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Illiquid Stock Options: SEBI Settlement Scheme 2.0

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SEBI, in deference to the directions of SAT, appeares to have framed the terms of the Settlement Scheme, 2022 (Settlement Scheme 2.0).

The saga of penalty proceedings initiated by Securities and Exchange Board of India (SEBI) in ‘Illiquid Stock Options’ matter continues with its turns and twists.

For a quick background, in 2015, SEBI had found that out of 21,652 entities who traded on BSE Limited (BSE) Stock Options Segment, as many as 14,720 entities were involved in generating artificial volume by executing reversal trades in the segment, i.e., these entities would either sell their options contracts only to buy them subsequently, or vice-a-versa, at a significant price differential. The alleged motive was to book losses or book profits for tax evasion through such non-genuine trades using the platform of stock exchange, making it a violation SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

According to SEBI investigation, during the period of April 01, 2014 to September 30, 2015 as much as 81.41% of the trades executed in the segment fell within these manipulative, fraudulent and unfair trades.

Consequently, SEBI decided to take appropriate action against all the entities in phases and the proceedings have come to be known as illiquid stock options matter where thousands of entities have been saddled with penalties under Section 15HA of SEBI Act, 1992. Many such orders have also been appealed and Securities Appellate Tribunal (SAT) has upheld almost all such penalty orders.

After dealing with multitude of such appeals, in one matter of R.S. Ispat Ltd. v. SEBI (SAT Appeal No. 25/2019, Order dated 14.10.2019), SAT nudged that “SEBI may consider holding a Lok Adalat or adopting any other alternative disputes resolution process with regard to the illiquid stock options.”

Thereafter, in response to the observations made by SAT, SEBI introduced a “ONE-TIME” Settlement Scheme, 2020 (Settlement Scheme 1.0) under Regulation 26 of the SEBI (Settlement Proceedings) Regulations, 2018 to provide an option to settle the matter. The scheme was made available from August 01, 2020 to October 31, 2020, which was further extended till December 31, 2020. However, the response to the scheme was tepid and only 1018 entities out of 14720 availed the benefit of the scheme.

Practically, the Settlement Scheme 1.0 was grossly underutilized leaving SEBI with two difficult choices – Either to amend the ‘one time’ Settlement Scheme tacitly admitting that it was uneconomical and not an optimal solution to the illiquid stock options matter, or to take it upon itself to appoint hundreds of Adjudicating Officers within SEBI to issue notices, conduct hearings and pass penalty orders in more than ten thousand matters which would have clogged the system for years to come.

SEBI found itself perhaps in a fix, to leave mid-way numerous enforcement actions it had initiated against the alleged errant entities. There could have been concerns such as loss of revenue to Government of India and also possible CBI and CVC inquiries.

Be that as it may, SEBI continues passing penalty orders which were landing at the doors of SAT again and again. Barring few exceptions, almost every order of SEBI imposed a flat penalty of 5 Lakhs, which was a minimum penalty under Section 15HA.

SAT kept on upholding SEBI Orders and in fact in few appeals, the Supreme Court also did not interfere with SEBI / SAT Orders. In one matter of Shubham Singhal v. SEBI, (SAT Appeal No. 191/2022, dated 13.05.2022) the Tribunal recently opined that the settlement scheme was not successful because of two reasons: the terms of settlement perhaps were onerous, stringent and unviable, and the scheme was issued during the peak of the Covid pandemic. In the aforesaid order, SAT directed that SEBI should reconsider coming out with a fresh scheme. SAT further suggested that “the terms of settlement should be attractive so that it could attract the entities to come forward and settle the matter which will ameliorate the harassment of penalty proceedings to the noticees and at the same time would help to clear backlog of these pending matters before various Adjudicating Officers.”


SEBI, in deference to the directions of SAT, appeares to have framed the terms of the Settlement Scheme, 2022 (Settlement Scheme 2.0). From the recently issued Show Cause Notices, it seems that the scheme will commence on August 22, 2022 and close on November 21, 2022 providing settlement opportunities to the entities who were involved in reversal trades in stock options segment on BSE during the period of April 01, 2014 to September 30, 2015, against whom enforcement proceedings have been initiated and are pending.

Settlement Scheme 2.0, unlike Settlement Scheme 1.0, seems to provide a simple process for calculation of settlement amount. In Settlement Scheme 1.0, settlement factor of 0.55 along with artificial volume created, number of non-genuine trades and number of contracts entered by the entities were considered while arriving at the settlement amount. Since, the resultant settlement amount was found to be onerous, SEBI appears to have tried to make it simpler in Settlement Scheme 2.0. The new scheme proposes arriving at the settlement amount based on number of contracts entered by the entities.

Settlement Scheme 2.0 proposes settlement amount as per the details below:

Sebi Settlement Scheme 2.0

SEBI has also clarified that if any entity does not want to settle the matter, the proceedings initiated against it shall continue from the stage the said proceedings were pending. The nitty gritties of the Settlement Scheme 2.0 along with Frequently Asked Questions (FAQs) are yet to be announced, the above proposals have been made public in recently issued show cause notices giving it a reason for postponement of hearings.

While SEBI would wish to bring an end to the illiquid stock options matter with the present settlement scheme, we may have to wait for few more months to know if this is the last of such schemes.

The author is Founder, Regstreet Law Advisors and a former SEBI Officer. sumit@regsla.com