This article is written by Aritro Gon.

Introduction

The Finance Act 2018,[1] brought into effect, significant amendments to laws applicable to the securities market in India including major changes to the Securities and Exchange Board of India Act, 1992 (SEBI Act), the Securities Contract Regulation Act, 1956 (SCRA) and the Depositories Act, 1996. These amendments were mostly focused on increasing the penal powers of the Securities and Exchange Board of India (SEBI) with intent to provide an effective tool in the hands of the regulator to deter the market players from violating the law. However bonafide this intent may seem, it needs a fair assessment as to whether the increased powers are justified or are excessive in nature.

Penal powers under the SEBI Act

Penal powers are a necessity for the market regulators to effectively control and regulate the market. However, the scope and limits of these powers have been the subject of debate across jurisdictions. If the powers are too less, the regulator might prove to be ineffective. On the other hand, if the powers are excessive, the market players suffer as a result of unreasonable sanctions. Hence, there is a need to strike a balance between the regulatory powers and provide a reasonable breathing space for the market players.

In the year 2000, as an aftermath of the famous Harshad Mehta case, the Dhanuka Committee recommended vast powers to be conferred upon SEBI. It is pertinent to note, that the Committee itself warned against the abuse of such powers distinctively. It stated:[2]

“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.”

It is important to note here, that the triggers to penal powers of SEBI, necessarily rest upon statutory violations. The Supreme Court of India, in the case of Swedish Match AB vs. SEBI,[3] held:“… the 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.”

Power Of SEBI To Levy Penalties

SEBI is empowered to levy penalties after adjudication of the matter if it finds that any such statutory contravention has occurred. SEBI, in general practice, assesses factual circumstances and establishes whether or not an offense has been made by the assessee, and levies the penalty stipulated by the Act. However, it is argued, that the purpose of any adjudicatory proceeding, should not be a mere assessment of facts but must also be a determination of the gravity of the offense and imposing a penalty that is proportionate to the same. SEBI has time and again, imposed penalties at a flat rate in a mechanical, “automatic” manner.[4]

Hence we see, that even prior to the recent amendments by the Finance Act 2018, the unreasonable application and use of punitive powers by SEBI was criticized heavily. This provides for more reason to assess whether the increase in such powers, as discussed hereinbelow, is reasonable or not.

It is pertinent to note here that Section 179 and 180 of the Finance Act 2018 amended Section 11 and 11B of the SEBI Act respectively, thereby conferring the Board with the power to levy penalties. Prior to this amendment, Whole Time Members of the Board had been passing directions which were only remedial and preventive in nature and the imposition of penalties used to be the job of Adjudicating Officers, for which separate proceedings were conducted. The amendment seeks to allow Whole Time Member to impose penalties as well as remedial and preventive directions. It is submitted that this is a welcome step, as it will reduce multiplicity proceedings and effective use of resources.[5] However, it is pertinent to note here, that the amendment does not necessitate the penal proceedings to be carried out by the Board. Hence, the lacunae relating to multiplicity still exists for cases where the Board chooses not to pass any punitive direction. Whether SEBI still has the power to carry out separate adjudicatory proceedings in such cases for the imposition of penalty? The question remains unanswered.

Further, the Finance Act 2018 inserted Section 23GA to SCRA, which provides:

“Where a stock exchange or a clearing corporation fails to conduct its business with its members or any issuer or its agent or any person associated with the securities markets in a manner not in accordance with the rules or regulations and directions made by the Securities and Exchange Board of India, the stock exchange or the clearing corporations shall be liable to penalty which shall not be less than five crore rupees but which may extend to twenty-five crore rupees or three times the amount of gains made out of such failure, whichever is higher.”

By virtue of this provision, SEBI has been empowered to impose a penalty on Stock Exchanges and Clearing Corporations on failures to conduct its business with its members or any issuer or its agent or any person associated with the securities markets.[6] This amendment has been brought with an aim to serve as a deterrent towards violation law. However, it is submitted that the amendment fails to clarify the extent of the discretion that SEBI may have while imposing penalties under the section for the reason discussed hereinbelow.

The Supreme Court of India, in recent times, has been unclear as far as the discretion of SEBI with respect to punitive powers is concerned. The Supreme Court, in SEBI v. Roofit Industries,[7]  held that the Assessing Officer has no the discretion in deciding the quantum of penalty to be imposed thereby necessitating the strict application of the penalty as stipulated by the applicable penal provision in the statute. The applicable penal provision in the instant case was Section 15A(a), which provided that if any person who is required under the SEBI Act to furnish any document, return or report to SEBI, failed to furnish the same, he shall be liable to pay a penalty of “one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”

This strict application of penal provisions led to an absurd situation where SEBI imposed enormous penalties for simple disclosure violations, without any regard for the nature of the transaction or for the factors laid down in Section 15J[8] for deciding the quantum of penalty to be imposed.[9]

Another bench of the Supreme Court, in the matter of Siddharth Chaturvedi vs. SEBI,[10] differed with the interpretation of the Court in SEBI vs. Roofit Industries, and held that if the interpretation provided by the Supreme Court in Roofit Industries case is followed, “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.” The Court hence opined that this question deserves to be considered by a larger bench.

The legislators, in order to bring clarity over the matter, brought an amendment in the SEBI Act as well as SCRA through Finance Act 2016, thereby adding an explanatory clause after Section 23J of the SCRA which read:

“For the removal of doubts, it is clarified that the power of an adjudicating officer to adjudicate the quantum of penalty under sections 23A to 23C shall be and shall always be deemed to have been exercised under the provisions of this section.”

Hence, as far as the present law stands, the Adjudicating Officer has the discretion to decide on the quantum of the penalty based on the factors provided under Section 23J[11] of SCRA, and strict application of penal amount as stipulated under sections 23A to 23C is not required if the said factors are satisfied.

However, it is interesting to note that the Finance Act 2018, fails to amend the explanation under Section 23J to include the newly added Section 23 GA, which in effect, is also a penal provision. Hence, it is submitted, that this failure results in a huge ambiguity as far as the discretionary power of the Board in levying penalty under Section 23 GA is concerned. It is further submitted, that this failure might lead to a strict interpretation of the said Section, which might result in excessive penalties being imposed on Stock Exchanges and Clearing Corporations, even for small violations which might not reasonably warrant for such huge sanctions.

For instance, according to Section 43 of the Securities Contracts (Regulation) (Stock Exchanges And Clearing Corporations) Regulations, 2012, every recognized stock exchange and clearing corporation has to furnish to the Board, its annual financial statements and returns to the Board by the thirtieth of September of every year. This filing obligation lies on the Stock Exchanges and Clearing Corporations.

Further, Section 23J of the SCRA (which, in its present form is not applicable to Section 23GA), provides for the following factors to be kept in mind by the Adjudicating Officer while deciding the quantum of penalty:

1. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
2. the amount of loss caused to an investor or group of investors as a result of the default;
3. the repetitive nature of the default.

Now, for example, a Clearing Corporation “A” fails to abide by this filing obligation for some administerial reasons, and the filing is made at a date after thirtieth September of the concerned year. Now, because the explanation appended under Section 23J does not cover Section 23 GA, the adjudicating officer will not be able to consider any bonafide delay on part of A. Whereas, he will be forced to strictly apply the penal provision under Section 23GA and impose a penalty of at least five crore rupees, as stipulated by the Section. Hence, essentially, the hands of the Adjudicating officer will be tied as far as exercising his reasonable the discretion is concerned.

Therefore, we see that the strict application of Section 23GA will result in SEBI being forced to impose enormous penalties for simple filing violations. This might prove to be highly unfair to Stock Exchanges and Clearing Corporations acting in a bonafide manner.

CONCLUSION

In conclusion, it is submitted that however, the power to impose penalties on Stock Exchanges and Clearing corporations, as envisaged under Section 23GA of the SCRA, is a welcome step as it brings more transparency and answerability over the said market players, the provision can be made more fair and reasonable if;

1. The ambit of Section 23J is broadened to include Section 23GA, thereby giving the power to SEBI officers to impose proportionate penalties in case of violation and avoid strict and unfair application of the newly added penal provision. Or;
2. A comprehensive list of violations under SCRA and the proportionate penalties are set by the legislature. An umbrella penal provision is unfair to the parties at the receiving end.

[1] Finance Act 2018, Notified on 29.03.2018, http://egazette.nic.in/writereaddata/2018/184302.pdf.

[2] Uma Lahore, How to Train your Dragon- the discretion in SEBI’s Penalty Orders, Lakshmikumaran and Sreedharan, (27.05.2018, 1320 hrs.), https://www.lakshmisri.com/News-and-Publications/Publications/Articles/Corporate/how-to-train-your-dragon-the the discretion-in-sebi-penalty-orders.

[3]Swedish Match AB vs. SEBI,122 CompCas 83 (SC) (2004).

[4] See DLF IPO Case, SAT Appeal No. 221 of 2014.

SAT criticized the abuse of punitive powers by SEBI as SEBI imposed an extraordinary penalty of 860 million on the assessee along with a 3-year ban from the market under Section 15HA of the SEBI Act.

[5] Finance bill, 2018 proposes significant Amendments in Securities Laws, Corporate Professionals, (27.05.2018, 1450 hrs.), http://corporateprofessionals.com/finance-bill-2018-proposes-significant-amendments-in-securities-laws.

[6] Ibid.

[7] SEBI v. Roofit Industries, 2016 (12) SCC 125.

[8]Note: The language of Section 15J of the SEBI Act is exactly the same as Section 23J of the SCRA.

[9] Shashank Prabhakar, Finance Act amendments to the SEBI Act and the SCRA: Parliament Settles the Roofit Question, Bar, and Bench, (27.05.18, 1900 hrs.), https://barandbench.com/finance-act-amendments-sebi-act-scra-parliament-settles-roofit-question/.

[10]Siddharth Chaturvedi vs. Sebi, (2016) 135 SCL 106.

[11] Note: The language of Section 23J of the SCRA is exactly the same as Section 15J of the SEBI Act. The language of Sections 23A to 23C which lay down the penalties for offenses committed thereunder are exactly similar to the language of Sections 15A(a).