Compounding of Offences under the SEBI Act: Limiting the Role of SEBI

[Abhiraam Shukla is a III year student at the National Law Institute University, Bhopal]

Section 24A of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) provides for the compounding/composition of certain offences which are punishable under the SEBI Act. It stipulates that any offence under the SEBI Act which is not punishable exclusively by imprisonment or by imprisonment and a fine may be compounded, before or after the institution of any proceedings. The offence may be compounded by the Securities Appellate Tribunal (“SAT”) or any Court of law where the said proceedings are pending, in case they have been instituted already.

In the recent case of Prakash Gupta v SEBI, the Apex Court conducted an in-depth analysis of the composition of offences under the said provision of the SEBI Act. It held that, although the consent of the SEBI is not required by the SAT or the court for compounding any offence according to the provisions of the SEBI Act, its views as an “expert body” are a pre-requisite for the same. Therefore, the Court must give due regards to the views of SEBI and must form its own opinion of the basis of it. However, SEBI’s objection to a compounding application would not ipso factonecessitate the court to reject the application. The final decision regarding the nature of the offence and whether it is to be compounded rests with the court only.  This judgement overrules the judgement of the Bombay High Court in N.H. Securities, in which it was held that consent of SEBI was requisite under section 24A. The Supreme Court also formulated certain guidelines for compounding offences under section 24A, which have to be kept in mind by SAT and Courts before adjudicating upon any application for compounding offences under section 24A.

This post seeks to analyse the approach of the Supreme Court in this case and the implications of the guidelines laid down by the Court.

Facts of the Prakash Gupta Case

Mr. Prakash Gupta, the director of Ideal Hotel and Industries Limited, had engaged in price-rigging and inside trading in contravention to regulations 4(a) and 4(e) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, along with certain provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994. After the initial investigation and inquiry, SEBI had appointed an Adjudicating Officer under the SEBI Act, and had further filed a criminal complaint against Mr. Prakash Gupta under section 26 of the SEBI Act.

The AO disposed of the case, holding Mr. Prakash Gupta liable and awarding a penalty of Rs.20,000 against him. Apart from that, in the criminal proceeding instituted against him by SEBI, Mr. Prakash Gupta filed a compounding application under section 24A of the SEBI Act. The High-Powered Advisory Committee of SEBI (‘HPAC’) objected to the said compounding application. The Trial Court dismissed the application on the basis of the JIK Industries decision of the Supreme Court in which it was held that no application could be compounded without the consent of the complainant. The High Court upheld the decision of the Trial Court. Hence, the present appeal was filed in the Supreme Court. 

Judgment

Although the Supreme Court dismissed the appeal on account of the offences being non-compoundable due to their serious nature, it held that the consent of SEBI is not mandatory for compounding an offence under section 24A. It further observed that the views of SEBI as a regulatory body are necessary for adjudicating any compounding application. The Court pronounced that “before deciding on whether to compound an offence punishable under section 24(1), the SAT or the Court must obtain the views of SEBI for furnishing guidance to its ultimate decision.”

However, the final decision of accepting or rejecting the application in this regard lies with SAT or Courts, as per the language of section 24A. Mandating that the consent of SEBI is necessary would amount to rewriting of the statutory provisions by the judiciary, which is not permissible.

Analysis

Drawing Parallels between Negotiable Instruments  Act 1881, Companies Act, 2013, and SEBI Act.

In Prakash Gupta, the Supreme Court analyzed the jurisprudential basis of compounding of offences under various statutes before it delving into the ambit of section 24A of the SEBI Act.

Negotiable Instrument Act, 1881Section 147 of the Negotiable Instruments Act, 1881 ( “NI Act”) provides that any offence punishable under the NI Act shall be compoundable. In the JIK Industries case, it was held that the complainant’s consent has to be sought by the Court before compounding the offence under the NI Act. However, the decision in JIK Industries cannot be used as a basis for evaluating the composition of offences under the SEBI Act because section 147 of the NI Act and section 24A of the SEBI Act are not pari materia. Under the NI Act, it is provided that any offence is compoundable whereas in SEBI Act only those offences which are not punishable exclusively by imprisonment or by imprisonment and fine, are compoundable. Apart from that, offences under the NI Act are committed primarily against the individuals and corporations, which harm their interests (i.e., as holders of the dishonoured instruments). Hence, the consent of the complainant for compounding the offence is necessary. This can be differentiated from the SEBI Act as there is no mention of the consent of SEBI to be required by the said authorities before adjudicating the compounding application.

Companies Act, 2013Section 621-A of the Companies Act states that any offence under the Companies Act, which is not punishable only by imprisonment or imprisonment and fine, shall be compoundable by Company Law Board or Regional Director as the case may be. In VLS Finance, it was held that that section 621-A provided that the compounding powers shall only be exercised by Company Law Board and Regional Director, and the prior permission of the Court was not necessary for such compounding.

In the author’s opinion, the decision in VLS Finance is proper in law because it correctly analyses the legislative intent behind the Companies Act. The Court correctly observed that – “It is also a cardinal rule of interpretation that words, phrases and sentences are to be given their natural, plain and clear meaning.” Furthermore, in contradiction to the NI Act, section 621-A of the Companies Act has the language analogous to section 24A of the SEBI Act. Hence, in this case, the Supreme Court was correct in using VLS Finance to base its decision instead of JIK Industries as had been done by the trial court.

The procedural requirements under section 24A

The 2007 SEBI circular specified the procedure for making an application for the compounding of an offence under section 24A. It states that apart from filing the application before SAT/Court, a copy of the application is to be sent to the Prosecution Division of SEBI. The HPAC of SEBI shall then present its acceptance or rejection before the adjudicating authority. Therefore, SEBI must present its views before the adjudicating authority. However, the final decision in this regard rests with the adjudicating authority.  

Apart from the procedural aspects of section 24A, the 2012 SEBI Amendment Circular states that “serious fraudulent and unfair trade practices which, in the opinion of the Board, cause substantial losses to investors and/or affects their rights” shall not be settled by SEBI under section 24A.  

Role of SEBI as a Regulatory Body

SEBI was incorporated to promote the healthy growth of India’s securities markets and prohibit unfair trade practicesrelating to securities markets. The powers of SEBI have grown to protect the interests of the investors which have increased in tune to parallel developments in the economy.  It is to be seen here that the courts have duly noted the expertise and regulatory powers of SEBI and have refrained from substituting their wisdom over the actions of SEBI. (See GL Sultania, PGF Limited, Akshaya Infrastructure)

Therefore, in Prakash Gupta, the Supreme Court correctly observed that “the view of SEBI, as envisaged in the 2007 SEBI Circular, must undoubtedly be sought by the SAT or the Court, to decide on whether an offence should be compounded. For SEBI can provide an expert view on the nature and gravity of the offence and its implication upon the protection of investors and the stability of the securities’ market. These considerations and others which SEBI may place before the SAT or the Court would be of relevance in determining as to whether an application for compounding should be allowed.”

Implications of the Supreme Court’s Guidelines

In this case, the court formulated some guidelines to be kept in mind by the SAT/Court before adjudicating compounding applications. The Court held that –

1. The adjudicating authorities must adhere to the factors enumerated in the 2007 SEBI Circular while deciding whether a compounding application must be allowed.

2. Views of HPAC of SEBI must be given due deference and the adjudicating authorities must differ from them only in cases where they are mala fide and manifestly arbitrary.

3. It should be ensured that the composition of offences does not mirror quashing of offences (under section 482 of CrPC) and that the aggrieved parties are suitably restituted by the accused before compounding the offence.

4. In cases where non-prosecution of an offence shall affect the public at large, the adjudicating authority should not compound the offence even if the aggrieved party is restituted.

Conclusion

The Prakash Gupta ruling is significant because the views of SEBI as an expert body have been given adequate substance in compounding of offences . However, since the Court has pronounced that consent of SEBI is not sine non qua for compounding of offences, it can be said that its role has been reduced from what was held in NH Securitiescase. Lastly, the Supreme Court has aptly exercised its jurisdiction by providing the said guidelines which suitably weigh the seriousness of an offence before providing for efficacious and authoritative disposal of the same.

The Court has interpreted the SEBI Act in an apposite manner keeping in view, the intention of the lawmakers.  After Prakash Gupta, SEBI Act has come at par with NI Act which already has guidelines issued for it by the Supreme Court.

– Abhiraam Shukla

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