SEBI
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.
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.
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.
The
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).
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).
There
are some concerns about the penalty levied.
are some concerns about the penalty levied.
Firstly,
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 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.
Secondly,
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.
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.
Thirdly,
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.
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.
Fourthly,
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:-
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:—
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.”
sponsored or carrying on or causing to be carried on any collective investment
scheme by any person.”
In
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.
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.
Thus,
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
investors.
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
investors.