Huge penalties being levied by SEBI following recent Supreme Court decision

 

SEBI
has recently passed several orders levying penalty of crores of rupees for
matters like non-filing of documents/information. What is interesting is that
levy of such huge and flat penalties is said to be mandatory and inevitable
following the mandate of recent decision of the Supreme Court in case of SEBI v. Roofit Industries Ltd (dated 26th November 2015). Such levy is unavoidable,
it is effectively being held, even where there are no aggravating factors.
Summary of decision of Supreme Court and
its immediate impact
The
Supreme Court was dealing with the provisions of Section 15A(a) which provides
for “a
penalty of one lakh rupees for each day during which such failure continues or
one crore rupees, whichever is less”. The penalty of Rs. 1 lakh per day of such
failure, the Court held, is absolute and non-discretionary. Thus, if there was
a delay/failure of, say, 75 days, the penalty would be Rs. 75 lakhs. However,
if the delay is of more than 100 days, then the penalty would be Rs. 1 crore.
While the
decision is on penalty under Section 15A(a), in view of almost identical
wording in other penalty provisions (except 15F(a) and 15HB), it will apply to
those provisions too. There are several similar provisions in the Securities
Contracts (Regulation) Act, 1956 and the Depositories Act, 1996 to which the
ratio of this decision will directly apply. To take an example of violation under
another such provision, in case of insider trading, the penalty under Section
15G of the SEBI Act would be a flat Rs. 25 crores. If three times the profits
from insider trading exceeds Rs. 25 crores, the penalty will be such higher
figure.
Note,
however, that these sections in all the three statutes have been amended with
effect from 8th September 2014. The amended provisions now provide
for a relatively far smaller minimum penalty. However, for all such violations
during the period 29th October 2002 to 7th September
2014, such flat and huge penalty would be imposable. Considering that such
violations of non-filing of documents/information (e.g., non-filing of
information relating to change in holdings under the Takeover/Insider Trading
Regulations) have been routinely found in numerous cases, all such cases will
face such large penalties.
Indeed,
within a very short time after this decision, SEBI levied penalties as
follows:-
Detailed discussion of decision
The
essential facts before the Supreme Court in this matter were as follows (there
were several cases and the facts discussed here relate to one of them – Alkan
Projects). SEBI had levied a penalty of Rs. 1 crore on one of such parties for
non-submission of information sought by it. The information was required to
investigate certain alleged manipulation, etc. in the shares of Roofit
Industries Ltd
. Alkan appealed to the Securities Appellate Tribunal
(“SAT”). SAT noted that while the violation was clearly established, Alkan was
in a bad financial position. Such large penalty was impossible to be recovered
and hence the order of penalty had effectively no meaning. In the worst
scenario, SEBI could prosecute Alkan for non-payment but that, as SAT noted,
would take a long time, considering the already existing backlog of similar
cases. SAT also noted that the provisions of Section 15J provided for certain
factors to be considered for levy of penalty. While “impecuniosity” of the
party was not specifically listed as a factor, SAT nevertheless held that it
should also be considered while deciding the amount of penalty. SAT accordingly
reduced the penalty from Rs. 1 crore to Rs. 15,000.
SEBI
appealed to the Supreme Court. The Supreme Court set aside the order of SAT. It
held that Section 15J listed three exhaustive factors for
consideration of penalty. No other factor, including “impecuniosity”, can be
considered, the Court held. The wording of Section 15(A)(a) was also definite
and prescribed penalty of Rs. 1 lakh per day (albeit with an upper limit of Rs.
1 crore) which the Court held to be absolute. According to the Hon’ble Court,
the “clear intention” for such high penalty “…is to impose harsher penalties for
certain offences, and we find no reason to water them down”.
The
Supreme Court also held that the amended penalty provision left no discretion
with the AO and thereby, even “the scope of Section 15J was drastically
reduced” for this purpose. The Supreme Court also dealt with Section 15I and
whether it allows for discretion to the AO in such matters. According to the
Hon’ble Court, the amendments taking away such discretion “ought to have been
reflected in the language of Section 15I, but was clearly overlooked”. However,
it also noted that, post amendment with effect from 8th August 2014,
the discretion was brought back in the law.
Closely
following this decision, SEBI has levied huge penalties in several cases. It is
apparent, from the clear wording of such orders of penalty, that it will follow
the same course in all other cases before it of violations during this long
period of approximately 12 years while this provision was in force. Mitigating
factors would not go to reduce the penalty. Further, aggravating factors would
not go to increase the penalty. It appears that Sections 15I and 15J are thus
by and large rendered otiose, of course for these limited purposes. (Note:- Ironically,
the Supreme Court, in view of the peculiar facts of the case, and also on
account of its ruling on whether the failure was a continuing one, held that
the penalty would be a lower amount, since the failure was committed before
29th
October 2002).
Critique
With due
respect, the decision of the Supreme Court needs reconsideration.
Section
15I does specifically provide for discretion to the Adjudicating Officer. It
provides that if the Adjudicating Officer “
..is satisfied that the
person has failed to comply with the provisions of any of the sections
specified in sub-section (1), he may
impose such penalty as he thinks fit
in accordance with the provisions
of any of those sections.”. The Hon’ble Court has, however, taken a view that
Section 15I should also have been amended to remove the discretion for cases
where such penalty is leviable but this was “clearly overlooked” by the law
makers.
The Court
has held that the factors listed in Section 15J are exhaustive, in view of the
word – “namely”. Thus, it has held that other mitigating factors cannot be
considered. It is submitted that a better interpretation of the section is that
it obligates the AO to consider these factors and thus is a
qualitative provision. If these factors are absent penalty may be reduced/not
levied. If one or more of such factors are present, then depending on the
intensity of such factors, higher penalty may be levied. Further, it is also
submitted, considering the discretion inbuilt in Section 15I, there is no bar
in considering other mitigating or aggravating factors present in circumstances
of each case.
Indeed,
considering the contradictory and even ambiguous provisions of Sections 15I and
15J, the Court could have, it is submitted with due respect, taken a view that
discretion still exists for the AO.
The
Hon’ble Supreme Court should have also considered that these penalty provisions
have actually been applied fairly consistently in the past by SEBI (and upheld
by SAT) by applying penalties in a discretionary manner.
The
Hon’ble Court should have also considered the absurd consequences of such an
interpretation. To take an example, a violation of insider trading resulting in
a profit of Rs. 1000 would nonetheless result in a penalty of Rs. 25 crores.
The view
of SAT that impecuniosity should also be considered as a factor is also not
devoid of merit. A penalty of, say, Rs. 1 crore on a person known to be
insolvent is, as SAT rightly pointed out, only on paper. I had pointed out
earlier here that the huge/record penalty of Rs. 7269 crores levied by SEBI on
PACL suffers from this same anomaly and is thus equally
meaningless/on paper only.
It is also
seen that
before 29th October 2002 and on and after 8th
September 2014, no such large and mandatory penalty was imposable. Even after
2014, though a minimum penalty is imposable, such minimum amount is relatively
far small. It is inconceivable, in my view, that law makers could have
considered levy of such huge and flat penalty, particularly considering that
the matters with which the provisions relate to are not serious. Where they are
serious, fairly large amount of penalties has indeed been provided for. If at
all, it is respectfully submitted, the Hon’ble Court should have read down
these provisions, instead of effectively reading down Section 15I and 15J.
I may add
that the Supreme Court in Swedish Match’s case (
[2004] 54 SCL 549
(SC)
) did consider, in passing though, with the issue whether a
penalty of Rs. 25 crores for non-compliance of making an offer is inevitable.
However, the views there were not as emphatic and direct as in Roofit’s case.
Even
otherwise, SEBI has also taken, in my view, a flawed stand with regard to another
Supreme Court’s decision (Shiram Mutual Fund’s case).
As was posted by me earlier, SEBI considers (wrongly, in my opinion) this decision as holding
that penalty should mandatorily follow a violation and there is no discretion
to SEBI in the matter. While SEBI has not levied sky high penalties, as it has
done following Roofit’s case, one hopes that this stand too is modified and
made consistent with what the Hon’ble Court really mandated in that case.

Be at as
it may be, SEBI seems to be on a roll and is almost gleefully levying huge
penalties. To me, it seems inevitable that the matter will go back to the
Supreme Court. It is hoped that the Hon’ble Court reconsiders its view and
holds that discretion still remains in matter of levy of penalty.

About the author

CA Jayant Thakur

3 comments

  • My reading of the judgement would be that the Supreme Court's interpretation of the SEBI (Amendment) Act, 2002 is obiter dicta and not the ratio decidendi. The Supreme Court need not have gone into the status of the law post the 2002 Amendment to reach the conclusion that it did on Section 15A as it existed prior to the 2002 Amendment. The facts clearly specify that the offense took place prior to the 2002 Amendment and the Supreme Court was right in applying Section 15A as it then stood to the facts of the case. Therefore, in my opinion, since the case does not turn on the Supreme Court's observations on the status of Section 15A post the 2002 Amendment Act, it has to be considered obiter dicta and not the ratio decidendi of the case.

    Shashank Prabhakar
    Senior Associate, Finsec Law Advisors

  • My reading of the judgement is that the pronouncement of the Supreme Court on the status of Section 15A post the SEBI Amendment) Act, 2002 was merely obiter dicta and not the ratio decidendi of the case. The facts clearly show that the offense took place prior to the 2002 Amendment Act and the applicable law was Section 15A as it then stood. The Supreme Court was correct in applying the law prior to the 2002 Amendment Act to the facts of the case to limit the penalty to Rs. 1.5 lakh. It is also clear that the case did not turn on the observations made by the supreme court on Section 15A post the 2002 Amendment Act and as such the judgement still stands if one were to totally disregard those paragraphs.

    Shashank Prabhakar
    Senior Associate, Finsec Law Advisors

  • @Shashank. Thanks. That would be an interesting way to look at it.

    The problem is that the appeal to the Supreme Court appears to be on issue of interpretation of Section 15J and whether factors such as impecuniousity can be a factor. Which Hon'ble Supreme Court did specifically decide on. ( As Supreme Court pointed out the issue before it – "The Appellant has now filed the present Appeal, contending that the SAT erred in reducing the penalty imposed by the Adjudicating Officer on wholly extraneous grounds including the inability of the Respondent to pay the penalty, a contingency which is not mentioned or featured in Section 15J of the SEBI Act.").

    The Court held that parameter laid down in 15J are exhaustive. It also held that in such circumstances there is almost nil/narrow discretion under 15I.

    The issue whether the default arose before the amendment in 2002 wasn't apparently before SEBI or even SAT ("While this question does not appear to have been raised before the SAT, it is a question of law and can therefore be raised at any point."). But that issue was also taken up, and Court held since default wasn't a continuing one, the default was completed before such amendment. Thus, the law pre-2002 amendment law was applied.

    Anyway, considering that SEBI has already taken a clear stand and has levied large penalties in several cases, it seems that the matter may go back to the Supreme Court.

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