The article is written by Anumeha Agrawal pursuing BA.LLB (Hons.) from Symbiosis Law School, Pune. This article deals with the report of the high-level committee (“the Committee”) under the chairmanship of Justice (Retd.) Anil R. Dave published by SEBI on June 16, 2020. The report is divided into four parts the current article summarises and analyses the second part of the report- recovery of monies due under the securities laws.

Introduction

SEBI is empowered under the SEBI Act, 1992, the Securities Contract Regulation Act, 1956 and the Depositories Act, 1996 (collectively referred to as the securities laws) to impose monetary penalties and issue directions for refund in case of default. However, there are several anomalies concerning the enforcement of these powers which hampers the efficiency of the recovery procedure. 

Recovery under various laws

Indian Scenario

Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

The arrears of amount mentioned in section 8 of the Employees Provident Funds and Miscellaneous Provisions Act shall be recovered according to the Second and Third Schedule of the Income Tax Act, 1961 and Income Tax( Certificate Proceedings) Rules, 1962.

Insurance Act, 1938

Section 33 of Insurance Act states that all expenses resulting out of the investigation are recoverable as an arrear of land revenue under Revenue Recovery Act, 1890. There are also state legislations for recovery of arrears of land revenue due to the Government.

Competition Act and CCI (Manner of recovery Monetary Penalty) Regulations

The Competition Act, 2002 aims to promote competition in the market and prevent practices that adversely affect the competition. Chapter VI imposes monetary penalties for violations, the Competition Commission of India is empowered to impose such penalties.

The recovery procedure under the Competition Commission of India (Manner of recovery of Monetary Penalty) Regulations, 2011 is also in accordance with the Second Schedule of the Income Tax Act, 1961, and requires a reference from the Commission to the Income Tax Authority.

International Scenario

United States of America

In the United States, the Securities Exchange Commission is the capital markets’ regulator and has been given the power to claim from a defaulter under the Debt Collection Act. The claim can include administrative offset, salary offset, tax refund offset and wage garnishment order.

Australia

The Australian Securities and Investment Commission has the power to pursue action in courts for misconduct, the action can be of two types: civil and criminal.

• Criminal Penalties like imprisonment, fines, community service orders etc. these are prosecuted by the Commonwealth Director of Public Prosecutions.
• Civil monetary penalties are payable to the Commonwealth of Australia. ASIC can recover the investigation expense and costs when the person is convicted and the judgment has been awarded against him. It can include costs of SIC staff working on the said investigation, travel expenses, external legal counsel and other expert’s expenses. 

Singapore

The Monetary Authority of Singapore Act, 1970 deals with the recovery of remuneration, expenses, financial penalties and fees as a civil debt. Due to this approach debt is recoverable in terms of Civil Law Act through a civil court.

Recovery under Securities Law

Section 28A of SEBI Act

Before 2013 SEBI could only impose debarment or file a criminal prosecution, this severely affected the to recover penalties and the general enforcement capability of the Regulation. Thus by virtue of Securities Laws (Amendment) Ordinance 2013 Section 28A was inserted which enabled SEBI to recover amounts due to it. The section was analogous to the existing section in Depositories Act and SCRA.

Power to Recover

The section empowers SEBI to conduct recovery for the pending dues. It can be triggered on the following occasions:

1. A person defaults in payment of the penalty imposed under the Act;
2. A person defaults in compliance with the board’s direction for a refund of monies;
3. A person defaults in compliance with the board’s direction of disgorgement;
4. A person defaults in payment of fees to the board.

When one of such default occurs the Recovery Officer draws up a certificate specifying the amount to be recovered from the person in one or more of the following manner:

1. attachment and sale of defaulter’s movable properties;
2. attachment of defaulter’s bank accounts;
3. attachment and sale of the defaulter’s immovable properties;
4. defaulter’s arrest and detention in prison; 
5. appointment of a receiver for the management of defaulter’s properties.

Recovery procedure

The section provides for following the procedure laid down under the Income Tax Act and Rules made thereunder. SEBI has been following the provisions of:

• Section 220– tax payable when the assessee is deemed in default.
• Section 221– penalty payable when rax is in default.
• Section 222– certificate to tax recovery officer.
• Section 223– tax recovery officer by whom recovery is to be effected.
• Section 224– the validity of certificate and cancellation or amendment thereof.
• Section 225– stay of proceedings in pursuance of certificate and amendment or cancellation thereof.
• Section 226– other modes of recovery.
• Section 227– recovery through State Government.
• Section 228A– recovery of tax in pursuance of agreements with foreign countries.
• Section 229– recovery of penalties, fines, interest and other sums.
• Section 231– period for commencing recovery proceedings.
• Section 232– recovery by suit or under other law not affected.

Legislative Changes

By the Finance Act, 2018 Section 28B was inserted. The section allows SEBI to continue the recovery proceedings against the legal representatives of a defaulter in case a defaulter dies. The recovery proceedings for disgorgement, refund initiated against the defaulter before his death shall be deemed to be against the legal representative and continues against him/ her. The legal representative becomes personally liable under this section in his capacity as a legal representative of the deceased defaulter. The extent of the legal representative’s liability is limited to the estate of the deceased in discharging the liability.

Concerns in Present Law

Recovery of siphoned-off monies

A common securities law violation is siphoning off money raised by public issue for purposes not mentioned in the offer document. Explanation to the Section 28A SEBI allows Recovery Officers to deal with transfers made to dependent relatives with whom clubbing of income is allowed under the Income-tax Act. Therefore when one promoter entity transfers the assets to another promoter entity (not an enumerated individual) to avoid recovery – it is problematic for a Recovery Officer to deal with such transfers.

In USA Securities Executive Commission inter alia can order disgorgement of unlawful gains against relief defendants against any person to whom unlawful proceeds are transferred who lack a legitimate claim on the funds and assets. These persons are called ‘relief defendants’ as their presence in the suit is necessary in order to provide full relief. It was stated in SEC v. George and Ors.

In Section 11B of SEBI Act, Depositories Act and SCRA Explanation II to clarify that the board’s power to issue directions are to include with respect to any person to whom proceed involved in violation have been transferred and who does not have a legitimate claim on the same.

To Section 28A of the SEBI Act, Explanation I should be added, it shall state person’s movable, immovable property or bank account monies transferred for inadequate consideration when the amount specified in the certificate had become due.

Interim attachment by Judicial branch

The Regulator has a potent power of attachment through the judicial branch to attach any bank account or other property found in Section 11(4)(e). The Banning of Unregulated Deposit Schemes Act, 2019 has linked the recovery monies under section 28A of SEBI Act.

However, the power is infrequently used due to its pre-requirement of proving the said proceeds are involved in a violation of any provisions of the Act, rules and regulations.this precondition to be satisfied makes the attachment difficult and defeats the urgency required to ensure of diverging of the assets by the defaulter.

In US SEC there is no such limitation on its powers, the position and its rationale were clarified in Federal Trade Commission v. Bronson Partners, LLC:

Disgorgement does not claim any entitlement to a particular property, it seeks only to deter violations of the laws by depriving violators of their ill gains…the Federal Reporter is replete with instances where judges permitted the SEC to obtain disgorgement without any mention of tracing.

In SEC v. Banner Fund Int’l, the SEC points out the requirement of the relation between a wrongful act and the property to be disgorged does not imply that a court may order a malefactor to disgorge only the actual property obtained by means of the wrongful act. Rather the connection required is between the amount by which the defendant was unjustly enriched amount the amount he can be required to disgorge.

 The position was clearly stated in SEC v. Blatt, The number of assets to be frozen prior to a finding of liability is determined not by whether the funds themselves are traceable to the fraudulent activity underlying the lawsuit but by showing a reasonable approximation of the amount with interest, the defendant was unjustly enriched.

Hence, the Committee recommends the attachment of assets should be allowed not to the extent of relation to the violation but the value of the proceeds involved in the violation.

Modifications under the Income Tax Act

It is common for enactments to have provisions which enable delegated legislation as if enacted under this Act and to declare the procedure of making such modifications. But SEBI Act lacks such a provision concerning modifications to sections 220 to 227, 228A, 229, 232 the Income-tax Act 1961 Second and Third Schedules when applied to the securities market context.

The Act also lacks rules concerning section 28A and the modifications to be made in the provisions of Income Act and Rules. The Committee recommends since these rules are deemed to be a part of the statute itself the board has the power to clarify the modifications to be made in these provisions while implementing in terms of securities market within the basic framework relating to Recovery Officer.

Suggested modifications in the Income Tax Act

The penalty payable when tax in default

Currently, the assessee in default of payment of ta shall also be liable to pay the penalty as directed by Assessing Officer. The total amount of penalty does not exceed the tax arrears.

The Committee recommends substituting the section with a section providing the liability of payment of dues, interest on such dues or other action under SEBI Act, SCRA and Depositories Act.

Certificate to Tax Recovery Officer

Section 222 states that in case of a person defaulting in making payment of tax the Tax Recovery Officer draws a certificate specifying the amount of tax payable and also the mode of recovery like attachment and sale of property etc.

The Committee recommends the replacement of this section by another section stating that the Recovery Officer shall draw up a certificate specifying the amount to be recovered and the mode of recovery for one of the following:

• A penalty imposed under the SCRA or Depositories Act.
• The amount payable on the failure of any person to refund any monies directed by the board.
• Any amount payable on the failure of any person to disgorge monies as directed by the board.
• Any fees due to the board.

Tax Recovery Officer by whom recovery is to be effected

Section 223 states who can carry out the recovery process. 

• Ordinarily, it is the Tax Recovery Officer upon the orders of Principal Chief Commissioner or Chief Commissioner within whose territorial jurisdiction the Assessee resides or its immovable property lies.
• When the assessee property is within the jurisdiction of more than one Tax Recovering Officer and one officer is unable to cover the entire amount of sale of property or for other purposes to expedite and secure the recovery may send the certificate to other Officer for recovering the residuary amount.

The Committee has recommended the implementation of the section by a corresponding section only substituting the “Assessee” by “defaulter”, “Assessing Officer” or “Tax Recovering Officer” by “Recovering Officer”, “ Chief Commissioner” or “Principal Chief Commissioner” by the board, tax by the payment due under SEBI Act, SCRA or Depositories Act and applicable when a certificate has been drawn up but not specifying the mode of recovery.

Validity of Certificate

Section 224 disallows an assessee to dispute the correctness of any certificate drawn by the Recovery Officer and can only be cancelled by the Tax Recovery Officer to correct any clerical or arithmetic error.

The Committee recommends a similar section preventing not only an assessee but any person from disputing the correctness of a certificate drawn by Recovery Officer.

Stay of proceedings in pursuance of certificate

Section 225 empowers Tax Recovery Officer has the power to:

• Grant time and stay the recovery proceedings for payment of tax by the defaulter.
• Grant time and stay the recovery proceedings when the order for the demand of tax has been modified in appeal but is still subject to final proceedings.
• Cancel or modify the certificate when in an appeal the amount is reduced or waived off.

The proposed section is corresponding to the existing section with minor changes. The Recovery Officer has the power to:

• Grant time and stay the recovery proceedings under SEBI Act, SCRA or Depositories Act for payment of tax by the defaulter
• Grant time and stay the recovery proceedings when the order for the demand of tax has been modified in appeal but is still subject to final proceedings.
• Cancel or modify the certificate when in an appeal the amount is reduced or waived off.

Other modes of recovery

Section 226 provides for the alternative manner of recovery in the given manner:

• It applies when a certificate has not been drawn by the Assessing Officer or not specifying the mode of recovery.
• If the assessee is the recipient of salary then issue a notice to the person paying the salary to deduct the due tax from such salary.
• Sent notice directing a person from whom money is due to the assessee to pay such due money to the Assessing Officer.
• Such notice may also be issued to a joint holder of a second-highest account with the assessee.
• Copy of such notice should be forwarded to the Assessee.
• If such a person refuses on an affidavit on oath that sum demanded is not due to the assessee then the person is not liable.
• Any other claim concerning such a property issued after the date of such notice is void.
• Such a person shall comply with the notice and becomes personally liable for the amount payable to the assessee or shall be deemed an assessee itself under the Act.
• On failure of payment of the due amount the Assessing Officer upon authorisation by Chief Commissioner or Principal Chief Commissioner may proceed against him the manner provided under this regulation like attachment of property.

The Committee has recommended the implementation of the section by a corresponding section only substituting the “Assessee” by “defaulter”, “Assessing Officer” or “Tax Recovering Officer” by “Recovering Officer”, “ Chief Commissioner” or “Principal Chief Commissioner” by the board, tax by the payment due under SEBI Act, SCRA or Depositories Act and applicable when a certificate has been drawn up but not specifying the mode of recovery.

Recovery through State Government

Section 227 provides for recovery of tax in any area entrusted to a State Government in addition to the municipal tax. The provision does not have an application to securities law hence no specific modifications are suggested.

Recovery of tax in pursuance of agreements with foreign companies

Section 228A is related to the recovery of tax in pursuance of agreements with foreign companies, this provision has little to no relevance to the securities market hence, it may be inapplicable to the SEBI Act. Therefore no modifications are suggested by the Committee. 

Recovery of penalties, fines, interest and other sums

Section 229 provides any sum imposed by way of interest, fine, penalty or other sums payable under the Act shall be recoverable under the provisions of the Act. Since section 28 A already lists the dues that can be recovered the section may not be necessary for the securities market context.

Recovery by suit or under the law not affected

Instead of the current provision Section 232 stating the act does not bar recovery of dues by the Government or Assessing Officer, the section shall state the board’s right to institute a suit for recovery from the defaulter is unaffected notwithstanding the amount being recovered by the Defaulter under these regulations. 

Key Modifications to the Procedure 

Rule 8 of Schedule II to Income Tax Act- Disposal of proceeds of execution

The Rule 8 of Schedule II to Income Tax Act prioritises payment of administration cost incurred by the board like fees, charges payable to the Administrator and other persons appointed by the administrator performing its functions over other claims.

The Committee recommends inclusion of expenses incurred in drawing with a certificate by the Recovery Officer for determining reserve price in this ‘administrative cost’ a given priority over other claims.

Rule 9- Bar to jurisdiction of Civil Courts

Rule 9 allows a civil suit to be brought before a civil court solely on the ground of fraud with respect to the execution, discharge or satisfaction of a certificate or relating to the confirmation or setting aside of an order.

The Committee recommends removal of such exception as the Securities Appellate Tribunal is the forum to file an appeal against any orders of the board on any and all grounds.

Rule 39- Proclamation how made

Rule 39(1) states the proclamation of sale to be made by the beating of drums or other customary modes which has become an outdated and impractical practice, therefore the rule should be omitted.

Rule 50- Proclamation of Attachment

Rule 50 states the proclamation of attachment to be made by the beating of drums or other customary modes near the property, which has become an outdated and impractical practice, therefore the rule should be omitted.

Rule 54- Mode of making a Proclamation

Rule 54(1) states the proclamation of sale of the immovable property to be made by beating of drums or other customary modes near the property, which has become an outdated and impractical practice, therefore the rule should be omitted.

Rule 57- Deposit by Purchaser and Resale in Default

Currently, Rule 57 states the purchaser of immovable property of a defaulter is mandated to deposit 25% of purchase money within 15 days from the sale of the estate. The Committee recommends extending this period to 3 months with levying interest at 15%p.a.

Rule 58- Procedure in Default of Payment

Currently under Rule 58 when a sale of the property fails due to failure of payment by the highest bidder the deposit amount is forfeited and the property is resold.

Considering the operational costs incurred in conducting an auction and entire process of sale the Committee recommends offering to sell the property to the second-highest bidder at the highest bid price (i.e. by the defaulting purchaser).

Rule 68B- Time limit for the sale of attached I Disposal of proceeds of execution immovable property

The rule 68B prevents any sale after 3 years from the end of the financial year in which the order giving rise to the recovery of tax/ interest/ fine/ penalty/ other sums by attachment of immovable property. This period is extended for one more year where the highest bid is less than the reserve price or due to default in payment of deposit money or default in residuary payment by the purchaser.

The Committee recommends non-application of this time limit for SEBI recovery proceedings particularly for monies due for disgorgement.

Enhancements in the Recovery Process

Definition of Property

Since the recovery is conducted by attachment of defaulter’s properties the term ‘property’ must be defined under the Regulations. Such definition should include assets of all kinds- movable and immovable, tangible and intangible, corporeal and incorporeal. It shall also include securities, deposits, bank accounts, interest or proceeds from an asset or any legal documents evidencing title over any other asset.

Sale by E-auction

SEBI regularly opts for e-auction as it saves on costing and simultaneously allows wider participation. Therefore it is suggested that e-auction and e-auction agencies should be defined.

Registered Valuer

Registered Valuers are essential in the recovery process to ensure the accurate worth of the estate is utilised. They fix the ‘reserve price’ and this is treated as ‘confidential’. A definition of registered valuer along with who all are eligible to be appointed as the same should be provided under the Regulations. A definition of the reserve price will also aid in providing clarity.

Service of Notices

There is also a need for a provision concerning the service of notice to the defaulter and the purchaser of the property of the defaulter for recovery. There are corresponding sections in SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 that can be examined.

Poundage fee

The poundage fee is levied in respect of any sale made in execution of a certificate and paid by the purchaser of the defaulter’s property. SEBI ought to appropriate such fees as ‘costs’ of sale of properties in the recovery proceedings to reduce the amount of cost. Also, the term ‘poundage’ shall be replaced by ‘fees’ as the origin of the word poundage is the currency of Britain. A provision for the same effect should be added. 

Deposit of earnest money

Under the Income Tax Rules, bids for the purchase of any properties should be accompanied with payment of earnest money calculated at 10%of the reserve price where the reserve price is up to Rs.10 crore, with a minimum of Rs. 50,000 or Rs. 10 lakh plus 5% on the remaining amount of reserve price where reserve price is Rs. 10 crores. The earnest money of the unsuccessful bidders is to be refunded within 60 days from the confirmation of the sale or some default. A similar provision should be added in the present legislation as well.

Power to seek information

Section 28(4A) of Recovery of Debts and Bankruptcy Act, 1992 allows Recovery Officer to require any officer to declare on an affidavit the particulars of an asset by issuing a certificate with the same effect. 

Committee recommended insertion of a similar provision.

Government Provision

In a scenario where the property to be sold in such a manner does not have any buyers there should be an option for Central or State Government buying the same at a price equivalent to or higher than the reserve price. 

The Bengal Land Revenue Sales Act, 1859 had a similar provision for recovery of arrears of the reviewed due thereon, if there be no bid, the Government may purchase the estate for one rupee and in case of bids are received at a minimum of the highest bid.

Such purchase should be allowed adhering to the following:

• Two prior auctions of the immovable property must have been unsuccessful.
• If the amount due to the Government does not exceed the reserve price of the estate the Government may acquire the estate by extinguishing the liability of the defaulter equal to the reserve price.

Residue Clause

The Committee recommends insertion of a residue clause to deal with unforeseen circumstances. The section should provide the Recovery Officer power to determine the procedure in certain circumstances.

Comprehensive Regulations

SEBI (Appointment of Administrator and Procedure for making Refunds to Investors) Regulations, 2018 apply to the following matters:

• Appointment of Administrator pursuant to failure to comply with disgorgement or refund orders passed by SEBI.
• Sale of properties attached by Recovery Officer of SEBI under the Act.
• Collection of claim documents and verification of claims of investors for effecting funds.
• Refund of monies to the investors pursuant to disgorgement or refund by SEBI.
• Recovery of disgorgement amounts directed by SEBI.
• Any act incidental thereto.

These SEBI should include other recovery provisions of such regulations.

Conclusion

The recommendations of the Committee under this part of the Report were most sought after as the primary objective of the Report was to strengthen the recovery process under Securities Law. Unfortunately, the recommendations are purely procedural and the Schedule II of Income Tax Act is a complete code in itself and provides an efficient recovery mechanism for various legislations in the country. 

Further, the key issue with the limitations in the current recovery mechanism is the fact that it is a summary proceeding whereas the Supreme Court in Tax Recovery Officer v. Gangadhar Ranade stated that title of a property cannot be decided in summary proceedings, therefore there is a need to treat the recovery proceeding as a regular proceeding with the entire exhaustive process including a judicial determination of the rights and titles over the property, and merely the development of correspondent regulations with nominal changes and increase in power of SEBI to deal with the third party as suggested by the board shall not serve the purpose.

References

• https://www.sebi.gov.in/reports-and-statistics/reports/jun-2020/report-of-high-level-committee-under-the-chairmanship-of-justice-retd-anil-r-dave-on-the-measures-for-strengthening-the-enforcement-mechanism-of-the-board-and-incidental-issues_46863.html

• https://taxguru.in/sebi/report-measures-strengthening-enforcement-mechanism-sebi-incidental-issues.html
• https://indiacorplaw.in/2020/07/dave-committee-on-strengthening-sebis-recovery-mechanism-missed-opportunities.html#:~:text=On%20December%2014%2C%202017%2C%20the,chaired%20by%20Justice%20Anil%20R.&text=One%20of%20the%20terms%20of,recovery%20mechanism%20under%20securities%20laws.

---

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: