SEBI Proposes Draft Settlement of Proceedings Regulations 2026 to Overhaul Enforcement Framework

What the Consultation Paper Proposes

The Securities and Exchange Board of India (SEBI) released a consultation paper on August 14, 2026, proposing the Securities and Exchange Board of India (Settlement of Proceedings) Regulations, 2026, which would completely replace the existing Settlement Proceedings Regulations, 2018. Public comments are invited until September 4, 2026. The stated objective is to reduce litigation, provide an alternative mode of resolution, and enhance clarity and ease of understanding of the settlement mechanism, while retaining deterrence as a core feature of securities enforcement.

In practice, the 2018 regulations have been criticised by practitioners for unpredictable settlement amounts, excessive discretion in the calculation methodology, and the inability to settle matters at the appellate stage. SEBI's own data shows that during FY 2025-26, it received 439 settlement applications, approved 170 by passing settlement orders, and rejected, withdrew, or returned 199. The high rejection and withdrawal rate underscores the systemic friction that the proposed regulations aim to address.

Simpler Formula for Settlement Amounts

Under the 2018 framework, settlement amounts were calculated using a multi-factor matrix that combined the nature of the violation, the entity's track record, and wrongful gains or investor losses. The proposed 2026 regulations decouple these elements. The base settlement amount would be determined through a simpler, more predictable formula tied to the severity category of the violation. Wrongful gains or investor losses would no longer automatically inflate the base amount. Instead, disgorgement (the repayment of illegal profits) would be calculated as a separate component, ensuring that the settlement amount and the disgorgement obligation are transparent and independently verifiable.

The Supreme Court in SEBI v. Kishore R. Ajmera (2016) 6 SCC 368 held that SEBI's regulatory actions must be proportionate to the gravity of the violation. The proposed formula-based approach directly responds to this principle by reducing the scope for disproportionate outcomes that have characterised certain settlement orders under the 2018 framework.

Settlement at the Appellate Stage

One of the most significant innovations is the proposal to allow settlement at the appellate stage, both before the Securities Appellate Tribunal (SAT) and the Supreme Court. Under the 2018 regulations, once a SEBI order was passed, the only avenue was to appeal; settlement was available only during the show cause notice (SCN) stage. The proposed regulations would allow an applicant who has already received an adverse order to seek settlement while the appeal is pending. This mirrors practices in several mature securities markets, including the SEC's consent decree framework in the United States.

In practice, appellate-stage settlement could substantially reduce the backlog at SAT, which has accumulated over 2,800 pending appeals as of March 2026. Practitioners have long argued that the inability to settle at the appellate stage forces entities into prolonged litigation even when both sides would benefit from an early resolution. SAT's own annual report for 2025-26 noted that the median disposal time for appeals exceeded 18 months, a timeline that imposes significant costs on both SEBI and respondents.

Fast-Track Settlement Replaces Summary Settlement

The existing "summary settlement procedure" for minor violations would be rebranded as "fast-track settlement" under the proposed regulations. The key change is procedural: fast-track cases would not require a hearing before the High Powered Advisory Committee (HPAC), which currently reviews all settlement proposals above a monetary threshold. By removing the HPAC stage for minor matters, SEBI expects to cut the disposal time for such cases from the current average of 4-6 months to under 60 days.

The consultation paper also proposes lower additional charges for applicants who refile a previously withdrawn settlement application. Under the 2018 regulations, withdrawal and refiling attracted a surcharge that practitioners considered punitive and which discouraged applicants from withdrawing strategically to strengthen their submissions.

Extended Filing Window and Non-Condonable Deadline

The filing window for settlement applications after receipt of an SCN is proposed to be increased from 60 days to 90 days. However, the 90-day deadline would be sacrosanct: SEBI proposes to make the deadline non-condonable, meaning that no extension would be granted under any circumstances. This is a departure from the current practice where SEBI has occasionally exercised discretion to accept late applications.

The SAT in Adjudicating Officer, SEBI v. Bharat Jayantilal Patel (2020) observed that procedural certainty in the settlement framework serves the interests of both the regulator and the regulated entity. The proposed non-condonable deadline, while strict, provides the predictability that SAT has consistently advocated.

Implications for Market Participants

If adopted, the proposed regulations would affect all categories of market participants who are subject to SEBI enforcement actions, including listed companies, intermediaries (brokers, merchant bankers, portfolio managers), investment advisers, and individuals facing insider trading or market manipulation proceedings. The formula-based approach would allow entities to calculate their likely settlement exposure before filing, reducing the uncertainty that currently deters settlement applications.

In practice, companies and intermediaries facing SCNs should use the 90-day window to conduct a cost-benefit analysis comparing the settlement amount under the proposed formula with the expected cost of contested proceedings. The appellate-stage settlement option adds a new decision point for entities that have already received adverse orders and are weighing the cost of an appeal against a negotiated resolution.

Sources and References

1. SEBI Consultation Paper on Draft Settlement of Proceedings Regulations, 2026, dated August 14, 2026

2. SEBI (Settlement Proceedings) Regulations, 2018 (existing framework)

3. SEBI v. Kishore R. Ajmera (2016) 6 SCC 368 (proportionality in regulatory actions)

4. SAT Annual Report 2025-26 (pending appeals data)

5. SEBI Annual Report FY 2025-26 (settlement application statistics)

This article is for informational purposes only and does not constitute legal advice. For specific guidance on SEBI settlement proceedings, consult a qualified securities law practitioner.