In an order passed on May 2, 2008, the Securities Appellate Tribunal (SAT) set aside the order of SEBI that directed 10 entities (including Karvy Stock Broking Limited) to disgorge a sum of Rs. 115.82 crores. The Hindu Business Line has a background to the case:
“The scam related to certain entities cornering IPO shares (in 2003-05) reserved for the retail category by using fictitious demat accounts. These demat accounts were ultimately transferred to the financiers through key operators. The financiers made their gains on the first day of listing of these shares.
SEBI’s disgorgement order of November 2006 had directed 10 entities including Karvy to jointly and severally pay up Rs 115.82 crore towards disgorgement (paying up money made through illegal or unethical gains).
However, SEBI refused to spell out how much each entity would have to pay, saying that it was a matter to be settled between the accused entities. It was against this order that the appeals to SAT were made.”
As is the case with several appeals before SAT that arise out of SEBI orders, Karvy succeeded mainly on procedural grounds. SAT found that SEBI had failed to follow the principles of natural justice in not calling upon the appellant, Karvy, to show cause why it should not be ordered to disgorge the amount determined in the order. The SAT even went to the extent of expressing its anguish “over the irrational manner in which [SEBI] proceeded to pass the impugned order only against the two depositories and their participants.” The SAT appears to have taken strict note of the fact that the ultimate beneficiaries of the scam, being the various beneficiary account holders, were not issued any directions by SEBI for disgorgement, while SEBI forcefully pursued the depositories and the participants only.
While, the SAT order itself is largely premised on grounds of natural justice, it does contain some useful explanation about the concept of “disgorgement” in relation to securities law:
“Before we deal with the contentions of the parties, it is necessary to understand what disgorgement is. It is a common term in developed markets across the world though it is new to the securities market in India. Black’s Law Dictionary defines disgorgement as “The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.” In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity. In a disgorgement action, the burden of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on [SEBI].”