Background
a) In an earlier article in this column, certain recent amendments to the SEBI Act were pointed out. One amendment that was noteworthy was of the powers given to SEBI to arrest any person for having defaulted in paying certain dues to SEBI. The dues to SEBI could be of several types – on account of penalty, on account of amounts ordered to be disgorged or even on account of fees, etc. SEBI could arrest and send to prison such a defaulter. Such arrest did not even require a court order. A relatively junior official of SEBI could arrest and send such person to prison for such a period. However, this is subject to conditions on the lines of and indeed borrowed from the Incometax Act, 1961.
b) Recently, however, on 18th December 2014, SEBI exercised this power for the first time and arrested a defaulter and sentenced him to prison for six months. The arrested person had to file a writ petition and the Bombay High Court set aside this order and released him. He was in prison for more than two and a half months. As will be seen later, the power to arrest was exercised by misconstruing and misapplying the provisions, in an arbitrary manner and, as the Court held, quite illegally too. The only silver lining to this episode was that the pre-conditions for such arrest were duly highlighted by the Court and thus, in future cases, hopefully, these pre-conditions will be observed.
c) Let us discuss the law first, as amended, and thereafter the SEBI Order and then the decision of the Bombay High Court that set it aside.
2) The Law
a) SEBI collects dues from various persons on several accounts. It collects fees for registration, fees for carrying out activities under securities laws such as public issues, open offers, buybacks, etc. It also levies penalties. It disgorges ill-gotten gains. And so on. Some of such amounts are remitted to the Consolidated Fund of India i.e., to the central government. Most of the others are used by SEBI. A person from whom amounts are due on such specified accounts may default for various reasons. He may not have the money or he may have the money but avoids paying it. He may even transfer his assets to his relatives/benami persons or others to avoid recovery. SEBI has several powers to deal with such defaulters. It can attach assets of the defaulter and recover the dues. It can even prosecute such defaulters (which is totally different from the new power discussed here) in court which may sentence such person to jail. However, vide the Securities Laws (Amendment) Act, 2014, a fresh power was given to deal with such defaulters. Vide the newly inserted section 28A, a defaulter can be, inter alia, arrested and detained in jail. The relevant provisions of this section have been reproduced below (certain words are highlighted which need review since the Court relied on these words to release the arrested in the case under discussion):-
Recovery of amounts
28A. (1) If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the Board for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B or fails to pay any fees due to the Board, the Recovery Officer may draw up under his signature a statement in the specified form specifying the amount due from the person (such statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from such person the amount specified in the certificate by one or more of the following modes, namely:—
(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable properties, and for this purpose, the provisions of sections 220 to 227, 228A, 229, 232, the Second and Third Schedules to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, in so far as may be, apply with necessary modifications as if the said provisions and the rules made thereunder were the provisions of this Act and referred to the amount due under this Act instead of to income-tax under the Income-tax Act, 1961.
…
(4) For the purposes of sub-sections (1), (2) and (3), the expression ‘‘Recovery Officer’’ means any officer of the Board who may be authorised, by general or special order in writing, to exercise the powers of a Recovery Officer.
b) As can be seen, the Recovery Officer exercises the powers under this Section. The Recovery Officer is any officer of SEBI who is authorised to act as such. In the present case, he was an Assistant General Manager.
3) SEBI order
a) The facts as stated in the SEBI Order are as follows. Certain penalties were levied against a person (“the Defaulter”) in respect of two companies where he was a non-executive Chairman. The cumulative amount was about Rs. 1.65 crore. The Defaulter failed to pay despite reminders. His bank accounts, etc. were attached but the amounts available were grossly insufficient. SEBI asked such Defaulter to submit a plan to pay such dues but he could not submit. He was finally asked to appear before the Recovery Officer to submit such a plan or be arrested. He appeared and could not either pay the dues nor submit a satisfactory plan. He was arrested u/s. 28A and sent to prison by the Recovery Officer for six months or till he paid the dues.
b) Interestingly, the provisions of Section 28A can be exercised irrespective of the nature of the dues. That is to say, the dues can be for having committed some malpractices or could even be dues on account of unpaid fees to SEBI.
c) The Defaulter filed a writ petition before the Bombay High Court.
4) Bombay High Court Order
a) In the Writ Petition before the Bombay High Court, an initial point was made that the Writ Petition was not maintainable since the Defaulter had a right of appeal to the Securities Appellate Tribunal. However, considering the facts of the case and precedents on this point, this point was rejected and the WP allowed.
b) The Court analysed the prerequisites for making an arrest u/s. 28A as clearly laid down in the section. It pointed out that the specified provisions of the Income-tax Act, 1961 (and specified Schedules/ Rules made thereunder) would apply. A review of such Schedule/Rules showed that it is a pre-requisite for arrest that at least one of two conditions should be satisfied. The Defaulter should have sought to obstruct the recovery by dishonestly transferring, concealing or removing his property. Alternatively, he should have refused or neglected to pay the whole or part of the dues despite having property to meet the dues. Apart from establishing such facts, the Recovery Officer should also record the reasons, etc. for the proposed arrest. The Court observed several things. Firstly, it was not shown at all that either of the two pre-conditions. Secondly, no inquiry was made giving a fair opportunity to the Defaulter to establish this. Finally, the reasons for arrest giving existence of these pre-conditions were not recorded. The reasons were sought to be put forth in the reply which obviously the Court found it to be too little and too late. The Court analysed Rule 73 to 77 of Second Schedule to the Income-tax Act, 1961 and made the following observations for setting aside the SEBI Order:-
23. A perusal of aforesaid relevant provision indicates that Part V of Second Schedule provides a detail procedure which is required to be complied with when the Tax Recovery Officer resorts to the mode of arrest and detention. Needless to state that the mode of arrest and detention though not a punitive action, is a drastic step which infringes upon the liberty of a person. Hence, recourse to such mode has to be necessarily in strict compliance with the provisions stipulated in Part V of second Schedule.
28. A bare reading of the notice and the impugned orders makes it abundantly clear that the power of arrest has not been exercised in the manner and for the circumstances provided for in Rule 73(1). It is to be noted that Rule 73(1) confers power of arrest and detention only in two situations i.e. when the Tax Recovery Officer is satisfied that
(i) the defaulter, with the object or effect of any obstructing the execution of the certificate, has dishonestly transferred, property or (ii) despite having means the defaulter, refuses or neglects to pay the dues. Rule 73(1) further mandates the Tax Recovery Officer to record in writing the reasons of his satisfaction.
29. In the instant case, the Tax Recovery Officer had not recorded his satisfaction with reasons in writing, as regards the existence of two situations, which are specified in Clause (a) of Rule 73(1). The Tax Recovery Officer has not detained and arrested the petitioner on the ground that he had transferred, concealed or removed any part of his property. The respondent had stated in the affidavit that upon issuance of the attachment orders, none of the banks have reported any accounts in the name of the petitioner, except Punjab National Bank at Mira Road (E) branch and only an amount of Rs.5160.82 was recovered by the respondent Board. By these averments, the respondent has sought to justify the arrest. Needless to state that having failed to record the reasons as regards existence of the situation in clause (a), the respondent cannot rectify the lacuna by stating the reasons in the reply.
30. It is also not the case of the Respondent Authority that the petitioner had failed to pay to dues despite having means to pay the arrears or some substantial part thereof. On the contrary, a bare perusal of the impugned order reveals that the petitioner was detained and arrested for non¬payment of dues and further for not giving a proposal of payment
32. In the light of the aforesaid principles, the Tax Recovery could not have ordered detention of the petitioner solely on the ground that he had failed to pay an amount or give the proposal.
33. The authority of the respondent had therefore not arrived at a satisfaction that the conditions specified in clause (a) and (b) of Rule 73(1) were satisfied and had further not complied with the mandate of Rule 73(1) of recording the reasons of satisfaction in writing. The absence of satisfaction as well as recording of reasons vitiates the exercise of power of arrest. We are, therefore, of the considered view that the detention and arrest is patently illegal and arbitrary.
c) Thus, the defaulter was forthwith released from prison. however, he was ordered not to leave the country during pendency of the proceedings and his passport was retained with the EOW. The recovery Officer could pass a fresh order after due compliance of the procedures and establishment of the conditions as stated in the law.
5) Concluding Comments
a) The Court thus has confirmed the essential pre- requisites for making such an arrest u/s. 28a. Arrest of a defaulter merely for not having paid dues would thus not be possible even if such dues were on account penalty for misdeeds.
b) Having said that, some other provisions of the act need to be noted since they too may result in imprisonment. Firstly, attention is invited to section 24(1) of the SeBi act which states that violation of any of the provisions of the act, regulations, etc. may result in a fine or imprisonment upto 10 years. However, this would obviously require due prosecution proceedings before the Court, demonstrating to the Court that such violations deserve imprisonment, etc. there is also section 24(2) which states that if a person on whom a penalty has been levied fails to pay the same, he can be sentenced to imprisonment from one month to 10 years. Here too, this can only be after due prosecution proceedings before the jurisdictional Court.
c) However, it is sad and curious that, with due respect, though the Court emphatically held that the arrest was arbitrary and illegal, the defaulter had to suffer more than two months in jail. But he was not awarded any compensation or even the costs of the legal proceedings.
