Disgorgement Orders under Indian Securities Law

[The following guest post is contributed by Shubham Janghu, a third year student at Jindal Global Law School
with inputs and minor edits by Aditya Swarup, who is an Assistant Professor at
Jindal Global Law School.]
remedies, though rarely adjudicated in India, are an important aspect of
commercial law. The powers of courts to award such remedies arise from statute,
for instance, the Indian Contract Act, 1872 (“Contract Act”) and common law and
equity. Another instance of a statute providing for a gain-based remedy is the
amended explanation to section 11B of the Securities and Exchange Board of
India Act, 1992 (“SEBI Act”) that grants to SEBI the power to direct any person
to disgorge an amount equivalent to the disproportionate gain or advantage made
or loss averted without prejudice to any other enforcement action”. Two cases,
viz. Re:
Beejay Investment & Financial Consultants Private Limited
and Re:
Ramalinga Raju & Ors
. have thrown light on the application of such a remedy.
In Beejay Investment, SEBI had passed an
earlier order prohibiting the parties from “buying, selling or dealing in the
securities market, directly or indirectly, till further orders.” While such
directions were in force, the parties allegedly dealt in securities indirectly
and earned huge profits and SEBI ordered disgorgement of these profits under section
11B of the SEBI Act. In Ramalinga Raju’s case (arising out of the Satyam
scandal), Ramalinga Raju and others falsified financial reports, duped
investors and engaged in insider trading. They were held to have
violated various
provisions of the SEBI Act and SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to the Securities Market) Regulations, 2003 and hence,
instructed to disgorge the entire amount which they received from the sale of
shares (Rs. 1,848.93 crore).
aim of this post is to provide an introduction to gain-based remedies and
analyse the application of section 11B of the SEBI Act. It is divided into three
parts. The first part discusses gain-based remedies in general. The second part
talks about the disgorgement remedy with reference to English law. The third
part examines the origin of disgorgement in Indian securities law and analyses
the current understanding of Indian Courts.
Gain-based Remedies in General
remedies in commercial law aim to compensate the plaintiff for the loss
occurred, i.e., award a sum of money
which, so far as money can be so, is equivalent to the plaintiff’s loss.
However, there also exists a niche area of gain-based remedies, i.e. remedies
that focus on the gain made by the defendant rather than the loss caused to the
plaintiff. Such gain-based remedies are classified into two types: (1)
restitution (including for unjust enrichment), and (2) disgorgement.
The basic distinction between the two is that the former operates to reverse a
wrongful/unjust transfer of value (restitutionary damages) gained at the
plaintiff’s expense and the latter operates to disgorge the profits which have
accrued to a defendant from a wrong (disgorgement damages).[1]
damages for unjust enrichment are embodied in sections 64 to 72 of the Contract
Section 64 states that in consequence of rescission of a voidable contract, the
rescinding party has to ‘
restore’ the benefit it has received under the contract. The word ‘restore’
implies that parties are to be restored
to status quo ante.[3]
Section 65 requires the parties to restore any ‘advantage’ received by a
person under a void contract. ‘Advantage’ refers to the relative benefit and is narrower than ‘benefit’.[4]
In accordance with section 68, where a person incompetent to contract is
supplied with necessaries, then he is liable to ‘
reimburse’ the supplier.
Section 70 states that where a person has done any lawful non-gratuitous act
for another person, then the former is entitled to ‘
compensation’. The liability under this section would be in proportion to
the benefit enjoyed by other party and is not the same as contractual rights.[5]
As can be observed above, different words have been used in different
sections of the Contract Act to provide a gain-based remedy. However, not much
examination by the Courts or research has been done to elaborate on the
meanings and ramifications of each of these words in the respective sections.
remedies on the other hand find their roots in common law and equity. In the
case of such a remedy, the plaintiff seeks to claim the gain made by the
defendant from the wrong committed by it. The measure of the gain ignores
whether or not any transfer of value has occurred from the plaintiff and is measured
by the actual profit accruing to the defendant from the wrong.[6]
Law of Disgorgement
Edelman (writing academically) in his book Gain Based Damages propounds
that disgorgement damages are a measure of deterrence and concerned with
stripping of the profits earned by the defendant who has committed a wrong to
the plaintiff. The distinct feature of disgorgements is that it focusses on
actual profit earned from the wrongdoing rather than examining whether the gain
was transferred from plaintiff’s assets.[7]
is quite often confused with punitive damages. There are two points of
difference between disgorgement damages and punitive damages. Firstly, the former requires wrongful
profit to be proved and the latter does not.
, while, punitive damages are granted where the defendant has
engaged in “malicious and high-handed conduct”, disgorgement damages do not
require such high standards.
like in the law of contracts, it is a central idea to the law of disgorgement
that there be a causal link between the wrong committed and the profit earned.[8]
Causation Link
Courts have developed and applied various tests to determine causation. Under
the ‘but for’ test, the court considers ‘if the defendant would have made that
gain irrespective of the wrong’.[9] In cases where only
a part of the gain is attributed to the wrong, Justice Edelman suggests that it
is important for the courts to identify such part. Where a part of the activity
is non-infringing, he says, it is best to create a divide between infringing
and non-infringing parts of the profit. To explain the concept, he cites Potton
v. Yorkclose Ltd,[10] where the
defendant designed several houses by infringing the plaintiff’s copyright.
Millet J. separated the profits which were not a result of the wrong by
independently accounting for profits earned from landscaping, appreciation of the
value of the houses between finishing of the building project and sale,
advertising, marketing etc.[11] Similarly, in
other cases on disgorgement the courts have opined that profits arising from
“skill, efforts, property and resources of the [wrongdoer], the capital he has
introduced and the risks he has taken so long as they are not risks to which
the principal’s property has been exposed” must be separated.[12] Where the
defendant has committed a deliberate wrongdoing, the courts have impliedly
rejected such an “allowance” on the grounds of punitive damages.[13]
case of breach of fiduciary duty, there are two approaches to determine
causation. In the first approach, causation is satisfied ‘where the profits
flowed from the breach irrespective of whether some of the profits might have
been gained if there had been no breach’.[14] The second
approach puts the burden on the defendant to prove that a part of the profit
would have arisen even if there was no breach.[15]
Application of Disgorgement
Damages in India
addition to the power to grant disgorgement under common law and equity, SEBI
has been directing disgorgement under the powers provided to it. Earlier, in
the case
Rakesh Agrawal v. Securities Exchange Board of
the Securities Appellant Tribunal (“SAT”) held that SEBI did not have
any power to order disgorgement. It held that pecuniary burden such as disgorgement
must be expressly provided in the legislation. Since at that time section 11B
of the SEBI Act did not provide for disgorgement, SEBI could not order the same.
It ruled that quasi-judicial bodies, such as SEBI, unlike ordinary civil
courts, do not have equitable powers and hence they cannot order disgorgement
under their ‘inherent powers’.
attempt to empower SEBI to order disgorgement was made in the Roopalben Panchal Scam Case.[17] In that case, SAT
upheld SEBI’s disgorgement order. It held that SEBI has wide powers under sections
11 and 11B of the SEBI Act, including the power and authority to order
disgorgement. It added that the disgorgement remedy is equitable and not penal.[18] It aims at
stripping the defendant of ill-gotten gains and restoring status quo ante. Hence, an order of disgorgement does “not
prejudice the right of the regulator to take such further administrative, civil
and criminal action as the facts of the case may warrant”. This ruling was
upheld in Karvy Stock Broking Ltd.
v. SEBI.[19] In that case, SAT further added that
this power can only be exercised only against those violators who have made a
profit out of their illegal acts.[20]
The amount cannot exceed the total profits earned out of the illegal acts. The
burden of proof is on SEBI to prove the causation link between illegal act and
profits earned therefrom.
2009, SEBI, in order to avoid inconsistency in its decisions, proposed an
amendment to provide an express power to itself to direct any person to
disgorge amount equivalent to disproportionate gain or advantage made or loss
averted without prejudice to any other enforcement action.[21] The proposed
amendment was incorporated by adding an explanation to section 11B of the SEBI
Act through the Securities Laws (Amendment) Act, 2014.[22]
Karvy and Roopalben seem to be in consonance with
the principle of disgorgement discussed above. However, recently, in the case
of Beejay Investment & Financial Consultants Private Limited[23] and Satyam
Scam Scandal
SEBI and SAT have wrongly applied the concept of disgorgement.
In the former case, SEBI ordered disgorgement of
profits to tune of Rs. 27.44 crores made from transactions made by persons who
were barred from participating in securities market. The concerned persons were
barred by SEBI for alleged violations of regulations 3, 4(1), 4(2)(a) and (g)
of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Market) Regulations. It is respectfully submitted that SEBI has
misunderstood the traditional concept of disgorgement damages. As discussed
above, the disgorgement damages arise from a “wrong”. However, in the present
case, the transactions entered into (although in violation of the order of
prohibition) were carried out in normal ordinary course of business. Hence, the
“profits” do not arise from the violations of the aforesaid regulations but
violation of a prohibitory order. The power to order such disgorgement under section
11B is suspect.
In fact, it is submitted that rather than ordering
disgorgement under section 11B, the SEBI/SAT could have considered ordering the
same amount to be disgorged under its equitable powers for violation of the
injunction/prohibitory order. In law, injunctions act in personam and if a person violates an injunction order, then he
or she is liable for contempt. However, the equity courts, in addition to the
power to punish for contempt, also have the power to order disgorgement of any
gains made in violation of the injunction order.[25]
The same is the position in India.[26]
In Cheruvannoor Nallalam Grama Panchayath v. Kathalatt Ravi,[27]
the Court stated:
“The court is entitled under its inherent power
to direct a party who has gained an undue advantage by flouting the order of
the court, to restore status quo ante or to disgorge the ill-gotten advantage
obtained through breach of the court order (vide paragraph 7 of the decision of
the Full Bench in Kanakku Kumara Pillai Thanu Pillai v. Mathevan 1962 KLT
The same principle could have been applied in the
present case.
In Satyam
case, Ramalinga Raju and other were held liable for falsifying
financial reports, duping investors, and insider trading. The judge held the
accused in breach of their fiduciary duty owed by them to act in the interest
of the shareholders. However, issues arise with respect to the amount ordered
to be disgorged , the causal link between the wrong and the gain (some of the
payments were not wholly attributable to the wrong itself) and the manner in
which the amount was calculated.
To conclude, SEBI and SAT have deviated from the
traditional concept of disgorgement damages. The concept of disgorgement, its
application, and the apparent relaxation of rule of causation by SEBI and SAT needs
a deeper analysis.

[1] James Edelman, ‘Gain Based Damages:
Contract, Tort, Equity and Intellectual Property’, (Oxford: Hart, 2002), p.

[2] Nallaya Goundar v. Ramaswami Gounder, (1958) 2 Mad LJ 86; Muppudathi Pillai v. Krishnaswami
, AIR 1960 Mad 1.

[3] Muralidhar Chatterjee v. International Film Co. Ltd., (1943) 70
IA 35 at 49. See also Bechu v. Bhabuti Prasad, (1930) 52 ER 831.

[4] Oxford
Advanced Learner’s Dictionary of Current English, pp. 100, 118.

[5] Food Corpn of India v. Allepy Municipality, AIR 1996 Ker 241 at

[6] James Edelman,  at p. 72.

[7] Ibid.

The Law of Restitution’ (Oxford University Press, 2011), p. 625; James
Edelman, ‘Gain Based Damages: Contract, Tort, Equity and Intellectual Property’
(Oxford: Hart, 2002), p. 103.

[9] Andrew
at p. 625.

[10] [1990] FSR 11.

[11] Id at p. 16, 18.

[12] James Edelman, at p. 105, quoting Warman International Ltd v.
Dwyer (1995) 182 CLR 544 (HCA) 561.

[13] James Edelman, at p. 105, citing D Friedmann “Restitution for
Wrongs: The Measure of Recovery” [2001] Texas Law Rev 1879, 1889 and Sheldon
v. Metro-Goldwyn Pictures Corp 309 US 390 (1940 SCUS) 397).

[14] Andrew
at p. 684.

[15] Andrew
at p. 684.

[16] (2004) 49 SCL 351. 

[17] In The Matter Of Investigation Into Initial
Public Offerings
WTM/GA/101/ISD/11/06 dated November 21, 2006.

[18] See also Shadilal Chopra v. SEBI, Appeal No. 201 of 2009 dated June 10, 2009.

[19] (2008) 84
SCL 208.

[20] See also National Securities Depositories Limited v. SEBI, Appeal No. 147 of 2006 dated November 22, 2007.

[21] Paragraph
2.3.14 of agenda note for Item No. 13, in Respect of 124th Meeting
of SEBI Board dated 18 June 2009


[24] In
the matter of Satyam Computer Services Ltd.
, WTM/RKA/SRO/64 – 68 /2014.

[25] British Motor Trade Association v.
Gilbert, [1951] 2 All ER 641 ; Attorney General v. Guardian Newspapers (No.2)
(“Spycatcher”), [1990] 1 AC 149 (HL).

[26] See Cheruvannoor
Nallalam Grama Panchayath
v. Kathalatt Ravi, AIR 2006 Ker 132; Paruthikkattuparambil Ayisha v. Permbra Abdul Nassar and Ors., ILR2015
(3) Kerala 934; Kanakku Kumara Pillai
Thanu Pillai
v. Mathevan Mathevan of
Aravamkadu Karakkattu Madathu Veedu and Anr.
,  AIR1963Ker179; State of Bihar v. Usha Devi, AIR 1956 Pat 455.

[27] Cheruvannoor
Nallalam Grama Panchayath v. Kathalatt Ravi
, AIR 2006 Ker 132.

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.


  • "……To conclude, SEBI and SAT have deviated from the traditional concept of disgorgement damages. The concept of disgorgement, its application, and the apparent relaxation of rule of causation by SEBI and SAT needs a deeper analysis."

    A good attempt made to analyze, prima facie to better serve an academic purpose.

    In one 's perspective, suggested deeper analysis could be purposeful, having in focus the contents of the earlier Post- http://indiacorplaw.blogspot.in/2016/11/sebi-to-reconsider-largest-penalty.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+IndianCorporateLaw+%28Indian+Corporate+Law%29; and the comment thereon.

    More so, it would, ideally speaking, be so purposeful provided,- as far as feasible, instead of being bogged down by what views courts have handed down in the past, on a case to case basis, some old hence outdated – the common law on equity and principles of natural justice are principally borne in mind as the essential guiding or influencing factors.

  • I really don't get how SEBI can exercise 'inherent power' in response to violation of its prohibitory orders, the concept of inherent power is alien to tribunals and cannot be exercised by tribunals unless specifically exercised mandated in the statute creating the tribunal

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