SEBI’s New Settlement Mechanism: 8 Things You Should Know
The Securities and Exchange Board of India (SEBI) has just revamped the settlement mechanism for violation of securities laws which had been first introduced in 2007 and subsequently revised in 2014 as SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. These regulations allowed SEBI to initiate various types of proceedings such as criminal proceedings, civil-quasi-judicial proceedings, settlement or compounding and recovery.
 
SEBI has now announced Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018 which will come into effect from 1 January, 2019.
Besides providing more clarity and eliminating some discrepancies in the existing mechanism, The Settlement Regulations, 2018 have come up with 8 material changes. 
 
1. Redefining 'Securities Laws' and the 'Specified Proceedings'
 
The most important change is widening the scope of the laws covered under the proceedings which earlier included the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. The new mechanism says all other laws administered by SEBI shall be covered by the new regulations. Also, Settlement Regulations, 2014 only included proceedings initiated by SEBI. The new  regulations include proceedings which are pending before SEBI or any other forum.  
 
2. Non-acceptance of Settlement Proposal for Proceedings Pending before the Court or Tribunal
 
Under the Settlement Regulations, 2014, any person intending to dispose of any proceedings under securities laws which were pending before the tribunal or a court, where SEBI was involved , could also file the settlement application. Also, the applicant who has applied for compounding of an offence before a court for the same cause of action related to the specified proceedings was also permitted to make an application under the regulations. However, such provisions with respect to the applications made before the court or tribunal have now been done away with under the new regulations. 
 
3. Consideration of the Settlement Applications
 
Under the new regulations, SEBI may itself consider the settlement applications, if it is satisfied that there was sufficient cause for not filing it within the specified period, which were earlier considered by the panel of whole-time members. Also, there is no such requirement to accompany an application for condonation of delay. The provisions have not only altered the settlement amount but also provided that such delayed applications would not be considered if filed after 120 calendar days from the expiry of the period specified.
 
4. Altering the Scope of Settlement
 
The Settlement Regulations, 2018, to a certain extent, may be construed as widening the scope of settlement by considering the applications where the alleged default was committed within a period of 24 calendar months from the date of the last settlement order. Having said that, it is also pertinent to note that SEBI may not consider any such specified proceedings, wherein the alleged default tends to -
 
i. Have a market-wide impact,
ii. Cause losses to a large number of investors, or
iii. Affect the integrity of the market.
 
Further, the scope of settlement of specified proceedings has also been narrowed to the extent that any application made by a wilful defaulter, a fugitive economic offender or a person who has defaulted in payment of any fees due or penalty imposed under securities laws shall not be considered by SEBI. Whereas the earlier regulations provided that breach of laws governing insider trading, fraudulent and unfair trade practices shall not be considered for settlement, the new regulations provide that in order to refuse a settlement application, SEBI shall take into consideration the three parameters mentioned as above. Therefore, violation of laws pertaining to insider trading, fraudulent and unfair trade practices not having market-wide impact (such as front-running, mis-selling to an investor, violation of internal code of conduct in insider trading) or where third-party interests are not involved, shall now be considered for settlement under the said regulations.
 
5. Constitution and Working of the High Powered Advisory Committee
 
The constitution of the high powered advisory committee (HPAC), which earlier consisted of a retired judge of the High Court, may also include a judicial member who has been the judge of the Supreme Court. The HPAC meetings can be through video linkage. There has been further specification by introducing a specified procedure to provide clarity on the working of the HPAC.
 
6. Notice of settlement
 
The regulations provide a new format under Schedule II of the regulations, which pertains to the settlement notice to be issued by SEBI prior to the issuance of the show cause notice in order to provide the noticee an opportunity to file a settlement application within 15 calendar days from the date of receipt of the settlement notice. 
 
7. Settlement with confidentiality 
 
Consistent with international practices, SEBI has introduced the concept of settlement of the proceedings in confidentiality. As per the regulations, such privilege of confidentiality shall be provided to applicants who agree to provide "substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws." 
 
However, the application shall be considered only in cases which prior to or pending investigation, inspection, inquiry or audit. The regulations provide the specified contents in Schedule IV, which has been specifically included for furnishing all the relevant disclosures, information and evidence relating to the commission of any violation of securities laws.
 
8. New concept—settlement schemes
 
The Settlement Regulations, 2018 have introduced a new term called 'settlement schemes'. SEBI shall specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme shall be deemed to be a settlement order under the regulations.
 
 
(The writer works in the Corporate Law Division Vinod Kothari & Company)
 
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    Moneylife Impact: RBI Asks Banks To Use External Benchmark for Floating Rates from Next Year but What about the Past?
    Under pressure from a public interest litigation (PIL) filed by Moneylife Foundation in the Supreme Court, the Reserve Bank of India (RBI) has asked all banks to adopt new external benchmark for providing loans for home, auto and micro and small enterprises (MSME) from 1 April 2019. RBI has also asked banks to keep fixed their spread over the benchmark rate throughout the tenure of the loan. This will possibly stop floating rate customers being cheated by banks in future. 
     
    Regular readers would know Moneylife Foundation has been relentlessly campaigning against arbitrary and opaque bank policies with respect to floating rate loans. Borrowers, who have taken loans on a floating rate basis, suffer an immediate increase when interest rates are hiked by the RBI but do not get much relief when rates go down. This makes a mockery of the very concept of ‘floating’ rates. We have highlighted this issue in several articles and our Cover Story “Banksters” (Moneylife, 28 April-11 May 2017). 
     
    The external benchmark now suggested by RBI includes its policy repo rate, government of India 91 days treasury bill yield produced by the Financial Benchmarks India Pvt Ltd (FBIL), government of India 182 days treasury bill yield produced by the FBIL, or any other benchmark market interest rate produced by the FBIL.
     
    RBI has said, "The spread over the benchmark rate — to be decided wholly at banks’ discretion at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract."
     
    This, in other words, means that, with the spread remaining fixed, banks will have to adjust interest rates as per the changes in external benchmark. 
     
    However, RBI is asking banks to use the new norms from April next year. It is silent about the previous years of overcharging that flourished brazenly.
     
    Last year, the Dr Janak Raj Committee in its report, "Internal Study Group to Review the Working of the MCLR System" had provided a shocking account of how wide and deep banking malpractices are with regard to floating rate loans. It confirmed every one of our arguments about how banks cheat customers, fudge rates and extort conversion charges. 
     
    The RBI study highlighted how banks deviated in an ad hoc manner from the specified methodologies for calculating the base rate and the MCLR, to either inflate the base rate or prevent the base rate from falling in line with the cost of funds. 
     
    It says, “Banks have been quite slow in migrating their existing customers to the MCLR regime. Most of the base rate customers are retail or small and medium enterprise (SME) borrowers. Hence, the banking sector’s weak pass-through to the base rate is turning out to be deleterious to the retail and SME borrowers in an easy monetary cycle.” 
     
    "The ad hoc adjustments used by banks, included inappropriate calculation of the cost of funds; no change in the base rate even as the cost of deposits declined significantly; sharp increase in the return on net worth out of tune with past track record or future prospects to offset the impact of reduction in the cost of deposits on the lending rate; and inclusion of new components in the base rate formula to adjust the rate to a desired level. The slow transmission to the base rate loan portfolio was further accentuated by the long (annual) reset periods," the report had said.
     
    Noticing this grave injustice, Moneylife Foundation wrote to Dr Urjit Patel, governor of RBI, requesting to direct banks to calculate the excess interest they have charged (through arbitrary and ad hoc calculations of base rate or MCLR) and refund the money to borrowers, especially retail borrowers and SMEs. (See Excess Interest Charged by Banks under Base Rate and MCLR Regime
     
    “The RBI should also direct banks to set up special helplines to handle complaints from borrowers, whom banks have overcharged over the years. We also request the Reserve Bank to immediately issue circular/master directions asking banks and financial institutions to allow existing borrowers to migrate to MCLR or any new system without any conversion fee or any other charges for the switchover,” the memorandum had said.
     
    RBI refused to act on it. We then had to file a PIL in the Supreme Court.
     
    The PIL filed by Moneylife Foundation sought justice for a huge section of Indian population including the middle class and lower middle class, who are badly affected by such discrimination. The primary respondent was the RBI. Others named were: ministry of consumer affairs, ministry of finance, Indian Banks’ Association (IBA), National Housing Bank (NHB), Banking Code and Standards Bank of India (BCSBI).
     
    The petition prayed that, 
     
    • Banking companies and non-banking finance companies (NBFCs) should calculate the amount of excess interest that has been charged to the existing borrowers under floating rate regime by denying the benefit of lower rates to pass through the benefit of a reduction in the interest rates to the existing consumers and borrowers of home loans, education loans and loans provided for consumer durables.

     

    • The amounts calculated above be transmitted to a central corpus under the aegis of the RBI and refund of such overcharged amount be directed to the borrowers by crediting the accounts through a centralised scheme to be framed by the RBI to pass through the benefit of a reduction in the interest rates to the consumer and borrowers of home loans, education loans and loans for durables.

     

    • Banking companies and NBFCs be directed that insofar as floating rate loans are concerned there can be no conversion charge extracted from customers who are entitled to avail the lower rate.

     

    • Banks and NBFCs, with effect from 1 April 2016, should apply to all customers who have availed floating rate loans, the rates computed based on the Master Directions (Interest Rates on Advances), 2016 irrespective of their acceptance;

     

    • The periodicity of reset under the MCLR system be conducted quarterly.

     

    • Borrowers be intimated of the change in repo rates and the corresponding reset within a day of such change by at least three modes of communications via multiple channels such as email, text messages and over telephone; and, banking companies and NBFCs should publish the methodology of setting the rate of interest and particulars of the spread on their website on a weekly basis.
     
    The Supreme Court directed the RBI to respond within six weeks to representations made by Moneylife Foundation on the unfair practice of banks regarding floating loans.
     
    The bench of Chief Justice Ranjan Gogoi, Justice SK Kaul and Justice KM Joseph, said, "Having heard the learned counsel for the petitioners and having considered the matter, we are of the view that, at this stage, the RBI should be directed to communicate its decision in the matter covered by the representation or letter of the petitioner dated 12 October 2017 to the petitioner within a period of six weeks from today. Thereafter the petitioners, if still aggrieved, will be at liberty to approach this Court once again."
     
    The RBI is yet to reply to respond to the Supreme Court order. We have reminded RBI once again to address the borrowers’ issues. Whatever RBI has announced today, it does not address the previous years’ overcharging, which we wanted addressed. 
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    COMMENTS

    Ralph Rau

    10 months ago

    We need honest banks to disrupt the market. Maybe a new bank like IDFC can become India's first honest bank. Dedicated to giving the consumer a fair and transparent deal ?

    That should help IDFC which is stagnating to really take off.

    Harish

    10 months ago

    Still no reply from RBI in spite of Supreme Court directions. Is this not contempt of Court?

    REPLY

    Prakash Patel

    In Reply to Harish 10 months ago

    RBI is like any other government organization, don't expect too much from it.

    ramchandran vishwanathan

    10 months ago

    We support this initiative . Our regulators have no accountability , they only want control. ML propagates active citizenship which is the need of the hour in all spheres of society otherwise the regulators and the Government will make a mokery of middle class

    Prakash Patel

    10 months ago

    There is a very absurd practice in LIC HFC of charging a certain amount when interest is revised downward in a Floating rate loan. When it is revised borrower has to request for the revision and then they send us one form to fill up and directs him to pay a certain amount by cheque. Feeling cheated, I foreclosed my loan assuming that transfer of the loan to other HFC will be a futile exercise as the same practice must be prevalent there also.
    Anybody could tell me whether this charging of fees for changing interest rate is legal.

    REPLY

    Jose

    In Reply to Prakash Patel 10 months ago

    Yes, I too went through this. very absurd. When the rates go down the people in LIC HFL will not inform also. If we find out they will ask for an application and charge some money. I being an NRI customer the process takes a couple of months to complete the process, in the meantime paying high interest. However, these GENTLEMEN will charge the higher rate as soon as it goes up. Can the regulators rein in this dubious practice?

    M PALANIAPPAN

    10 months ago

    Good initiative by MLF...

    Dayananda Kamath

    10 months ago

    2018: When the dark side of leadership dominated. Business Line dtd6/12/2018.
    It is not only these leaders even dark side of institutions are revealed in 2018. Particularly in India. Judiciary, CBI, RBI, have revealed their dark side. With the credit policy of implementing floating rate scheme in its true form, which was deliberately allowed to be exploited by banks to loot the borrowers all along these years, even after bringing it to its notice from time to time since its inception. But they were in denial mood. Even monitoring of implementation of FEMA provisions since 2004. They are still in denial mood. If they had and even now start monitoring prudently lot of money laundering round tripping facilities provided deliberately or inadvertantly by their vague notifications lot of forex crisis of India could have been avoided and can be avoided. But still in denial mood. Hope they will wake up early. Because here it is not individuals but second biggest economies interest is at stake.

    Vaibhav Dhoka

    10 months ago

    Most of regulators just do courier service to complaints addressed to them.They just pass on complaint to entity against whom complaint is made without any directives to send reply to complainant.If the matter would have so simple none would approach them.Very sorry state action at highest level.

    nadeem

    10 months ago

    Banks do not only cheat the retail customers on interest ratesbut also pay no heed to complaints.
    'Relationship Manager' only help you till loan approval/disbursal.... then they ' disappear'..!

    Dayananda Kamath

    10 months ago

    I have written umpteen times to RBI, as well as in money life comments about faulty implementation of floating rate concept by RBI since its inception. At least it is stopped from next year.
    I have also requested that RBI direct the banks as to whenever they change or introduce new interest rates and schemes they have to clearly mention what they have changed whether the base rate or the spread. So that the spread should be same throughout the life of loan and rate will change periodically on set period based on the base rate prevailing on the date of reset. That is the true floating rate.
    RBI may also specify which interest rates can be chosen for base rate for floating rate. And the banks boards should give the satisfactory reason and justification for choosing the particular rate as base rate in their approval for the rate schemes.

    Shiv Kumar

    10 months ago

    :)

    SEBI releases cyber security framework for brokers, depositories
    Mumbai, The Securities and Exchange Board of India (SEBI) on Monday came out with a cyber security framework for stock brokers and depositories.
     
    The guidelines would come into force on April 1, 2019, SEBI said in a circular.
     
    "As part of the operational risk management framework to manage risk to systems, networks and databases from cyber attacks and threats, stock brokers/depository participants should formulate a comprehensive cyber security and cyber resilience policy document encompassing the framework," the circular said.
     
    In case of deviations from the suggested framework, reasons for such deviations, technical or otherwise, should be provided in the policy document, it added.
     
    As per the guidelines, stock brokers or depository participants should designate a senior official or management personnel whose function would be to assess and identify cyber security risks, respond to incidents, establish appropriate standards and controls.
     
    The board or proprietors of the stock brokers or depository participants would have to constitute an internal "technology committee" comprising experts, which would, on a half-yearly basis review the implementation of the cyber security and cyber resilience policy of the organisation.
     
    It also said: "No person by virtue of rank or position should have any intrinsic right to access confidential data, applications, system resources or facilities."
     
    Any access to systems, applications, networks, databases and so on, should be for a defined purpose and for a defined period, the regulator added.
     
    "All critical systems of the stock broker/depository participant accessible over the Internet should have two-factor security (such as VPNs, Firewall controls etc)."
     
    It mandated the brokers and depositories to ensure that records of user access to critical systems, wherever possible, are uniquely identified and logged for audit and review purposes and also ordered for storing logs in a secure location for at least two years.
     
    The guidelines further said that physical access to the critical systems should be restricted only to authorised officials. 
     
    For algorithmic trading facilities, SEBI ordered that adequate measures should be taken to isolate and secure the perimeter and connectivity to the servers running algorithmic trading applications.
     
    "Critical data must be identified and encrypted in motion and at rest by using strong encryption methods," the circular said.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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