The price of peace: SEBI’s new settlement arithmetic

I have a piece with Pranjal Kinjawadekar in today's Financial Express on SEBI's new settlement regulations:. 

A settlement mechanism in which more applications fall away than are settled has a problem. SEBI’s mechanism was introduced administratively through a circular in April 2007 and gained statutory backing in 2014 through amendments to the SEBI Act, the Securities Contracts (Regulation) Act and the Depositories Act. The SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 were later replaced by the SEBI (Settlement Proceedings) Regulations, 2018.

The case for reform is evident from SEBI’s own numbers. In 2025-26, SEBI received 439 settlement applications. It passed settlement orders in 170, while 199 were rejected, withdrawn or returned. The backlog grew from 429 to 499. Against this backdrop, SEBI has notified the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2026, which replace the 2018 Regulations from 7^th November.

The biggest change is in how the settlement amount is calculated. Under the 2018 Regulations, where there was wrongful gain or investor loss, the base amount was generally the higher of the tabulated amount and that gain or loss. This tied the amount closely to the economic harm of the alleged conduct.

The 2026 Regulations take a different route. The base amount is now the minimum statutory penalty, scaled by a multiplier for the type of applicant. This is then multiplied by the sum of factors for the stage of proceedings, past regulatory action, gravity and aggravation, less a factor for mitigation. The structure is simpler. Whether it is fairer will turn on how these factors are applied.

The difficulty lies in the starting point. A minimum penalty bears no relation to the scale of wrongful gain, investor loss or market impact. Disgorgement remains a separate settlement term, but it merely recovers the gain; it does not penalise the conduct. In a serious case, a low starting figure leaves the factors to do most of the work. A Rs. 500 crore manipulation and a Rs. 5 crore one may begin from the same number.

Since the base amount is computed for each count of default, counting matters as much as the formula. Regulation 11(8) lists nine situations to be treated as a single default. These include front running the trades of a particular big client, disclosure defaults in a statement for a calendar or financial year, and trades to manipulate the price or volume of a scrip. The panel of Whole Time Members may treat other defaults as one and, under Regulation 11(9), increase or reduce the count.

The final text drops some categories proposed in SEBI’s consultation paper of 14 August 2026. These include misleading statements in a single advertisement, disclosure or corporate announcement, and disclosure defaults arising from a single event. The panel’s discretion may cover such cases. Without an express provision, however, one misleading announcement carried in three places could be one default or three.

The scope of settlement has also widened. SEBI may still decline to settle defaults with a market-wide impact, losses to a large number of investors or harm to the integrity of the market. However, Regulation 18(2) now allows such cases to be settled if monetary terms and remedial and regulatory terms, including a higher settlement amount, can adequately address the harm. Under Regulation 17(2), diversion or siphoning off of funds is no bar to settlement if all such money is brought back with interest. The door has not opened for everyone, though. Wilful defaulters, fraudulent borrowers and fugitive economic offenders are now expressly barred from settling.

Another new feature is the notice of settlement, to be issued before a show cause notice. It sets out the substance of the probable charges and enforcement action, with brief extracts of the findings. The recipient then has 60 days to file a settlement application. Comparisons with the Wells Notice used by the US Securities and Exchange Commission are tempting but misleading. A Wells Notice allows a prospective respondent to argue against proposed action before the SEC decides whether to proceed. SEBI’s notice is an invitation to settle, not to contest.

This limits its value as a procedural safeguard. The recipient must decide within 60 days, a period that cannot be extended, on the strength of brief extracts and with no express right to argue the merits. SEBI may also modify the probable charges later. The applicant is asked to price a case it has only partly seen.

Pending applications are governed by Regulation 44. Where the High Powered Advisory Committee has not yet made its recommendation, the application restarts under the 2026 Regulations with a fresh Internal Committee meeting. Where the committee has made a recommendation but the panel has not approved it, the applicant may choose between fresh processing and the amount the committee recommended under the 2018 Regulations. This choice must be made within 30 days of receiving SEBI’s notice. Where the panel has already approved the settlement terms, the 2018 Regulations will continue to apply.

Regulations 4(3) and 4(4) also open a 90-day window for proceedings pending on commencement where no settlement application was filed earlier, or where one was rejected, returned or withdrawn. Such entities may apply under the new regime, but will pay 20 per cent more than the settlement amount calculated under Regulation 10. A second chance, in other words, comes at a premium. Those eligible should decide quickly; the window closes in early February.

The 2026 Regulations mark a genuine shift from discretion towards arithmetic. Yet a formula does not, by itself, guarantee predictability. Discretion survives in counting defaults, applying the factors and deciding what can be settled at all. The test of the new regime is not whether its sums add up. It is whether the same conduct ends up costing the same price.

 

SME IPO overhaul: Has the SME sector come of age?

SEBI wants to rewrite the SME IPO rulebook: market cap eligibility, a tougher profit test, no compulsory underwriting, and easier retail entry. Most of it is sound. Doing it all at once is the risk. My piece in today's @FinancialXpress with Purva Mandale:

The SME Platform has grown up. That, at least, is the premise of SEBI’s consultation paper of October 14, 2026, which proposes a near-complete rewrite of the rules for initial public offers (IPOs) by small and medium enterprises. Most of the proposals point in the right direction. The difficulty lies in making all of them at once.

As of July 31, 2026, 1,496 companies had listed on the SME Platform, raising Rs. 40,222 crore, with a combined market capitalisation of about Rs. 4.7 lakh crore. Of these, 365 have since migrated to the Main Board. A window for small businesses has become a market in its own right. Its rules should reflect that scale, and the differences in size and maturity among the companies listed on it.

The most overdue proposal concerns eligibility, which today turns on post-issue paid-up capital. SEBI proposes to use post-issue market capitalisation at the offer price instead. An issuer valued at up to Rs. 1,000 crore would have to list on the SME Platform. Issuers valued above Rs. 1,000 crore and up to Rs. 4,000 crore would have the option to do so, if their restated consolidated financial statements follow Ind AS.

Paid-up capital measures the face value of shares, not the size of a business, so the principle is sound. The thresholds are another matter. In the last three financial years, at least 40 Main Board IPOs were valued at Rs. 1,000 crore or less, while the largest SME IPO was valued at Rs. 748 crore. An issuer that qualifies for the Main Board should not be compelled onto the SME Platform merely because of its size. A Main Board issuer whose valuation falls to Rs. 1,000 crore or below by the red herring prospectus stage would have to re-file under the SME framework. Conversely, letting an issuer worth five times the largest SME IPO list as an SME invites regulatory arbitrage. And since the offer price is set by the issuer and its bankers, the threshold is, to a degree, one the issuer chooses.

The profitability test would be tightened. Today, an issuer must have an operating profit (EBITDA) of at least Rs. 1 crore in at least two of the preceding three financial years. SEBI would replace this with an average operating profit of not less than Rs. 3 crore per year over the same period. The higher figure is welcome; the averaging is not. Unlike the Main Board test in Regulation 6(1)(b) of the ICDR Regulations, it does not require a profit in each year. One strong year could carry two weak ones.

An issuer that fails this test would not be shut out. It could still list through book building if at least 75 per cent of the net offer is allotted to qualified institutional buyers (QIBs). Retail investors would be capped at 10 per cent, and the subscription refunded if the QIB portion is not met. As under Regulation 6(2) for the Main Board, the premise is that institutional judgement can stand in for a profit record. That holds only where institutional demand is deep and discerning, which SEBI should test in the SME segment rather than assume.

Today, an offer for sale (OFS) in an SME IPO cannot exceed 20 per cent of the issue size, and a selling shareholder cannot offer more than 50 per cent of its pre-issue shareholding. SEBI now proposes a one-year holding period for shares offered for sale, as on the Main Board, while exempting QIB selling shareholders from both limits. The exemption would not extend to the alternative route, sensibly so. A route built on institutional validation should not double as an institutional exit. Otherwise, a cleaner exit could encourage pre-IPO investment by QIBs.

The underwriting proposal is the easiest to support. Currently, every SME IPO must be 100 per cent underwritten, with the lead manager underwriting at least 15 per cent of the issue on its own account. SEBI proposes to remove both requirements and adopt the Main Board underwriting framework, alongside a minimum subscription requirement of 90 per cent of the offer, failing which application money is refunded.

Underwriting fees accounted for nearly half of the total issue expenses of SME IPOs on NSE in 2024-25. Yet the working group found that underwriters had to take up shares in only four SME IPOs in three years. Issuers have been paying for insurance that almost never paid out. A minimum subscription test, backed by a refund, is a more honest signal of demand.

The retail proposals call for the most caution. In March 2025, SEBI raised the minimum application to above Rs. 2 lakh to limit participation by smaller investors in a high-risk segment. Nineteen months later, it proposes to bring this back to Rs. 1 lakh, in four lots of Rs. 25,000. The trading lot would fall to one share, compulsory market making would go, and the lock-in on non-promoter pre-issue capital would be halved to six months. The IPO gate would stay at Rs. 1 lakh. On listing day, it would be the price of a single share.

The proposals do two different things. Replacing paid-up capital with market capitalisation, raising the profitability bar and rationalising underwriting improve the structure of the market. Widening retail entry, easing exits for pre-IPO investors and removing market makers change who bears the risk in it. Each is defensible on its own. Introduced together, they could alter the risk profile of the segment far more than any one reform suggests, and leave no way of telling afterwards which change caused what.

SEBI should sequence the reforms. The structural changes can go first. The retail relaxations should follow once the new eligibility filter has operated for at least a year and SEBI has seen the quality of the issuers it lets through. The platform may have grown up. Its newest investors should not be the ones to find out whether its issuers have. 

Who is responsible for your holdings if your stockbroker goes rogue?

Who is responsible for your holdings if your stockbroker goes rogue?

The Supreme Court's Edelweiss v. NSE Clearing ruling says: not the professional clearing member. But the judgment carries a date stamp, and post-2021 the answer may be different.

My column with Yash Vardhan in today's Financial Express:

Who is responsible for your holdings if your stockbroker goes rogue? The Supreme Court, in its recent judgment in Edelweiss Custodial Services Limited v. NSE Clearing Ltd, explores the answer. The case concerned Anugrah Stock & Broking, which operated as a stockbroker and a depository participant (DP). It offered Derivatives Advisory Services (DAS) in the nature of portfolio management services, albeit without the requisite registration. Under such services, Anugrah accepted clients’ securities under agreements promising fixed returns. Its role as DP facilitated the movement of securities from its clients’ demat accounts, which were then used as collateral for trades on its own account in the futures and options (F&O) segment. However, after suffering huge losses, it soon found itself in murky waters and could no longer meet its settlement obligations with the clearing members (CMs).

To digress, CMs are intermediaries responsible for clearing and settling trades. In the F&O segment, traders can take positions worth more than the amount deposited upfront. These positions are backed by margins, which may be provided as securities. The collateral travels from the client to the stockbroker, then to the CM and, ultimately, the clearing corporation.

The responsibility at each stage is, however, different. A client is responsible for obligations arising from its own trades. The stockbroker is responsible for the aggregate obligations of itself and its clients towards the clearing member. The clearing member, in turn, must satisfy the settlement obligations owed to the clearing corporation.

In the same way, when Anugrah was unable to satisfy its settlement obligations, its professional clearing member (PCM), Edelweiss, liquidated securities worth around Rs 460 crore. These included securities belonging to clients who had subscribed to Anugrah’s Ponzi-like DAS scheme. Anugrah was later proceeded against by SEBI and eventually shut its operations. The investors, however, eager to recover their losses from any option available, filed complaints against the PCMs for liquidating their securities.

Subsequently, NSE Clearing Limited (NCL), (wrongfully) found the PCMs liable for liquidating the shares. It imposed a penalty and directed restitution within 15 days. By the time restitution was ordered, the securities had appreciated to over Rs 900 crore. Further, in case of non-compliance, collateral equivalent to the securities’ value on the sixteenth day, together with an additional 5%, was to be blocked. A plain reading of the SCRA and NCL’s bye-laws makes it clear that NCL does not possess any power to order restitution. NCL can only levy penalties, and in certain circumstances, order expulsion of the CM.

However, the Securities Appellate Tribunal (SAT), one might say with its overreaching hand, blessed the decision of NCL. SAT was satisfied that, if not NCL, its own rules allowed it to suo motu direct restitution of the liquidated shares. That is how the case found its way to the apex Court.

The Court found itself answering three questions. First, whether a PCM was obliged and equipped to verify the debit and credit positions of a trading member’s individual clients before liquidating the collateral. Second, whether NCL’s committee could order restitution. Third, whether investors could claim against a PCM for the default of their stockbroker.

On the first issue, the Court noted that a PCM’s client was the trading member, not its individual investors. Accordingly, the responsibility for ensuring that one investor’s securities were not used for another investor rested with Anugrah. Edelweiss was only required to ensure that Anugrah’s collateral was not used to meet another trading member’s obligations.

Further, the PCMs had no visibility of the individual investors’ debit and credit positions. Although the clearing agreement allowed PCMs to seek information from Anugrah, it imposed no duty to verify each investor’s account before liquidation. Therefore, when Anugrah defaulted, Edelweiss could enforce the collateral furnished by Anugrahwithout first looking through Anugrah and reconstructing each investor’s position.

The second, and rather more interesting part of the judgment concerns restitution. NCL sought to justify its direction on the basis that the greater power to expel a clearing member must include the lesser power to order restitution. Attractive as that argument may sound, restitution and expulsion do entirely different things. Expulsion removes a member from the market. Restitution makes one entity bear another’s financial loss.

The Court held that neither the SCRA nor NSE Clearing’s bye-laws empowered its committee to direct restitution. SAT could not fill this gap through its rules either. Its power to regulate procedure could not create a substantive remedy which the original authority had no power to grant. The failure to specify restitution in the show-cause notice was also significant, although it became inconsequential once the Court found that the power itself did not exist.

Third, the Court rejected the investors’ claims against the PCMs for Anugrah’s default. It was rather unsympathetic towards the investors, noting that they had willingly participated in an illegal assured-return arrangement in the highly speculative F&O segment. The Court left them free to pursue their stockbrokers, although recovery from a defunct broker may be easier ordered than achieved.

However, the judgment comes with an important date stamp. SEBI’s July 2021 framework on segregation and monitoring of collateral introduced daily client-level reporting and gave clearing members visibility of client positions. The Court itself recognised that this later framework imposes obligations on PCMs even though they have no direct contract with investors. The judgment is therefore not a permanent exemption from responsibility for clearing members. It only decides their responsibility under the earlier framework.

So, who is responsible when a stockbroker goes rogue? In this case, not the PCMs. Under the post-2021 framework, the answer may well be different and possibly unfair on the PCMs who now have obligations without any vision. For the Anugrah investors, the Court’s decision may be a dead end.

A certificate in search of an aim

SEBI's consultation paper on accredited investors has ten proposals. Every one is about who qualifies and how they prove it, none about what accreditation is actually worth once you have it. The repairs are sensible and deserve support. But accreditation didn't fail because the gate was in the wrong place; it failed because there was little on the other side worth the walk. And the relaxations that have arrived, NISM waiver, investor-cap exclusion, side letters, no PPM template, are reliefs for the manager, not rights for the investor. While this piece was written before yesterday's board meeting, which implemented the consultation paper recommendation, the arguments have solidified from recommendation to SEBI decision. My column in @FinancialXpress:

SEBI has fixed the plumbing of accreditation and left the more important question unasked. Its consultation paper of 13 August 2026 carries ten proposals on the accredited investor framework. Every one of them is about who qualifies and how they prove it. Not one is about what accreditation is worth once you have it.

The diagnosis in the paper is correct, and the repairs are sensible. Accreditation arrived in 2021 and has barely been used. SEBI records 3,820 accredited investors as on 31 July 2026, against an AIF investor base of roughly one lakh. Anyone who has taken a client through the process knows why. Two accreditation agencies operate. The cost is real, the validity is short, and few wealthy families enjoy handing their financial statements to a third party for the privilege of renewing next year.

So the paper proposes a securities market assets route, Rs. 5 crore for individuals and Rs. 20 crore for body corporates, verifiable from a depository statement rather than a chartered accountant’s certificate. It proposes to let the manager of the investment product determine accreditation at onboarding, valid for three years across the manager’s group, with the agency route surviving alongside for investors who want portability. It extends deemed accreditation to all persons resident outside India. By SEBI’s own estimate the securities assets route alone could make about four lakh investors eligible. These proposals should be supported.

But notice what the ten share. They all widen the gate. None of them touches what lies beyond it. The framework did not fail because the gate was in the wrong place. It failed because for most of its life there was very little on the other side worth the walk.

That has begun to change, and the direction of the change is instructive. SEBI created a separate class of accredited investors only funds through the Third Amendment to the AIF Regulations, notified on 18 November 2025, and cut the minimum ticket for a large value fund from Rs. 70 crore to Rs. 25 crore by its circular of 8 December 2025. Now read the relaxations. The NISM certification requirement for the manager’s key investment team falls away. Accredited investors are excluded from the count for the 1,000 investor cap. Pari passu rights can be waived and side letters written. The scheme can run five extra years instead of two. In a large value fund, the standard placement memorandum template and its annual audit go as well. Every one of those is a relief for the manager. Not one is a right the investor did not have the day before he was accredited.

The numbers make the point. There were 649 accredited investors in July 2025 and 3,820 in July 2026, a near sixfold rise in the year the accredited investors only fund arrived. Investors accredit themselves when accreditation buys something. They do not want the certificate. They want the product on the other side of it.

SEBI has said more than once that its long term vision is to move from the minimum commitment threshold to accreditation status as the primary measure of sophistication, and that the two metrics will co-exist for now to avoid disruption. That was the position in August 2025. It is still the position in August 2026. “For now” is carrying a great deal of weight in a sentence that has not changed in a year. A paper devoted to overhauling accreditation was the natural place to say when the transition happens. It does not.

The paper does ask, in terms, whether securities market assets are an appropriate criterion for sophistication. They are a better proxy than net worth and still only a proxy. All three routes measure wealth. A retired promoter sitting on Rs. 5 crore of a single scrip qualifies; a derivatives trader with Rs. 50 lakh and fifteen years of scars does not. Every jurisdiction that started with a wealth test has been pushed to supplement it. The US Securities and Exchange Commission added holders of the Series 7, 65 and 82 licences, and knowledgeable employees of private funds, to its definition in August 2020. India is refining its wealth test at the moment others are looking past one.

On manager led accreditation, the objection is obvious. It places the certification of sophistication in the hands of the person who earns a fee on the onboarding. SEBI’s proposed safeguards, an accreditation policy at manager level, record maintenance and independent verification, are the right instinct. They need a sanction behind them. Sample audit of manager accreditations by the accreditation agencies, with consequences in registration terms for a pattern of wrongly certified investors, would supply one.

The proposals deserve support. They are the right repairs to a process that plainly needed them. But SEBI has answered the question it set itself and avoided the one that matters. A gate is worth only as much as the room behind it, and that room is at present furnished for the manager. Until the minimum commitment threshold goes, accreditation will remain a certificate in search of a purpose.

Building India’s REIT

SEBI has issued two consultation papers on REITs and InvITs within two days, one enabling depository receipts against their units, the other proposing five ease-of-doing-business measures. Both are welcome, and both leave the central questions half-answered: the DR framework transplants equity rules onto instruments that behave differently, and never explains what problem DRs actually solve when foreign investors can already buy these units directly. Aniket, Purva and I, in our column in @FinancialXpress on what SEBI should fix before finalising.

India has issued almost no equity depository receipts since 2014. SEBI now proposes to extend the instrument to its real estate and infrastructure trusts. Within two days in August, it issued two consultation papers on Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The first, dated August 4, 2026, proposes a framework for issuing Depository Receipts (DRs) against units of REITs and publicly listed InvITs (CP-1). The second, dated August 6, 2026, proposes five ease of doing business measures for the same instruments (CP-2). 

Both consultation papers draw on recommendations of SEBI’s Hybrid Securities Advisory Committee, and CP-2 additionally responds to representations from the Indian REITs Association and the Bharat InvITs Association. Both leave the central questions half-answered.

CP-1 addresses an enabling gap rather than a fresh policy choice. Units of REITs and InvITs already qualify as “permissible securities” under the Depository Receipts Scheme, 2014, and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, permit persons resident outside India to invest directly in these trusts as “Investment Vehicles”. DRs against such units have, in principle, been permissible. What was missing was an enabling provision under the SEBI regulations and an operational framework. 

CP-1 seeks to fill that gap by inserting a regulation in the REIT Regulations and in the InvIT Regulations, without expanding the foreign investment permissions under the Foreign Exchange Management Act, 1999. Privately listed InvITs are excluded because a DR, once listed overseas, trades freely and cannot carry forward the lot-size restriction applicable to privately listed InvITs, which limits their units to institutional investors and body corporates.

Annexure A of CP-1 raises calibration concerns. Most arise from transplanting the equity DR framework onto instruments that behave differently. 

First, CP-1 proposes a uniform 75 per cent approval threshold for every fresh DR issue beyond the initial listing. That is disproportionate. A DR issue does not by itself change control, and its dilutive effect depends on the size and terms of the issue. The approval requirement could instead be calibrated based on the size or nature of the issue, with a higher threshold reserved for issues involving material dilution or control implications.

Second, the framework places responsibility on DR holders to monitor the 25 per cent acquisition threshold, a breach of which triggers a unitholder approval requirement and, failing approval, an exit offer to dissenting unitholders. In practice, this may be difficult to achieve through international clearing systems. A corresponding obligation on the foreign depository or domestic custodian may be more effective.

The more fundamental question, however, is commercial rather than regulatory: what problem will DRs solve?

India’s capital markets are already among the largest and most actively traded in the world. Foreign investors, including sovereign wealth funds and global asset managers, already hold significant stakes in listed REITs and InvITs through the foreign portfolio investment route. CP-1 does not identify any restriction that impedes overseas investors from participating directly.

Further, India’s experience with equity DRs, negligible since 2014, suggests their declining relevance owes as much to market preference as to regulatory constraint. Whether REIT and InvIT DRs fare any better is an open question.

If DRs are to be enabled, the enabling should be wider. CP-1 excludes privately listed InvITs because a DR, once listed overseas, cannot carry their lot-size restriction. That does not require exclusion. Eligibility can be controlled at the point of issue, by confining subscription to qualified institutional buyers and their overseas equivalents, and by requiring the foreign depository to police holder eligibility under the deposit agreement. Privately listed InvITs hold much of India's operating infrastructure. Denying them the one new access route on offer narrows the market SEBI says it wants to build. 

CP-2 approaches the market from a different direction. Its five proposals seek to address operational frictions identified by industry participants.

The proposal to permit non-controlling minority investment in under-construction third-party projects addresses a genuine gap, since REITs and InvITs presently cannot deploy capital during a project’s development phase without assuming controlling interest. 

The requirement for a binding agreement to transition to the prescribed level of ownership and control may limit the flexibility the proposal intends, particularly where other shareholders will not commit upfront. SEBI may therefore consider a framework that permits REITs and InvITs to remain minority investors in such projects, rather than requiring every such investment to ultimately result in control over the investee entity.

Oversight can instead come from governance and contractual mechanisms: veto rights over specified matters, prescribed voting thresholds, and information and reporting covenants. These would serve as alternatives to the mandatory glide path.

The proposed shift in the unitholder approval threshold from “value” to “votes cast” is also useful, but participation and voting weight need careful consideration. In pooled investment vehicles, voting is generally linked to economic interest, so a unitholder with a larger economic stake should continue to have greater voting power. A votes cast formulation should therefore preserve this principle and should be accompanied by a minimum participation requirement.

Narrowing “dissenting unitholders” to those who voted against a resolution, rather than all who simply did not vote in favour, corrects a definitional overreach that conflated apathy with active opposition. Removing the proportionate-acceptance cap on exit offers, subject to a one-year window to cure any resulting breach of minimum public unitholding, matches the cure period under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. SEBI itself draws the comparison. 

Taken together, the two consultation papers reflect a shift from simply expanding the regulatory framework to making it more responsive to how REITs and InvITs operate, with InvITs having been part of the Indian listed market since 2017 and REITs since 2019. The proposed reforms could support the next phase of growth by widening avenues for foreign capital, enabling REITs and InvITs to participate in projects at an earlier stage, and improving flexibility in governance and sponsor exits. Their effectiveness, however, will depend on whether the final framework provides sufficient flexibility without weakening investor protection. The larger opportunity is therefore not merely to simplify rules, but to build a regulatory framework that allows REITs and InvITs to access capital more efficiently, invest across the project lifecycle and scale as a mainstream asset class in India.

The insider trading defence that Indian law does not have

The Supreme Court has just told insiders they have more defences than the rulebook lists. That sounds like relief. It isn't. A closed list of six has become an open list nobody can state in advance, and the burden of discovering its contents falls on the person who already carries the burden of proof. Worse, the one defence an insider actually needs that he decided to sell before the information reached him, still isn't there. My column in Financial Express on SEBI v. Rajeev Vasant Sheth, and the entry SEBI should write into the proviso without waiting for Parliament.

The Supreme Court has told insiders that they have more defences than the rulebook lists. That is not the relief it appears to be. A closed list of six has become an open list. Nobody can state its contents in advance, and the work of discovering them falls on the person who already carries the burden of proof.

On 11 August 2026, in Securities and Exchange Board of India v. Rajeev Vasant Sheth, the apex Court set aside an order of the Securities Appellate Tribunal and restored SEBI’s findings against the promoters of Tara Jewels Limited. Between 2 October and 29 November 2017 the company’s collapsing results were still unpublished. In that window the Chairman and Managing Director sold 30,93,948 shares, roughly 12.56 per cent of the shareholding. His two daughters, both promoters and vice presidents, sold their entire holdings. The loss the market had not yet seen was Rs. 166.80 crore for the quarter, against Rs. 6.62 crore in the quarter before. The defence of the Sheth family was that they sold shares to raise money for the company, which used it to repay creditors.

SEBI’s whole time member found that the sales avoided a cumulative loss of about Rs. 1.38 crore. He ordered disgorgement with interest, restrained the three from the securities market and imposed penalties under the SEBI Act. The Tribunal set all of it aside. It accepted that the shares were sold to keep Tara Jewels from being downgraded to a non-performing asset. That explanation, it held, fell within the proviso to Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015. The Supreme Court restored the regulator’s order, reducing only the principal promoter’s penalty from Rs. 25 lakh to Rs. 10 lakh.

Two propositions emerge. The first is that the six circumstances in the proviso to Regulation 4(1) are illustrative and not exhaustive, because the enumeration is introduced by the word “including”. The Court declined to apply ejusdem generis, which reads a general expression down to the specific instances that follow it, because here the general expression comes first. Any further defence, it held, must be of the same or a similar character as the six. The second proposition is that the purpose to which the sale proceeds were applied is irrelevant. Avoiding a loss is as much a benefit as making a gain. The Court distinguished its own decision in SEBI v. Abhijit Rajan, where the trades dated from 2013 and the 1992 Regulations left room to ask why an insider had traded. That question, it said, no longer arises.

The first proposition will be reported as a liberalisation. It is not one. An insider who could once read the proviso and know that he stood outside it must now persuade a tribunal that his facts resemble facts that stand inside it. Certainty has been exchanged for analogy. Where the burden already rests on the accused, that is not obviously a favourable exchange.

The deeper problem is one the judgment exposes rather than creates. Indian law prohibits trading while in possession of unpublished price sensitive information. It does not require SEBI to prove that the information was used in a causal chain, that the informational advantage caused the trade. Regulation 4(1) presumes use, and the proviso is the only way out to break the causal chain. But the proviso lists transactional situations: off-market inter-se transfers, block deal window trades, transactions under a statutory obligation, the exercise of stock options, internal arrangements within non-individual insiders and trades under a Regulation 5 trading plan. Not one of them is a defence of non-use. There is no route by which an insider may say, and prove, that he decided and committed to sell before the information reached him. The Court has told us that further defences exist. It has not told us that non-use is among them, and on this language it could not have. 

The proviso exists to let an insider break that causal chain, to show that the trade occurred while he was pregnant with unpublished information but was not caused by it. Its list does that only in transactional settings. Consider a promoter who needs money at short notice for open heart surgery in his family and sells shares while the results are unpublished, raising close to the sum the surgery costs. On no sensible view did the information cause that trade. Nothing in the proviso saves him, and after this ruling nothing outside it will either. 

The second objection goes beyond causation, to intention. Insider trading began life as a fiduciary wrong. The earliest cases, brought by shareholders in American courts, predate any statute prohibiting insider trading by several decades. They share the DNA of the modern offence. The US passed the Securities Exchange Act in 1934 to prohibit fraud, and insider trading was drawn out of that anti-fraud rule only in 1961, in Cady, Roberts. Till today, the US has not passed a separate law prohibiting insider trading. The pedigree matters. The offence is quasi-criminal and its parent is fraud. India chose to write a standalone prohibition and left intention out of it. The Supreme Court has itself read the roots of fraudulent intent back into the law in two earlier rulings. This ruling departs from that, and would make a wrongdoer of the seller in the surgery example above. The Court could have reached the same result on these facts, by holding that the Sheths had not discharged the burden of showing that the information did not cause their trades and that nothing on the record displaced an intention to trade on it. It said instead that purpose never matters, which is far wider than the case needed.

SEBI can fix this without waiting for Parliament. A defence of non-use, open to an insider who can prove he committed to trade before the information reached him, belongs in the proviso itself. The Court has said the list is not closed. The regulator should write the missing entry into it. Dispensing with both causality and intent to harm will have long shadows on future innocent conduct. 

The Medium Has Changed. The Rules Should Too.

SEBI's June 2026 consultation paper proposes a single Common Advertisement Code to replace the fragmented, entity-specific codes that currently govern how brokers, advisers, analysts, portfolio managers and mutual funds describe what they sell. It is a genuine simplification and should be adopted. But harmonisation is the starting point, not the object: universal 24-hour filing and standing prior approval for celebrity endorsements keep it a permission system, only a tidier one. Parker Karia and I in today's Financial Express on what the paper gets right and where it stops short.

Financial regulation usually follows innovation in products. SEBI’s consultation paper of 23 June 2026 addresses innovation in selling. The proposed Common Advertisement Code says nothing about what regulated entities may offer investors. It governs only how they may describe it, across every medium that now reaches investors.

Advertisements today reach investors through social media, podcasts, webinars and trading applications at a speed and scale the first advertisement codes never contemplated. Those codes remain fragmented and entity specific, differing more in procedure than in principle. A stock broker answers to exchange circulars, investment advisers and research analysts to their master circulars, a mutual fund to the Fifth Schedule of its regulations and a portfolio manager to an annexure of another. SEBI now proposes to replace all of them with a single chapter in the SEBI (Intermediaries) Regulations, 2008, covering brokers, depository participants, investment advisers, research analysts, portfolio managers, online bond platform providers and mutual funds.

The proposal is both timely and necessary. The market has moved from distinct intermediaries to integrated platforms that offer several regulated products through one interface. Separate codes for each entity produced overlapping obligations, inconsistent interpretation and avoidable cost, although every code pursued the same objective: advertisements that are fair, balanced and not misleading. The Code is also technology neutral, treating print, broadcast and digital communication alike. Investor harm turns on what a communication says, not on the medium that carries it. It borrows, too, the Central Consumer Protection Authority’s 2023 guidelines on dark patterns, so that false urgency and subscription traps are treated as advertising failures in their own right.

The most significant change proposed is the shift from prior approval to post-issuance reporting. Several existing codes require an intermediary to obtain clearance from an exchange or supervisory body before an advertisement is issued, a model built for a time when advertising was infrequent and confined to traditional media. Entities now respond to market developments on the same day, sometimes within the hour. Requiring clearance for each such communication delays legitimate activity without measurably improving investor protection. SEBI’s own explanation is candid: the prior approval model was designed for traditional advertising where volumes were low and lead times were long.

The proposal then stops short. Every advertisement must still be reported to the supervisory body, promptly and no later than 24 hours from issuance. For an entity that issues hundreds of digital communications a month, that does not reduce the compliance burden. It relocates it from before publication to after. The filing is universal, so supervisory attention remains spread evenly across communications that carry no risk at all. A more proportionate design would rely on internal approval by the entity, prescribed governance standards for how that approval is exercised, and periodic or risk-based review by the supervisory body. Where an advertisement is misleading, it should be taken down through a reasoned order that the entity can contest, not forestalled by a filing obligation imposed on everyone in advance.

The paper also recognises that not every communication issued by a regulated entity is an advertisement. Investor education, factual corporate communication and regulatory disclosure serve a purpose different from promotion and should not be treated alike. The carve-out, however, turns on branding that is “minimal and incidental” and content carrying “no promotional intent”. Both are matters of degree, and degree is exactly what a compliance officer cannot certify. A workable test would be structural rather than aesthetic: educational content should fall outside the Code so long as it identifies the entity, makes no performance claim, names no product and contains no call to action. An entity can apply that test without asking anyone’s permission.

The treatment of celebrity endorsement is the clearest instance of the older approach surviving. SEBI would permit celebrities at the entity or brand level rather than for a named product, which is a liberalisation, but it retains prior approval for every such advertisement. The definition of celebrity then extends across eight categories, taking in anyone with more than five lakh followers on a single social media handle, a television anchor who has completed ten episodes, and a virtual character with lifelike human traits. The rule therefore attaches to who is speaking rather than to what is said. A line drawn at five lakh followers also invites the obvious answer, which is to engage four influencers with four lakh followers each. The requirement is then satisfied and the investor is in precisely the same position. If prior approval is retained, it should at least carry a defined timeline, failing which it should be deemed granted.

Two structural gaps remain. Because the Code is anchored in the Intermediaries Regulations, it reaches only registered intermediaries. Mutual fund distributors, who register with the industry association and not with SEBI, fall outside it, although they remain among the primary points of contact between a product and a retail investor. A common code that omits a large category of sellers preserves the fragmentation it was drafted to remove. Second, the paper sensibly permits a hyperlink to full disclosures where an SMS, a pop-up or a push notification cannot carry them. The same constraint applies to short-form video and audio, where a spoken disclaimer is either unreadable or unheard, and the concession should extend there as well.

The Code is a real simplification and should be adopted. But harmonisation is the starting point, not the object. A single rulebook administered through universal filing and standing approvals is still a permission system, merely a tidier one. SEBI has accepted that the medium no longer determines the harm. It should now accept that the messenger does not either.