[Navya Saxena and Aadya Bansal are 4th-year B.A., LL.B. (Hons.) students at National Law Institute University, Bhopal]
In Prakash Gupta v. Securities and Exchange Board of India (26 July 2021), the Supreme Court has addressed the question of whether the Securities and Exchange Board of India (“SEBI”) has veto power over compounding of offences under the Securities and Exchange Board of India Act, 1992 [“SEBI Act”]. The Court for the first time deliberated upon the connotations of section 24A of the SEBI Act, and interpreted the requirements for compounding therein. Through the lens of this judgment, the authors will expound upon the same, scrutinizing the Court’s position of giving deference to the view of SEBI while holding its requirement as not mandatory. The authors will delve into the essential role SEBI plays as the market regulator and the significance of the present judgment.
Background and Facts
The present case concerns an instance of compounding, a process based upon mutuality between the parties and one which features an agreement between the parties to not prosecute in exchange of consideration. Herein, SEBI had received a complaint against Prakash Gupta’s company alleging price rigging and insider trading, activities that contravene regulations 4(a) and 4(e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, and multiple provisions of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994. After a preliminary inquiry, SEBI appointed an Adjudicating Officer and filed a criminal complaint against the petitioner. He then filed for compounding of the offence under section 24A of the SEBI Act, to which SEBI did not consent. The trial court dismissed the petition due to the lack of consent of both parties, a decision which was upheld by the High Court, leading to the present special leave petition before the Supreme Court.
Analysis: Compounding under Indian Law
Section 24A of the SEBI Act
Section 24A acts as an omnibus provision and states that regardless of the Criminal Procedure Code’s (“CrPC”) stance on compounding, and barring the offences punishable with imprisonment only or imprisonment and fine, all offences punishable under the Act may be compounded. The Court, in the present case, observed that the section has four main components: firstly, it begins with a non-obstante clause; secondly, the provision shall be applicable only where the alternative to imprisonment is a fine; thirdly, the offence can be compounded both before and after the proceeding has been instituted; and fourthly, the forum may be the Securities Appellate Tribunal (“SAT”) or the court before which the proceedings are pending. However, once the proceedings have been instituted, it is the imprimatur of the court alone. Additionally, in order to address the embedded ambiguities in the section, SEBI had issued Circulars in April 2007 and May 2012. The Circulars lay down the procedure for filing of a compounding application wherein the application is placed before the High Powered Advisory Committee (“HPAC”) whose recommendations must be considered by the court. The Circulars also prescribe an indicative list of factors that must be considered while compounding, such as the intention behind the violation and the conduct of the party.
Compounding under CrPC and the NI Act: Similarities and Differences
While interpreting section 24A of the SEBI Act, the Court in Prakash Gupta drew upon section 320 of the CrPC, since it was the first provision under Indian criminal law that employed compounding as a procedural tool. In fact, despite section 24A precluding the application of CrPC through a non-obstante clause, courts have been wary of imposing a complete embargo on the principles of compounding contained therein. Section 320 of the CrPC and section 24A of the SEBI Act are analogous in terms of specifying the nature of offences that may be compounded and the authority empowered for such compounding. However, there exists hardly any terminological comparability in terms of the parties’ and court’s consent. Section 320 of the CrPC entitles private parties to settle a dispute outside the court with the assurance of a proper restitution of the complainant, and bestows responsibility upon the court to ensure that the restitution is provided in societal interest. Simply put, the provision permits courts to withhold consent only in “public interest”, thereby limiting their involvement to supervision through terms like “with the permission of the Court”, and “with the consent of the Court”. This phrasing of the provision differs drastically from section 24A of the SEBI Act, which provides for the offence to be “compounded by an SAT or a court”, thereby indicating minimal involvement, if any, of the parties in compounding. A plain reading of section 24A suggests that the court or SAT plays the primary or sole role in compounding of offences: to digress would amount to re-writing the statute. Therefore, any semblance of the parties’ involvement in compounding an offence can be extracted only from reasonably construing section 24A SEBI Act in accordance with the principles of compounding contained in other provisions akin to itself.
Negotiable Instruments Act, 1881 and Companies Act, 1956
The Court in the present case further cited section 147 of the Negotiable Instruments Act 1881 (“NI Act”) which, unlike the SEBI Act and the CrPC, provides no explicit guidance on the stage at which compounding can be effected, and whether it can be done at the instance of the complainant or with the leave of the court. Evidently, the provision remains unguided on specifications. Therefore, the Court, in Damodar S Prabhu v. Sayed Babalal H, provided exclusive guidelines to overcome section 147’s inherent vagueness while excluding the entire gamut of procedure of section 320 of the CrPC pursuant to the non-obstante clause against the CrPC contained therein. However, in JIK Industries Limited v. Amarlal v. Jumani, the Court, while disagreeing with the ruling in the Damodar case, observed that the NI Act must be construed in a manner that the main principle of compounding is not abandoned through a non-obstante clause since the consent of the complainant “cannot be wished away nor can the same be substituted by virtue of Section 147 of the NI Act”. The Court regarded it as absurd to leave the NI Act “uncontrolled” and provided for its reasonable construction. Conversely, in 2017, a two-judge bench of the Supreme Court in Meters and Instruments Pvt. Ltd. v. Kanchan Mehta held that cases under the NI Act could be compounded by the court, irrespective of the parties’ consent, if it is satisfied that the complainant has been duly compensated. Therefore, the court’s consent remains absolute in cases of compounding under the NI Act.
However, as Justice DY Chandrachud pointed out in Prakash Gupta, it is important to acknowledge the difference between section 147 of the NI Act and section 24A of the SEBI Act due to the blanket recognition of compounding of all offences under the NI Act, as opposed to the specific offences explicitly provided in section 24A. Accordingly, section 621-A of the Companies Act 1956 may be deemed a more befitting comparison for section 24A of the SEBI Act. Section 621-A provided that any offence under the Companies Act, which is not punishable only by imprisonment or imprisonment and fine, shall be compoundable by the Company Law Board or Regional Director. Evidently, section 621-A is analogous to section 24A of the SEBI Act due to the explicit enumeration of the offences to be compounded and a specification of who is empowered to compound. While addressing the contours of section 621-A of the Companies Act in VLS Finance Limited v. Union of India, the Supreme Court held that an offence was compoundable only by the Company Law Board and Regional Director since the requirement of “prior permission of the court” is absent in the provision. This signifies that the power to compound is strictly restricted to who it has been provided to explicitly by the legislature. Accordingly, section 24A presently permits only the court or the SAT to compound and limits the role of SEBI’s consent to minimal.
Supreme Court’s Decision and its Repercussions
The Supreme Court dismissed the appeal and held that while SEBI’s consent is not mandatory for compounding of an offence under section 24A, it must still be given due deference due to SEBI’s essential role as the market regulator. Furthermore, the Court laid down guidelines on how there must be cogent reasons to disagree with SEBI’s recommendation.
Importance of SEBI’s Consent as the Market Regulator
SEBI was established in 1988 in response to tremendous growth in capital markets, with the dual intention of safeguarding the interest of investors in securities and facilitating the development and regulation of the securities market. Its decisions impact the entire economy. It was considered so essential to a healthy market that, in 2002, the SEBI Act was amended in order to confer more power on the Board and strengthen it in terms of its organisational structure and institutional capacity. The Board of SEBI currently performs a plethora of functions, as listed under section 11(2). A cursory glance at the same effectively reflects the central role that the Board plays in regulation of market practices and protection of investor wealth. A strong investor protection system is a prerequisite for a healthy financial market as it encourages efficient investments, accurate security prices and better access to external finance, thus making the role of SEBI a crucial one. The Supreme Court in SEBI v. Kishore R Ajmera had echoed the general sentiment of faith in SEBI as a regulator while observing the trajectory of growth in the market and stating that this increasing investor confidence in the market is a reflection of the effectiveness of the mechanism. SEBI, with its comprehensive investor grievances processing mechanism and transparent market system has established itself as an appropriate, proportionate and effective market regulator.
How Prakash Gupta is a Call for Legislative Action
One of the principles that remains consistent across the compounding provisions of the CrPC is agreement with the injured party; the requirement of consent or leave of the court is stipulated only to maintain a check on the compromise to ensure that an agreement between the parties is not reached at the cost of societal interest. It is in light of this proposition that the role of courts in compounding must be construed as supervisory rather than absolute, as is also reflected in the wording of section 24A of the SEBI Act.
SEBI’s indispensable role as India’s securities market regulator entitles the authority to discretion in settling of disputes arising from actions that may affect the functioning of the market, whether short or long-term. Since the Indian economy is striving to sustain itself in the midst of the pandemic, it is the prerogative of SEBI to protect the investor’s needs and cultivate a securities environment that is protected from, if not immune to, frauds and other offences. Recognising SEBI’s sector specific expertise, the Court’s decision in Prakash Gupta correctly emphasises on the need to provide “due deference” to the body’s consent and for limiting the grounds for diverging from its stance – even if done implicitly for the time being.
– Navya Saxena & Aadya Bansal