Adjudication of penalties under SEBI: SC ruling gives controlled discretion to Adjudicating Officer
-Ruling of Bhavesh Pabari overrules Roofit Industries
By Smriti Wadehra (smriti@vinodkothari.com)
A three member Bench of the SC recently overruled its earlier decision in Roofit Industries Ltd vs SEBI, and provided a controlled discretion to the Adjudicating Officer in fixing penalties for offences under the SEBI Act as well Securities Contract Regulation Act (SCRA) as a result of the ruling, the Adjudicating Officer shall not be constrained by the minimum extent of penalty laid in SEBI Act and may, where circumstances so warrant, either waive off the penalty completely or may assign a penalty less than the so called minimum. Thus, the adjudication of penalties may be expected to be more commensurate with the gravity of the offence, than was so far possible primarily due to the position arising out of Roofit ruling.
In this article, we are going to briefly discuss the status of section 15J of Securities and Exchange Board of India Act, 1992, as clarified by a recent judgement of Hon’ble Supreme Court of India in the case of Adjudicating Officer vs. Bhavesh Pabari dated 28th February, 2019[1]. However, before discussing the judgement of Hon’ble Supreme Court we have to first understand what the provision of section 15J of the Act provides for and the relevance of such provision.
The SEBI Act was enacted in 1992 which laid down the heavy penal consequences for non-compliance under section 15A to 15HA of the Act. However, the quantum of penalty and power of adjudication was provided under section 15J of the Act which has to be read along with sections pertaining to penal provisions. To summarise, we may say that section 15A to 15HA provides for penal provisions 15J provides for determination of quantum of penalty by the Adjudicating Officer. Accordingly, the relevant extract of the section has been reproduced below:
“While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely :—
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
Explanation.—For the removal of doubts, it is clarified that the power of an adjudicating officer to adjudge the quantum of penalty under sections 15A to 15E, clauses (b) and (c) of section 15F, 15G, 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section.”
As discussed earlier, the aforesaid provisions of the section provided that the adjudicating officer shall be responsible to determine the quantum based on the parameters mentioned in clauses (a) to (c) of the section. The point is that it is not the case that in case of any default or failure penalty shall be directly be imposed mandatorily as per section 15A to 15HA. The provisions of 15J has to be read along with the sections prescribing penal provisions i.e. the Adjudicating Officer based to the facts and circumstances will levy the penalty. However, the question which arose was whether these conditions mentioned in clauses (a) to (c) were illustrative or exhaustive?
The judgement of Court provided that the provisions of section 15J are illustrative in nature and depends from situation to situation. This is because, the Adjudicating Officer is precluded in law from considering such situations and deciding such quantum of penalty as deemed fit. Accordingly, there can be circumstances beyond those provided in clause (a), (b) and (c) of section 15J of the Act which can be taken note by the Adjudicating Officer while determining the quantum of penalty. That is to say, the law has provided such liberty to the Adjudicating Officer to decide the penalty based on the current circumstances.
Relevance of section 15J can be better understood with the judgement held in the case of M/S Roofit Industries Ltd where it was wrongly or erroneously held as the same provided that the provisions of 15J shall not be applicable post amendment of section 15A with effect from 29th October, 2002.
Roofit Industries Ltd vs. SEBI[2]
The facts of the case of SEBI vs. Roofit Industries Ltd, were that SEBI (AO) demanded for some documents and information from the Respondent (M/s Roofit Industries Ltd). However, even after extension of time, no information was provided to SEBI. Accordingly, the Adjudicating Officer in terms of section 15A of the SEBI Act levied a penalty of Rs. 1 Crore. The respondent company appealed before SAT who concluded that the penalty under section 15A should be reduced as the provision pursuant to the amendment in 2002 read as:
“15A. If any person who is required under this Act or any rules or regulations made thereunder-
- To furnish any document, return, or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”
In this regard, the Adjudicating Officer also appealed against the order of SAT and provided that inability of payment of penalty was not a contingency mentioned or featured in section 15J of the SEBI Act, 1992. Further, there would be no purpose of section 15J if the AO’s discretion to levy penalty did not exist.
It was provided that prior to the amendment, the section provided for a penalty not exceeding one lakh fifty thousand rupees for each failure, thus, provided discretion to the AO to determine the appropriate amount of penalty. However, the amended provisions removed the provided discretion and hence the scope of section 15J was drastically reduced. However, the provisions of 15J became relevant post amendment introduced by the Securities Laws (Amendment) Act, 2014 which amended the provisions to read as below:
“15A. If any person who is required under this Act or any rules or regulations made thereunder-
- To furnish any document, return, or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to maximum one crore rupees”
Accordingly, if the penalty was imposed post amendment the levy of reduction would not have been available with the Respondent.
Judgement of Supreme Court- Supreme Court in its judgement provided that the 15J never eclipsed and have continued to apply in terms of defaults under section 15A of the SEBI (amended section w.e.f 29th October, 2002. This is because the explanation to section 15J clearly provides that Adjudicating Officer shall always be deemed to have exercised and applied the provisions at the time of levy of penalty and hence the provision of this section never discontinued.
Further, in it was also cited in the case of Siddharth Chaturvedi & Ors vs. Securities and Exchange Board of India [3]which provided that by prescribing a minimum mandatory penalty was not to curtail the discretion of the Adjudicating Officer. However, normally, the expression “whichever is less connote absence of discretion, but in context of the amendment in section 15A the legislative intent was not to prescribe minimum mandatory penalty. However, the same provided discretion to the AO to impose minimum penalty of Rs, 1 Lakh subject to maximum penalty of Rs. 1 Crore.
Here, a point to be noted is that the factors enumerated in section 15J are to be considered while determining the quantum of penalty to be imposed. However, the imposition of penalty depends upon satisfaction of substantive provisions of section 15A to 15H of the Act.
Penalties to be proportional to gravity of offence
As discussed above, this is not the first case where Supreme Court has provided the judgement that penalties shall be proportional to the gravity of offence. There are many case laws on the same, some of these are appended below:
- Supreme Court in the case of State of H.P vs Nirmala Devi on 10th April, 2017 held:
“The cardinal principle of sentencing policy is that the sentence imposed on an offender should reflect the crime he has committed and it should be proportionate to the gravity of the offence. This Court has repeatedly stressed the central role of proportionality in sentencing of offenders in numerous cases.”
- Supreme Court in the case of State of M.P vs Najab Khan and Ors [4]on 1st July, 2013 said:
“It is settled principle of law that the punishment should meet the gravity of the offence committed by the accused and courts should not show undue sympathy with the accused persons. This Court has repeatedly stressed the central role of proportionality in sentencing of offenders in numerous cases.”
- Supreme Court in the case of Shailesh Jasvantbhai and Another vs. State of Gujarat and others in 2006 held:
“that the sentence imposed is not proportionate to the offence committed, hence not sustainable in the eyes of law”
- Supreme Court in the case of State of Punjab v Prem Sagar & Ors [5]held:
“Supreme Court expressed serious concern in this behalf pointing out the recommendations of committees as the Madhava Menon Committee & the Malimath Committee for framing of sentencing guidelines. It was, however, observed that while awarding a sentence, whether the court would take recourse to the principles of deterrence or reform, or invoke the doctrine of proportionality, would depend upon the facts and circumstances of each case”
- Supreme Court in the case of Union of India vs. V. Sriharan, Murugan & Ors[6] on 2nd December, 2015 held:
“Punishments must be proportionate to the nature and gravity of the offences for which the same are prescribed.”
Therefore, this is a well settled sentencing principle that quantum of penalty is proportionate of the gravity of offence of the offender and the discretion is with the Court. Accordingly, in case of determination of penalty under SEBI Act, the Adjudicating officer has to evaluate the factors enumerated in section 15J to consider the quantum of penalty to be imposed. However, as discussed earlier, the imposition of penalty depends upon satisfaction of substantive provisions of section 15A to 15H of the Act.
Continuing Offence and Repeated Offence
The judgement also clarified the distinction between a continuing offence and repeated offence and its applicability in the provisions of law. Firstly, a continuing offence is a one which is of cntinuous nature as explained in case of State of Bihar vs. Deokaran Nenshi & Ors[7] and continues till the rule or requirement is obeyed or complied with.
Further, in the case of Union of India & Anr vs. Tarsem Singh continuing offence and default in service law was explained as single wrongful act which causes continuing injury. On the other hand, recurring or successive wrong are those which occurs periodically with each wrong giving rise to separate cause of action.
The distinction between the two types of offences is that in case of continuing offence the factor of continuance of offence takes places, however, repeated offence constitutes an act or omission which continues but constitutes as a fresh offence every time or occasion where in occurs.
Note that the provisions of section 15J refers to repetitive nature of default and not a continuing default. Therefore, this factor must be taken into consideration while deciding the quantum of penalty. However, this does not mean that the factor of continuing default shall not be regarded or is irrelevant, this is because, the provisions of clause (a) to (c) of section 15J are merely illustrative and not the only deciding grounds for determining penalty.
Conclusion
Through the judgement of Supreme Court we are clarified on two major things. Firstly, the position of section or rather applicability of section 15J of the Act, has been made clearer i.e. the provisions shall always be applicable at the time of levy of penalty. Secondly, the distinction between a continuous default and repeated default has been highlighted.
To conclude, we may say the provisions of section 15J of the Act bestows responsibility on the Adjudicating Officer to determine the quantum of penalty based on the parameters mentioned in clauses (a) to (c) or any other determining factor based on the circumstance. Hence, the Adjudicating Officer plays a significant role in determination of penalty, which is expected to be befitting the scale and nature of the offence, and the principles underlying adjudication as laid in section 15A to 15HA.
[1] https://www.sci.gov.in/supremecourt/2013/36291/36291_2013_Judgement_28-Feb-2019.pdf
[2] https://www.sci.gov.in/jonew/judis/43137.pdf
[3] https://indiankanoon.org/doc/88547322/
[4] https://www.sci.gov.in/pdf/SupremeCourtReport/2013_v8_pii.pdf
[5] https://indiankanoon.org/doc/1889684/
[6] https://indiankanoon.org/doc/50602236/?type=print
[7] https://indiankanoon.org/doc/669593/
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