[Rakshita Poddar and Jitesh Maheshwari are associates at Mindspright Legal]
The Supreme Court of India has recently passed a landmark judgment in Adjudicating Officer (“AO”), SEBI v. Bhavesh Pabari by which it has overruled its previous judgment in SEBI v. Roofit Industries Ltd. and explained the relevance of section 15J of the Securities and Exchange Board of India Act, 1992. The Securities and Exchange Board of India (SEBI) is empowered to initiate adjudicatory proceedings against an entity in terms of section 15I and has the power to levy penalty as prescribed under sections 15A to 15HB of the SEBI Act. Section 15J, however, states three factors which an adjudicating officer (AO) has to consider while adjudging the quantum of penalty.
In its judgment in Bhavesh Pabari, the Supreme Court has dealt with two important issues of securities law and has also explained the difference between a continuing offence and a repeat offence. However, for the purposes of this post, the authors are only dealing with the second issue dealt with by the Court and the implications of the judgment.
Section 15A(a) of the SEBI Act prescribes the penalty for not furnishing documents, returns or reports to SEBI. Prior to 2002, the penalty prescribed for the same was not to exceed one lakh and fifty thousand rupees for each such failure. The provision was amended in 2002 and the penalty was prescribed as one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. The provision was again amended in 2014 and the penalty was prescribed as an amount which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
The Supreme Court in the Roofit Judgment dealt with the issue whether section 15J was applicable in respect of section 15A(a) post the amendment in 2002 until it was amended in 2014. The Court observed that prior to 2002 and post 2014, the AO had discretion to decide the amount of penalty to be levied as the provision provided for a maximum penalty which can be levied by the AO. However, the provision as it stood subsequent to the amendment in 2002 until the amendment in 2014 did not give discretion to AO in deciding the quantum of penalty as it states that the minimum penalty to be imposed as one crore rupees if the failure continued for more than 100 days. This means that the minimum mandatory penalty for failure over 100 days to provide information to SEBI under section 15A(a) had been fixed by the statute to be one crore rupees and the same could not be reduced even after applying the factors stated in section 15J of the Act. Therefore, it was held by the Court that section 15J was not applicable in deciding the quantum of penalty under section 15A(a) of the SEBI Act.
Siddharth Chaturvedi Judgment
The same issue was again dealt by the Supreme Court in Siddharth Chaturvedi v. SEBI in which a division bench observed that the interpretation of sections 15A(a) and 15J adopted by the Court in Roofit was incorrect and was arbitrary in infringing the fundamental rights. However, as Roofit was decided by a division bench of the Supreme Court, the bench in Siddharth Chaturvedi case referred the matter to the larger bench.
Bhavesh Pabari Judgment
Recently, a three-judge bench in Bhavesh Pabari overruled Roofit and held that section 15J continued to apply to the defaults under section 15A(a) as it stood subsequent to the amendment in 2002 until the amendment in 2014. It observed that sections 15A(a) to 15HA have to be harmoniously read along with section 15J in such a manner as to avoid any inconsistency; the provision of one section cannot nullify the another unless it is impossible to reconcile the two. The bench agreed with the observation made in the reference order of Siddharth Chaturvedi and further observed that the insertion of an ‘explanation’ in section 15J would reflect that the legislative intent was not to curtail the discretion of AO by prescribing the minimum mandatory penalty in section 15A(a).
Most importantly, it has been categorically held by the Supreme Court in the judgment that normally the expression ‘whichever is less’ would connote the absence of discretion by minimum mandatory penalty, however the intention of the legislature was not to prescribe the minimum penalty of one lakh rupees per day during which the default and failure had continued under section 15A(a), as the same is read along with the explanation in section 15J of the Act. Moreover, it has been held that the three factors stated in section 15J are not exhaustive in nature and the AO has discretion to consider any other factor in deciding the quantum of penalty.
This judgment has made the penalty provisions under SEBI Act just and reasonable as now the AO will have power to levy lesser penalty than the prescribed minimum mandatory penalty under the penalty provisions of SEBI Act for technical defaults of smaller amounts.
In opinion of the authors, the interpretation of section 15J as supplied by the Supreme Court can result in levying lesser penalty than the minimum mandatory penalty as prescribed in the penalty provisions of SEBI Act. For instance, section 15G of the Act prescribes the penalty for insider trading and states that the penalty for the same shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. It is pertinent to note here that despite the term ‘shall’ used in the provision, in the light of the recent judgment, the AO will have the discretion to impose a penalty of an amount less than ten lakh rupees considering the mitigating circumstances as stated in section 15J and other mitigating factors as well. Hence, it can be said that the minimum mandatory penalty as prescribed under sections 15A to 15HB are no more mandatory as the same has to be read with section 15J of the SEBI Act. Theoretically it is possible for AO to impose of penalty of just one rupee even though the provision mandates the minimum mandatory penalty of ten lakh rupees.
The scope of 15J has been substantially enhanced by the Court and discretion has been given to AO to consider any other factor apart from the ones stated in section 15J in deciding the quantum of penalty. However, such discretion has to be exercised reasonably and with utmost care. Although the interpretation adopted by the Supreme Court in Bhavesh Pabari has increased the power and discretion of the AO in imposing the penalty, the same will be used by market players and entities as a tool against the AO. The noticees will now flood the AOs with all the factors for imposition of lesser penalty and the AOs will have the duty to deal with all the factors and provide reasons for accepting or rejecting the same.
– Rakshita Poddar & Jitesh Maheshwari