This series of articles introducing securities laws for listed companies to the lay reader continues . . .
(1) Under Securities Laws, for violation of provisions, there is a wide variety of actions that can be taken. Typically, there is adjudication coupled with penalty. For registered intermediaries, their registration can also be suspended or cancelled or they may be censured. Other actions include debarring persons from accessing the capital market or otherwise dealing in securities for a specified period. Specific directions to remedy the wrong committed may also be given. However, the strongest action would be to initiate prosecution which could lead to imprisonment.
(2) Malpractices in capital markets can virtually ruin lives of those affected. It is no wonder that the law provides imprisonment for violation of laws, apart from penalties and other consequences. What are the violations of Securities Laws that can result in imprisonment ? What are the pre-requisites ? Can one voluntarily come forward and settle his crime and avoid imprisonment ? These and some incidental questions are considered in this article.
(3) Securities Laws, for this article, means the SEBI Act, the Securities Contracts (Regulation) Act and the Depositories Act. As will also be seen later, violations of Regulations and Rules issued thereunder also invite prosecutions and hence Securities Laws would cover these Regulations and Rules also.
(4) Also, if one sees the pattern and scheme of provisions relating to prosecution, the basic provisions are almost identically worded in the three principal statutes. Hence, the provisions of only one of the statutes, viz., the SEBI Act (‘the Act’), are discussed and this discussion will equally apply to the other statutes.
(5) Essentially, the scheme, strangely, of the provisions is that heavy punishment is provided for violation of any and every of the provisions of the Act and Regulations and Rules issued thereunder. To bring the point more into force, any violation of the Securities Laws can result up to the maximum punishment and no demarcation is made between violation of different points. Punishment is apart from the penalty and other action. It is possible to ‘compound’ the prosecution proceedings by paying a monetary sum. One could also apply for immunity by following an elaborate procedure.
6.1 Let us consider the basic Section — S. 24 of the Act — which provides for such punishment and which reads as follows :
24. Offences :
(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees or with both.
(2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years or with fine, which may extend to twenty-five crore rupees or with both.
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.