SEBI’s formulaic regime breeds regulatory arrogance

A settlement regime that delivers neither proportionality nor speed serves neither markets nor investors, and certainly not justice

SEBI introduced a settlement mechanism in 2007 to prevent clogging of the enforcement pipeline by minor violations and to allow the regulator to focus on serious market abuse. However, in the past two decades, the framework has drifted far from that purpose. What was meant to be a practical tool for swift enforcement resolution has hardened into a system that is rigid, opaque, and painfully slow. 

Arithmetic Over Judgement: The turning point came when SEBI attempted to address complaints about inconsistent settlement outcomes. Instead of developing a principled framework grounded in reasoning, precedents, and transparency, the regulator took the easier bureaucratic route. With the Settlement Regulations of 2014 and 2018, settlement was reduced largely to mathematical formulae.

Violations were slotted into numerical categories. Multipliers were applied. Judgement was quietly replaced by arithmetic. This mechanisation reflects a deeper institutional instinct. SEBI’s enforcement culture and institutional DNA have increasingly hardened into a reflexive preference for the most adverse interpretation available. The exercise of balanced discretion is often treated as a personal risk, while severity is worn as a personal badge. The unwritten rule is ‘stretch the allegation as far as possible, maximise the charge, and let the noticee struggle to get a remedy’. The present settlement framework is simply a natural product of that culture. 

This could have been justified if the staff were facing excruciatingly unreasonable internal vigilance. The fact is, this insensitive culture is there despite a sporadic and grossly ineffective internal vigilance. Even with an “independent” Chief Vigilance Officer in place for years, the vigilance machinery functions like Kumbhakarna: mostly asleep, occasionally stirring just enough to remind everyone that it exists, but rarely awake long enough to enforce any real accountability.

Evidence Reduced to an Irrelevance: Under the current regime, settlement amounts are driven by the regulation allegedly violated and by procedural variables, such as the stage of proceedings. Shockingly, the factor of strength of the evidence gathered during SEBI’s investigation or inspection is completely sidelined. Whether a case rests on compelling proof or on fragile inference often makes little difference to the settlement computation.

This is fundamentally flawed. Any credible enforcement system must weigh evidentiary strength. A regulator that ignores the seriousness and reliability of its own evidence is effectively admitting that discovering the truth is secondary to mechanically disposing of files. 

The outcome is serious violations and trivial lapses falling under the same regulatory provision produce similar settlement figures. This isn’t justice; it is bureaucratic convenience dressed up as objectivity. In cases involving minor or debatable technical lapses, settlement amounts often appear disproportionately high in the context of the gravity of the conduct. Faced with these figures, many market participants choose to litigate instead. Many such matters, which could have been resolved quickly, remain pending. 

Meanwhile, in serious cases supported by strong evidence, the formula may produce a settlement amount that is commercially tolerable for the alleged violator. Those cases frequently get settled—typically on a convenient “without admission or denial of guilt” basis.

The settlement mechanism has, therefore, achieved the exact opposite of its intended purpose. Minor cases remain contested and prolonged, while serious violations can be quietly closed. It is a complete structural failure.

Myth of Eliminated Discretion: SEBI often claims that the formula-based system promotes objectivity. The claim collapses upon closer inspection. While arithmetic governs the calculation of settlement amounts, the gateway to settlement remains deeply discretionary. The regulations exclude “non-settleable” cases involving phrases such as “market-wide impact”, “affecting market integrity”, or “loss to a large number of investors”. These expressions are interpreted vaguely. The regulations offer no objective benchmarks. This allows SEBI to deny settlement whenever it chooses, without any explanation. The supposed mathematical objectivity, therefore, masks a wildly discretionary system that is less transparent than the one it replaced.

HPAC: Oversight or Ritual Approval?: The High-Powered Advisory Committee is presented as an independent safeguard within the settlement process. Experience suggests it is closer to ritual endorsement; again, without assessing the evidence. The near-uniform pattern of approval of staff recommendations raises an obvious question: is the HPAC performing meaningful scrutiny or merely lending institutional cover? Once a proposal receives the imprimatur of a committee chaired by a retired High Court judge, the decision acquires an aura of unimpeachable legitimacy. 

Further, the HPAC meets intermittently, and its involvement often adds delay without visible value.

Procedural Paralysis: The settlement mechanism was supposed to provide speed and certainty. Instead, it frequently operates at a glacial pace. Recent experience suggests that the first procedural meeting with SEBI staff in most cases occurs several months, sometimes more than a year, after the settlement application is filed. Such delays defeat the entire purpose of settlement. Many applicants approach the mechanism primarily to avoid prolonged uncertainty.

When the regulator itself fails to act within reasonable timelines, the process becomes self-defeating. The absence of meaningful board-level monitoring of settlement timelines is to be blamed for this.

Need for Structural Reform: The settlement framework requires structural repair. Evidentiary strength must again become central to settlement decisions. Experienced senior officials, not mechanical formulae, should evaluate cases based on evidence, intent, investor impact, and conduct. Mathematical models can assist decision-making, but they cannot replace judgement. All cases should, in principle, remain eligible for settlement. Settlement with admission of guilt and with non-monetary terms should be meaningfully operationalised where appropriate. Settlement orders should not be sketchy. Finally, strict timelines must govern every stage of the settlement process. A settlement regime that delivers neither proportionality nor speed serves neither markets nor investors, and certainly not justice. It serves only institutional convenience.