Finance Act Amendments to the SEBI Act and the SCRA: Parliament Settles the Roofit Question

[Guest post by Shashank
Prabhakar
, who is a lawyer with Finsec
Law Advisors]
The Finance Bill,
2017, which has been passed by both the houses of Parliament and which was
assented to by the President of India on 3 April 2017, has amended certain
provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and the Securities Contracts
(Regulation) Act, 1956 (“SCRA”). The
most important among them are the amendments carried out to sections 15J and 23J
of the SEBI Act and the SCRA respectively. The amendments have now put paid to
the conundrum posed by the Supreme Court decision in SEBI
v. Roofit Industries
(“Roofit”).
Background
In may be recalled
that Roofit involved certain
disclosure violations under section 15A(a) of the SEBI Act and the maximum
penalty that SEBI could impose for offences under the said provision. Section
15A(a) of the SEBI Act, as amended by the parliament in October 2002, provided
that if any person who is required under the SEBI Act to furnish any document,
return or report to SEBI failed to furnish the same, he shall be liable to pay
a penalty of “one lakh rupees for each
day during which such failure continues or one crore rupees, whichever is less.”

Similar amendments were also carried out to sections 15A(b) and (c), 15B, 15C,
15D, 15E, 15F(b) and (c), 15G, 15H and 15HA.
The Roofit case raised two important
questions of law, which are: (a) whether the adjudicating officer (“AO”) is free to consider factors other
than the ones laid down under section 15J of the SEBI Act to determine the
quantum of penalty under section 15A(a); and (b) whether the language of section
15A(a) provided any discretion to the AO in determining the quantum of penalty.
The Supreme Court
answered the first question in the negative and held that only those factors
which were mentioned under section 15J could be considered by the AO while
determining penalty and that no extraneous factors could influence the decision
on the quantum of penalty that may be levied. As for the second question, the
Supreme Court held that the 2002 amendment took away the discretion of the AO
to determine the quantum of penalty payable under section 15A(a). The court
held that the language of section 15A(a) did not provide the AO any scope to consider
mitigating factors under section 15J. The court read down the scope of section 15J
and held that the AO could only exercise discretion under section 15J while
deciding the quantum of penalties under sections 15F(a) and 15HB. This led to
an absurd situation where SEBI imposed enormous penalties for simple disclosure
violations without regard to any of the factors laid down in section 15J. The
ratio of Roofit is applicable to sections
15A(b) and (c), 15B, 15C, 15D, 15E, 15F(b) and (c), 15G, 15H and 15HA, whose
language was similar to Section 15A(a).
Although sections 15A
to 15HB were again amended in 2014 to its present form, the court in Roofit held that the AO had no
discretion in deciding the quantum of penalty under sections 15A(a), (b) and
(c), 15B, 15C, 15D, 15E, 15F(b) and (c), 15G, 15H and 15HA for offences
committed between 2002 and 2014. Strangely, it is noticed that the ratio of the
Roofit decision was only applied to disclosure
violations under section 15A(a) and not to violations under other provisions
which had similar language. 
A few months after
Roofit, another bench of the Supreme
Court in Siddharth
Chaturvedi v. SEBI
(“Chaturvedi”)
was seized of a matter which dealt with disclosure violations under the
erstwhile SEBI (Prohibition of Insider Trading) Regulations, 1992. This case
also involved interpretation of section 15A. The bench disagreed with the
interpretation offered in Roofit on
both the questions of law and held that if the interpretation suggested by the
court in Roofit were to be followed “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.”
The bench
was of the opinion that these questions deserved to be considered by a larger
bench and placed the matter before the Chief Justice of India to form a larger
bench.
Amendments to the SEBI Act and the SCRA
The Finance Act,
2017 has amended section 15J by inserting an explanation, which reads as
follows:
“For
the removal of doubts, it is clarified that the power of an adjudicating
officer to adjudicate the quantum of penalty under Section 15A to 15E, clauses
(b) and (c) of Section 15F, Section 15G, Section 15H and 15I-IA shall be and
shall always be deemed to have been exercised under the provisions of this
section.”
This explanation
makes it clear that the AO will now have to consider the factors laid down
under section 15J for determining the quantum of penalty in respect of those
provisions mentioned in the explanation for offences which were committed
between 2002 and 2014.
A similar
amendment was also carried out to Section 23J of the SCRA, which reads as
follows:
“For
the removal of doubts, it is clarified that the power of an adjudicating
officer to adjudicate the quantum of penalty under sections 23A to 23C shall be
and shall always be deemed to have been exercised under the provisions of this
section.”
The language of section
23J of the SCRA is exactly the same as section 15J of the SEBI Act. The
language of sections 23A to 23C, which lay down the penalties for offences
committed thereunder, are exactly similar to the language of section 15A(a) as
it stood between 2002 and 2014. The language of sections 23A to 23C also does
not provide any discretion to the AO while imposing penalties. The amendment
pre-empts similar questions of law, under the SCRA, as Roofit from arising in the future.
Conclusion
The proposed
amendments to the Finance Act, 2017 will soon take effect, now that they have
received the assent of the President of India. However, the amendments lay to
rest only one of the two questions raised in Roofit – the second one, to be precise. The first question, i.e.,
whether the AO is free to consider factors other than the ones laid down in
Section 15J of the SEBI Act to determine the quantum of penalty, is still
alive. The bench in Roofit was of the
opinion that the factors under Section 15J are exhaustive, while the bench in Chaturvedi disagreed. A larger bench
will still have to be constituted to determine the answer to this question.
– Shashank
Prabhakar

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.

3 comments

  • OFFHAND
    Referring to the writer’s winding-up suggestion that “A larger bench will still have to be constituted to determine the answer to this question. “ , – will it not be a better suggestion / course of action for the legislature itself to bring about clarity through a further amendment; thereby obviate, though not entirely avoid, the possible further procrastination.

    Pending a further probe, in one's instant perception, however, another point on which the scope for controversy appears to be still left open is this: Whether in terms of/even after the 2017 amendment , in exercise of his power the adjudicating officer can , based on his findings, decide that no penalty is to be levied. Is that not so ?

  • Could anyone clarify as to why only clauses (b) and (c) of Section 15F (and not all the clauses of Section 15 F) are included in the explanation to Section 15 J.

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