SEBI Overhauls Enforcement Framework: New Settlement Regulations Poised to End Litigation Glut and Rationalize Penalty Calculations

SEBI Overhauls Enforcement Framework: New Settlement Regulations Poised to End Litigation Glut and Rationalize Penalty Calculations​

The Securities and Exchange Board of India (SEBI) has launched a sweeping review of its settlement mechanisms, introducing significant proposals aimed at reducing protracted litigation and establishing clearer criteria for calculating enforcement penalties. The consultation paper seeks stakeholder input on the proposed SEBI (Settlement of Proceedings) Regulations, 2026, signaling a major shift in how securities law violations will be resolved across the market.

Rationalizing Settlement Calculations Under Proposed Regime​

A core focus of the proposed regulations is bringing rationality and economic soundness to the settlement amount calculation. The previous mechanism, which often resulted in settlement amounts being substantially higher than penalties imposed, has been targeted for reform.

The new draft proposes a streamlined formula: Settlemant Amount (SA) = BA × (S + R + G + A - M). This model is designed to balance deterrence with the feasibility of settling matters quickly.

Key components include:

• Base Amount (BA): Instead of relying solely on specific tables, the Base Amount will be linked directly to the minimum penalty amounts specified under the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, and Depositories Act, 1996. The BA calculation involves a multiplier based on the applicant’s role, ranging from 2 for an Independent Director to 4 for a Company or intermediary.
• New Deterrence Balancing: A critical change addresses the 'double impact' created by disgorgement requirements during settlement. While wrongful gains and losses caused to investors must still be disgorged as non-monetary terms, these factors will no longer inflate the underlying calculation of the settlement amount itself.

Procedural Streamlining and Enhanced Deterrence Factors​

The proposed regulations introduce numerous procedural clarity points and refinements to limit the arbitrary application of penalty frameworks. SEBI is moving toward a system that rewards proactive cooperation while maintaining strict deterrent capability.

Under the new structure, mitigating factors have seen a significant increase in possibility. The general mitigating factors (M) currently capped at three are proposed to be raised up to five, each carrying a base value of 0.20. Conversely, the number of General Aggravating Factors (A) is being reduced from seven to five, although a residuary clause has been added to allow for other relevant concerns.

Other procedural changes include:

• Limitation Period Increase: The time limit for filing settlement applications in pending proceedings will be extended from sixty days to ninety days following the service of the Show Cause Notice (SCN).
• Fast Track Settlement: A new mechanism is proposed offering fast track settlements based on violations or a monetary threshold of up to ₹10 lakh, which may bypass certain processes like the High Powered Advisory Committee meeting for low-value cases.

Clarity in Defining Defaults and Regulatory Action​

To eliminate ambiguity prevalent in enforcement proceedings, SEBI has focused heavily on standardizing the definition of "counts of default." The proposal dictates that the base amount must be calculated for each count of default, which is defined by the number of allegations made, rather than the number of provisions violated. This measure aims to ensure that one underlying act—such as a single advertisement with multiple misleading statements—is counted as only one default.

Furthermore, new rules bring precision to multi-layered violations:

• Repetitive Default: The concept of repetitive nature has been clarified. Specific acts like insider trading arising from a single Unpublished Price Sensitive Information (UPSI), regardless of the number of trades executed, will be considered as a single count of default.
• Financial Misrepresentation: Irrespective of how many misrepresentations are made in one financial statement, that failure shall be treated as one count of default for the entire financial year.

Key Proposed Operational Changes​

Several operational amendments are being introduced to enhance efficiency and fairness in the settlement process:

• Settlement Notice Prioritization: SEBI proposes that before issuing any show cause notice, a formal settlement notice must be issued. This would inform entities of their opportunity to settle proactively within sixty calendar days of receiving the notice.
• Accountability for Non-Noticees: A provision is being introduced to prevent unfair burdening where settlements demand terms from directors or Key Managerial Personnel (KMPs) who were not specifically named in the original show cause notice.
• Fund Diversion Clauses: In cases involving allegations of fund siphoning or diversion, settlement terms will require the applicant to bring back the diverted funds along with interest, but this act of good faith will ensure that the diversion itself does not become an impediment to settling the matter due to loss caused to investors.

The consultation paper serves as a critical call for stakeholders—from corporate entities to legal professionals—to review these extensive changes and provide feedback before SEBI finalizes the draft regulations. Interested parties can submit their comments by September 04, 2026, through the designated portal.