India's securities regulator has rewritten the rules for how companies and individuals can settle enforcement cases, placing the recovery of misappropriated money at the centre of the process. The Securities and Exchange Board of India has approved the Settlement of Administrative and Civil Proceedings Regulations, 2026, which replace the framework in place since 2018. The new rules will come into force 30 days after notification.
Sebi chairman Tuhin Kanta Pandey framed the overhaul in blunt terms: "If there is a siphoning of money, it should come back first. That is non-negotiable." The statement signals a shift in emphasis. Settlements, in the regulator's view, should not become a way for wrongdoers to pay a fee and move on while investors remain out of pocket.
What changes
The new regulations introduce several structural changes. First, the settlement amount will be tied to a defined formula based on multiples of the applicable penalty, rather than depending as heavily on discretionary calculations. That is intended to make outcomes more predictable and consistent across cases.
Second, wrongful gains and disgorgement will be treated separately from the settlement amount. Under the new approach, any money unlawfully obtained must be returned in addition to whatever is paid to settle the proceedings. Whole-time member Kamlesh Chandra Varshney said the process would enable "quicker recovery of money, with interest", while retaining the ability to impose remedial and regulatory terms on the settling party.
Third, Sebi is creating a fast-track settlement route for specified categories of violations. Lower-severity breaches, such as certain disclosure lapses, can be resolved more quickly, freeing enforcement resources for serious cases.
Fourth, access to settlement is being widened, allowing more categories of proceedings and more parties to apply.
Settlement notices before show-cause notices
Perhaps the most significant procedural change is the introduction of settlement notices issued before show-cause notices. Under the new process, an entity facing potential enforcement action will receive a settlement notice and have a 60-day window to apply for settlement before formal proceedings begin.
Securities lawyer Sumit Agrawal noted that the settlement notice draws inspiration from the Wells process used by the US Securities and Exchange Commission, under which the regulator notifies a party that staff intend to recommend enforcement action, giving it an opportunity to respond. He added, however, that the Indian notice serves a distinct purpose within the country's own regulatory framework.
The regulations also offer a one-time 90-day window for applicants whose settlement requests were rejected under the 2018 framework. Those applicants can reapply under the new rules but must pay an additional 20 per cent on top of the settlement amount. That provision is designed to clear a backlog of pending cases while ensuring that late settlement carries a cost.
Why it matters now
Sebi's enforcement caseload has grown sharply as India's capital markets have expanded. The number of demat accounts has multiplied since 2020, retail participation in derivatives has surged, and the number of listed companies and intermediaries has risen. Enforcement proceedings, from insider trading and market manipulation to disclosure failures and fund diversion by promoters, have become more numerous and more complex.
Settlement is an essential tool for managing that caseload. It allows the regulator to resolve matters without lengthy adjudication and appeals, which can take years to wind through the Securities Appellate Tribunal and the courts. But settlement has also attracted criticism. Investor advocates have argued that it can allow wealthy parties to buy their way out of accountability, and that settlement amounts have sometimes been small relative to the harm caused.
By separating disgorgement from the settlement amount and making recovery non-negotiable, Sebi is addressing that criticism directly. A promoter who diverted funds from a listed company cannot simply pay a settlement fee; the diverted money must be returned first, with interest.
Implications for companies and markets
For listed companies and their promoters, the new framework raises the cost of wrongdoing and reduces uncertainty about settlement outcomes. A formula-based approach allows legal teams to estimate likely exposure earlier, which may encourage faster resolution. The pre-show-cause settlement notice gives companies an opportunity to settle before formal proceedings become public, which can limit reputational damage for lesser violations.
For intermediaries such as brokers, portfolio managers and investment advisers, the fast-track route could speed resolution of routine compliance lapses. For investors, the greatest benefit lies in the prospect of faster restitution in cases involving diversion of funds.
The reforms arrive at a moment when governance scrutiny in Indian markets is high. The regulator has pursued several high-profile cases involving related-party transactions and fund diversion in recent years, and foreign investors, who have sold heavily this year, pay close attention to the quality of enforcement when allocating capital to emerging markets.
Open questions
The global context is instructive. Regulators in the United States, the United Kingdom and Singapore all use settlement or equivalent mechanisms extensively, and each has faced periodic debate over whether settlements are too lenient. The common thread in recent reforms abroad has been a greater emphasis on restitution to harmed investors and on admissions or undertakings that change behaviour, rather than on penalty size alone. Sebi's new framework moves in that direction, while keeping the efficiency advantages that make settlement attractive for a regulator with a heavy docket.
For market participants, the practical advice from compliance specialists is likely to be straightforward: invest in early detection of lapses, respond quickly to settlement notices, and treat any question of diverted funds as a matter to be resolved in full before negotiating anything else.
Several details will matter in practice. The formula's multipliers, the categories eligible for fast-track settlement, and the treatment of repeat offenders will determine how the framework works on the ground. The regulator will also need to ensure that the settlement notice process does not become a pressure tactic that pushes parties to settle weak cases simply to avoid proceedings.
There is also a question of capacity. Faster settlements require quicker processing by Sebi's enforcement and legal teams. If the new windows generate a surge of applications, particularly from those rejected under the old regime, the regulator's ability to handle them efficiently will be tested.
Still, the direction is clear. By putting recovery of investor money ahead of the convenience of settlement, Sebi is aligning its enforcement toolkit with the priorities of the retail investors who now make up a large and growing share of India's market participants. The next step is to see how the rules perform once they take effect.
