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Sebi’s new settlement scheme sees modest success

10 Nov , 2022   By : Monika Singh

Sebi’s new settlement scheme sees modest success

The  Settlement Scheme, 2022, recently introduced by Sebi, may have seen modest success, according to people familiar with the matter. The scheme aims at providing settlement opportunities to entities that executed reversal trades in the illiquid stock options segment of the BSE between April 1, 2014 and September 30, 2015, and against whom proceedings were initiated and are pending before any forum or authority such as the Securities Appellate Tribunal.

“The 2022 scheme provides more reasonable terms to attract parties to close their matters with Sebi. This also opens up Sebi’s bandwidth to deal with more consequential matters. A lot more matters are being settled under the current scheme due to more reasonable terms,” said Tomu Francis, partner, Khaitan & Co.

“The earlier scheme was onerous, stringent and unviable, and issued during the peak of the pandemic. The new settlement scheme is relatively more successful, although it doesn’t close or conclude all legal issues,” said Sumit Agrawal, founder, Regstreet Law Advisors.

An email sent to Sebi on the number of cases settled and penalty collected did not immediately get a response.

In 2015, Sebi had found that out of 21,652 entities that traded on the BSE’s stock options segment, nearly 70%, or 14,720 entities, were involved in generating artificial volumes by executing reversal trades. This means that entities would either sell their options contracts only to buy them subsequently, or vice-versa, at a significant price differential, thereby generating an artificial volume.

A settlement scheme is in the nature of a plea bargaining where the party suo motu opts for the scheme and ultimately settles the dispute with the regulator if the terms offered are fair and as per the scheme.

“Liability for non-permitted trading in securities can only be determined on the basis of a detailed examination of trades executed, volume and timing. Settlement schemes minimise prolonged litigation involving establishment of facts and may be fruitful in grey areas of application of a regulatory provision,” said Saurabh Tiwari, partner, DSK Legal.

Sebi’s 2020 settlement scheme was not successful as the terms laid down for the settlement were not very attractive. Even  persons with a small quantity of such manipulative trades were asked to pay a hefty settlement amount.

“The factor considered for arriving at the new settlement amount is only the number of trades and not the volume contributed or number of contracts, which were there in the 2020 scheme. The terms of the settlement amount are attractive for alleged noticees wherein they can avoid the entire litigation process and close the matter without an admission or denial of guilt,” said Abhiraj Arora, associate partner, Economic Laws Practice.

According to Jayant Thakur, a chartered accountant, quite a few people have paid Rs 5 lakh on an average even for relatively smaller number of wrongful trades under the earlier scheme. “Now, for the same violation, other entities would pay amounts starting at Rs 1 lakh under the new scheme. If parity is to be maintained, should not the excess amount paid by the persons as per the earlier scheme be refunded?” he asked.

“There are many noticees who had paid higher amount earlier are looking for a refund or relief. Equally, there are applicants whose applications are not being considered on the ground of delay as penalty orders have been passed in their matters,” said Agrawal.

Arora believes that the parties who had settled under the earlier scheme may challenge the scheme in a court on the ground that the settlement amount paid for the offence was much higher than that applicable under the current scheme. However, it will be open for Sebi to argue that the matters were settled with the party on terms accepted by it without force and coercion and the same therefore cannot be reopened, he said.

The new scheme is operational till November 21 this year. Those availing settlement are required to submit a settlement application along with an application registration fee of Rs 25,000 plus GST in case of body corporates and Rs 15,000 plus GST in case of individuals.

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