An interesting feature of the SEBI Act, 1992 is that one can potentially be prosecuted u/s 24 for violating any provision of the Act and even any of the rules and regulations made thereunder. Further, the punishment can be in the form of imprisonment for as long as ten years, or a fine of up to Rs. 25 crores. Non-payment of the penalty imposed is also punished stringently, with a minimum prison term of one month and a maximum of ten years; or with a fine of Rs. 25 crores. This is quite unlike other laws under which only specified serious violations can be prosecuted as offences. In a sense, the provisions of the SEBI Act, at least on paper, sound more stringent than even the Indian Penal Code that has varying punishments for different offences.
Fortunately, prosecution is not generally initiated indiscriminately under the SEBI Act. However, the fear of being prosecuted remains. The question that arises is how does a person, who is willing to make amends for the wrong he has committed get relief from prosecution? For this purpose, the SEBI Act has enabling provisions for compounding of offences. Section 24A provides that offences, other than those punishable with imprisonment only or with both imprisonment and fine, can be compounded by the Securities Appellate Tribunal or the court before which the proceedings are pending.
Considering that there is no violation in the Act that is punishable by imprisonment only or by both imprisonment and fine, the conclusion is that all offences are compoundable and thus any prosecution proceeding can be compounded (see later herein for certain remarks of the Supreme Court). This is because there is a common provision for prosecution u/s 24, unlike other laws that have separate punishments prescribed for different violations.
The question that came up before the Supreme Court in Prakash Gupta vs. SEBI (order dated 23rd July, 2021, [2021] 128 taxmann.com 362 [SC]) was whether, for compounding an offence by a Court / SAT, the consent of SEBI is a prerequisite? In other words, if SEBI vetoes the application for compounding and does not grant consent, can the offence still be compounded? The Supreme Court, while dealing with this question, ruled on several aspects and thereafter even laid down guidelines for compounding. These were made, the Court said, in the absence of explicit provisions in the law which gap it attempted to fill. Thus, the ruling has relevance on several aspects of the subject.
PROVISIONS OF LAW
As stated earlier, section 24A of the SEBI Act enables compounding of offences and the authority for this purpose is the SAT or the court before which the proceedings are pending. SEBI has notified settlement regulations which deal with settlement of civil proceedings and compounding of offences. The Regulations provide that the principles as applicable for settlement of civil proceedings would also apply for compounding. General principles have been laid down for three categories of proceedings. In respect of the offence of non-payment of penalty, such amount of penalty with interest and legal charges as deemed appropriate by SEBI would be proposed before the court. Generally, the amount for compounding the offence would be as per the guidelines laid down in the Schedule to the Regulations. If the application for compounding is made after framing of charges by the court, then this amount would be increased by 25%, apart from legal charges and other terms as approved by the whole-time panel of SEBI as set up under the Regulations.
However, there are many areas where there is silence or lack of clarity. Is there an inherent right to compounding? Can all offences be compounded as a matter of right? If there are some offences which cannot be compounded, which are those and who decides this? Whether such a decision can be questioned and, if so, on what grounds?
If the person rights the wrong, compensates the party that is wronged, etc., does compounding become a matter of right? In this context, is compounding of offences under the SEBI Act at par with compounding with, say, under the Negotiable Instruments Act for dishonouring of cheques?
Finally, is the consent of SEBI necessary for compounding or is it solely at the discretion of the court to compound the offence? What is the relevance and weight of the views of SEBI in the matter?
These are some of the issues discussed in the decision.
IS THE OFFENCE OF NON-PAYMENT OF PENALTY COMPOUNDABLE?
Section 24(2) treats non-payment of penalty levied under the Act as an offence over and above the violation in respect of which the penalty is levied. The question is whether this offence is compoundable. In principle, considering that the offences of violation of the provisions of the Act / Regulations / Rules are compoundable, the answer should have been yes. However, the Court dwelt on what seem to be ambiguous words used in the provision. It appeared to the Court that since there was a minimum prison term of one month provided, one view could be that imprisonment is mandatory. Section 24 says that an offence punishable with imprisonment and fine cannot be compounded. In which case, as per this view, the offence of non-payment of penalty cannot be compounded. However, since this specific issue was not before the Court, it did not give a final ruling on it and kept it for consideration at a future date. In the author’s opinion, considering the framework not only of the section but also of the settlement regulations, the better view should be that non-payment of penalty should also be compoundable.
HISTORICAL ORIGIN OF COMPOUNDING OF OFFENCES
In passing, and as a matter of academic interest, it is interesting to note that originally compounding itself was an offence and continues to be so to a certain extent. Compounding generally meant a person accepts consideration for not prosecuting an offence. This could be even by a police officer, or others in authority, and could thus be a bribe. However, the position has changed over time. There were less grave situations where it may not be worth the effort to prosecute a person. For offences such as under the Negotiable Instruments Act, the intention may be to make dishonouring of cheque an offence a means to make such a person honour the cheque. Hence, if the party is willing to pay off its dues, the court may generally be inclined to allow compounding. There may also be situations where the offence is not very grave, the offender may have realised his wrong and regretted it, and even the injured person may be willing to let the matter go (perhaps also on receipt of some compensation). Hence, compounding of offences could be lawfully done if the law provided for it. Different laws have provided for compounding in different ways and hence the question was how should the provisions of the SEBI Act be interpreted.
Serious wrongs that cannot be compounded
The Court noted that there may be offences that are not cured merely by compensating the injured person or even if the injured person is not interested in pursuing the proceedings. There are wrongs that are public in nature and have wider implications. The yardstick applied cannot be a single and uniform one.
WHETHER CONSENT OF SEBI IS NECESSARY FOR COMPOUNDING
In the matter before the Court, the appellant had applied for compounding before a lower court. When the views of SEBI were sought, SEBI refused to grant consent to such compounding and the Additional Sessions Judge before whom the proceedings were initiated thus rejected the application. The appellant approached the High Court which, citing earlier precedents, affirmed the decision.
The Supreme Court held that the wording of section 24A is clear. There is no mandatory requirement of consent of SEBI for the Court to allow compounding. The Court would consider the views of SEBI but the decision of whether or not to compound the offence would rest with the Court. The important question, however, is what weight should the Court assign to the views of SEBI.
VIEWS OF SEBI ON WHETHER OR NOT TO ALLOW COMPOUNDING
The Court elaborately discussed the object of the SEBI Act and the role of SEBI as an expert body in the securities markets. It noted that SEBI has a duty to protect the interests of investors and generally the capital market. It also reviewed the mechanism laid down by SEBI for consideration of applications for compounding and also the independent High-Powered Advisory Committee (‘HPAC’) set up to provide advice on the matter. The Court held that the views of SEBI on whether or not compounding should be allowed should be respected and followed unless the view taken can be shown to be arbitrary or mala fide.
The Court also considered the aspects that SEBI takes into account and as laid down in the guidelines issued by SEBI. In particular, the matters in respect of which compounding / settlement would ordinarily not be allowed were noted.
All in all, the Court held that while the consent of SEBI is not a prerequisite, the views / recommendations of SEBI would ordinarily be followed.
As if to not only give the last word but provide a comprehensive framework for compounding, the Court laid down specific guidelines that would effectively fill the gap existing today. The Supreme Court laid down four guidelines that the Court / SAT should consider while disposing of applications for compounding:
a. The factors enumerated by SEBI in its Circular of 20th April, 2007 and accompanying FAQs should be considered, though not as exhaustive.
b. The application for compounding has to be made to SEBI which places the same before the HPAC. The recommendation of HPAC should be placed before the Court / SAT which should give due deference to such opinion. It should differ if it has cogent reasons and only if the reasons provided by SEBI / HPAC are mala fide or manifestly arbitrary.
c. The offences under the SEBI Act are not comparable with other laws where restitution of the injured party is a strong ground for allowing compounding. Most offences under the SEBI Act are of a public character and restitution may not always be enough. In any case, for this purpose the opinion of SEBI should be relied upon.
d. Finally, and this point is an extension of the third one, the Court / SAT should consider whether the offence is private or public in nature. If of a public nature, it would affect the public at large. Such offences should not be compounded even if restitution has taken place.
