PENALTY PROVISIONS UNDER SECURITIES LAWS – SUPREME COURT DECIDES

The legal provisions have
seen frequent changes and even suffer from poor drafting. Even court decisions
have seen twists and turns by changes in interpretation by SEBI. SEBI
interpreted an earlier decision of Supreme Court in Shri Ram Mutual Fund
((2006) 5 SCC 361 (SC)) that the court held that penalty was mandatory in
case of violations and no mens rea had to be proved. It was arguable
that the Court did not make penalty mandatory. However, SEBI took a view that
it had no choice but to levy penalty. This had also to be seen in context of
the fact that there were provisions which provided for fairly large minimum
penalties.

Finally,
there were two fundamental interpretation issues of certain provisions. One
related to section 15J in the Securities and Exchange Board of India Act, 1992
provided that three factors to be taken into account by the Adjudicating
Officer (“the AO”) while levying penalty. The second question was whether these
three factors were merely illustrative, in which case other factors
could also be taken into account? Or whether they were exhaustive, meaning
that no other factors could be taken into account.

A related issue was whether
the AO has any discretion not to levy penalty or levy a lower penalty
than the one prescribed. These questions arose out of seemingly anomalous or
contradictory provision because some sections provided for a minimum and
mandatory penalty while another provision required the AO to consider certain
factors while deciding levy of penalty.

Fortunately, all of these
issues have been considered by the Supreme Court in a recent decision in Adjudicating
Officer, SEBI vs. Bhavesh Pabari ((2019) 103 taxmann.com 8 (SC)).

Background

The decision with several
separate cases in appeal though all of them had a common theme of penalty. The
Court thus first discussed in detail the legal background in the form of
earlier cases of the Supreme Court and also the provisions of the Act including
the various changes therein over the period.

The Court then arrived to
certain conclusions as to how the law should be interpreted and applied with
regard to certain matters and questions. These interpretation were then applied
to the facts of individual cases while deciding the violation.

It will be thus necessary
to summarise what the Court decided for each issue before it.

Whether
penalty is to be mandatorily levied or is there any discretion/exception
possible?

This has been a fundamental
question and the general stand taken by SEBI was that its hands were tied by
the decision of the Supreme Court in Shriram. Thus, SEBI held that once there
was a violation levy of penalty was mandatory and mens rea has no
relevance. Author submits that the Court in Shriram’s case did not held that
levy of penalty was mandatory. However, the Court in the present case has
reviewed the provisions dealing with penalty and some other issues.

It was seen that there were
several provisions dealing with levy of penalty – for example section 15A(a) to
15-HA) each section provided for penalty for the specific violation dealt with
in the section. Curiously, from 2002 to 2014, provisions relating to penalty
made a strange reading. Some provisions provided for a minimum penalty of Rs. 1
crore u/s. 15-A. The questions were : whether minimum penalty was to be
mandatorily levied? Did the Adjudicating Officer have the power to levy a lower
penalty or even waive the penalty? For instance section 15J provided for three
specific factors to be considered whilst levying penalty. The issue was : if
levy of a minimum penalty was mandatory, then would section 15J not become
redundant?

The Court pointed this
anomalous consequence and held that such a view usually cannot be taken. It
observed, “…if the penalty provisions are to be understood as not admitting of
any exception or discretion and the penalty as prescribed in Section 15-A to
Section 15-HA of the SEBI Act is to be mandatorily imposed in case of default/failure,
Section 15-J of the SEBI Act would stand obliterated and eclipsed… Sections
15-A(a) to 15-HA have to be read along with Section 15-J in a manner to avoid
any inconsistency or repugnancy. We must avoid conflict and head-on-clash and
construe the said provisions harmoniously. Provision of one section cannot be
used to nullify and obtrude another unless it is impossible to reconcile the
two provisions.”.

The court then pointed out
that the law had been amended in 2014 and it was clarified that discretion was
available to the Adjudicating Officer to consider the specified factors before
levying a penalty. The Court held that this clarification put beyond doubt that
discretion was always available with the Adjudicating Officer to consider
various factors and was not bound by the provisions providing for minimum and
mandatory penalty.

The Court observed, “The
explanation to Section 15- J of the SEBI Act added by Act No.7 of 2017, quoted
above, has clarified and vested in the Adjudicating Officer a discretion
under Section 15-J on the quantum of penalty to be imposed while adjudicating
defaults under Sections 15-A to 15-HA. Explanation to Section 15-J was
introduced/added in 2017 for the removal of doubts created as a result of
pronouncement in M/s. Roofit Industries Ltd. case ([2016] 12 SCC 125).”
(emphasis supplied). Hence the court reaffirmed that the earlier decision in
Roofit’s case was erroneous.

How should
a provision specifying a minimum penalty be interpreted?

There were several
provisions in the Act that provide, even today, for a minimum penalty of Rs. 1
lakh. The Court pointed out that some of these can be even for technical
defaults involving small amounts. The Court highlighted its earlier decision in
Siddharth Chaturvedi & Ors.( [2016] 12 SCC 119), which had held,
“…that Section 15-A(a) could apply even to technical defaults of small amounts
and, therefore, prescription of minimum mandatory penalty of Rs.1 lakh per day
subject to maximum of Rs.1 crore, would make the Section completely
disproportionate and arbitrary so as to invade and violate fundamental rights.”

The Court also pointed out
that the law was later amended to provide for a lower minimum penalty. In
short, the court concluded that discretion was available with the AO even with
regard to levy of a minimum penalty taking into account relevant facts of the
case.

Whether
the factors specified in section 15J were illustrative or exhaustive?

Section
15J is the general provision that applies to the various specific penalty provisions.
It states that while levying penalty, the AO shall consider three factors. One
was the amount of disproportionate gain or unfair advantage made. The second
was whether loss was caused to investors. The third was whether the default was
repetitive.

The
issue was: whether the above three were the only factors to be
considered by an AO or whether the other relevant factors AO could consider. It
was pointed out that section 15-I did provide that the AO shall levy “such
penalty as he thinks fit in accordance with the provisions of any of those
sections.”.

The
Court pointed out that there were several penalty provisions where none of the
three factors specified in section 15J would be relevant. Hence, taking a view
that these three factors are the only relevant factors would lead to an
anomalous result.

The
Court thus concluded the AO ought to consider not just the three factors
specified in section 15J but such other factors that are relevant. It observed,
“Therefore, to understand the conditions stipulated in clauses (a), (b) and (c)
of Section 15-J to be exhaustive and admitting of no exception or vesting any
discretion in the Adjudicating Officer would be virtually to admit/concede that
in adjudications involving penalties under Sections 15-A, 15-B and 15-C,
Section 15-J will have no application. Such a result could not have been
intended by the legislature. We, therefore, hold and take the view that
conditions stipulated in clauses (a), (b) and (c) of Section 15-J are not
exhaustive and in the given facts of a case, there can be circumstances
beyond those enumerated by clauses (a), (b) and (c) of Section 15-J which
can be taken note of by the Adjudicating Officer while determining the quantum
of penalty.”

Application
in individual cases

The Court then applied the
aforesaid conclusions in the various individual cases before it in appeal to
decide whether the penalty levied was in accordance with law and the
conclusions reached by the Court.

Can
penalty be levied separately for transactions in a party’s own name and also in
the name of a firm in which he is sole proprietor?

While dealing with individual cases, the
Court was presented with an interesting question. In a particular case, it was
observed that a party carried out transactions in violation of law in two names
– one (Bhavesh Pabari) was in his own name and the other through a firm name
(Shree Radhe) where he was sole proprietor. SEBI levied penalty of Rs. 20 lakhs
each for both the names. The appellant argued only one penalty should have been
levied since the party was the same. The Court rejected this argument on the
facts of the case. It observed, “This contention superficially seems
attractive, but on an in-depth reflection should be rejected as Bhavesh Pabari
had indulged in trading in its personal name and also in the name of his firm
M/s. Shree Radhe.”.

Can the
Supreme Court consider the reasonableness of penalty levied?

This was yet another issue
worth discussing. Can a party pray to the Supreme Court for reconsidering the
amount of penalty levied and argue that it was excessive or disproportionate?
This is particularly relevant since appeals against such orders can be to the
Securities Appellate Tribunal and thereafter straight to the Supreme Court. The
Court rejected this contention, and made the following pertinent observation,
“This court, in the exercise of its jurisdiction under Section 15-Z of the SEBI
Act, cannot go into the proportionality and quantum of the penalty imposed,
unless the same is distinctly disproportionate to the nature of the violation
which makes it offensive, tyrannous or intolerable. Penalty by it’s very
nature of the is penal. We can interfere only where the quantum is wholly
arbitrary and harsh which no reasonable man would award.”

Hence, except in exceptional
case the court, would generally not go into the reasonableness of the penalty.

Conclusion

The
decision of the Supreme
Court is very relevant and will need to be considered by SEBI and even
SAT
while considering cases of penalty. Parties would be free to present all
relevant facts of the case and emphasise all relevant factors with
respect to
the alleged violations in penalty proceedings. The AO will have to
judicially consider the facts and is no longer bound to levy ?minimum
penalty’.