SEBI’s settlement framework incentivises fund managers to raise their hands early in case of compliance missteps

The regulatory landscape for India’s funds industry has undergone significant transformation in the past decade. Regulations continue to evolve at a rapid pace, and the complexity of compliance requirements has increased substantially.

Additionally, the regulator, the Securities and Exchange Board of India (SEBI) now has access to comprehensive real-time data due to online filings, enhanced powers and advancements in regtech.

This means that compliance gaps – whether due to oversight, misinterpretation or process failures – are increasingly likely to be identified during routine inspections or scrutiny.

It therefore augurs well for fund managers to adopt a proactive approach and conduct routine compliance audits to ensure that nothing has knowingly or unknowingly slipped between the cracks, as well as following through with rectification action once a compliance issue is noticed.

In this context, the settlement framework under the SEBI (Settlement Proceedings) Regulations, 2018 (Settlement Regulations), offers a constructive alternative by encouraging early cooperation and remediation.

Through this framework, a fund manager can commute and resolve non-compliance by voluntarily filing a settlement application with SEBI. The resulting settlement order may typically involve paying a settlement amount and complying with non-monetary terms.

In essence, this leads to speedy resolution without admission of guilt or default.

Value of voluntary settlement

The distinction between settlement and adjudication is of critical importance. An adjudication order containing a finding of default could trigger adverse clauses in agreements between the fund manager and investors.

In contrast, a settlement order, particularly one obtained through the voluntary route, does not contain an admission of guilt. As a result, adopting an early voluntary settlement approach signals good governance and can resolve the matter without triggering adverse contractual consequences, thereby preserving the fund manager’s reputation and ensuring operational continuity.

For fund managers and investors, a settlement order signifies a timely and efficient resolution, allowing the manager to focus on their primary responsibility of investing and making returns for investors.

Conversely, an outstanding show cause notice (SCN) may be perceived as a pending risk or governance issue against the fund manager, potentially complicating fundraising and operations until it is resolved.

Determinants influencing outcomes

(1) Factors in determining settlement amount. The settlement amount is computed using a blend of formula-based and factor-based approaches. These take into consideration: stage of the proceeding; prior regulatory actions if any; mitigating and aggravating factors; nature and gravity of default; extent of undue investor loss, or undue gain of defaulting entity. A base penal amount is assumed for each count of default.

Mitigating factors. When determining the settlement amount, SEBI considers several mitigating factors. These include minimal participation in the default; proactive co-operation; prior acknowledgment of misconduct; voluntary and substantial corrective measures; reporting delays under seven days that do not result in undue gain or loss; voluntary compensation or disgorgement of profits; use of an incorrect disclosure format; the entity’s status as a governmental authority; and impaired ability to provide restitution to investors.

Aggravating factors. Aggravating factors considered by SEBI include efforts to obstruct investigations, providing inaccurate or misleading information, and misconduct lasting over 30 days.

Other factors include significant monetary losses exceeding INR50 million (USD555,000), failure to follow prior regulatory guidance, premeditated actions, or using sophisticated methods to conceal the wrongdoing.

SEBI also considers actions that jeopardise a listed intermediary or market infrastructure, endanger market liquidity, involve an abuse of trust or special skills, or conceal default. Fraudulent management control and the reporting of false information are also treated as aggravating circumstances.

(2) Stages of proceeding and implications. The stage at which a settlement application is filed impacts the settlement amount and overall outcome. The settlement framework outlines a clear framework for this process.

(i) Voluntary, or suo motu, application seeking confidentiality. When a fund manager proactively approaches SEBI before any notice is issued, providing full and true disclosure, and co-operating fully. This often benefits from a lower settlement amount and may be granted confidentiality at SEBI’s discretion.

Factors to be considered. This proactive approach allows the fund manager to frame the facts, demonstrate remediation and seek confidentiality, thereby protecting their reputation while resolving the matter.

Operationally, fundraising and other business activities can continue without disruption. A settlement order is often viewed as procedural, which can help maintain (or not dent) investor confidence.

Proceeding to later stages typically means losing the confidentiality benefit and may result in a higher settlement amount.

(ii) Pre-SCN. Once SEBI has initiated an inquiry or inspection but has yet to issue an SCN, the settlement amount remains relatively moderate, although higher than under voluntary settlement, as the record is beginning to crystalise but there is still room to offer context, cure governance gaps, and present restitution or disgorgement where relevant. Fund managers who swiftly implement structural remediation, independent reviews and board‑level oversight improvements generally tick-off a substantial portion of mitigating factors, keeping settlement terms manageable.

Factors to be considered. Penalties for defaults are often contained, avoiding the escalation that comes with formal charges.

Opportunity cost is minimised as fundraising and investment activities can continue uninterrupted.

A delay beyond this stage typically triggers the issuance of an SCN, which formalises the allegations and ultimately increases the calculated settlement amount.

(iii) Post-SCN. After an SCN is issued, the settlement amount becomes relatively higher as the allegations are framed. The scope for settlement narrows, and while still possible, the resulting settlement order is typically more detailed. Monetary terms increase, particularly where investor harm, market impact or unjust enrichment are alleged. For complex matters, SEBI may prioritise disgorgement in addition to a monetary penalty. Remedial steps still carry weight but have a diminished role as mitigating factors compared to earlier stages.

Factors to be considered. Investors may pause commitments due to the uncertainty of ongoing litigation involving potential fraud or serious non-compliance.

Concealment of a default is a significant aggravating factor that may cause a settlement application to be rejected. If rejected, this could become a separate issue in the adjudication.

(iv) Post-adjudication order. Seeking settlement after an adjudication order, or once appeal proceedings are underway, often involves higher amounts payable, as the factual findings have been formally recorded, and a public record has been established.

Factors to be considered. Settlement amount will usually be higher than the original penalty (a settlement premium) as it avoids the risk of the order being upheld.

Issuance of an adjudication order crystallises allegations into a formal finding of guilt, which may typically constitute a “material adverse effect” or “cause” under fund documents. This breach could legally empower investors to declare a default, suspend all capital drawdowns, and force the removal of the manager or dissolution of the fund.

Recent settlement orders

Three recent SEBI settlement orders from 2025 illustrate the significant differences in settlement terms across the different stages of proceeding.

• On 6 May, a manager seeking voluntary settlement self-reported a potential conflict of interest between its AIF and mutual fund operations. The lapse could have been categorised as a “Chinese Walls” failure, but was reframed as a procedural oversight, settled suo motu for INR3.6 million (USD40,000) with reputational harm prevented.
• On 17 September, a fund manager who pledged fund assets as collateral for borrowing by an investee company, thereby subordinating investor rights and failing to conduct mandatory valuations, faced a settlement cost of INR14.3 million.
• On 30 September, SEBI identified a systemic governance failure involving misleading disclosures to trustees and structuring deals in favour of the fund manager over clients. This breach of fiduciary duty resulted in a settlement of INR6.1 million, accompanied by non-monetary sanctions: namely, a 12-month debarment of key officers, effectively removing the fund manager’s leadership and signaling a complete loss of regulatory confidence.

Conclusion

For fund managers navigating a complex and fast-evolving regulatory landscape, the option to voluntarily settle is not just better governance but works out to be a strategic advantage with the regulator as well as investors.

Furthermore, SEBI’s approach demonstrates a clear willingness to settle matters where entities demonstrate accountability and take corrective action. The availability of a settlement mechanism is a practical option for speedy resolution.