SEBI eases settlement, overhauls PMS

Why in the News

The Securities and Exchange Board of India (SEBI) has approved a new settlement framework for entities facing enforcement proceedings. The new norms replace the Settlement Proceedings Regulations, 2018 and are aimed at reducing the regulator’s own discretion. The same decision approved a common advertisement code for market intermediaries and a comprehensive overhaul of the Portfolio Managers Regulations. The contested point is whether widening the settlement route prices a violation below the harm it caused.

What is a settlement proceeding before SEBI?

1. Closure without a finding: An entity facing enforcement proceedings pays a computed amount and the matter closes without an adjudicated finding against it. The show cause notice starts the period within which an application may be filed.
2. The deciding body: A High Powered Committee examines the application and retains the power to reject it. Settlement is an option the regulator grants rather than a right the applicant holds.
3. Exclusions under the 2018 regulations: The Settlement Proceedings Regulations, 2018 excluded whole categories of violation from the route, including those involving significant market impact, substantial investor losses and threats to market integrity.

What changes in the settlement framework?

1. A formula in place of an assessment: SEBI has introduced a new formula for calculating settlement amounts. The calculation now drives the figure rather than a case by case assessment.
2. A fast track below a threshold: A case may be settled without reference to the High Powered Committee where the calculated amount is below Rs 10 lakh. Small matters therefore close without a committee sitting.
3. A longer filing window: The deadline for filing a settlement application runs to 90 days from the date of the show cause notice, against 60 days earlier.
4. Statutory anchoring: The new regulations are aligned with provisions introduced in the Securities Contracts (Regulation) Act, 1956. Those provisions supply a statutory framework for settlement and related mechanisms.

What changes for portfolio managers and for market advertising?

1. The Portfolio Managers Regulations overhaul: SEBI approved a comprehensive overhaul of the regulations governing portfolio management services (PMS), the business of running a client’s securities portfolio under a discretionary or advisory mandate. The stated aims are expanding the industry, easing compliance requirements, consolidating the regulations and removing outdated provisions.
2. The competitiveness objective: The reforms seek to make the business more competitive by improving operational flexibility and simplifying compliance. Consolidation replaces a set of separately amended provisions with one instrument.
3. A common advertisement code: A single advertisement code will apply to market intermediaries and regulated entities across the securities market. Its stated purpose is to simplify and standardise advertising practices.

Challenges to the new settlement framework

1. A settlement produces no adjudicated finding: A matter closed by settlement leaves no ruling for the market to read, so conduct at the margin stays untested. Eg. The objection put to the regulator was that a violator could settle by paying less than the impact caused, and the answer given was that the high powered committee retains the discretion to reject an application.
   The Fix: Publish a reasoned order for every settled matter above a stated value, recording the conduct and the calculation applied.
2. Unresolved proceedings carry their own cost: An enforcement matter left open for years freezes an entity’s corporate actions whatever the eventual finding. Eg. The National Stock Exchange (NSE) brought its over Rs 22,200 crore public issue to listing only after a decade long regulatory and legal overhang.
   The Fix: Publish a standing disposal timeline for enforcement matters, so speed does not depend on the entity choosing to settle.
3. A rupee threshold is not indexed: A fast track limit set in rupees covers a changing share of matters as values and participation rise. Eg. The minimum investment in bonds on online bond platforms has been cut to Rs 10,000 to widen retail participation.
   The Fix: Tie the fast track threshold to a published index with automatic revision, so the committee’s caseload stays a policy choice.
4. Framework changes reprice a business before they are notified: A proposal on how a regulated business earns its revenue moves prices on the day it is published. Eg. An Insurance Regulatory and Development Authority of India (IRDAI) consultation paper, ‘Recalibrating Economics of Insurance Distribution’, triggered heavy selling in insurance distribution stocks.
   The Fix: Publish a dated implementation calendar with every consultation paper, so a regulated entity prices the change rather than the announcement.

Conclusion

Board approval is not notification. The framework’s effect turns on the calculation formula and on how many matters bypass the committee once the regulations are in force. The regulator has traded a case by case judgement for a published rule. That is the trade it describes as reducing its own discretion. The thing to watch is the share of enforcement matters disposed through the fast track route in the first full year, and whether a reasoned order is published for the rest.

Matching Previous Year Question

“[2013, GS2, 10 marks] The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.”