Introduction SEBI has recently passed several orders levying huge penalties, running into crores for defaults like non-filing of documents/information. What is interesting is that levy of such huge and flat penalties is said to be mandatory and inevitable following the mandate of the recent decision of the Supreme Court in the case of SEBI vs. Roofit Industries Ltd. SEBI’s view is that such levy is unavoidable, it is effectively being held, even where there are no aggravating factors.
Summary of decision of Supreme Court and its immediate impact
The Supreme Court was dealing with the provisions of section 15A(a) of the SEBI Act, 1992 which provides for “a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less”. The penalty of Rs. 1 lakh per day of such failure, the Court held, is absolute and non-discretionary. Thus, if there was a delay/failure of, say, 75 days, the penalty would be Rs. 75 lakh. However, if the delay was of more than 100 days, then the penalty would be Rs. 1 crore.
While the decision is on penalty u/s. 15A(a), in view of almost identical wording in other penalty provisions (except 15F(a) and 15HB of the SEBI Act), it will apply to those provisions too. Further, there are several similar provisions in the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996 to which the ratio of this decision will apply. To take an example of violation under another such provision, in case of insider trading, the penalty u/s 15G of the SEBI Act would be a flat Rs. 25 crore. If three times the profits from insider trading exceeds Rs. 25 crore, the penalty will be such higher figure.
Note, however, that these provisions in all the three statutes have been amended with effect from 8th September 2014. The amended provisions now provide for a relatively far smaller minimum penalty. However, for all such violations during the period 29th October 2002 to 7th September 2014, such flat and huge penalty would be imposable. Considering that such violations of non-filing of documents/information (e.g., non-filing of information relating to change in holdings under the Takeover/Insider Trading Regulations) have been routinely found in numerous cases, all such cases will face such large penalties.
Indeed, within a very short time after this decision, SEBI levied penalties as follows:-
1. Presha Metallurgical Ltd. and others (Rs. 8 crore)
2. Vipul Shah (Rs. 4 crore)
3. Sunciti Financial Services Private Limited (Rs. 2 crore)
4. Alok Electricals Private Limited and others (Rs. 1 crore)
Detailed Discussion on Decision
The essential facts before the Supreme Court in this matter were as follows (there were several cases of broadly the same category in appeal and the facts discussed here relate to one of them – Alkan Projects). SEBI had levied a penalty of Rs. 1 crore on one of such parties for nonsubmission of information sought by it. The information was required to investigate certain alleged manipulation, etc. in the shares of Roofit Industries Ltd. Alkan appealed to the Securities Appellate Tribunal (“SAT ”). SAT noted that while the violation was clearly established, Alkan was in a bad financial position. It was impossible to recover such a large penalty, and thus it did not serve any purpose. In the event of non recovery, SEBI could prosecute Alkan but that, as SAT noted, would take a long time, considering the already existing backlog of similar cases. SAT also noted that the provisions of section 15J provided for certain factors to be considered for levy of penalty. While “impecuniosity” of the party was not specifically listed as a factor, SAT nevertheless held that it should also be considered while deciding the amount of penalty. SAT accordingly reduced the penalty from Rs. 1 crore to Rs. 15,000.
SEBI appealed to the Supreme Court. The Supreme Court set aside the order of SAT . It held that section 15J listed three exhaustive factors for consideration of penalty. No other factor, including “impecuniosity”, can be considered, the Court held. The wording of section 15(A)(a) was also definite and prescribed a penalty of Rs. 1 lakh per day (albeit with an upper limit of Rs. 1 crore) which the Court held to be absolute. According to the Hon’ble Court, the “clear intention” for such high penalty “…is to impose harsher penalties for certain offences, and we find no reason to water them down”.
The Supreme Court also held that the amended penalty provision left no discretion with the adjudicating officer (AO) and thereby, even “the scope of section 15J was drastically reduced” for this purpose. The Supreme Court also dealt with section 15I and whether it allows for discretion to the AO in such matters. According to the Hon’ble Court, the amendments taking away such discretion “ought to have been reflected in the language of section 15I, but was clearly overlooked”. However, it also noted that, post amendment with effect from 8th August 2014, the discretion was reintroduced into the law.
Following this decision, SEBI has levied huge penalties in several cases. It is apparent, from the clear wording of such orders of penalty, that it will follow the same course in all other cases before it of violations during this long period of approximately 12 years while this provision was in force. Mitigating factors would not go to reduce the penalty. Further, aggravating factors would not go to increase the penalty. It appears that sections 15I and 15J are thus by and large rendered otiose, of course for these limited purposes. (Note:- Ironically, the Supreme Court, in view of the peculiar facts of the case, and also on account of its ruling on whether the failure was a continuing one, held that the penalty would be a lower amount, since the failure was committed before 29th October 2002).
Critique
With due respect, the decision of the Supreme Court needs reconsideration.
Section 15I does specifically provide for discretion to the Adjudicating Officer. It provides that if the Adjudicating Officer “..is satisfied that the person has failed to comply with the provisions of any of the sections specified in subsection (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.” The Hon’ble Court has, however, taken a view that section 15I should also have been amended to remove the discretion for cases where such penalty is leviable but this was “clearly overlooked” by the law makers.
The Court has held that the factors listed in section 15J are exhaustive, in view of the word – “namely”. Thus, it has held that other mitigating factors cannot be considered. It is submitted that a better interpretation of the section is that it obligates the AO to consider these factors and thus is a qualitative provision. If these factors are absent penalty may be reduced/not levied. If one or more of such factors are present, then depending on the intensity of such factors, higher penalty may be levied. Further, it is also submitted, considering the discretion inbuilt in section 15I, there is no bar in considering other mitigating or aggravating factors present in circumstances of each case.
Indeed, considering the contradictory and even ambiguous provisions of sections 15I and 15J, the Court could have, it is submitted with due respect, taken a view that discretion still exists for the AO.
The Hon’ble Supreme Court should have also considered that these penalty provisions have actually been applied fairly consistently in the past by SEBI (and upheld by SAT ) by applying penalties in a discretionary manner.
The Hon’ble Court should have also considered the absurd consequences of such an interpretation. To take an example, a violation of insider trading resulting in a profit of Rs. 1000 would nonetheless result in a penalty of Rs. 25 crore.
The view of SAT that impecuniosity should also be considered as a factor is also not devoid of merit. A penalty of, say, Rs. 1 crore on a person known to be insolvent is, as SAT rightly pointed out, only on paper. I had pointed out earlier in this column that the huge/record penalty of Rs. 7,269 crore levied by SEBI on PACL suffers from this same anomaly and defect and is thus equally meaningless/ on paper only.
It is also seen that before 29th October 2002 and on and after 8th September 2014, no such large and mandatory penalty was imposable. Even after 2014, though a minimum penalty is imposable, such minimum amount is relatively far small. It is inconceivable, in my view, that law makers could have considered levy of such huge and flat penalty, particularly considering that the matters with which the provisions relate to are not serious. Where they are serious, fairly large amount of penalties has indeed been provided for. If at all, it is respectfully submitted, the Hon’ble Court should have read down these provisions, instead of effectively reading down section 15I and 15J. I may add that the Supreme Court in Swedish Match’s case ([2004] 54 SCL 549 (SC)) did consider, in passing though, with the issue whether a penalty of Rs. 25 crore for non-compliance of making an offer is inevitable. However, the views there were not as emphatic and direct as in Roofit’s case.
Even otherwise, SEBI has also taken, in my view, a flawed stand with regard to another Supreme Court’s decision, viz., SEBI vs. Shriram Mutual Fund (68 SCL 216 (SC). SEBI considers (wrongly, in my opinion) this decision as holding that penalty should mandatorily follow a violation and there is no discretion to SEBI in the matter. While SEBI has not levied sky high penalties, as it has done following Roofit’s case, one hopes that this stand too is modified and made consistent with what the Hon’ble Court really mandated in that case.
Be that as it may, SEBI seems to be on a roll and is almost gleefully levying huge penalties. To me, it seems inevitable that the matter will go back to the Supreme Court. It is hoped that the Hon’ble Court reconsiders its view and holds that discretion still remains in matter of levy of penalty.
