SEBI settlement overhaul separates fund recovery from settlement payment

The Securities and Exchange Board of India (SEBI) has overhauled its settlement framework, separating the recovery of funds allegedly diverted from a company from the settlement payment itself, according to lawyers. This distinction is crucial in cases of fund diversion and misappropriation, where returning the money to the company would not compensate for the settlement amount or disgorgement, where applicable.

Gazal Rawal, partner at Cyril Amarchand Mangaldas, emphasized that the settlement amount is determined based on a prescribed formula considering the nature of defaults and is credited to the Consolidated Fund of India. In contrast, disgorgement, which is based on wrongful gains or loss averted and aims to rectify the situation, is credited to the Investor Protection and Education Fund.

SEBI Chairman Tuhin Kanta Pandey clarified that recovery of diverted funds remains a separate consideration, with the primary beneficiary being the restoration of shareholders' funds, including interest, back into the company. Tushar Kumar, an advocate at the Supreme Court of India, noted that the new framework allows wrongful gains to be addressed independently through disgorgement or other regulatory measures.

Rohit Jain, managing partner at Singhania & Co., highlighted that settlement in fund diversion cases could enhance shareholder recovery if the terms include restoration of the diverted money, disgorgement, and remedial actions. SEBI has also proposed issuing a settlement notice before a show-cause notice in specific cases, allowing entities to engage with SEBI earlier in the process.

This early engagement could potentially reduce the time and cost associated with parallel SCN and settlement processes. However, the impact of a lower factor for the pre-SCN stage on the final settlement amount remains unclear, as it would also be influenced by the nature of the default and other factors. The revised formula aims to provide greater predictability by considering factors such as the stage of proceedings, regulatory history, and the gravity and circumstances of the misconduct.

SEBI has also included a revocation provision, allowing the regulator to revoke a settlement obtained through misrepresentation or non-compliance, thereby reactivating the underlying proceedings. While SEBI has outlined the broad principles, the operational framework for calculating recovery, disgorgement, and shareholder restitution is yet to be detailed and will be outlined through a subsequent circular.