This article seeks to question the penal powers of the Securities and Exchange Board of India (SEBI), regulator of the Indian securities market. SEBI has been vested with powers to impose heavy penalties on companies indulging in activities that hamper investor interests and securities market. Despite that it enjoys the image of ‘a friend to the investors’ it is argued that its punitive powers are unbridled. It is common to see companies facing huge penalties for omissions that seem to be of a comparatively harmless nature. One might wonder if the powers vested with SEBI are to be used in proportion with the gravity of the matter, or mechanically in straitjacketed application of the statute.
The levy of penalty
The SEBI has levied penalty almost invariably when there is a securities law violation. In this context it is often stated that once statutory regulations are violated, imposition of penalty becomes sine qua non. There is no denying that the Supreme Court has in SEBI v. Shriram Mutual Fund [68 SCL 216 (SC)], Bharjatiya Steel Industries v. Commissioner, Sales Tax, Uttar Pradesh reported in 2008 (1) SCC 617 and Swedish Match AB v. SEBI [122 CompCas 83 (SC) (2004)] held the contravention of statutory obligations to be the threshold of imposition of penalty:
“…penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant.”
However, the decisions do not go on to throw light on the quantum of penalty for each kind of offense. Many would argue that the purpose of adjudication is not mere assessment of factual circumstances, establishing whether or not an offence is made out thereby. Ideally, a judicial or quasi-judicial proceeding must also determine the gravity of the offence while sifting the facts and impose a penalty accordingly.
It follows that the gravity of an offence is to be assessed not on arbitrary or whimsical grounds on the caprices of the regulator, but on established factors - guiding principles provided by statute or developed jurisprudence of the particular sector. While Section 15J of SEBI Act, 1992 provides for certain factors such as amount of disproportionate gains and the past history of default to be considered in determining penalties, it still so happens that the quantum of penalty imposed is often disproportionate to the nature of the offence. Based on these factors, the SAT, in JM Mutual Fund v. SEBI [(2005) 3 CompLJ 544 SAT] reduced the penalty, as there were no disproportionate gains or loss to investors.
The SAT’s DLF IPO decision
The most recent occurrence which brings these issues to light is the decision of the Securities Appellate Tribunal (SAT) dated March 13, 2015 in the DLF IPO Case [Appeal No. 331 of 2014] where the issue of proportionality of penalties was specifically avoided. A penalty of 860 million was imposed along with a 3 year ban from the market under Section 15HA of the Act which provides for imposition of penalty of 25 crores or three times the amount of profits made out of such practices, whichever is higher.
The SAT made its displeasure clear with certain observations against SEBI’s exercise of punitive powers. SEBI called into question the adequacy of disclosures in the IPO prospectus in a series of investigations. While there is a need to penalize such non-disclosure, admittedly there was no observation to the effect that non-disclosure of the transactions in question adversely affected the interests of the shareholders. At this stage the question is whether the proportion of penalty levied was justifiable or not.
The two members of SAT observed that SEBI has been conferred upon with wide discretionary powers and this is all the more reason why it has to apply its mind to every set of facts dispassionately without any influence:
“It is pertinent to mention here that while SEBI was being conferred with vast powers in the year 2000 by way of a thorough amendment of the SEBI Act, 1992, the Dhanuka Committee, which had recommended the conferment of such powers, had itself warned against their abuse in clear terms by stating that SEBI and its officers are often called upon to act both as Regulators and adjudicators of the first instance and consequently there is a considerable scope of mixing up of these rules and for enthusiastic interpretation and enforcement.”
Does discretion require regulation?
In the light of the undue delay in passing of the impugned order that is considered to hamper the fairness of the judicial process, is it fair to impose a humungous penalty, the biggest ever imposed in a single case? The above observation made by the Members serves as an alarm bell for those harboring similar concerns but naturally hesitant to voice them, in the light of the favorable public opinion enjoyed by SEBI as a savior of the investors penalizing those who jeopardize the market and the investments. The same may explain the wide berth given to this issue by the legal body, the financial sector and even the SAT and courts. The Tribunal, despite coming extremely close to this topic has carefully avoided this question and left it be considered in the future. But do we intend to keep this question unanswered? Especially when India doesn’t fare well among the nations with ease of doing business and we intend to attract investments? Let us not forget that the teeth we gave SEBI after incidents like the Harshad Mehta scam might come back and bite our investments in companies, listed or unlisted.
In cases involving Sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15H, 15HA and 15HB of the SEBI Act, various penalties have been prescribed. However, in the interest of justice, the adjudicator must be given the discretion to reduce it based on the factors listed in Section 15J. The Securities Law (Amendment) Bill, 2014 brings hope of positive changes in this respect. While imposing monetary penalties, adjudicating officers will have discretion to impose minimum penalties, which will not be less than 1 lakh for most offences and not less than 10 lakh for insider trading and non-disclosure. This has been clarified as a move to streamline the penalty regime reining in the discretion of adjudicating officers as opposed to giving them complete freedom.
A penalty in the discretion of a judicial or quasi-judicial authority must be imposed with qualification. The quantum must be in proportion to the gravity of the lapse based on mindful discretion, not at a flat rate in a mechanical, “automatic” manner. These long-established canons of law surely apply to the admittedly more fluctuating sector of the financial market which invites stringent and pervasive regulation.
[The author is an Associate, Lakshmikumaran & Sridharan, Ahmedabad]