In a significant judgment, the Bombay High Court has held that settlement of regulatory proceedings with SEBI cannot act as a shield against criminal liability in grave economic offences. The Court’s observations came in the context of the long-running case relating to alleged fraud in the 2005 Initial Public Offering (IPO) of Yes Bank, where the Securities and Exchange Board of India (SEBI) had earlier entered into a consent settlement with the accused parties. The essence of the High Court’s decision is that a regulatory settlement does not automatically absolve a party from prosecution simply because civil or regulatory liabilities were compromised via conciliation, especially when the alleged offences involve complex fraud and serious economic wrongdoing.
The backdrop to the dispute is rooted in investigations conducted by SEBI, which uncovered substantial irregularities in the opening of demat accounts by Karvy Stock Broking in the Yes Bank IPO. These irregularities included opening accounts in fictitious or benami names, circumventing Know Your Customer (KYC) norms, and facilitating IPO financing to these accounts—actions that potentially cornered the retail portion of the IPO. SEBI’s system audit also pointed to failures in internal checks by the depository participants and depository institutions, raising red flags about the integrity of the IPO process.
Following SEBI’s investigation, the Central Bureau of Investigation (CBI) registered a First Information Report (FIR) in 2006 and subsequently filed a chargesheet against multiple individuals in 2007. The charges included criminal conspiracy, cheating, forgery, and misuse of position under various provisions of the Indian Penal Code, Companies Act, and the Prevention of Corruption Act. Despite the criminal case, some of the accused had earlier entered into a “consent order” with SEBI in 2009, under which they paid disgorgement amounts to SEBI and settled the regulatory proceedings without admitting or denying wrongdoing.
Later, the criminal proceedings were challenged in the Bombay High Court, and a single-judge bench, in 2022, quashed the cognizance orders, effectively bringing the criminal prosecution to a halt. The bench’s decision was substantially based on the earlier SEBI settlement, treating it as a bar to further criminal action. However, this view was overturned by the Supreme Court, which set aside the High Court’s order and remitted the case back for a fresh hearing by a division bench, signalling that the matter could not simply be closed because of the regulatory compromise.
On remand, the Bombay High Court revisited the issue, and its decision struck a firm balance between regulatory flexibility and the need for accountability in cases of serious economic offences. The Court emphasised that criminal liability and SEBI’s consent mechanism pertain to distinct domains: regulatory settlements deal with civil or administrative consequences, whereas criminal proceedings address the question of culpability under penal laws. The Court underscored that allowing a settlement to extinguish criminal liability in cases of deep-seated fraud would significantly undermine public confidence in the integrity of capital markets.
The Court referred to the Supreme Court’s reasoning that quashing criminal prosecutions merely because a regulatory settlement was in place would be legally untenable in cases involving deliberate and high-stakes misconduct. It noted that the character and gravity of the allegations in the Yes Bank IPO case warranted separate and independent criminal scrutiny, regardless of regulatory outcomes. The Court pointed out that SEBI's settlement order simply imposed financial obligations but did not provide any finding of innocence or exoneration in a criminal sense.
Moreover, the Court remarked on the importance of a clear and categorical exoneration before claiming shield from prosecution. Unless a regulatory body affirms that allegations are baseless, a settlement alone cannot exclude a criminal trial. The Court observed that in the SEBI consent order in this case, there was no declaration that the accused were innocent of the underlying fraud; rather, they simply agreed to pay a settlement amount. The Court concluded that, in the absence of any clean declaration of innocence, the criminal court must be allowed to examine the full facts, including detailed evidence of wrongdoing, and decide whether criminal charges should stand.
By doing so, the Bombay High Court reaffirmed a critical principle: regulatory settlement mechanisms should not become a backdoor escape from criminal accountability in serious economic crime cases. The judgment protects the integrity of prosecutorial mechanisms and ensures that consent orders do not dilute legal responsibility when significant public harm arises from financial misconduct.
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