OPINION | SEBI’s New Era of Enforcement: Incentivising compliance through litigation risk

The market regulator takes to the 'broken window theory'

A subtle but material shift is underway in the Securities and Exchange Board of India's (SEBI) approach to market discipline. Observing recent regulatory actions suggest that SEBI no longer limits its enforcement strategy in case of technical violations to traditional adjudication proceedings. Instead, even technical or procedural lapses by market participants are now leading to parallel regulatory action, reflecting a more comprehensive enforcement mandate. This change marks a significant, tightening of the compliance environment.

In the aftermath of several instances, where market processes failed and instances where investors were misled by intermediaries and advisers, SEBI and the stock exchanges have tightened their supervisory approach.

The focus now is on ensuring that repeated technical defaults do not escalate into larger systemic problems that could affect a wide base of investors. 

Pincer movement

Often, SEBI also starts parallel proceedings under the Intermediaries Regulations, where possible directions include suspension or cancellation of registration. These actions carry heavier consequences: reputational damage, loss of client trust, and impact on future business, often beyond monetary penalties.

This sharper risk profile is pushing intermediaries to strengthen compliance proactively and consistently to avoid SEBI enforcement that can lead to multiple, costly litigations.

An altered risk landscape

While the regulator has, in certain instances, adopted a lenient view where intermediaries have taken corrective steps and settled penalties in related matters, the larger risk landscape remains deeply concerning. The pendency of intermediary proceedings can leave firms operating under a cloud of uncertainty, with expansion plans stalled, critical business approvals paused and counterparties hesitant to commit. The operational and strategic freeze that accompanies such regulatory overhang is not a theoretical risk but a very real constraint that can erode competitiveness and long-term stability. This underscores how even modest compliance lapses can trigger consequences that extend far beyond the immediate proceeding.

An example of reputational risk

A recent SEBI order involving Stockholding Services Limited, broking arm and wholly owned subsidiary of Stockholding Corporation of India Limited serves as a telling example of this evolving enforcement outlook. While SEBI emphasised the intermediary’s responsibility to comply with applicable regulatory requirements, SEBI opted to issue a regulatory censure - a milder enforcement action that records the lapse without imposing a penalty but may still impact the entity’s reputation and be noted in future regulatory assessments.

There is also a clear trend of intermediaries and market participants choosing SEBI’s settlement mechanism to avoid prolonged litigation and reputational taint when SEBI initiates multiple proceedings.

Settlement mechanisms can have significant financial implications

However, even for minor violations, they often end up paying significant settlement amounts, and these amounts increase when multiple proceedings are initiated. The settlement proceedings are not just limited to monetary penalty but also comes with adverse directions in certain cases as well. This experience is prompting firms to tighten their compliance frameworks upfront so they can prevent breaches and avoid settlements and related risks.

The intent behind stronger supervision is not to burden intermediaries or market participants, but to ensure that procedural or substantive lapses do not ultimately affect investors. Every regulatory action, including the recent increase in scrutiny, must therefore be understood in the larger context of safeguarding market integrity and maintaining confidence among investors.

Importance of dealing with small mistakes

Early and proactive compliance can spare intermediaries a great deal of trouble. Fixing small mistakes, the moment they surface during inspections, and letting the regulator know that the fix has been taken care of, goes a long way in reducing the risk of enforcement action. SEBI, to its credit, tends to be fair when entities show they are taking responsibility. In fact, a quick clean up often ensures that what could have become a regulatory storm ends up as nothing more than a gentle compliance drizzle.

There is a noticeable shift in the market, with an increasing number of intermediaries subjected to routine inspections by the regulator and the market infrastructure institutions opting for independent legal and compliance audits by external experts. This trend is visible across entities of varying sizes and reflects a growing recognition that early identification of gaps is critical for reducing the likelihood of enforcement action.

Compliance with the law is the best shield against enforcement actions and litigation. As SEBI enters a new phase of focused and consistent enforcement, market participants must recognise that following regulatory norms is not just good governance, but it is the most effective way to reduce risk. Those who comply remain largely insulated from regulatory action; it is non-compliance that invites scrutiny, penalties, and reputational damage.

(KC Jacob is a Partner and Mridula Bhat is an Advocate at Economic Laws Practice.)

The above article does not constitute legal advice and the views expressed herein are personal views of the authors and do not represent the stand of this publication.