, this language is decisive. The IA is not binding, and SEBI is legally authorised to depart from it where it considers appropriate.
The existence of discretion, by itself, is not problematic. The difficulty lies in how that discretion is exercised and recorded. Settlement orders don’t explain whether the IA was applied, whether the SA diverged from it, or which considerations under regulation 10 influenced the outcome. The internal calculation sheet prepared by the Internal Committee and approved by the High Powered Advisory Committee detailing how variables such as cooperation, harm, or regulatory history were weighed, remains confidential and unpublished. The result is a structural ‘black box.’ The regulatory inputs (the regulations and formula) and the regulatory outputs (the settlement orders) are public. The process that connects the two is opaque. For market participants, this opacity makes it impossible to assess whether settlement outcomes are proportionate and consistent across comparable cases. Two entities accused of similar disclosure violations may settle for materially different amounts, yet the settlement orders provide no intelligible basis for explaining the divergence. This has broader implications for enforcement credibility.
After all, regulatory sanctions serve a signalling function, communicating expected consequences and shaping compliance behaviour. However, when settlement outcomes lack a clear, publicly intelligible rationale, their signalling ability diminishes. This makes it difficult to accurately assess proportionality, and enforcement results may seem arbitrary, even if they are legally justified by internal standards.
At this juncture, it is essential to recognise that SEBI’s resistance to detailed disclosure is rooted in an efficiency rationale. Settlement is designed to avoid adjudication, not to recreate it. If settlement orders were required to disclose granular computations or detailed justifications, the process would risk turning into calculation-heavy mini-adjudications wherein applicants would contest each variable, undermining speed and finality. Comparative experience supports this concern. In the United States, the Securities and Exchange Commission’s reliance on consent decrees has been defended on the grounds that negotiated resolutions allow for prompt enforcement without the costs associated with establishing factual truth through trial. Courts have ultimately emphasised procedural propriety over substantive adequacy, recognising that excessive scrutiny can defeat the purpose of settlement. With confidentiality also playing a functional role, excessive transparency in settlement reasoning could undermine the incentive to settle by effectively making factual findings through the back door.
It is important to note that this critique does not seek the elimination of discretion. Nor does it suggest that settlement outcomes should replicate adjudicatory reasoning. Rather, the concern is that in a regime where settlement outcomes increasingly shape enforcement expectations, the discretion must remain intelligible if it is to retain legitimacy.
The Limits of Settlement as Legal Closure
A distinct concern arises from the legal consequences of settlement itself, particularly the extent to which settlement can operate as a form of regulatory closure. Settlement orders dispose of proceedings pending before SEBI, but neither the SEBI Act nor the Settlement Regulations confer finality in the sense of res judicata. Settlement does not amount to a determination of merits, nor does it extinguish all legal consequences flowing from the underlying conduct.
Indian courts have consistently recognised this limitation. Settlement with SEBI resolves regulatory proceedings within the Board’s jurisdiction but does not preclude independent statutory or criminal action arising from the same facts. The recent Bombay High Court decision in Manoj Gokulchand Seskaria v. State of Maharashtra has reaffirmed that consent or settlement with SEBI cannot be relied upon to quash criminal proceedings, particularly in cases involving serious economic offences. Such offences are treated as wrongs against society, not merely regulatory violations that can be settled.
This judicial position extends beyond criminal law. Courts have also shown willingness to scrutinise settlement outcomes where third-party interests are implicated, especially in matters affecting investor protection and market integrity. In Ashok Dayabhai Shah v. SEBI, the Bombay High Court affirmed that minority shareholders who are victims of alleged illegalities have a substantive right to access the investigation report and show cause notices, even if a settlement is being pursued. Thus, settlement confidentiality and consensual resolution do not operate as shields against judicial review when statutory duties are involved.
From SEBI’s perspective, this limited legal effect is not accidental. Settlement is designed as an enforcement tool within the regulator’s domain, not as a comprehensive resolution of all possible liabilities. However, for regulated entities, settlement is often pursued with an expectation of achieving practical closure, particularly in terms of reputational and commercial terms. The divergence between regulatory disposal and legal conclusiveness thus reflects an inherent boundary of the mechanism: it can efficiently conclude proceedings before SEBI, but it does not guarantee comprehensive legal closure.
Recent Developments: The Securities Markets Code Bill, 2025
The proposed Securities Markets Code Bill, 2025 (“the Bill”), seeks to consolidate India’s securities laws into a single legislative framework. While the Bill does not seek to redesign the settlement mechanism, certain institutional changes introduced by it have a bearing on how settlement operates within the broader enforcement ecosystem.
Most notably, the Bill formalises the separation of investigative and adjudicatory functions within SEBI, ensuring that individuals involved in investigation do not act as adjudicating authorities in the same matter. Clause 17(2)(d) provides that a person who has considered a settlement application in a matter shall not be designated as the adjudicating officer in that matter, while clause 17(3)(b) stipulates that once a person is designated as an adjudicating officer, that person shall not consider or decide any settlement application in the same matter. This structural separation changes how settlement discretion is exercised and limits the concentration of enforcement function in the same hands.
Furthermore, the Bill reorganises securities law violations by expressly distinguishing market abuse attracting criminal sanctions from other contraventions that are subject to civil penalties (Chapters XI and XII). This classification impacts settlement strategy, as settlement under clause 26 applies only to administrative and civil proceedings and does not foreclose criminal liability for serious market misconduct. In parallel, the introduction of limitation periods on initiation of inspection or investigation (clause 16) and statutory timelines for completion of investigations (clause 13) reshapes the enforcement pipeline within which settlement applications arise, narrowing the temporal window for negotiated resolution.
Taken together, these developments do not resolve the structural concerns examined in this article. They do, however, reshape the institutional environment in which settlement operates, reinforcing the need to examine settlement not in isolation, but as part of the broader enforcement framework.
Suggestions
The shortcomings of SEBI’s settlement mechanism are structural, but they are not irreparable. Reform need not compromise efficiency or confidentiality; it must instead recalibrate how discretion is exercised and communicated.
First, settlement outcomes should meet a minimal justification standard. Without engaging in findings on merits or admissions of guilt, settlement orders should briefly articulate why the settlement was considered appropriate and how public interest considerations, such as investor protection and market integrity, were addressed.
Second, SEBI should adopt factor-bucket disclosure to address opacity and proportionality. Rather than publishing calculation sheets or bargaining positions, settlement orders could indicate whether the schedule II framework was used to arrive at the indicative amount, whether the final amount materially diverged from that figure, and which broad categories of factors under regulation 10, such as cooperation, investor harm, repetitiveness, or compliance history, primarily influenced the outcome.
The aforementioned suggestions stem from comparative experience with consent-based enforcement in the United Kingdom, which demonstrates that negotiated outcomes can remain non-adjudicatory while still offering sufficient intelligibility to display application of mind. The Financial Conduct Authority (“FCA”), in its final notice on settlements, provides detailed factual findings and penalty breakdowns as a matter of routine. The penalties imposed are based on section 6.5A of the FCA Decision Procedure and Penalties Manual, which outlines the ‘Five-Step Framework’ to calculate penalties in enforcement. For instance, in its final notice in the matter of Barclays Plc, the FCA provided detailed facts of the case and a summary of reasons to justify the penalty imposed. This approach preserves settlement efficiency while enabling meaningful comparison across cases and restoring the disciplinary signal of enforcement.
Conclusion
SEBI’s settlement mechanism has undergone significant evolution since its introduction in 2007. With reforms aimed at improving its efficiency, transparency, and objectivity, the mechanism has become a go-to for alleged violators to settle matters without admitting guilt. However, issues pertaining to transparency and proportionality, as well as incorrect assumptions about comprehensive legal closure, have raised concerns about the mechanism’s efficacy as a regulatory tool to manage compliance behaviour. Thus, improvements in terms of balanced disclosure of discretion, akin to FCA’s practice in final notices on settlements, would bring much-needed clarity to the process, leading to enhanced comparability of cases and increased confidence in the mechanism. Regarding the legal certainty of settled matters, it appears to have been put to rest by recent judicial decisions, holding that a settlement with SEBI will not foreclose enforcement by authorities for the same violation under separate laws. This solidifies the limited definitiveness of the mechanism. Viewed together, the state of SEBI’s settlement mechanism reflects the need for a regulatory approach that preserves efficiency while offering sufficient intelligibility for market participants to understand enforcement expectations and plan their legal strategies accordingly.
– Sambit Rath