India Inc, individuals could soon get to settle fund diversion cases

Mumbai: India's capital market regulator plans to let companies and individuals accused of siphoning funds out of listed companies settle their cases, a route currently closed to them. It also plans to introduce a new mutual fund-only category for portfolio management services (PMS). Sebi's board meets on September 24 and is likely to consider both proposals.

Settlement lets an accused party end a case by agreement with the regulator. Sebi has so far refused it in cases involving diversion of funds or misstated financial accounts, because they can hurt large numbers of investors and damage market integrity. Under the proposal, offenders would have to return the diverted money with interest and make appropriate disclosures to investors. Sebi's view is that an offender willing to bring back the diverted funds along with interest to the company changes whether such a case can be settled.

Pratap Venugopal, senior advocate, at the Supreme Court, said settlement is "not synonymous with leniency". "Cases involving widespread investor harm or market-integrity concerns, a settlement backed by meaningful restitution, disgorgement and corrective action could serve investors and the market more effectively than prolonged proceedings,". He said the changes marked a shift towards "a more pragmatic enforcement framework."

In FY2026, Sebi received 439 settlement applications, approved 170, and rejected, withdrew or returned 199. A Sebi study on the settlement applications filed in the past two years showed that settlement amounts proposed and not accepted in such matters were, on average, eight times higher than the penalty amount they eventually paid. Sebi's receipts from settlement and compounding charges rose eightfold to ₹815 crore in FY25 from ₹104 crore in FY24, its annual accounts showed.

Sandeep Parekh, managing partner at Finsec Law Advisors, said the existing pricing left accused parties with no reason to settle: "a rational noticee litigates". The new formula, the notice to settle before a show-cause notice and settlement at the appellate stage should change that calculation meaningfully, he said.