On February 28, 2019, in the matter of
SEBI v. Bhavesh Pabari, the Supreme Court finally settled the question of the interplay between two sections of the SEBI Act previously raised in the Roofit and Siddharth Chaturvedi cases, also apex court rulings. These discuss the powers of a SEBI judicial authority (adjudicating officer) to consider mitigating factors while discussing the amount of penalty to be imposed by such authority.
Prior to the amendment to the SEBI Act in 2014, the relevant portion dealing with imposition of penalty in Section 15A of the SEBI Act, which provides for imposition of penalty for failure to furnish information, provides that a penalty “
of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less” shall be imposed.
In a) whether the adjudicating officer of SEBI (“AO”) has any discretion in determining the quantum of penalty under Section 15A, and
SEBI v. Roofit Industries, two questions were raised –
b) whether the AO can consider factors other than those mentioned under Section 15J in determining the quantum of penalty.
With respect to the first question, the Supreme Court held that, as the law stood between 2002 and 2014, an AO had no discretion and could not consider the factors laid down in Section 15J while deciding the quantum of penalty to be levied against an offender under Section 15A.
As a result, SEBI was forced to pass orders imposing penalties of Rs. 1 crore even for minor violations of disclosure requirements committed during the said period, where disclosures were made with delays of greater than 100 days.Regarding the second question, the Supreme Court held that only those factors mentioned under Section 15J are to be considered for determining the penalty, namely –
The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
The amount of loss caused to an investor or group of investors as a result of the default; and iii. the repetitive nature of the default. Therefore, any other factor, including the impecuniosity of a party, cannot be a factor that can be considered.
Interplay Of Sections
Siddharth Chaturvedi v. SEBI, the question of the interplay between Section 15A and Section 15J was once again considered, and the Supreme Court did not subscribe to the rationale laid down in the Roofit case. The Supreme Court had stated that it is difficult to appreciate as to how the imposition of penalty under Section 15A, as amended in 2002, may be construed in isolation without giving regard to factors to be considered under Section 15J.
The court further added that if we were to subscribe to the interpretation suggested in the Roofit case, 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 and may lead to anomalous results. In light of this, the matter was referred to a larger bench of the Supreme Court.
However, before the larger bench arrived at a decision, the Finance Act, 2017 amended Section 15J of the SEBI Act. An explanation has been inserted which states that the power of an AO to adjudicate the quantum of penalty under relevant sections, including section 15A, “
shall be and shall always be deemed to have been exercised under the provisions of this section”. This explanation makes it clear that SEBI must consider the factors laid down under Section 15J for determining the quantum of penalty even for violations which were committed between 2002 and 2014. Consider Aggravating Circumstances
In the current case, interpreting the legislative intention, the Supreme Court held that the intent was not to prescribe a minimum penalty of R. 1 lakh for every day during which the default and failure continues. The aggravating and mitigating circumstances, including those provided under Section 15J, are required to be considered. Further, the Supreme Court rejected a narrow view of Section 15J and held that the provisions of Section 15J are merely illustrative, and where such circumstances exist, the AO is not precluded from considering other factors while deciding the quantum of penalty.
As the explanation inserted by the Finance Act, 2017 had settled the question of law raised in Roofit and Siddharth Chaturvedi cases regarding the applicability of the provisions of Section 15J while determining the quantum of penalty, with respect to the first question raised in Roofit, this judgement is merely academic in nature.
However, by holding that the factors laid down in Section 15J are merely illustrative and not exhaustive, the Supreme Court has clarified and expanded the scope of the powers of the AO under Section 15J. In other words, the new case law allows the AO to consider various rational reasons before passing an order instead of acting mechanically and is therefore good for those facing the fire of SEBI for un-intended or technical breaches.
Sandeep Parekh is the managing partner and Raghuvamsi Meka is an associate at Finsec Law Advisors.