SEBI to Reconsider the Largest Penalty Imposed

On September 22, 2015, an Adjudicating Officer (AO) of SEBI passed an order against PACL Limited and
certain other persons imposing a penalty of Rs. 7,269.5 crores in connection
with a case involving the illegal and fraudulent mobilization of funds from the
public. This is said to be highest
penalty
that SEBI has ever imposed. Such a penalty was imposed under
section 15HA of the Securities and Exchange Board of India Act, 1992, which
provides that any personal engaging in fraudulent and unfair trade practices
relating to securities may be liable to a maximum penalty of Rs. 25 crores or
three times the amount of profits made out of such practices, whichever if
higher. The AO had found that the company had illegally mobilized a sum of Rs.
2,423.2 crores, and that this was a fit case to impose the maximum penalty of
three times that amount. The AO had observed:
Keeping in view the entire
facts and circumstances of the case, I am of the view that there cannot be a
better case than this which deserves imposition of maximum penalty and if it is
done so, than [sic] it will give a strong message to securities market at large
that such type of violations will not be viewed lightly. In the recent past,
the country has suffered a lot in the hands of entities who indulge in such
illegal money mobilization under various schemes, wherein hard earned money of
the common man has been duped. Thus, imposition of deterrent penalty is the
need of the hour. …
PACL and other affected parties preferred an appeal to the
Securities Appellate Tribunal (SAT) on the ground that the AO had imposed a
penalty without computing the profit, if any. This contention was not only
accepted by SAT, but SEBI’s counsel offered that SEBI was willing to reconsider
the matter afresh.  In a brief
order
, SAT held:
Even if the A.O. considers
the appellants to be highly unscrupulous and that the appellants have indulged
in fraudulent and unfair trade practices, it was obligatory on part of A.O. to
determine the quantum of profits made in such practice and thereafter proceed
to impose penalty under Section 15HA of SEBI Act.
This puts the ball back in SEBI’s court. It may have to
discharge a rather unduly high burden if it proposes to impose a penalty of
stratospheric proportions.

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

  • OFFHAND
    As perceived:

    Per AO

    "……the country has suffered a lot in the hands of entities who indulge in such illegal money mobilization under various schemes, wherein hard earned money of the common man has been duped. Thus, imposition of deterrent penalty is the need of the hour. …"

    Per SAT

    "….it was obligatory on part of A.O. to determine the quantum of profits made in such practice and thereafter proceed to impose penalty under Section 15HA of SEBI Act."

    If were to be simply read and understood, the AO has sought to justify imposition of maximum penalty on the ground of 'economic loss' suffered by the 'country' and/or the 'common man'. The SAT , on the contrary, in forming its opinion, has stressed that the determining factor should be "the quantum of profits made in such practice" (by the penalized party (ies)!)

    To say the least, so far as common knowledge goes, there is no standard or norms, mathematically prescribed for determining either the 'loss', or 'profits', that too in real terms and objectively, thereby leaving no scope for any further dispute.

    In the ultimate analysis, would the law /other experts, duly equipped, have any solution to offer, to undo the obvious predicament most likely to be faced in the further follow-up proceedings, is any- (or no-?)body's guess !

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