By Jayant M. Thakur
Chartered Accountant
BACKGROUND
One of the many penal powers that SEBI has under the SEBI Act, 1992 (‘the Act’) is to levy fairly hefty penalties on those who have violated the provisions of various securities laws. The penalty is often up to three times the gains or Rs. 25 crores, whichever is higher. A person on whom a penalty has been levied can appeal to the Securities Appellate Tribunal (‘SAT’) and, if he does not succeed, further to the Supreme Court.
However, the question is, can SEBI review and revise its own orders?
The penalty is levied by an Adjudicating Officer (‘AO’) who, though subordinate to SEBI, is expected to act independently. It may happen that the ‘AO’ has, in the eyes of SEBI, made an error and thus the alleged wrongdoer escapes with a lower or even no penalty. Can this error be corrected? An incorrect order not only lets a wrongdoer escape but also creates a precedent for related matters in similar context and future cases.
The Act provides for a review and revision of the orders passed by the ‘AOs’. The Act was amended in 2014 with effect from 28th March, 2014 and sub-section (3) was introduced to section 15-I to permit such revision. Broadly stated, SEBI can initiate proceedings to revise an adjudication order and enhance the penalty if the order is found erroneous and not in the interests of the securities markets. The review proceedings have to be initiated within three months of the original order, or disposal of appeal by SAT against such order, whichever is earlier.
SEBI has passed several review orders under this provision. In fact, it recently enhanced the penalty on credit rating agencies in the matter of IL&FS from Rs. 25 lakhs as per the original order to Rs. 1 crore. Let us analyse the provision in more detail and consider briefly some pertinent cases.
SECTION 15-I(3) ANALYSED
Section 15-I of the SEBI Act lays down the procedure for adjudication by an ‘AO’ under various provisions that prescribe the penalty for specific wrongs. Section 15-I(3) lays down the provisions relating to revising orders passed by the ‘AO’ and reads as under (emphasis supplied):
Power to adjudicate
…
(3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify:
Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter:
Provided further that nothing contained in this sub-section shall be applicable after expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.
Specific aspects of this provision are discussed in the following paragraphs.
ORDER SHOULD BE ‘ERRONEOUS’
This is the basic and most important prerequisite for enabling SEBI to take up revision of such orders. There has to be a manifest error in the order. The error may be of fact or of law. The error may be of not levying a penalty where the law requires it, or levying a lower penalty. An error must also be distinguished from taking a different view from amongst two or more views plausible. It is submitted that the view taken by the ‘AO’ has to be erroneous in the sense that such view could not possibly be taken. An error may not be very difficult to identify and demonstrate. However, in case of law there may be some subtleties. If two views are possible on reading the relevant provision of law, merely because the ‘AO’ took one of the plausible views does not mean that the order is erroneous. However, if the view in law is not possible to be taken, then the order is erroneous.
The other issue is, when can the amount of penalty levied be said to be erroneous? Certain provisions levy a minimum penalty and thus if the ‘AO’ levies penalty below this statutory minimum, the order is obviously erroneous. There can be other similar errors. The interesting question is that if the ‘AO’ levies penalty within a certain range permissible under law, can the order be held to be erroneous and a higher penalty be levied? As we shall see later, SEBI has levied higher penalty, albeit on facts, in certain orders.
THE ORDER IS ‘NOT IN THE INTEREST OF SECURITIES MARKETS’
The error should be of such a nature that it is not in the interests of securities markets. This provision is obviously very broad in nature and gives a wide brush for the SEBI to paint with. The securities markets consist of investors, companies, various intermediaries, exchanges, etc. There is also generally the credibility of the securities markets. Further, and more importantly (as also pointed out in orders under this provision), an error whereby a wrongdoer escapes with lower or no penalty creates an unhealthy precedent for others and indirectly serves as a disincentive for those who scrupulously follow the law.
The two conditions are simultaneousThe order should be erroneous and such error should be one that is not in the interests of the securities markets. Both these conditions have to be shown by SEBI before it can take up review of such an order and pass a revised one.
Opportunity of being heard
This is a basic principle of natural justice and is inbuilt in the provision. The party should be given a fair opportunity of being heard since the revision may result in enhancement of the penalty.
Enhancement of the quantum of penalty
The order can be revised and the amount of penalty can be increased. An interesting contention was raised in a couple of cases that enhancement means that the earlier order should have levied at least some penalty. And, therefore, if there was no penalty levied, there is no question of enhancement! SEBI has rejected this technical argument and has held that a penalty can be levied even if no penalty was levied earlier.
Interestingly, SEBI has even taken a view in some orders that the revision need not necessarily be for enhancing the penalty. It may even be for correcting a wrong interpretation of law by the ‘AO’.
Time limit
The provision shall not apply after a period of three months from the date of the original order or disposal of the appeal by SAT in relation to such order, whichever is earlier. While the wording is not wholly clear on this point, SEBI has taken a view that the time limit applies to initiation of the proceedings and the final revised order may be passed in due course even after such time.
Whether appeal to SAT against original order would bar such revision till appeal is disposed of?
SAT has refused to bar the continuation of such proceedings for revision even when the original order was under appeal before it (in the case of India Ratings and Research Private Limited vs. SEBI, order dated 1st July, 2020). However, it also ordered in that case that the revised order should not be given effect to.
Whether the provisions relating to revision under the Income-tax Act, 1961 are pari materia with the provisions under the Act?
A stand often raised by parties when faced with such revision proceedings is that the provision under the Act should be interpreted and applied in the same strict manner as the provision for revision of orders under the Income-tax Act for which there are numerous precedents laying down principles. However, SEBI has rejected this stand generally. It has taken a view that the scheme, object and even wording of the provision under the Income-tax Act are sharply different. Hence, section 15-I(3) of the (SEBI) Act has to be viewed independently and broadly.
SOME ORDERS PASSED UNDER THIS PROVISION
Over the years, SEBI has passed several orders revising the original order. Some of those orders are worth reviewing briefly.
In an order dated 13th November, 2014 in the case of Crosseas Capital Services Private Limited, no penalty was levied in a certain case of self-trades through automated trading. On facts, SEBI reviewed this order and held that a penalty was leviable and also directed the party to review its systems to ensure that such acts are not repeated. SEBI also rejected the argument that ‘enhancement’ can be only where the earlier order had levied at least some penalty. Orders of similar nature were passed against a stock-broker and his client in two other cases –
a) In the case of broker Adroit Financial Services Private Limited and its client AKG Securities and Consultancy Limited, vide order dated 13th January, 2015, and
b) In the case of broker Marwadi Shares and Finance Limited and its client Chandarana Intermediaries Brokers Private Limited, vide order dated 13th October, 2015.
Vide order dated 11th January, 2017, in the matter of Saradha Realty India Limited, SEBI passed an interesting direction. The original order of the ‘AO’ had let off certain directors of the company who had resigned although they were directors at the time when the violations took place. The penalty was thus levied, jointly and severally, only on the existing directors. SEBI passed a revised order levying such penalty on all the persons who were directors at the time when the violations took place. The amount of penalty itself was not enhanced.
In a recent order (dated 20th November, 2020 in the matter of Oxyzo Financial Services Private Limited), SEBI held that the ‘AO’ had made a wrong interpretation of the applicable provision and thus revised it as per the correct interpretation. However, since even otherwise there was no violation by the party of the applicable law, no penalty was levied even in the revised order.
In three recent orders, all dated 22nd September, 2020, SEBI enhanced the penalty levied from Rs. 25 lakhs to Rs. 1 crore in each case. These were the cases of credit rating agencies in respect of credit rating in the matter of IL&FS. SEBI held that, especially in view of the significant amounts involved and the impact on investors, a higher penalty was deserved.
CONCLUSION
Often, adjudication proceedings are initiated many years after an alleged violation. These proceedings themselves may take a long time to conclude. The revision proceedings would then add yet another layer to the time and proceedings. Thankfully, there is a short time limit of a maximum of three months of the original order to initiate such proceedings.
However, the wordings of the provision for revision are broad and even vague at places. The scope ought to be narrow particularly considering that the original order has to be ‘erroneous’. Merely because SEBI holds another, different view should not result in invocation of this provision if the view in the original order is also an alternate and acceptable one. Further, merely because a higher penalty was leviable by itself should not result in invocation of this provision. One hopes that, in appeal, clearer principles would be laid down.
