SEBI's New Settlement Rules, Explained: A Formula for Penalties — and Investors' Money Back First

On Thursday, September 24, 2026, SEBI's board approved the biggest rewrite of its settlement framework in years — and buried inside the legal language is a sentence every Indian investor should hear. SEBI Chairman Tuhin Kanta Pandey said it plainly at the press conference: "If there is a siphoning of money, it should come back first. That is non-negotiable." Translation: when companies or market players are accused of diverting investors' money, the new rules are designed to get that money back before anyone talks about settling the case. Here is what the new SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2026 change, in plain language. ## First, What Is "Settlement" in SEBI's World? When SEBI investigates a suspected violation of securities law — say, misrepresentation in financial statements or insider trading — it can end in a long legal battle, or the accused party can apply to settle: pay an agreed amount, accept certain conditions, and close the proceedings without admitting or denying guilt. Settlement is not a loophole and not an acquittal. It is a pragmatic enforcement tool: SEBI recovers money and imposes conditions quickly instead of spending years in tribunals. Courts have endorsed it — the Supreme Court has urged SEBI to use settlement schemes to reduce pendency and give the market certainty. The old framework dated to 2018; the 2026 regulations replace it entirely. One crucial timing note: the board has approved the regulations, but they are not yet notified. They take effect the day after 30 days from the date of notification. So this is the approved blueprint — not yet the law in force. ## The Big Change: A Formula, Not a Guess Under the 2018 regulations, the settlement amount came from a complicated multi-layered formula that SEBI itself admitted still embedded a lot of subjectivity. The 2026 regulations introduce a cleaner, published formula: Settlement Amount = Base Amount × (S + R + G + A − M) + Legal Costs Here is what each factor means: - Base Amount — linked to the minimum penalty prescribed for that violation under securities law, multiplied by a factor based on the type of applicant. (Market infrastructure institutions get a higher multiplier of 5.5, SEBI's chairman disclosed.) - S — Stage of proceedings. Settle early and you pay less: the factor ranges from 0.2 for a voluntary application before formal proceedings begin, up to 1.5 if the matter is already before the Supreme Court. - R — Regulatory action factor. Repeat offenders pay more — the factor rises with each prior adjudication, direction or disciplinary order against the applicant. - G — Gravity of the violation. More serious defaults attract a higher multiplier. - A — Aggravating factors, minus M — Mitigating factors. Good conduct and cooperation reduce the amount; concealment and obstruction increase it. The philosophy is simple and worth stating: the formula rewards early, honest settlement and punishes delay and repeat offending. It does not eliminate discretion entirely — SEBI's whole-time members retain the power to reject any settlement — but it makes the maths transparent. ## "The Money Comes Back First": Disgorgement Gets Its Own Lane This is the part the SEBI chairman emphasised, and the part that matters most to investors. Under the old system, wrongful gains — money siphoned off, losses avoided, or losses caused to investors — were folded into the base-amount calculation, which SEBI says created "double counting" that could distort penalties. The new regulations separate them completely: - Wrongful gains, losses avoided, and losses caused to investors are excluded from the base amount. Where they can be quantified, they are disgorged separately — paid back, in full, on top of the settlement amount. - Interest applies too: 9% annually on disgorgement in specified cases, rising to 12% after the final order until the settlement application is filed. (No interest on interest.) - Settlement terms now have three explicit parts: the settlement amount, disgorgement (where applicable), and remedial and regulatory terms (RRT) — previously called "non-monetary terms" — which can include disclosures and bringing back diverted funds. In cases of misrepresentation of financial statements and siphoning of funds, SEBI's press release confirms the new regulations will permit settlement subject to these remedial terms — including bringing back the diverted money. That is the "non-negotiable" the chairman was talking about: no one settles a siphoning case and keeps the siphoned money. ## Faster, Earlier, Simpler: The Process Changes The 2026 regulations also rebuild the settlement process to be quicker and more accessible: Settlement notice before the show-cause notice. Before SEBI even issues a show-cause notice, it will now issue a settlement notice giving the entity 60 days to file a settlement application. (This window does not apply where prosecution or an interim order is contemplated — the serious cases skip the queue.) More time after a show-cause notice. Once a show-cause notice is served, the window to apply for settlement increases from 60 days to 90 days. Fast-track route for smaller cases. A simplified process covers cases with settlement amounts up to ₹10 lakh and specified violations, including disclosure violations — designed to clear less serious matters quickly instead of clogging the system. One-time window for pending cases. Specified proceedings still pending before the board can use the facility on payment of an additional 20% settlement amount — a deliberate nudge to clear the backlog. SEBI says the overall design goal is a framework that is "less discretionary, easier to understand," and that fast-tracks less serious matters while keeping the heavy machinery for the big ones. ## What Doesn't Change: Egregious Cases Still Can't Settle Important balance, stated by SEBI's whole-time member Kamlesh Varshney at the press conference: "If there is any egregious case which should not be settled, will not be settled." The panel of whole-time members keeps the discretion to reject any settlement application even if it is recommended — that safeguard survives the rewrite. So the framework is not a "pay and walk away" scheme. Serious fraud still faces full enforcement; settlement remains a tool for cases where recovering money and imposing conditions quickly serves investors better than a decade of litigation. ## What This Means for You as an Investor You will never file a settlement application yourself — this is a framework for companies and market intermediaries. But it affects you in three concrete ways: 1. Faster recovery of siphoned money. By making disgorgement a separate, mandatory, interest-bearing component, the rules prioritise getting investors' money back over procedural wrangling. 2. More predictable enforcement. A published formula means more consistent outcomes across cases — fewer sweetheart deals, fewer arbitrary-seeming penalties. 3. A clearer signal when fraud is alleged. When the next corporate-governance scandal breaks, you now know the mechanism: settlement amount + disgorgement + remedial terms, with egregious cases excluded from settlement entirely.