Penalty Under Sebi Act Should Not Be Imposed Arbitrarily

Updated: Oct 28 2002, 05:30am hrs
In recent times, there has been a spurt in the penal proceedings initiated by SEBI against defaulting companies, promoters, market intermediaries and other persons liable for violating the provisions of Securities and Exchange Board of India Act, 1992 (the Act) and the various rules and regulations made there under. Interestingly, in a large number of cases, particularly when substantial penalty is imposed, the aggrieved party goes in appeal before the Securities Appellate Tribunal (Tribunal). Although no specific statistics are available, prima facie, it does appear that in many cases the penalty imposed by SEBI is either totally withdrawn or substantially reduced in appeal.

Therefore, it is desirable to examine the provisions relating to the imposition of penalty by SEBI concerning violations under the Act. Chapter VIA, comprising of sections 15A to 15J of the Act, provides for penalties and adjudication. Section 15A stipulates three categories of penalties as under: a) penalty not exceeding Rs.1,50,000 for each such offence as mentioned therein; b) penalty not exceeding Rs.5,000 for every day during which the failure continues as stipulated in the said clause: and c) penalty not exceeding Rs.10,000 for every day during which the failure continues as stipulated in the said clause.

The power to impose penalty is specifically given by section 15-I of the Act. Section 15-I (2) of the Act, inter-alia, states that, he may impose such penalty as he thinks fit in accordance with the provisions of any of these sections. Here it is pertinent to note that while on the one hand the power has been given to the adjudicating officer to impose such penalty as he thinks fit, but this has to be read with the words in accordance with the provisions of any of these sections. In this context, the provisions of section 15-J of the Act are very relevant as it imposes a duty on the adjudicating officer to take cognizance of the following factors: the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default; the repetitive nature of the default.

In Samrat Holdings Ltd. v. Securities & Exchange Board of India [(2002) 36 CC B-253 (Sat Mum-Trib) (Full Report)], an appeal was preferred against the order passed by the adjudicating officer of SEBI imposing a sum of Rs.1,21,500 as penalty on the appellant. The penalty was levied on the basis of his findings that section 15A of the Act had been violated in the context of acquisition of 47,50,000 equity shares of Timex Watches Ltd. by the appellant. The brief facts of the said case are that the appellant, a private limited company, was involved in inter se transfer of shares amongst group companies and as such, exempt from the provisions of regulations 10, 11 and 12 of the SEBI Takeover Regulations. However, in terms of regulation 3(4) the appellant was required to report to SEBI the details of the acquisition as specified therein within 21 days of the acquisition. Incidentally, the appellant complied with the requirement after a delay, of about 240 days. The SEBI Chairman ordered the adjudication by appointing a SEBI official as the adjudicating officer. After concluding the necessary inquiry, the adjudicating officer penalised the appellant by, imposing a monetary penalty of Rs.1,21,500, against which the aforesaid appeal was filed.

The appellant focused its argument on the rationale of imposing monetary penalty on the appellant in light of the facts of the case and the legal provisions. The appellant had admitted that it was a matter of fact that there had been a delay in filing the report, but the same was not deliberate. The report was voluntarily submitted by the appellant after it realized the lapse on its part.

It was submitted on behalf of the appellant that the delayed filing of the report had not resulted in any harm or loss to any of the investors. So also, no gain or unfair advantage was sought to be obtained and no gain or advantage had resulted to the appellant from the delay. Moreover, it was the first lapse on the part of the appellant and not a repetitive one.

It was also submitted on behalf of the appellant that in terms of the provisions of section 15-I read with section 15J of the Act, the adjudicating officer was required to exercise penal powers judicially taking into consideration the mandatory factors provided in section 15J. It was also claimed that an offence, per se, under section 15-I, was not punishable. The Tribunals attention was drawn to the Supreme Courts decision in Hindustan Steel Ltd. v. State of Orissa [AIR 1970 SC 253] to show that the impugned order was made without taking into consideration the guidelines provided by the Supreme Court therein. Therefore, the appellant prayed for setting aside of the said order.

It was contended on behalf of SEBI that in view of the appellants admission that the report was filed involving a delay of 243 days, violation of regulation 3(4) stood established. Therefore, the adjudicating officer was perfectly justified in imposing the penalty in exercise of his powers under section 15-I read with section 15A. The Tribunal duly considered the submissions of the respective parties. The Tribunal referred to the case of Cabot International Capital Corporation v. Adjudicating Officer, SEBI (Appeal No. 24 of 2000, dated 25-1-2001) wherein the Tribunal had considered the scope of sections 15-I and 15J, in the context of unintentional failure on the part of the appellant to comply with the requirement of regulation 3(4). In that case, it was, inter-alia, held that, the adjudicating officer should have had due regard to the factors stated in the section as that was a direction and not an opinion. The Tribunal observed that it was not incumbent on the part of the adjudicating officer to impose penalty and it was left to his discretion, depending on the facts and circumstances of each case.

The Tribunal also made a reference to the clear-cut guidelines provided by the Supreme Court in Hindustan Steels case (supra). So also it referred to the Supreme Court judgement in Superintendent & Remembrancer of Legal Affairs to Government of West Bengal, wherein it was held that the expression shall be liable to a penalty occurring in many statutes had been held as not conveying the sense of an absolute obligation or penalty but merely importing a possibility of such obligation or penalty. The Tribunal held that the penalty to be imposed for failure to perform the statutory obligation was a matter of discretion left to the adjudicating officer and that discretion was to be exercised judicially and on a consideration of all the relevant facts and circumstances. The Tribunal also held that in case it was felt that penalty was warranted, then the quantum had to be decided taking into consideration the factors stated in section 15J.

Significantly, the Tribunal observed that it was not that the penalty was attracted per se the violation, as the adjudicating officer had to satisfy that the violation deserved punishment.