When SEBI’s Discretion Overshadows Deterrence and Investor Trust

The aphorism that justice must be seen to be done sits at the heart of Securities and Exchange Board of India's settlement proceedings framework. It isn’t just about fairness. It’s about the regulator showing that each act of misconduct has consequences. Without that, investor confidence quickly turns fragile. Yet, lenient settlements and opaque reasoning often seem to blunt SEBI’s sharpest tool, which is its ability to enforce discipline.

It is impractical to lay down every conceivable circumstance or violation that might invite settlement. The trouble lies in how SEBI uses its discretion, and just as often, when it decides not to. Some settlements seem shaped more by expediency than consistency, with little explanation of the facts behind them.

Since its introduction in 2007, the SEBI consent order guidelines (the 2012 amendment), or its more evolved avatar, the Settlement Proceedings Regulations, 2018, have remained in the eye of the storm. Driven by the maxim ‘justice delayed is justice denied,’ the market regulator considered equipping itself with an alternate enforcement tool for dealing with securities law violations to preserve regulatory resources and focus on competing priorities by bypassing the cumbersome, costly, and slow litigation process.

The framework lays down a seemingly clear structure, defining what can be settled, setting codified terms, and detailing methods for arriving at penalties and disgorgements. It even prohibits settlements where the alleged default has market-wide impact, causes losses to a large number of investors, or compromises market integrity. But the same framework also vests substantial discretionary powers in internal committees, high powered advisory committees, and panels of whole-time members, who can decide whether or not to accept applications and on what settlement terms. It is this combination of codification and subjectivity that breeds confusion, and occasionally, distrust.

In many cases, the final outcome from the regulatory actions unintendedly creates an unfavorable effect, failing to boost market integrity and investor confidence.

A Troubling Case
Nothing underscores this better than the front-running episode involving Axis Mutual Fund. Between September 2021 and March 2022, SEBI’s surveillance systems picked up unusual trading patterns that pointed to possible front-running at Axis Mutual Fund. Its interim order-cum-show cause notice of 28 February, 2023, named 21 entities suspected of profiting from trades placed ahead of the fund’s own, pocketing gains of about ₹305.6 million. SEBI noted that roughly 6.6 million unitholders, with assets of ₹2.52 trillion, could have been affected.

Yet, two years later, on 24 March, 2025, SEBI issued a settlement order accepting a suo motu application by Axis AMC Limited, Axis Mutual Fund Trustee Limited, and four of its employees, none of whom was named among the 21 suspected entities. The settlement amount ₹62.7 million. For violations of this scale, SEBI’s response felt less like proportionate justice and more like a gentle tap on the wrist. The AMC was quick to disown its dealer, Viresh Joshi (the alleged prime mover in the front-running), but months of fraudulent trades could hardly have gone unnoticed without serious lapses in oversight. That, in turn, raises a larger question: where was the governance?

The unease only deepened with what came next. In July 2025, SEBI quietly settled with the fund’s Head of Risk for ₹1.9 million for violations identified in a forensic audit covering the April 2020-September 2022 period. Two months later, another settlement followed — this time with a fund manager — for ₹8.6 million and a clawback of 43,310.73 units across the Axis Quant and Axis Value Funds. For an episode that shook investor confidence, these penalties hardly looked like a reckoning or proportionate.

The Enforcement Directorate, meanwhile, has traced illicit gains of more than ₹2 billion linked to front-running, including ₹910 million allegedly parked across shell companies tied to Joshi and his family. In the hindsight, the gap between SEBI’s modest settlements and the scale of the alleged misconduct is, to put it mildly, staggering.

Wider Malaise
This is not merely a story of one fund house or one failure. For a regulator charged with protecting millions of small investors, such caution can look uncomfortably like leniency.

A cursory review of SEBI enforcement orders throws up enough signs of lopsided discretion in settlement proceedings, ignoring procedural discrepancies.

Certain cases, despite repeated violations or serious procedural lapses, have found resolution through settlements that seem disproportionately light. ICICI Securities, for instance, a designated Qualified Stock Broker, has faced three violations of varying severity within a year, including a past episode involving 26 bogus entities. Yet each time, the matter found its way to a settlement, with penalties that barely compared with gravity of defaults of that scale.

It would be naive to argue that every violation deserves a hammer. The point of settlement, after all, is to balance deterrence with efficiency. Regulation, like justice, must not only be fair but be seen to be so. Investors need to believe that the cost of malpractice is real — that those who breach trust can’t simply bargain their way out of it. A framework that is perceived as soft on offenders, even unintentionally, does little to instil confidence in the markets it seeks to protect.

When enforcement starts looking negotiable, credibility is the first casualty. And once credibility goes, deterrence follows close behind.