SEBI's 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 doing so, SEBI explicitly seeks to make settlement simpler, more predictable and less discretionary, and to render it a more attractive option for market participants, without compromising market integrity.

Importantly, the consultation paper situates the reform against the evolution of SEBI's settlement framework from the 2007 circular, through the statutory recognition of settlement in the 2014 Securities Laws (Amendment) Act, to the 2014 and 2018 settlement regulations. The Proposed Regulations thus represent the next stage in institutionalising settlement as an integral component of SEBI's enforcement architecture, rather than a mere exceptional deviation from adjudication.

The Case for Reform

SEBI's own empirical analysis underpins the proposed reform. The consultation paper records that a study of settlement applications filed over the preceding two years (excluding outliers and focusing on cases proximate to the eventual enforcement outcome) showed that the settlement amounts proposed in matters which ultimately resulted in adjudicated penalties were, on average, about eight times the penalty actually imposed. The paper suggests that the proposed methodology could reduce this differential to approximately four times.

This is a significant acknowledgement. A rational settlement regime must incorporate a premium over the expected adjudicatory outcome; otherwise, an alleged violator has little economic incentive to settle. However, where the premium becomes excessive, settlement risks being perceived as a financial penalty for exercising the right to contest proceedings rather than as a consensual alternative to litigation. The consultation paper recognises this concern and explicitly proceeds on the premise that settlement should be economically rational for market participants.

The paper also relies on broader judicial support for consensual dispute resolution, including observations by the Supreme Court and the Securities Appellate Tribunal (SAT). In particular, SAT has, in multiple matters, such as the connected appeals in B. N. Rathi Comtrade Appeal No. 282 of 2023, decided on 12.12.2023 and earlier decisions, urged SEBI to consider appropriate settlement schemes to reduce pendency and provide certainty, thereby endorsing settlement as a legitimate tool of securities enforcement.

A Simpler and Statutorily Anchored Formula

1. Replacement of the Existing Formula

Under the 2018 Regulations, the indicative settlement amount is derived from a multi-layered formula involving a proceeding conversion factor, regulatory action factor, base values, base amounts and a series of aggravating and mitigating multipliers. SEBI itself concedes that, notwithstanding its mathematical appearance, the formula embeds significant subjectivity.

The Proposed Regulations introduce a new formula:

Settlement Amount = Base Amount × (S + R + G + A − M)

Here:

* S represents the stage of proceedings;

* R represents past regulatory action;

* G captures special categories of violations;

* A covers aggravating factors; and

* M captures mitigating factors.

The stage factor ranges from 0.2 where a voluntary application precedes formal proceedings, to 1.5 where the matter is pending before the Supreme Court, thereby operationalizing the principle that earlier settlement justifies a greater discount. The regulatory-action factor, in turn, ranges from zero (for applicants with no adverse orders) to incremental additions for each prior adjudication, direction or disciplinary order, reflecting the heightened concern associated with repeat violators.

While this structure is substantially easier to understand and apply, it does not eliminate discretion. The determination of the Base Amount and the evaluation of aggravating and mitigating factors remain areas in which similarly situated applicants may, in practice, face divergent outcomes.

2. Linking the Base Amount to Statutory Penalties

One of the most conceptually important reforms is linking the Base Amount to the minimum statutory penalty prescribed under the SEBI Act, the Securities Contracts (Regulation) Act, and the Depositories Act. Under the proposal, the Base Amount is computed by multiplying the statutory minimum penalty by a multiplier that depends on the applicant's category ranging, for example, from a lower multiplier for independent directors to higher multipliers for market infrastructure institutions, with intermediaries and issuers in an intermediate band.

This approach has two clear advantages. First, it anchors the settlement amount in a statutory benchmark, thereby enhancing legal predictability. Secondly, it reflects a differentiated assessment of regulatory responsibility and potential culpability across categories such as companies, intermediaries, senior management, promoters and independent directors.

At the same time, the specific multipliers (for instance, 2, 3.5, 4 or 5.5) are ultimately normative policy choices. The consultation material does not appear to disclose the empirical basis for choosing particular multipliers for each category. From the standpoint of transparency and objectivity, core stated aims of the reform, it would be desirable for SEBI to publish the methodology or data set justifying these differential multipliers.

Addressing Double Counting, Counts of Default and Qualitative Factors

1. Avoiding Double Counting of Wrongful Gains

Under the existing regime, wrongful gain or investor loss influenced both the indicative settlement amount and the quantum of disgorgement, effectively exposing applicants to a double impact. SEBI acknowledges that this structure could disincentivize settlement.

The Proposed Regulations therefore remove wrongful gain or loss caused to investors from the calculation of the Base Amount but retain disgorgement (with interest) as a separate non-monetary settlement term. Interest on disgorgement is proposed to be charged at 9% per annum up to the date of a SEBI final order and 12% per annum thereafter, with an express clarification that simple interest applies and that no interest is levied on interest unless so directed in an order.

This separation is conceptually sound. Disgorgement is essentially restitutionary, designed to eliminate unjust enrichment, whereas the settlement amount is intended to reflect a combination of deterrence, procedural savings and proportionality. Distinguishing the two avoids transforming settlement into an overlay of disgorgement plus a punitive premium on the same monetary base.

2. Clarifying “Counts of Default”

The consultation paper also tackles one of the most contentious practical issues in settlement computations: what constitutes a separate “count” of default. The proposal distinguishes between the number of statutory provisions technically violated and the underlying acts or transactions giving rise to those violations.

Recurring violations may, in appropriate cases, be aggregated into a single count where they arise from one core act or transaction. Illustratively, the paper contemplates treating as a single count: multiple trades based on the same unpublished price sensitive information (UPSI), multiple communications of the same UPSI, a series of front-running trades linked to one client order, repeated periodic disclosure failures within a financial year, or multiple misleading statements in one advertisement or corporate announcement.

This recalibration matters because it aligns settlement liability more closely with the substantive gravity of the misconduct than with the mechanical multiplication of formal violations. At the same time, SEBI will need to ensure that this aggregation principle does not unduly soften the treatment of genuinely repetitive or continuing misconduct which, in substance, reflects a pattern rather than a single episode.

3. Aggravating and Mitigating Factors

On the qualitative side, the Proposed Regulations seek a more balanced approach by increasing the maximum number of mitigating factors from three to five (each weighted at 0.20) and reducing the maximum aggravating factors from seven to five (also at 0.20 each). New mitigating factors include, inter alia, changes in management or control and the applicant's role as an independent director; residuary clauses are proposed for both mitigating and aggravating circumstances, allowing the fact-specific realities of each case to be recognised.

This framework appropriately recognises that not all violations, or violators, are alike. Factors such as cooperation with the investigation, corrective action, governance changes and the applicant's functional role can legitimately influence the settlement outcome. However, residuary clauses should be accompanied by transparent and reasoned application; otherwise, the very discretion that the formulaic structure seeks to restrain may be reintroduced through open-ended qualitative assessments.

Procedural Innovations: Pre‑SCN Settlement, Fast-Track Routes and Flexibility

1. Settlement Notice before Show-Cause Notice

One of the most innovative procedural proposals is the introduction of a “settlement notice” before issuance of a show‑cause notice (“SCN”), except where prosecution is contemplated. Under the Proposed Regulations, SEBI may issue such a notice setting out the substance of the prima facie findings, the provisions likely to be invoked and the probable proceedings, and invite the noticee to file a settlement application within 60 days.

This mechanism has the potential to reshape settlement practice. It gives content to the lower stage factor for pre‑SCN settlement. It allows matters to be resolved before adversarial positions crystallise and before high procedural costs are incurred on both sides. The effectiveness of this innovation will, however, depend critically on the sufficiency of detail in such notices; applicants must have adequate information on the evidentiary basis and likely charges to make an informed settlement decision.

2. Fast-Track Settlement

The Proposed Regulations create a distinct fast‑track settlement mechanism, comprising violation‑based and monetary-threshold-based fast‑track proceedings. For cases falling within a specified monetary threshold (proposed at ₹10 lakh) or within prescribed categories of violations, settlement may be processed without reference to the High Powered Advisory Committee, moving directly from the Internal Committee to the Panel of Whole Time Members.

This should reduce administrative burden and accelerate disposal of lower-value or lower‑complexity cases. Nevertheless, monetary thresholds are only an imperfect proxy for seriousness; technically complex matters with modest settlement amounts may still raise significant issues of principle or market conduct and may warrant full‑scale evaluation.

3. Extended Timelines, Re‑applications and Withdrawal

Several procedural refinements aim to make the regime more workable:

* The limitation period for filing a settlement application in pending proceedings is proposed to be extended from 60 to 90 days from service of the SCN, recognising the practical constraints faced by corporates and overseas entities.

* The additional settlement amount payable on refiling after withdrawal is proposed to be reduced from 50% to 20%, making withdrawal and refiling a less prohibitive option where circumstances change.

* Applicants whose earlier settlement applications were rejected may, in specified situations and subject to an additional premium, seek settlement again at a later stage—for instance, after an intervening order of SEBI or SAT alters the risk calculus.

* SEBI may condone delays up to 30 days in complying with certain time-bound requirements, where delay was for reasons beyond the applicant's control, subject to an additional 1% of the settlement amount where the delay relates to payment after a demand notice.

In disclosure‑related violations, the requirement to make outstanding disclosures as a precondition to settlement is proposed to be deferred to the post‑approval stage: applicants would make such disclosures after in‑principle approval by the Panel of Whole Time Members but before the settlement order is passed. This avoids the inequity of compelled public disclosures where settlement is ultimately refused.

Further, the Proposed Regulations introduce an explicit right to an opportunity of hearing before revocation of a settlement order, which may occur where settlement terms are violated or where undertakings, information or waivers are found to be false or incorrect. This responds to natural‑justice concerns, given that revocation re‑exposes the applicant to enforcement proceedings.

Scope of Settlements in Serious Cases and Transitional Issues

Under the 2018 Regulations, SEBI was generally disinclined to settle matters involving market‑wide impact, loss to a large number of investors or adverse impact on market integrity. The Proposed Regulations move away from a near‑categorical exclusion and instead allow the Internal Committee and HPAC to examine whether such cases can be adequately addressed through an appropriate combination of monetary and non‑monetary terms, including restitutionary measures and corrective disclosures.

This reflects an important conceptual evolution: the mere seriousness of a violation does not necessarily make it unsuitable for settlement. The more relevant enquiry is whether a settlement package can effectively remedy the regulatory harm and deter future misconduct by restoring investor interests and correcting market information, rather than through years of contested litigation with uncertain outcomes. At the same time, exclusions remain for certain categories such as wilful defaulters and fugitive economic offenders, preserving the outer boundaries of what may be compromiseable.

Transitionally, the Proposed Regulations contemplate that pending settlement applications under the 2018 Regulations may, within 90 days of commencement, be processed under the new framework upon payment of an additional 10% of the settlement amount computed under the new formula. The draft also preserves the continuity of institutional structures such as the Internal Committee and HPAC, deeming them constituted under the new regime, and provides for the repeal of the 2018 Regulations while saving prior settlement orders and notices.

The Proposed Settlement Regulations, 2026 amount to a substantial and, in many respects, well‑calibrated evolution of SEBI's enforcement toolkit. They rationalise settlement amounts through a simpler, statutorily anchored formula; avoid double counting of wrongful gains; clarify what constitutes a count of default; rebalance aggravating and mitigating factors; widen access to settlement (including at early and late stages); introduce pre‑SCN settlement notices and fast‑track procedures; and strengthen procedural fairness through extended timelines, limited condonation, hearing rights and clearer forms.

The central challenge will be to ensure that simplification does not coexist with unpredictability and that flexibility does not shade into unstructured discretion. SEBI will likely need to supplement the text of the Regulations with transparent guidance on the choice of multipliers, the application of residuary factors, the exercise of the power to reject applications in the interest of investors or market integrity, and the use of settlement in matters of systemic significance.

In an ideal steady state, the settlement regime would enable every market participant to answer, with reasonable confidence, three questions: (i) whether a particular type of misconduct is, in principle, eligible for settlement; (ii) the broad economic range within which settlement is likely to fall; and (iii) the nature of remedial and non‑monetary terms that may accompany settlement. If the final Regulations, read with their subsequent administration, can deliver that degree of transparency while preserving SEBI's ability to respond firmly to serious and emerging forms of misconduct, the 2026 framework may well become a credible model of modern securities‑law enforcement in which settlement and deterrence operate as complementary, rather than competing, instruments.

Public comments on the draft Settlement Regulations, 2026 have been invited up to 4 September 2026, offering market participants, intermediaries and other stakeholders an important opportunity to shape the final contours of this regime.

Author is a Senior Advocate practicing at Supreme Court of India. Views are personal.