SEBI’s Discretion (or Lack Thereof) in Imposing Penalty – A Twist in the Tale

[The following guest post is
contributed by
Vaneesa Agrawal, Securities Lawyer and former
Legal Officer, SEBI. She can be reached at [email protected].
A previous post on this Blog relating to
the subject matter can be found here.]
has been much furore in the corporate world due to the Supreme Court’s order in
SEBI v. Roofit Industries Limited, [(2015
(12) SCALE 642, Order dated November 26, 2015, hereinafter “Roofit Judgement”], wherein it had held
that the Securities and Exchange Board of India (“SEBI”) did not have discretion while imposing penalty under certain
sections of the SEBI Act, 1992 (including section 15A, 15HA, etc.) after the
amendment to the SEBI Act in 2002. Due to this judgment, one saw many matters
pending before the Securities Appellate Tribunal (“SAT”) being withdrawn by the appellants in recent months. Other
matters were remanded to SEBI by the SAT for passing a fresh order in light of
the Roofit Judgement.
SEBI had itself filed a review application [Review Petition – Civil 1676 -1691
Of 2016] in this case. While SEBI’s review application is still pending before
the Supreme Court (with the next date of listing being March 30, 2016), another
recent judgment of the Supreme Court Division Bench has dealt with the same
issue, and has referred the matter to larger bench of Supreme Court to
authoritatively decide the issue.
division bench of Supreme Court of India while hearing the matter of Siddharth
Chaturvedi v SEBI
, in Civil Appeal No(s). 14730 / 2015 [order dated
March 14, 2016] has differed with the views in the Roofit Judgement.
The Supreme
Court was hearing appeals against three SAT Orders (here, here and here) wherein appellants (Siddharth Chaturvedi, Ankur Chaturvedi and
Jay Kishore Chaturvedi) are promoters/directors of Brijlaxmi Leasing and
Finance Company Ltd. It was an admitted position before SAT that these appellants
had purchased the shares of the company in question from time to time, but they
failed to make disclosures to the stock exchange as stipulated under Regulation
13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Although the
appellants argued that the violation was technical in nature, and hence warranted
reduction in penalty amount, SAT dismissed these appeals upholding SEBI’s orders.
analyzing the Roofit Judgement, Supreme Court observed the following:
10. Prima facie, we find it a little difficult
to subscribe to both the views contained in paragraph 4 as well as in paragraph
5 of the said judgment. The expression “shall have due regard to” is a very
known legislative device used from the time of Julius v Bishop of Oxford (1880)
LR 5 AC 214 (HL), and followed in many judgments both English as well as of our
Courts as words vesting a discretion in an Adjudicating Officer. The question
which arises in the present appeals is whether
the expression “namely” fixes the discretion which can be exercised only in the
circumstances mentioned in the three clauses set out in Section 15J, or whether
it would also take into account other relevant circumstances, having particular
regard to the fact that it is a penalty provision that the Court is construing.

As this needs to be authoritatively decided for the future, it would be better
if we refer it to a larger Bench for such authoritative pronouncement.
We also find it a little difficult to accept what is stated in paragraph 5 of
the judgment. It is very difficult, keeping in view, particularly, two
important legal facets – one the doctrine of harmonious construction of a
statute; and two, the fact that we are construing a penalty provision of a
statute which is to be strictly construed, Section 15A, post amendment in 2002,
is suddenly given a pride of place, and Section 15J is made to yield entirely
to it. The familiar expression
“notwithstanding anything contained” does not appear in the amended Section
This being the case, it is a little difficult to appreciate as to
how one can construe Section 15A, as amended, in isolation, without regard to
Section 15J. In fact, the facts of the present case would go to show that where
there is allegedly only a technical default, and the three parameters of
Section 15J would allegedly be satisfied by the appellants, namely, that no
disproportionate or unfair advantage has been made as a result of the default;
no loss has been caused to an investor or group of investors as a result of the
default; and there is in fact, no repetitive nature of default, no penalty at
all ought to be imposed. What has been done by the appellants here is to fail
to adhere to Regulation 13, as alleged in the show cause notice, which failure
has occurred on three days and consequently, has allegedly not been repeated by
the appellants anytime thereafter. If we were to read Section 15A, as amended
in 2002, in the manner suggested by the Division Bench of this Court, it may
lead to anomalous results in that the effect of continuing failure to adhere to
statutory regulations alleged to have been continued well beyond the period of
three days, and which continues till this day, has Rs.1 lakh per day as the
minimum mandatory penalty under the provisions, which would culminate in the
appellants herein having to pay Rs.1 crore in each of the three appeals. We do
not think that this could have been the intention of the Parliament in enacting
Section 15A, as amended in 2002. We
also feel that on the assumption that paragraph 5 of the judgment is correct,
it would be very difficult for Section 15A to be construed as a reasonable
provision, as it would then arbitrarily and disproportionately invade the
appellants’ fundamental rights.
This being the case, on both the
conclusions reached by this Court in paragraphs 4 and 5, as stated by us
hereinabove, these matters deserve consideration at the hands of a larger
Bench. The Registry is, accordingly, directed to place the papers of these
appeals before Hon’ble the Chief Justice of India for placing these matters
before a larger Bench.”
is currently no stay on the operation of the Roofit Judgement. However, since
the issue has been referred to a larger bench, it implies that the issue is not
fully settled and the Roofit Judgement may no longer act as a precedent.
Further, it a well-settled legal position that if there is a conflicting
judgement of another coordinate bench (both being Division benches in this
case), the decision which comes later in time should be followed.

– Vaneesa Agrawal

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment


    The subject matter is in regard to the power of ‘discretion’ vested in SEBI to levy ‘penalty’; and on the observations of the SC in a recently reported case . The point (s) of issue is reported to have now been referred to a larger bench.
    In the context, one may prudently wish to draw, for inspirational guidance, pointed attention to a new development; which, of course, pertains to the income-tax regime . That is, the newly introduced penalty provision in the recent 2016 fiscal Budget. The details of the new provision brought in , in the income-tax regime, are noted to be covered in the write-up @Budget 2016: Rationalisation of Income Tax penalty provisions. As regards the power of discretion vested in the income-tax authority in the referred provision by way of ‘rationalisation’ of the extant enactment, the nuances thereof are noted to have been highlighted by an eminent tax expert; for more, may be listened to @…/eminent-jurist-s-e-dastur-expl…/

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