Disgorgement and Settlement

When an insider profits from unpublished price sensitive information, two distinct questions arise once liability is in sight. First, how does the regulator claw back the unlawful gain so that crime does not pay? Second, can the noticee end the proceedings by paying a sum and accepting terms, without a full-blown adjudication and without admitting guilt? The first question is answered by disgorgement — an equitable, gain-based remedy that deprives the wrongdoer of profits made or losses averted. The second is answered by settlement, the consent mechanism codified in Section 15JB of the SEBI Act and the Settlement Proceedings Regulations, 2018. Though the PIT Regulations, 2015 do not themselves create these remedies, every insider-trading order ultimately turns on them. This chapter maps both tools, their statutory anchors, the limits the Supreme Court and the Securities Appellate Tribunal have read into them, and how they interact with penalties, compounding and the Investor Protection and Education Fund.

Two remedies, two logics: why disgorgement and settlement sit together

Insider-trading enforcement under the SEBI (Prohibition of Insider Trading) Regulations, 2015 draws on the parent SEBI Act, 1992 for its remedial machinery. The PIT Regulations define the wrong — trading while in possession of UPSI or its communication or procurement — but the consequences flow from Sections 11, 11B, 15G and 15JB of the Act. Two of those consequences operate on opposite logics and are easily confused.

Disgorgement is restitutionary and gain-based: it asks what the wrongdoer unjustly took and orders it returned, neutralising the unlawful enrichment. Settlement is consensual and forward-looking: it lets a noticee terminate proceedings by paying a negotiated sum and accepting undertakings, conserving regulatory resources and securing certain recovery without proving every element to the hilt. A single enforcement matter can engage both — a noticee may offer to settle and, as part of the settlement terms, agree to disgorge. Understanding each on its own terms is therefore the first task.

Crucially, neither remedy is a penalty in the strict sense. Disgorgement merely strips a wrongful gain; the penalty under Section 15G of the Act (up to the higher of Rs 25 crore or three times the profit) is the punitive layer that sits on top. Settlement, in turn, is not an acquittal — it is a regulatory bargain. Conflating these categories is the single most common error in answering questions on this topic.

The statutory source of disgorgement: Section 11B and the 2014 Explanation

For years SEBI ordered disgorgement by reading it into the broad direction-making power of Section 11B of the SEBI Act, 1992, which empowers the Board to issue such directions as it thinks fit "in the interest of investors or orderly development of the securities market". The power was not named in the section; it was inferred. That gap was closed by the Securities Laws (Amendment) Act, 2014, which inserted an Explanation to Section 11B in the following terms: "For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention."

Three features of this text repay attention. First, the measure of disgorgement is fixed by statute — "an amount equivalent to the wrongful gain made or loss averted" — not the harm to investors. Second, the Explanation is expressly retrospective: the words "and always be deemed to have been included" validate disgorgement orders passed before 2014, putting the regulator's earlier practice beyond challenge. Third, it covers both profit made and loss averted, so a person who dumps shares ahead of bad-news UPSI to escape a loss is as exposed as one who buys ahead of good news to make a gain. The bare provisions can be read on indiacode.nic.in.

What disgorgement is — and is not: the Karvy formulation

The conceptual anchor in Indian law is Karvy Stock Broking Ltd. v. SEBI (SAT, Appeal No. 6 of 2007, decided 2 May 2008). The Securities Appellate Tribunal there gave the now-canonical description: disgorgement, in commercial parlance, is "the forced giving up of profits obtained by illegal or unethical acts". The Tribunal was emphatic that it is neither a punishment nor a measure of the damages suffered by victims of the misconduct. It is restitutionary — its object is to restore the status quo ante by removing the unjust enrichment, not to compensate the injured nor to add a deterrent sting.

From that premise Karvy drew the limit that governs every disgorgement order: only a wrongdoer who has actually made gains can be made to disgorge, and the amount disgorged cannot exceed those gains. The Tribunal placed the burden squarely on SEBI to show that the sum ordered reasonably approximates the unjust enrichment. A disgorgement figure plucked from notional or speculative calculations, untethered from demonstrable gain, is liable to be set aside. This proportionality-to-gain principle is the constant thread running through the later authorities and is the most testable single proposition on the subject.

The Karvy framing also carries a corollary about who can be made to disgorge. Since the remedy depends on a gain having accrued to the particular person, a noticee who merely participated in a scheme but pocketed nothing cannot be made to disgorge another's profit; his liability, if any, lies in penalty and debarment, not restitution. Equally, where several persons jointly reaped a single pool of unlawful gain, SEBI must apportion the disgorgement so that the aggregate does not exceed the total gain — otherwise the order ceases to be restitutionary and becomes, in substance, an unauthorised penalty. These refinements all flow from the same founding idea: disgorgement tracks the gain, no more and no less.

Disgorgement versus penalty: distinct heads, cumulative liability

Because disgorgement only strips the gain, it does not exhaust the noticee's exposure. Insider trading attracts a separate monetary penalty under Section 15G of the SEBI Act — a sum which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. The two heads are conceptually independent: disgorgement removes what was wrongly taken; the Section 15G penalty punishes and deters. A noticee can therefore be ordered both to disgorge the profit and to pay a multiple of that profit as penalty, without any double-counting objection, because the heads answer different questions.

The Supreme Court underlined the punitive character of the penalty regime in N. Narayanan v. Adjudicating Officer, SEBI (2013) 12 SCC 152. Upholding a two-year market debarment and a penalty of Rs 50 lakh against a whole-time director of Pyramid Saimira Theatre Ltd. for falsified financials that lured investors, the Court stressed that SEBI's powers are meant to protect market integrity and that directors who allow fraudulent disclosures cannot escape liability. Narayanan is usually cited for director accountability and the punitive reach of Section 15HA, but it is equally a reminder that the remedial (disgorgement) and punitive (penalty) layers operate together, each justified on its own footing.

Interest on disgorged sums: Dushyant Dalal and the time value of unlawful gain

If disgorgement only neutralises the gain, what about the period for which the wrongdoer enjoyed it? The Supreme Court answered this in Dushyant N. Dalal v. SEBI (Civil Appeal No. 5677 of 2017, decided 4 October 2017). The appellants had manipulated retail demand in a public issue and made an unlawful gain of about Rs 4.05 crore, in breach of Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations, 2003. The question was whether SEBI could levy interest on the disgorged amount.

The Court held that the power to charge interest is part of substantive law, not mere procedure, because it affects the parties' vested rights — and that the specific statutory basis for recovering such interest is Section 28A of the SEBI Act, inserted by the 2014 amendment, which imports the recovery machinery of the Income Tax Act (including interest) for sums due to SEBI. The principled rationale is that the wrongdoer enjoyed the time value of the illegal gain, and disgorgement is incomplete unless that benefit too is neutralised. Dushyant Dalal thus completes the Karvy logic: disgorgement equals the wrongful gain, and interest restores the period-of-enjoyment advantage, but both must rest on a principled commencement date and rate rather than an arbitrary figure.

Where the money goes: the Investor Protection and Education Fund

Disgorged sums do not become general revenue of the State, nor are they routinely handed to identified investors. Under Section 11(5) of the SEBI Act, the amount disgorged pursuant to a Section 11B direction is credited to the Investor Protection and Education Fund (IPEF) established by the Board, to be utilised in accordance with the regulations made under the Act. The mechanism reinforces the restitutionary, non-compensatory character of the remedy: the point is to take the gain away from the wrongdoer, not necessarily to make any particular investor whole.

This pooling design has a doctrinal consequence. Because disgorgement is not investor-specific compensation, a noticee cannot resist it by arguing that no identifiable investor can be matched to his trades, nor can investors claim a vested right to the disgorged sum. The remedy operates at the level of market integrity and unjust enrichment, with the IPEF serving the broader investor-education and protection mandate. Where direct restitution to wronged investors is feasible, SEBI may additionally direct it under its Section 11B powers, but that is a separate exercise from crediting the disgorged corpus to the Fund.

Quantifying disgorgement: the discipline the courts impose

The hardest part of any disgorgement order is the arithmetic, and it is here that orders most often fail on appeal. The governing discipline, distilled from Karvy and reaffirmed since, is reasonableness: SEBI must produce a methodology by which the figure ordered "reasonably approximates" the actual unjust enrichment. Notional gains, double-counted heads, or amounts exceeding demonstrable profit fall foul of the gain-based ceiling.

The most consequential recent illustration is Reliance Industries Ltd. v. SEBI, 2026 LiveLaw (SC) 564 (decided 29 May 2026), arising from the 2007 Reliance Petroleum (RPL) futures episode. SEBI had directed disgorgement of Rs 447.27 crore with interest, alleging that RIL built large short positions in RPL futures through twelve entities while selling RPL shares in the cash market, depressing the settlement price. The Supreme Court set aside the fraud findings under the PFUTP Regulations, 2003 and consequently quashed the disgorgement, holding that fraud and market manipulation require proof of intent and cannot be sustained on a mere technical breach of position-limit norms; it preserved only a Rs 25 crore penalty for the position-limit violation and directed refund of sums deposited. The decision is a cautionary marker: disgorgement is parasitic on a sustained finding of contravention, and if the underlying fraud finding collapses, the gain-based remedy collapses with it. For insider-trading matters this means the disgorgement quantum can be no stronger than the proof that the trades were in fact tainted by possession of UPSI.

The settlement framework: Section 15JB and the journey from consent orders

Settlement allows a noticee to end administrative or civil proceedings by agreement rather than adjudication. Its statutory home is Section 15JB of the SEBI Act, inserted by the Securities Laws (Amendment) Act, 2014. The provision allows any person against whom proceedings have been or may be initiated under Sections 11, 11B, 11D, 12(3) or 15-I to propose settlement; the Board may, after considering the nature, gravity and impact of the default, agree to settle on payment of such sum or on such other terms as may be determined in accordance with the regulations. Two structural features matter: settlement is discretionary (the noticee has no right to demand it), and an order made under Section 15JB is not appealable.

The mechanism predates its statutory codification. SEBI first introduced a consent order framework by an administrative circular in April 2007, modified in 2012, then put on a regulatory footing by the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014, after Section 15JB was enacted. The 2007 framework initially permitted settlement even of serious offences; the 2014 Regulations swung the other way, carving serious defaults out of the scheme. The current regime, examined next, struck a more calibrated balance.

The Settlement Proceedings Regulations, 2018: a principle-based regime

The operative code today is the SEBI (Settlement Proceedings) Regulations, 2018, framed under Section 15JB and in force from 1 January 2019. The 2018 Regulations made the regime principle-based rather than offence-listed: instead of a rigid exclusion of "serious" categories, they confer flexibility to settle most defaults — including insider trading and fraudulent or unfair trade practices — while reserving a residual power to refuse. A default will not be settled where, in SEBI's opinion, it has had a market-wide impact, caused loss to a large number of investors, or affected the integrity of the market. This is precisely the kind of insider-trading matter — large-scale, market-distorting communication or procurement of UPSI — that is least likely to be settled.

The settlement amount is computed using indicative formulae and factors in the Regulations, with the High Powered Advisory Committee and the panel of Whole Time Members in the loop. The Regulations also permit settlement in confidentiality: an applicant who provides substantial assistance in an investigation, inspection or audit against another person may receive favourable settlement terms, an Indian analogue to the leniency/cooperation tools familiar from competition law. Settlement may carry monetary terms, non-monetary terms (such as a voluntary debarment, exit from management, or enhanced audit and compliance undertakings), or a combination.

"Without admitting or denying": the no-admission settlement

The defining feature of SEBI settlement is that it can be done without admission or denial of guilt. Under the 2018 Regulations the applicant may settle either by admitting the findings of fact and conclusions of law, or by neither admitting nor denying them. The careful drafting — "without admitting or denying the findings of fact and conclusions of law" — preserves the noticee's legal position: a settlement order is not a finding of guilt and generally cannot be pleaded as an admission in collateral proceedings.

That neutrality, however, comes with a hard condition. A person who settles without admitting or denying guilt may never thereafter publicly represent that he is not guilty or that SEBI had no case; if he does, SEBI is entitled to revive the enforcement process. The settlement therefore buys closure and certainty, not vindication. For a noticee weighing settlement against contesting an insider-trading charge, the calculus turns on the strength of SEBI's UPSI-possession evidence, the size of the likely disgorgement and Section 15G penalty, the reputational cost of a contested order, and the value of finality — a balance that often favours settlement even where the defence is arguable.

The no-admission character also shapes the evidentiary afterlife of a settlement. Because the order records no finding of guilt, third parties — for instance investors pursuing a civil claim, or a foreign regulator — cannot simply lift the settlement as proof that the insider trading occurred. This is a deliberate policy choice: it lowers the cost of settling and thereby encourages noticees to come to the table, advancing SEBI's interest in swift, certain recovery over the slower, contested route of full adjudication and appeal. The trade-off is that the public record is left without an authoritative pronouncement on the merits, which is one reason the 2018 Regulations bar settlement of the most serious, market-wide defaults where a reasoned adjudicatory finding is thought necessary.

Settlement is not compounding: Section 15JB versus Section 24A

A frequent confusion is between settlement under Section 15JB and compounding under Section 24A of the SEBI Act. The two are distinct in subject matter and forum. Section 15JB settles administrative and civil proceedings and is administered by the Board itself. Section 24A deals with criminal offences: any offence punishable under the Act, not being one punishable with imprisonment only or with imprisonment and fine, may be compounded by the Securities Appellate Tribunal or by the court before which the prosecution is pending.

The forum difference is decisive. Because compounding extinguishes a criminal liability, the power vests in the SAT or the court, not in SEBI; the regulator's consent is not a precondition, as the Supreme Court clarified in Prakash Gupta v. SEBI (Civil Appeal No. 569 of 2021, decided 23 July 2021), which held that SEBI's consent is not mandatory for compounding under Section 24A though the court must take its views into account. The practical upshot: a noticee facing both a civil/administrative proceeding and a criminal prosecution for the same insider trading may need to settle the former under Section 15JB and compound the latter under Section 24A — two separate processes, before two separate fora.

How it plays out in an insider-trading case

Bringing the threads together: suppose a connected person trades on UPSI in breach of Regulation 4 of the PIT Regulations, 2015, having no defence under the permitted exceptions such as a valid trading plan. SEBI's enforcement toolkit then layers as follows. Liability is established under the PIT Regulations read with Section 12A of the SEBI Act. The gain is removed by a disgorgement direction under Section 11B (measured by the profit made or loss averted, plus interest under Section 28A), and that sum is credited to the IPEF. The punitive response is a penalty under Section 15G, which can reach three times the profit. SEBI may additionally debar the person from the securities market.

At any stage the noticee may seek to settle under Section 15JB and the 2018 Regulations, offering a settlement amount and undertakings, possibly including voluntary disgorgement, without admitting or denying guilt — subject to SEBI's discretion to refuse where the conduct had market-wide impact. If a criminal prosecution is also launched, compounding under Section 24A is a parallel track before the SAT or court. Mapping a fact pattern onto these layers — identifying which remedy is restitutionary, which is punitive, and which is consensual — is exactly the analytical move examiners reward.

Recurring exam and interview themes

Three propositions recur. First, the nature of disgorgement: it is an equitable, restitutionary, gain-based remedy, neither a penalty nor compensation, capped at the actual unjust enrichment (Karvy), with interest available to neutralise the time value of the gain (Dushyant Dalal, anchored in Section 28A). Second, the source and validity of the power: long exercised under Section 11B and put beyond doubt by the retrospective 2014 Explanation, with proceeds going to the Investor Protection and Education Fund under Section 11(5). Third, the architecture of settlement: discretionary, non-appealable, principle-based under the 2018 Regulations, available on a no-admission basis but barred where there is market-wide impact, and distinct from criminal compounding under Section 24A.

A strong answer also notes the live tension exposed by Reliance Industries v. SEBI (2026): disgorgement is only as secure as the contravention finding beneath it, and the courts demand proof of intent for fraud-based charges rather than punishing technical breaches. Cross-reference the evolution of the PIT framework from the 1992 Regulations to show how the remedial architecture matured alongside the substantive prohibitions, and you will have covered the chapter end to end.

Frequently asked questions

Is disgorgement a penalty under SEBI law?

No. As the SAT held in Karvy Stock Broking Ltd. v. SEBI (2008), disgorgement is the forced giving up of profits obtained by illegal or unethical acts — an equitable, restitutionary remedy that is neither a punishment nor a measure of the victims' damages. It only strips the unjust enrichment and is capped at the actual gain made or loss averted. The punitive layer is the separate penalty under Section 15G of the SEBI Act.

What is the statutory basis for SEBI's power to order disgorgement?

SEBI historically ordered disgorgement under its general direction-making power in Section 11B of the SEBI Act, 1992. The Securities Laws (Amendment) Act, 2014 inserted an Explanation to Section 11B expressly declaring that the power "shall include and always be deemed to have been included" the power to direct disgorgement of "an amount equivalent to the wrongful gain made or loss averted". The deeming language makes the validation retrospective.

Can SEBI charge interest on a disgorged amount?

Yes. In Dushyant N. Dalal v. SEBI (Supreme Court, Civil Appeal No. 5677 of 2017, decided 4 October 2017), the Court held that the power to levy interest is substantive, not merely procedural, and is supported by Section 28A of the SEBI Act (inserted in 2014), which imports the Income Tax recovery machinery. The rationale is that interest neutralises the time value of the unlawful gain the wrongdoer enjoyed.

Where does the disgorged money go?

Under Section 11(5) of the SEBI Act, amounts disgorged pursuant to a Section 11B direction are credited to the Investor Protection and Education Fund (IPEF) and utilised in accordance with regulations made under the Act. Because the remedy targets unjust enrichment rather than compensating specific investors, the sum is generally pooled in the IPEF rather than distributed to identified individuals.

Does settling with SEBI mean admitting guilt?

Not necessarily. Under the SEBI (Settlement Proceedings) Regulations, 2018, an applicant may settle either by admitting the findings or by neither admitting nor denying them. A no-admission settlement is not a finding of guilt. However, the settling party may never afterwards publicly claim innocence or that SEBI had no case — if he does, SEBI may revive the enforcement proceedings.

How is settlement under Section 15JB different from compounding under Section 24A?

Section 15JB settles administrative and civil proceedings and is administered by SEBI itself, on a discretionary, non-appealable basis. Section 24A concerns criminal offences and is exercised by the Securities Appellate Tribunal or the court before which the prosecution is pending; as held in Prakash Gupta v. SEBI (2021), SEBI's consent is not mandatory for compounding, though its views must be considered.