[The following guest post is contributed by Kanwardeep
Singh Kapany, and is a continuation of previous posts in Parts 1
and 2]
Singh Kapany, and is a continuation of previous posts in Parts 1
and 2]
Direction to disgorge
does not amount to double jeopardy
does not amount to double jeopardy
The
expression disgorgement is a common term in developed markets across the world,
though it is new to the securities market in India. The said expression
connotes repayment of ill-gotten gains that is imposed on wrongdoers by the
courts. In commercial parlance, the said expression has been construed to mean
the forced giving up of profits obtained by illegal or unethical acts. In
other words, it is “The act of giving up something such as profits illegally
obtained on demand or by legal compulsion.”[1]
Disgorgement is not a punishment nor is it concerned with the damages sustained
by the victims of the unlawful conduct. It is a monetary equitable remedy
designed to prevent a wrongdoer from unjustly enriching himself as a result of
his/her illegal conduct. Disgorgement of ill-gotten gains may be ordered under section
11B[2]
against one who has violated the provisions of the Act, rules or regulations
(collectively called “Securities Laws”).
However, SEBI cannot ask every violator to disgorge. Only such wrongdoers who
have made gains as a result of their illegal act(s) could be asked to do so. It
will thus be seen that the order for disgorgement can be passed by SEBI only
after a delinquent has been found guilty of violating the Securities Laws. The
innate objective in the ordering of disgorgement is to make sure that the
wrongdoers do not profit from their wrong doing. Therefore, 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.[3]
expression disgorgement is a common term in developed markets across the world,
though it is new to the securities market in India. The said expression
connotes repayment of ill-gotten gains that is imposed on wrongdoers by the
courts. In commercial parlance, the said expression has been construed to mean
the forced giving up of profits obtained by illegal or unethical acts. In
other words, it is “The act of giving up something such as profits illegally
obtained on demand or by legal compulsion.”[1]
Disgorgement is not a punishment nor is it concerned with the damages sustained
by the victims of the unlawful conduct. It is a monetary equitable remedy
designed to prevent a wrongdoer from unjustly enriching himself as a result of
his/her illegal conduct. Disgorgement of ill-gotten gains may be ordered under section
11B[2]
against one who has violated the provisions of the Act, rules or regulations
(collectively called “Securities Laws”).
However, SEBI cannot ask every violator to disgorge. Only such wrongdoers who
have made gains as a result of their illegal act(s) could be asked to do so. It
will thus be seen that the order for disgorgement can be passed by SEBI only
after a delinquent has been found guilty of violating the Securities Laws. The
innate objective in the ordering of disgorgement is to make sure that the
wrongdoers do not profit from their wrong doing. Therefore, 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.[3]
Experience
has shown that SEBI’s directions with respect to disgorgement have been
resisted on account of the said directions leading to double jeopardy.[4] The
Constitution of India provides for a fundamental right which frowns upon double
jeopardy as the said fundamental right states in unequivocal terms that no
person shall be prosecuted and punished for the same offence more than once.[5]
The basis for resisting direction(s) to disgorge is that where a direction or
set of directions have already been issued by SEBI under section 11B, if SEBI
still proceeds to issue another direction in the form of disgorgement with
respect to the same contravention of Securities Laws, then SEBI is punishing the
wrongdoer for the same violation again. However, the said plea attempting at
preventing initiation of disgorgement proceedings by SEBI with respect to the
same contravention in respect of which the Board has already issued a direction
or set of directions, is completely misplaced. The proceedings under section
11B are neither criminal proceedings nor the direction of disgorgement is a penal
action. Instead, disgorgement is in fact a continuation of the earlier
proceedings under which a person has been held guilty of violating the Securities
Laws and the said person has benefited illegally and SEBI decides to disgorge
the delinquent of the unlawful gains.[6] Also,
there is no legal bar in initiating action for violating different provisions
of the SEBI Act. The SEBI Act itself permits adjudication proceedings under
Chapter VIA of the SEBI Act, issue of directions under sections 11 and 11B of the SEBI Act and prosecution under section 23 of the SEBI Act
for violating provisions of the SEBI Act or the rules made thereunder.
Therefore, direction to disgorge does not amount to double jeopardy.
has shown that SEBI’s directions with respect to disgorgement have been
resisted on account of the said directions leading to double jeopardy.[4] The
Constitution of India provides for a fundamental right which frowns upon double
jeopardy as the said fundamental right states in unequivocal terms that no
person shall be prosecuted and punished for the same offence more than once.[5]
The basis for resisting direction(s) to disgorge is that where a direction or
set of directions have already been issued by SEBI under section 11B, if SEBI
still proceeds to issue another direction in the form of disgorgement with
respect to the same contravention of Securities Laws, then SEBI is punishing the
wrongdoer for the same violation again. However, the said plea attempting at
preventing initiation of disgorgement proceedings by SEBI with respect to the
same contravention in respect of which the Board has already issued a direction
or set of directions, is completely misplaced. The proceedings under section
11B are neither criminal proceedings nor the direction of disgorgement is a penal
action. Instead, disgorgement is in fact a continuation of the earlier
proceedings under which a person has been held guilty of violating the Securities
Laws and the said person has benefited illegally and SEBI decides to disgorge
the delinquent of the unlawful gains.[6] Also,
there is no legal bar in initiating action for violating different provisions
of the SEBI Act. The SEBI Act itself permits adjudication proceedings under
Chapter VIA of the SEBI Act, issue of directions under sections 11 and 11B of the SEBI Act and prosecution under section 23 of the SEBI Act
for violating provisions of the SEBI Act or the rules made thereunder.
Therefore, direction to disgorge does not amount to double jeopardy.
Directions can be
issued against Professionals not regulated by SEBI Act
issued against Professionals not regulated by SEBI Act
There
is no doubting the proposition that SEBI cannot regulate the profession of Chartered
Accountants/Company Secretaries/Cost & Work Accountants and the like
(collectively called “Professionals”) who are regulated by various acts
of the Parliament specifically dealing with the said Professionals. However, to
put forth that SEBI has absolutely no power to undertake remedial or preventive
measures against the acts or omissions of Professionals, which is detrimental
to the interest of investors will be untenable in law, as it is the statutory
duty of the SEBI to see that the interests of the investors are protected.
Similarly, the mere taking of remedial and preventive measures by SEBI in the
interest of investors and for regulating the securities market will not amount
to regulating the Professionals. If the said Professionals, whether appointed
by shareholders of a company or otherwise do not discharge their duties in the
manner required by law, as a consequence of which they are not able to fulfill
their duty towards the said share holders, it becomes extremely important for SEBI
to step in and take all remedial and protective measures. [7]
is no doubting the proposition that SEBI cannot regulate the profession of Chartered
Accountants/Company Secretaries/Cost & Work Accountants and the like
(collectively called “Professionals”) who are regulated by various acts
of the Parliament specifically dealing with the said Professionals. However, to
put forth that SEBI has absolutely no power to undertake remedial or preventive
measures against the acts or omissions of Professionals, which is detrimental
to the interest of investors will be untenable in law, as it is the statutory
duty of the SEBI to see that the interests of the investors are protected.
Similarly, the mere taking of remedial and preventive measures by SEBI in the
interest of investors and for regulating the securities market will not amount
to regulating the Professionals. If the said Professionals, whether appointed
by shareholders of a company or otherwise do not discharge their duties in the
manner required by law, as a consequence of which they are not able to fulfill
their duty towards the said share holders, it becomes extremely important for SEBI
to step in and take all remedial and protective measures. [7]
As
a matter of common knowledge, an investor invests his money by considering the
financial health of the Company and in order to find out the same, one will
naturally bank upon the accounts and balance sheets of the Company. Nowadays
for financial gains, even small investors are investing money, which might
include even retired persons who end up investing their retiral dues in the
purchase of shares and ultimately if such a person is defrauded, he/she will be
totally ruined and may be put in a situation where his/her life savings are
wiped out. Now, if it is unearthed that a particular Professional was in
connivance and in collusion with the officers/directors of the Company in undertaking
something that has violated the law, there is no reason as to why
to protect the interests of investors and
regulate the securities market, SEBI cannot prevent such a Professional from undertaking
acts that could have otherwise been performed by the said Professional.[8]
a matter of common knowledge, an investor invests his money by considering the
financial health of the Company and in order to find out the same, one will
naturally bank upon the accounts and balance sheets of the Company. Nowadays
for financial gains, even small investors are investing money, which might
include even retired persons who end up investing their retiral dues in the
purchase of shares and ultimately if such a person is defrauded, he/she will be
totally ruined and may be put in a situation where his/her life savings are
wiped out. Now, if it is unearthed that a particular Professional was in
connivance and in collusion with the officers/directors of the Company in undertaking
something that has violated the law, there is no reason as to why
to protect the interests of investors and
regulate the securities market, SEBI cannot prevent such a Professional from undertaking
acts that could have otherwise been performed by the said Professional.[8]
Directions issued run concurrent
with Companies Act
with Companies Act
There
is no denial of the fact that there are several other legislations like the
erstwhile Companies Act, 1956 or the present Companies Act, 2013 (“collectively
called the “Companies Act”) with
certain provisions to protect the interests of investors. Also, in the field of
investor protection, there is an overlap of jurisdiction of authorities under
the Companies Act and the SEBI Act. SEBI’s power to take measures to protect
the interests of investors and the requirement under Companies Act intending to
protect the interest of investors is concurrent. There is no inhibition of any
sort on exercising measures for investor protection by SEBI in view of the
specific mandate given by the SEBI Act. The Supreme Court[9]
while shedding light on role of dual agencies where enforcement power is found
overlapping laid down that the Companies Act does not carve out an exclusive
jurisdiction for itself to the exclusion of other authorities in the field of
investor protection.
is no denial of the fact that there are several other legislations like the
erstwhile Companies Act, 1956 or the present Companies Act, 2013 (“collectively
called the “Companies Act”) with
certain provisions to protect the interests of investors. Also, in the field of
investor protection, there is an overlap of jurisdiction of authorities under
the Companies Act and the SEBI Act. SEBI’s power to take measures to protect
the interests of investors and the requirement under Companies Act intending to
protect the interest of investors is concurrent. There is no inhibition of any
sort on exercising measures for investor protection by SEBI in view of the
specific mandate given by the SEBI Act. The Supreme Court[9]
while shedding light on role of dual agencies where enforcement power is found
overlapping laid down that the Companies Act does not carve out an exclusive
jurisdiction for itself to the exclusion of other authorities in the field of
investor protection.
There
can be no dispute that SEBI is not at all competent to exercise powers under
the Companies Act, as it is not a designated enforcement authority thereunder.
However, SEBI is competent to issue directions for enforcement independent of
the provisions of Companies Act. For instance, if investors have not been
returned there share application money even after the designated stock exchange
has refused the listing permission, SEBI will be absolutely justified in issuing
directions in the nature of a relief measure for the benefit of investors.[10]
Moreover, issuance of such a direction in the instant case can very well be a
speedy and summary measure for the benefit of the investors. The Companies Act
is a general statute relating to companies in general, inter alia investor
protection is also covered therein, whereas the SEBI Act is a special statute
focused mainly for protecting the interests of investors. One cannot and should
not ignore this aspect while examining the ambit of the powers bestowed on SEBI
by the SEBI Act.
can be no dispute that SEBI is not at all competent to exercise powers under
the Companies Act, as it is not a designated enforcement authority thereunder.
However, SEBI is competent to issue directions for enforcement independent of
the provisions of Companies Act. For instance, if investors have not been
returned there share application money even after the designated stock exchange
has refused the listing permission, SEBI will be absolutely justified in issuing
directions in the nature of a relief measure for the benefit of investors.[10]
Moreover, issuance of such a direction in the instant case can very well be a
speedy and summary measure for the benefit of the investors. The Companies Act
is a general statute relating to companies in general, inter alia investor
protection is also covered therein, whereas the SEBI Act is a special statute
focused mainly for protecting the interests of investors. One cannot and should
not ignore this aspect while examining the ambit of the powers bestowed on SEBI
by the SEBI Act.
CONCLUSION
SEBI
has been battling various scourges prevalent in the securities market in order
to avert erosion of investor confidence. The menace of Securities Laws
violations has been attempted to be neutralized inter alia with the aid of directions
which SEBI is empowered to issue under section 11B of the SEBI Act. Therefore,
the heart of the said power is in the right place. However, certain unintended
consequences which have ensued have definitely put the said power in the spot
light. An illustrative and not an exhaustive list of such consequences is absence
of clarity with respect to certain core expressions used in section 11B;
absence of timelines with respect to reviewing the continuation of a certain
direction; expansive effect of certain directions, on occasions even without
the investigation having been completed. These consequences have had a profound
impact on persons associated with the securities market, irrespective of
whether the said persons are actually held to have violated Securities Laws or
not.
has been battling various scourges prevalent in the securities market in order
to avert erosion of investor confidence. The menace of Securities Laws
violations has been attempted to be neutralized inter alia with the aid of directions
which SEBI is empowered to issue under section 11B of the SEBI Act. Therefore,
the heart of the said power is in the right place. However, certain unintended
consequences which have ensued have definitely put the said power in the spot
light. An illustrative and not an exhaustive list of such consequences is absence
of clarity with respect to certain core expressions used in section 11B;
absence of timelines with respect to reviewing the continuation of a certain
direction; expansive effect of certain directions, on occasions even without
the investigation having been completed. These consequences have had a profound
impact on persons associated with the securities market, irrespective of
whether the said persons are actually held to have violated Securities Laws or
not.
Although,
I have defended the constitutionality of section 11B hereinbefore when the same
was being questioned due to the said consequences, however I still remain an
ardent supporter, of ideally speaking, to completely eradicate the said
consequences, practically speaking, to mitigate the said consequences as much
as possible. Be it formulating a new legislation or amending an existing one,
in order to attain the intended objective of the new enactment or of the
amendment to an existing one, it is very thoughtful and fruitful to inter alia
invite all the stakeholders on board and draw from there invaluable experience
and advice, to take into account previous adjudications, if any, with respect
to the said legislation. SEBI had at hand a ripe opportunity to address the
aforementioned concerns through the Securities Laws (Amendment) Act, 2014.
However, with all due respect, the said opportunity has not at all been put to
use. The only amendment introduced with respect to section 11B is insertion of
an explanation to the said section, which provides that SEBI has and has always
had the power to direct disgorging, subject to fulfillment of certain
conditions. Therefore, the wait, to see the heart of the power and the
consequences flowing from use of the said power, in sync, has been prolonged.
I have defended the constitutionality of section 11B hereinbefore when the same
was being questioned due to the said consequences, however I still remain an
ardent supporter, of ideally speaking, to completely eradicate the said
consequences, practically speaking, to mitigate the said consequences as much
as possible. Be it formulating a new legislation or amending an existing one,
in order to attain the intended objective of the new enactment or of the
amendment to an existing one, it is very thoughtful and fruitful to inter alia
invite all the stakeholders on board and draw from there invaluable experience
and advice, to take into account previous adjudications, if any, with respect
to the said legislation. SEBI had at hand a ripe opportunity to address the
aforementioned concerns through the Securities Laws (Amendment) Act, 2014.
However, with all due respect, the said opportunity has not at all been put to
use. The only amendment introduced with respect to section 11B is insertion of
an explanation to the said section, which provides that SEBI has and has always
had the power to direct disgorging, subject to fulfillment of certain
conditions. Therefore, the wait, to see the heart of the power and the
consequences flowing from use of the said power, in sync, has been prolonged.
[Concluded]
– Kanwardeep Singh Kapany
[1] Karvy Stock
Broking Ltd. v. SEBI , [2008] 84 SCL 208 (SAT- MUM).
Broking Ltd. v. SEBI , [2008] 84 SCL 208 (SAT- MUM).
[2] Shailesh Jhaveri v. SEBI, [2013] 117 SCL 210(SAT-MUM).
[3] Dhaval Mehta
v. SEBI, [2010] 2 CLONLINE 42 (SAT-MUM).
v. SEBI, [2010] 2 CLONLINE 42 (SAT-MUM).
[4] Dushyant N. Dalal
v. SEBI, [2011] 105 SCL 139 (SAT – Mum); In Re: IL and FS Ltd.
(ILFS) and Ors., MANU/SB/0027/2011.
v. SEBI, [2011] 105 SCL 139 (SAT – Mum); In Re: IL and FS Ltd.
(ILFS) and Ors., MANU/SB/0027/2011.
[5] The Constitution of
India, 1949, art 20(2).
India, 1949, art 20(2).
[6] Shailesh Jhaveri v. SEBI, [2013] 112 CLA 547 (SAT).
[7] Price Waterhouse
and Co. and Ms. Sharmila Karve, v. SEBI, [2010]
160 Comp Cas 324 (Bom).
and Co. and Ms. Sharmila Karve, v. SEBI, [2010]
160 Comp Cas 324 (Bom).
[8] Price Waterhouse v.
SEBI, [2011] 108 SCL 216 (SAT).
SEBI, [2011] 108 SCL 216 (SAT).
[9] Radheyshyam Khemka
v. State of Bihar, (1993) 77 Comp Cas 356 (SC).
v. State of Bihar, (1993) 77 Comp Cas 356 (SC).
[10] Bank of Baroda
v. SEBI, [2000] 26 SCL 532 (SAT –
MUM).
v. SEBI, [2000] 26 SCL 532 (SAT –
MUM).
