As 2023 drew to a close, SEBI gave effect to settlements initiated by two Alternative Investment Funds under the SEBI (Settlement Proceedings) Regulations, 2018, (“Settlement Regulations”). In this article, ELP has reflected on the nature of the disputes involving a Category II Alternative Investment Fund and Category III Alternative Investment Fund, respectively, which were settled.
By way of background, Settlement Regulations came into effect on January 1, 2019, and replaced the erstwhile SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. The Settlement Regulations sets out the procedures for settling disclosure-related violations, complying with refund requirements, and offering exit or purchase options for investors in line with securities laws.
Aligned with Securities and Exchange Board of India’s (“SEBI”) objectives of protecting investor interests and regulating the securities market, the Settlement Regulations aim to integrate the quasi-judicial processes with alternative dispute resolution mechanisms. This integration was intended to create a more efficient and harmonized system, eliminating conflicts and delays. Having said that, the Settlement Regulations carve out exceptions for matters which cannot be settled (i.e., breach of regulations related to insider trading, disclosure of unpublished price-sensitive information, and engaging in fraudulent or unfair trade practices) and persons who cannot apply for settlement (i.e., wilful defaulters, fugitive economic offenders, etc.).
Alternative Investment Fund (“AIF”) structures have evolved into increasingly complex forms, such as debt funds, fund of funds, hedge funds, amongst others. As they develop, inadvertent/advertent minor infractions and violations are likely to arise along the way.
The case of a Category II AIF
On December 11, 2023, SEBI exercised its authority to settle the violations in Cleanmax Renewable Trust. In Cleanmax Renewable Trust, the Sponsor (Clean Max Enviro Energy Solutions Pvt. Ltd.) and the Investment Manager (Clean Max Energy Ventures Pvt. Ltd.) (collectively “Applicants”) of a Category II Alternative Investment Fund filed a joint sou motu application under the Settlement Regulations, to propose settlement of enforcement proceedings that may be initiated against them for violations of Regulation 20 (13) of SEBI (Alternative Investment Funds) Regulation, 2012 (“AIF Regulations”) (read with SEBI Circular dated June 19, 2014 on ‘Guidelines on disclosures, reporting and clarifications under AIF Regulations’).
To resolve potential proceedings arising from these delayed compliances, the Applicants engaged with SEBI’s Internal Committee, proposed revised settlement terms, and eventually settled the matter by remitting INR 17.4 lacs as per the High-Powered Advisory Committee’s (“HPAC”) recommendation.
The case of a Category III AIF
By a Settlement Order dated December 18, 2023, a settlement came into effect in Unifi AIF, a Category III Alternative Investment Fund . Unifi (“Applicant”) invoked the Settlement Regulations to settle enforcement proceedings that may be initiated against it for non-compliance of the AIF Regulations along with (read with the Circular dated 18 December 2014), by neither admitting nor denying any finding of fact or conclusion of law.
In the circumstances, the Applicant and the concerned entities/personnel sought a settlement. The Applicants engaged with SEBI’s Internal Committee and proposed revised settlement terms. Following HPAC’s recommendation that the settlement amount shall not be drawn from investor funds but from responsible officers, which SEBI’s Whole Time Members approved, a payment of INR 38 lacs was made. Subsequently, it was clarified that a different parameter should have been applied, resulting in an additional payment of INR 11.4 lacs. Once this sum was remitted, the matter was finally resolved.
Analysis and Conclusion
While SEBI exercised its authority to settle the violations in both the above matters, the settlements remain subject to conditions delineated in Regulation 28 of the Settlement Regulations i.e., preserving SEBI’s prerogative to take appropriate action if (i) discrepancies arise (ii)if any representations made during the settlement are found untrue, or (iii) if there’s a breach of the settlement terms. Per Regulation 28, whenever any settlement order is revoked, the amounts paid under the Settlement Regulations are not refundable and SEBI is at liberty to restore/initiate the proceedings with respect to which the settlement order was passed.
The settlement process is as an alternative enforcement mechanism, for the benefit of the accused party, investors, and the regulatory body. At the same time, before proceeding, it is crucial to be mindful of inherent factors within the Settlement Regulations. For instance, applicants are mandated to submit an undertaking in a prescribed format, which involves waivers of certain rights. These waivers inter alia encompass – waiver of appeals and reviews before tribunal/court; waiver of raising regulatory-related pleas (including conflict of interest), and waiver of initiating legal actions against SEBI on matters covered in the settlement order, and waiver of any allegations of bias or prejudgment by SEBI, its officers, or HPAC.
There are certain regulations within the AIF Regulations that grant SEBI and whole-time members complete discretion to reject applications upon receiving information from parties about compliance violations at any stage of the proceedings. Additionally, according to Regulation 16(2), any settlement does not confer a right on the noticee, to enforce the settlement or avoid any enforcement actions. Many such provisions within the Regulations, when read with the schedules, are relevant considerations before choosing to apply for a settlement. The settlement mechanism differs from compounding of offenses provided under several other statutes, where authorities have negligible discretion to reject applications for compounding.
Nevertheless, it is welcoming to witness the fruition of settlements under the Settlement Regulations inasmuch as it expedites the conclusion of enforcement proceedings, bypasses prolonged litigation, and concurrently safeguards investors’ rights.
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 2023 SCC OnLine SEBI 411
 2023 SCC OnLine SEBI 411
 2023 SCC OnLine SEBI 419
 SEBI Circular CIR/OAIE/1/2014
 SEBI Complaints Redress System (SCORES)
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.