Prosecution under Securities Laws

6.2 Any and every contravention of the provisions of the Act
or of Regulations or of Rules made thereunder is deemed to be an offence. I am
reminded of an old Gujarati saying — Andheri Nagri, Gandu Raja, Takke sher bhaji,
Takke sher khaja — meaning, in a town with a mad and blind ruler, vegetables and
sweets are priced equally. What is implied in the present context is that there
is no distinction made between the nature and severity of the violations and a
common punishment is provided for all violations. Any violation of any
provisions of the Act, Regulations or Rules invites imprisonment up to 10 years
or a fine up to Rs.25 crores or with both.

6.3 It needs to be noted that it is not violation of the
statutes and Rules and Regulations issued thereunder that invite such punishment
but mere violation of even the directions or orders of the Adjudicating Officer
would invite additional punishment of similar nature. Thus, even if one does not
pay the penalty levied, punishment is possible under this Section. Of course, it
is very likely that the Court will levy appropriate punishment taking into
account the nature of the violation and other factors.

6.4 Typically, in many other statutes, we find differing
punishment varying with the seriousness of the violation. For example, under
provisions relating to non-banking financial companies in the Reserve Bank of
India Act, some violations are punishable with fine only, some with imprisonment
or with fine, but if the requirement of non-registration as NBFC is violated,
there is a minimum imprisonment of at least one year and fine. Such
differentiating punishment is missing in Securities Laws. This is despite the
fact that these provisions were substantially amended in 2002 — that is 10 years
after their original enactment.

6.5 Any attempt to violate the Securities Laws or any
abetment thereof also invites the same punishment. To put in other words, an
unsuccessful attempt to violate or assistance in the violation is put in the
same category as a successful violation. Again, the Court may levy different
punishment for attempts or abetment, depending upon the actual facts.

7. Compounding of offences :

Simplified a little, compounding of offences means coming. forward and settling the violation through a monetary fine with the approval of SEBI and the Court/Securities Appellate Tribunal. SEBI had notified last year Guidelines for compounding of offences, alongwith those for consent orders for other proceedings. These Guidelines were discussed earlier herein and there have been numerous orders under these Guidelines. SEBI has set up an independent High Powered’ Advisory Committee which facilitates the process. The prosecution proceedings are likely to be a long-drawn process consuming time, effort of and cost to both sides. It may make sense to settle the matter by payment of a monetary fine. For the accused, it saves cost and effort involved in litigation and he is also absolved from punishment. For SEBI, it achieves the objective of ensuring that the violator is punished with fine which may also act as deterrent for others and saving in time and effort. Unless one of the parties feels that it has a very strong case or unless for either of them it is a matter of principle in a particular matter which impels not to settle, it is always worth considering this option of compounding. Importantly, an application to compound an offence can be made at any stage – even before formal proceedings have commenced. Obviously, the later the matter is taken up by the accused, the higher would be the compounding fee. The amount recovered through settlement is paid to the Government of India and not SEBI.

8. Application for immunity:

A person can also apply for immunity from prosecution and penalty by making a full and true disclosure of the alleged violation. The immunity is granted by the Central Government on the recommendation of SEBI. An important difference between compounding and immunity is that immunity has to be granted before commencement of proceedings for prosecution.

9. Unique features of prosecution proceedings as compared to adjudication, enquiry and other proceedings:

9.1 Detailed discussion or even summary of prosecution proceedings generally is beyond the scope of this article. However, some features can be high-lighted. It must be noted that it is not necessary that the features described here relating to prosecution proceedings in general would necessarily apply in their full effect to prosecution proceedings under Securities Laws. Securities Laws are different from purely criminal statutes such as the Indian Penal Code and other statutes such as the Companies Act, 1956. Further, Securities Laws unfortunately do not lay down in more detail the factors relevant for consideration in prosecution proceedings. Hence, time and judicial precedents will tell us more how these principles would be applied.

9.2 Mens Rea, or guilty state of mind, is normally a necessary ingredient in an offence and it is submitted that it would have to be proved in prosecution proceedings under Securities Laws.

(i)    The Supreme Court observed in Swedish Match AB and Anr. v. SEBI and Anr., [(2004) 11 SCC 641] as follows:

“The provisions of S. 15-H of the Act mandate that a penalty of rupees twenty five crores may be imposed. The Board does not have any discretion in the matter and, thus the adjudication proceeding is a mere formality. Imposition of penalty upon the appellant would, thus, be a foregone conclusion. Only in the criminal proceedings initiated against the appellants, existence of mens rea on the part of the appellants will come up for consideration.” (emphasis supplied)

(ii)    These remarks may appear to be obiter dicta since the matter related to appeal in respect of adjudication proceedings and the issue was whether mens rea was a necessary ingredient in such adjudication proceedings. However, still, they do throw some light.

9.3 The following observations of the  Bombay High Court in SEBI v. Cabot International Capital Corporation, (2005) 123 Comp. Cases 841 (Born), cited by the Supreme Court in Swedish Match’s case cited above, on mens rea are relevant and are are summarised below:

(1)    Mens rea is an essential or sine qua non for criminal offence.

(2)    Strait-jacket formula of mens rea cannot be blindly followed in each and every case. Scheme of particular statute may be diluted in a given case.

(3)    If, from the scheme, object and words used in the statute, it appears that the proceedings for imposition of the penalty are adjudicatory in nature, in contradistinction to criminal or quasi-criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word ‘penalty’ by itself will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal.

(4)    The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravener and the delinquency.

(5)    Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities.

(6)    There can be two distinct liabilities, civil and criminal under the same Act.

9.4 The prosecution proceedings are before the Court while adjudication and other proceedings are before SEBI.

Arguably, the principle that the accused is innocent till found guilty would apply more strongly in prosecution proceedings under Securities Laws as compared to adjudication and similar proceedings. As the Latin maxim goes, Actus non facit reum, nisi mens sit rea. A man is responsible, not for his acts in themselves, but for his acts coupled with mens rea or guilty mind with which he does them.

10. Offences by companies:

(a) S. 27 deals with offences by companies and which of the directors, persons in charge, etc. would be deemed to be guilty of the offence and under what circumstances they can claim immunity, that is they are not liable. The wording of this Section is fairly standard and similar to corresponding provisions in most other statutes and hence not discussed here further.

Conclusion:

It is often forgotten how broad the definition of offences is and how harsh the punishment can be. Despite this, one often also gets a feeling that securities laws violations are not getting adequately punished. Perhaps the reason is the long-drawn and difficult process of prosecution and proving the offence, particularly since the parties involved are educated and well advised. Perhaps also that the punishment levied in such offences is not given the required publicity. Perhaps, there is also the cavalier approach of the law-makers to such offences as is seen by the poor attention paid to drafting of the provisions leading to numerous anomalies. The result is such strict provisions do not always act as a deterrent as they ought to. The challenge before both the law-maker and the law enforcer is to make the law simple prescribe punishment and enforce the law whilst understanding realities of business strictly, so that the law not only acts as a deterrent but is respected. The challenge to the citizen is to understand the complexities in the law – a tough call.