SEBI’s order levying record penalty – some concerns

has recently levied
the highest penalty in its history of Rs. 7269 crores on PACL. It has made
findings of serious violations of law and hence the maximum of penalty may be
justified. However, there are some issues that are of concern.

The facts
of the case may be quickly summarised here. PACL, as per SEBI’s order, is one
of the several so-called Collective Investment Schemes that have illegally
collected monies on the pretext that it was running a land sale-cum-development
scheme. The underlying facts, the Order states, are wholly inconsistent with
such claim.

had already directed
earlier the company to refund the amounts collected, which has been upheld
by SAT. The present order levies a penalty.

penalty levied is as per the newly inserted clause 4(2)(t) in the SEBI FUTP
Regulations with effect from 6th September 2013. Thus, SEBI levied
penalty for the period from that date till 15th June 2014 (since SEBI
did not have exact figures for the broken period, it actually considered period
from 1st October 2013 onwards).

are some concerns about the penalty levied.

the penalty levied is three times the amounts collected by PACL.
Section 15HA permits penalty of three times the gains made, which would
be the gross collections less the expenses including the amount spent on buying
land, commission, other expenses, etc. Even if the collection is illegal, the
law permits levy of penalty on gains, and not gross receipts.

the penalty levied is in addition to orders made
for refund of collections made. In other words, PACL and named directors are
not only required to refund the whole amount collected, but also pay three
times penalty of the gross amount collected. Thus, if the company’s total gross
collection is Rs. 100, they will have to pay Rs. 400.

SEBI’s earlier order directing refund of amount collected states that the
company had made gross collections of Rs. 49,100 crores over 15 years, while
the assets available appear to be a fraction of such amount. This also seems to
be without considering the returns promised. Hence, there already appears to be
a huge shortfall of refunding even the basic amount collected. To levy a
penalty of three times the gross amount collected is unrealistic and, in
practical sense, seems meaningless.

it is also worth considering the interpretation that SEBI has adopted of the
clause relating to penalty. The relevant clause 4(2)(t), as introduced with
effect from 6th September 2013, reads as under:-

(2) Dealing in securities shall be deemed
to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of
the following, namely:—
(t) illegal mobilization of funds by sponsoring or causing to be
sponsored or carrying on or causing to be carried on any collective investment
scheme by any person.”

SEBI’s view, illegal mobilization of funds will be deemed to be a fraudulent or
unfair trade practice by itself. There is no need to prove fraud or mens rea. SEBI
states, “…the only thing that remains to be decided in this issue is whether
the funds were ‘illegally mobilized’…The activities, mentioned under Regulation
4(2), if committed by any person, shall tantamount to fraudulent or unfair
trade practices…the argument that to invoke Regulation 4(2), fraud needs to be
separately proved, does not hold any strength, whatsoever.”. Penalty, SEBI then
holds, follows automatically, by applying the decision of the Supreme Court in
Shriram Mutual Fund’s case.

while the penalty may sound like one of the strictest action SEBI may have
taken, it seems arbitrary and on paper only. Far from the penalty being
recovered, or possibly even the return promised, it appears even the basic
amount collected may not be wholly recovered/refunded. A penalty has to serve
the purpose of acting as a punishment as well as a deterrent for others. A
penalty levied in this manner may thus merely becomes a display of strict
action. Even if it may deter future illegal/fraudulent CISs or others, it would
not be the type of enforcement action that would result in also relief for

About the author

CA Jayant Thakur

1 comment

  • IMPROMPTU (OFFHAND – to share own thoughts):
    "Even if it may deter future illegal/fraudulent CISs or others, it would not be the type of enforcement action that would result in also relief for investors."
    The subject matter of the faulted conduct/misdemeanour, or abuse of ethics, is, and relates to, if were to be strictly viewed, a purely 'commercial' transaction. That being so, by any standard, and especially going by ordinary commercial considerations and /or common sense reasoning, the norms / prescription itself, and the quantum of penalty levied on a case to case basis, may not satisfy the fundamental principles of natural justice to appropriately apply. The aspects of 'enforcement action' and 'relief for customers' do certainly require to be gone into in depth, for testing the efficacy or reasonableness of the SEBI Rules governing this or such other like matters, in general, in the larger 'public interest'. And, for this purpose, the adverse consequential impact, of such authoritative action (s), on the financial rights and interests of investors and stakeholders in the penalized corporate ought not to be obsessively over sighted or ignored. The point of poser in mind , suggested for a serious deliberation by one and all concerned, is this, – is it not the men in actual governance of the faulted corporate affairs, and the personnel, etc., who are responsible and have to bear the brunt of the blame; not its investors and other stakeholders having no involvement in the normal course?
    OPEN to EDIT

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