SECURITIES LAW PROJECT

ADJUDICATORY MECHANISM
UNDER SEBI ACT

Submitted by:
SHARIKA.R

973

X Semester

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 TABLE OF CONTENTS

TOPIC PAGE

 Introduction 3

 The Adjudicatory Officer 4

 Adjudication Orders 5

 Settlement of Proceedings 7

 Securities Appellate Tribunal 7

 Appeal to Supreme Court 14

 Conclusion 15

 Bibliography 15

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 1. INTRODUCTION

A regulatory body in the form of the Securities Exchange Board of India was established in
pursuance of the SEBI Act, 1992 for the securities market. SEBI performs a twin role as clarified
by the words enshrined in the Preamble of the Act, namely: “to promote the development of, and
to regulate the securities market”. As such, SEBI’s strives to create an effective surveillance
mechanism for the securities market, and to encourage responsible and accountable autonomy on
the part of the existent players in the market. In accomplishing its objectives, SEBI would be
responsive to the needs of the three groups which basically constitute the market: (i) the
investors, (ii) the issuers of securities, and (iii) the market intermediaries.1

Consequent to its enactment in 1992, the various scams and fraud cases persistent in the country
necessitated SEBI to be armed with the powers of imposing penalties and of adjudication. In
view of the same, an amendment was made to the existing legislation in 1995 by the Securities
Laws (Amendment) Act, 1995 which was to come into force from 25th of January 1995. The 1995
Amendment thus inserted Chapter VI A, dealing with ‘Penalties and Adjudication’ and Chapter
VI B, dealing with ‘Establishment, Jurisdiction, Authority and Procedure of Appellate
Tribunal’.2

SEBI has a limited jurisdiction only up till the violation of SEBI Act and regulations, orders or
directions issued under the Act. The SEBI Act has been subjected to numerous amendments,
with the latest being in 2019 by the Banning of Unregulated Deposits Scheme Ordinance, 2019.
In this project work, I will delve into the various current provisions governing the adjudicatory
powers of SEBI with special reference to those of the Adjudicating Officer and the Appellate
Tribunal while tracing the background of the same. The powers will be further clarified through
the help of various case laws.

1
K. Sekhar, SEBI Capital Issues, Debentures & Listing, (3 rd ed.) at p. 127.
2
Chapters VI A and VI B containing sections 15A to 15J and 15K to 15Z respectively, inserted by Securities Laws
(Amendment) Act, 1995

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 2. THE ADJUDICATING OFFICER

Chapter VI A of the SEBI Act, 1992 which deals with ‘Penalties & Adjudication’ in the latter
part deals with the adjudicatory powers.

2.1 POWER TO ADJUDICATE

Section 15-I provides for the appointment of an Adjudicatory Officer. It states as follows: For
the purpose of adjudging under sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15H, 15HA and
15HB, the Board shall appoint any officer not below the rank of a Division Chief to be an
adjudicating officer for holding an inquiry in the prescribed manner after giving any person
concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

Sub-section (2) delves into the powers of the adjudicating officer and states that: While holding
an inquiry the adjudicating officer shall have power to summon and enforce the attendance of
any person acquainted with the facts and circumstances of the case to give evidence or to
produce any document which in the opinion of the adjudicating officer, may be useful for or
relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person
has failed to comply with the provisions of any of the sections specified in subsection (1), he may
impose such penalty as he thinks fit.

SEBI was further empowered under Section 15-I (3) by the Securities Laws (Amendment) Act,
20143 to call for and examine the record of any proceedings under this section. If SEBI considers
any order passed by the adjudicating officer to be erroneous to the extent it is not in the interests
of the securities market, it may if the circumstances of the case so justify, after making inquiries,
pass an order enhancing the quantum of penalty. The Proviso to this sub-section states that: no
such order shall be passed unless the concerned person has been given an opportunity of being
heard. Additionally, it is also provided that: nothing contained in this sub-section shall be
applicable after an 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.

3
Inserted by the Securities Laws (Amendment) Act, 2014, w.e.f. 28-03-2014

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2.2 FACTORS TO BE TAKEN INTO ACCOUNT

Section 15-J states that: While adjudging quantum of penalty under section 15-I, the
adjudicating officer shall have due regard to the following factors:-

(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

Thus, the power of the adjudicating officer to adjudge the quantum of penalty shall always be
deemed to have been exercised under the provisions of this section.

2.3 CASE LAWS- Adjudication Orders

In respect of: Bina Udyog Private Limited4, the Adjudicating Officer, Jeevan Sonparote, dealt
with a matter concerning illiquid stock options at BSE. The same was under Section 15-I of
SEBI Act, 1992 read with Rule 5 of SEBI (Procedure for Holding Inquiry and Imposing
Penalties by Adjudicating Officer) Rules, 1995. SEBI observed a large scale reversal of trades in
Stock Options segment of Bombay Stock Exchange leading to creation of artificial volume. On
investigation, it was found that Bina Udyog Pvt. Ltd. was one of the various entities which
indulged in execution of non genuine trades in Stock Options Segment of BSE. Observing that
the reversal trades undertaken by the Company defy the criteria to be called normal practice and
a mere means to book gains and losses by the participating entities, the Officer held that they
were in violation of Regulations 3(a), (b), (c) and (d) and 4(1) and 4(2)(a) of SEBI (Prohibition
of Fraudulent and Unfair Trading Practices related to Securities Markets) Regulations, 2003.
Consequently after considering the factors enumerated in section 15Jof the SEBI Act, imposed
monetary penalty of Rs.5,00,000/- to be remitted by DD to “SEBI - Penalties Remittable to
Government of India”.

4
Adjudication Order No. Order/JS/DJ/2018-19/1762

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In the matter of Mahamaya Steel Industries Limited,5 some promoters of Mahamaya Steel
Industries Limited undertook certain transactions in the shares of the Company failed to comply
disclosures requirements for the same as under regulation 7(2) (a) of SEBI (Prohibition of Insider
Trading) Regulations, 2015. The Adjudicating Officer observed that the main purpose of such
disclosure is that the investors should be made aware that the promoters are changing their
shareholding and the investors can take informed decision.” Reference was made to the SAT
decision in Milan Mahendra Securities Pvt. Ltd. V. SEBI,6 wherein it was observed that, “the
purpose of these disclosures is to bring about transparency in the transactions and assist the
Regulator to effectively monitor the transactions in the market. We cannot therefore subscribe to
the view that the violation was technical in nature”. They had failed to make the relevant
disclosure on more than one occasion. Hence, the violation was repetitive in nature. The
Company was held to have violated Regulation 7(2) (a) and a penalty of 5,00,000/- was imposed
under section 15 A(b) of SEBI Act.7

In the matter of Saianand Commercial Limited8, SEBI on investigation discovered that Ashok
Shivlal Rupani and Naresh Rupani were directors of the company and the change of their
shareholding exceeded 1% and failed to make the requisite disclosures under regulation 13(4)
read with 13(5) of SEBI (Prohibition of Insider Trading) Regulations, 1992. The noticees
claimed to have made the disclosure to BSE, but a perusal of BSE website made it clear that no
such disclosure had been made. The Adjudicating Officer observed that: since directors of the
company failed to make disclosure under PIT Regulations, the market was unaware of their
change in shareholding and as such were liable for violation of regulation 13(4) read with 13(5).
Reference was made to SEBI v. Shri Ram Mutual Fund9 case wherein it was observed that: “In
our considered opinion, penalty is attracted as soon as the contravention of the statutory
obligation as contemplated by the Act and the Regulations is established and hence the intention
of the parties committing such violation becomes wholly irrelevant…” The quantum of penalty
under section 15 A(b) of the SEBI Act was determined after considering the factors stipulated in
section 15J as `2,00,000/-.

5
Adjudication Order No. EAD-9/ AO/SM/ 125 /2018-19
6
Appeal No. 66 of 2003
7
Penalty for failure to furnish information, return, etc, SEBI Act, 1992
8
Adjudication Order No. EAD-9/ AO/SM/112 – 113/2018-19
9
[2006] 68 SCL 216(SC)

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 3. SETTLEMENT OF PROCEEDINGS

Section 15-JB governs the settlement of administrative and civil proceedings and was inserted in
the year 2014.10 It states that any person, against whom proceedings have been initiated or may
be initiated under section 11, section 11B, section 11D, section 12(3) or section 15-I, may file an
application in writing to the Board proposing for settlement of the proceedings initiated or to be
initiated for the alleged defaults.

Sub-section (2) states that the after taking into consideration the nature, gravity and impact of
defaults, SEBI may, agree to the proposal for settlement, on payment of certain sum by the
defaulter or on certain other terms as may be determined by the Board in accordance with the
regulations. Section 15-JB (3) states that the settlement proceedings under this section shall be
conducted in accordance with the procedure specified in the regulations made under this Act.
Further, sub-section (4) clarifies that no appeal shall lie under section 15T to the SAT against
any order passed by the Board or adjudicating officer under this section.

4. THE SECURITIES APPELLATE TRIBUNAL

Chapter VI B of the SEBI Act, 1992 deals with ‘Establishment, Jurisdiction, Authority and
Procedure of Securities Appellate Tribunal’.

4.1 ESTABLISHMENT & COMPOSITION

Presently, Section 15K states that: The Central Government shall, by notification, establish a
Tribunal to be known as the Securities Appellate Tribunal to exercise the jurisdiction, powers
and authority conferred on it by or under this Act or any other law for the time being in force.11
Further, sub-section (2) states that: the Central Government shall specify the matters and places
in relation to which the SAT may exercise jurisdiction.

10
Supra 3
11
Substituted by Part VIII of Chapter VI of the Finance Act, 2017

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However, prior to the 2017 amendment, Section 15K provided for the establishment by Central
Government of one or more Appellate Tribunals to be known as the Securities Appellate
Tribunal. Thus, since 2017 provision is made only for a single SAT.

Section 15L which provides for the ‘Composition of SAT’ states that: it shall consist of a
Presiding Officer and such number of Judicial Members and Technical Members as the Central
Government may determine, by notification, to exercise the powers and discharge the functions
conferred on the Securities Appellate Tribunal …12
Sub-section (2) states that: (a) the jurisdiction of the Securities Appellate Tribunal may be
exercised by Benches (b) a Bench may be constituted by the Presiding Officer with two or more
Judicial or Technical Members as he may deem fit: (c) the Benches of the Securities Appellate
Tribunal shall ordinarily sit at Mumbai and may also sit at such other places as the Central
Government may notify.
Previous position: Initially, prior to the SEBI (Amendment) Act, 2002, the SAT was to consist
only of one person, namely the Presiding Officer. In 2002, the section was amended to consist of
a Presiding Officer and two other Members, to be appointed, by the Central Government. The
amendment to the section also provided that the SAT, consisting of one person only, established
before 2002, shall continue to exercise the jurisdiction, powers and authority conferred on it till
two other Members are appointed under this section.
Presently in 2017 the section has been further amended to remove the limit of 3 maximum
members and instead provides for such number of Judicial and Technical Members as the
Central Government may determine along with the Presiding Officer.

Section 15M deals with ‘Qualification for appointment as Presiding Officer or Member of
SAT’ and states that: A person shall not be qualified for appointment as the Presiding Officer or
a Judicial Member or a Technical Member of the Securities Appellate Tribunal, unless he-
(a) in the case of the Presiding Officer- is, or has been, a Judge of the SC or a Chief Justice of
HC or a Judge of HC for at least seven years
(b) in the case of a Judicial Member, is or has been, a Judge of HC for at least five years

12
Supra 11

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(c) in the case of a Technical Member– is or has been, a Secretary or an Additional Secretary in
the Ministry or Department of the C. Govt. or is a person of proven ability, integrity and standing
having special knowledge and professional experience, of not less than fifteen years, in financial
sector.

Section 15N deals with ‘Tenure of office of Presiding Officer and other Members of
Securities Appellate Tribunal’ and states that: the Presiding Officer or every Judicial or
Technical Member of the Securities Appellate Tribunal shall hold office for a term of five years
from the date on which he enters upon his office, and shall be eligible for reappointment for
another term of maximum five years. Proviso states that no Presiding Officer or the Judicial/
Technical Member shall hold office after he has attained the age of seventy years.13
However, prior to the amendment by Finance Act 2017, the Presiding Officer was not to hold
office after he had attained the age of sixty-eight years and the Members were not to hold office
after the age of sixty-two years.
Section 15P deals with ‘Filling up of vacancies’ and states that, if, for reason other than
temporary absence, a vacancy occurs in the office of the Presiding Officer or any other Member,
then the Central Government shall appoint another person in accordance with the provisions of
this Act to fill the vacancy and the proceedings may be continued before the Securities Appellate
Tribunal from the stage at which the vacancy is filled. Additionally, Section 15 PA which was
inserted by the Finance Act, 2017 states that in the event of any vacancy in the office of the
Presiding Officer of the Securities Appellate Tribunal by reason of his death, resignation or
otherwise, the senior-most Judicial Member shall act as the Presiding Officer until a new
Presiding Officer is appointed.
‘Resignation and removal’ has been dealt with under Section 15Q which states that he
Presiding Officer or any other Member of a SAT may, by notice in writing under his hand
addressed to the Central Government, resign his office. Sub-section (2) empowers the Central
Government to make an inquiry through the Judge of the SC and remove the Presiding Officer or
Judicial or Technical Member if he-
(a) is, or at any time has been adjudged as an insolvent;

13
Supra 11

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(b) has become physically or mentally incapable of acting as the Presiding Officer, Judicial/
Technical Member;
(c) has been convicted of any offence which involves moral turpitude;
(d) has so abused his position as to render his continuation in office detrimental to the public
interest; or
(e) has acquired such financial interest or other interest as is likely to affect prejudicially his
functions as the Presiding Officer or Judicial/ Technical Member
Section 15R clarifies that Orders of the Central Government constituting Appellate Tribunal are
final and no act or proceeding before SAT shall be called in question on the ground merely of
any defect in its constitution.

4.3 APPEAL OF SECURITIES APPELLATE TRIBUNAL

Section 15T deals with ‘Appeal to the Securities Appellate Tribunal’ and states that any
person aggrieved,—
(a) by an order of SEBI made, on and after the commencement of the Securities Laws (Second
Amendment) Act, 1999, under this Act, or the rules or regulations made thereunder, or
(b) by an order made by an adjudicating officer under this Act, or
(c) by an order of the Insurance Regulatory and Development Authority or the Pension Fund
Regulatory and Development Authority,
may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

Previously, sub-section (2) provided that, no appeal shall lie to the Securities Appellate Tribunal
from an order made by SEBI or by an adjudicating officer with the consent of the parties.
However, this now stands omitted by the Securities Laws (Amendment) Act, 2014. Further, sub-
section (3) states that every appeal shall be filed within a period of forty-five days from the date
on which a copy of the order made by the Board or the Adjudicating Officer or the IRDAI or the
Pension Fund Regulatory and Development Authority is received by him. The appeal shall be in
such form and be accompanied by such fee as prescribed. It is provided that the SAT may
entertain an appeal after the expiry of the period of forty-five days if it is satisfied that there was
sufficient cause for not filing it within that period.

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Section 15 T(4) states that on receipt of an appeal the SAT may, after giving the parties to the
appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming,
modifying or setting aside the order appealed against. Under sub-section (5) the SAT shall send a
copy of every order made by it to SEBI or the IRDAI or the Pension Fund Regulatory and
Development Authority, the parties to the appeal and to the concerned Adjudicating Officer.
Under sub-section (6) it is provided that: the appeal filed before the SAT shall be dealt with by it
as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally
within six months from the date of receipt of the appeal.

4.4 PROCEDURE & POWERS OF SECURITIES APPELLATE TRIBUNAL

Section 15U states that the SAT shall not be bound by the procedure laid down by the CPC,
1908 but shall be guided by the principles of natural justice and, subject to the other provisions
of this Act, and of any rules, the SAT shall have powers to regulate their own procedure
including the places at which they shall have their sittings.
(2) The SAT shall have, for the purposes of discharging their functions under this Act, the same
powers as are vested in a civil court under the CPC, while trying a suit, in respect of –
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte ;
(g) setting aside any order of dismissal of any application for default or any order passed by it ex
parte ;
(h) any other matter which may be prescribed.

Under sub-section (3), every proceeding before the SAT shall be deemed to be a judicial
proceeding and the SAT shall be deemed to be a civil court.
Sub-section (5) as inserted by the Finance Act, 2017 states that on the application of any of the
parties and after notice to the parties, and after hearing such of them as he may desire to be

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heard, or on his own motion without such notice, the Presiding Officer of the SAT may transfer
any case pending before one Bench, for disposal, to any other Bench.
Section 15Y emphatically clarifies that: No civil court shall have jurisdiction to entertain any
suit or proceeding in respect of any matter which an adjudicating officer appointed or a SAT is
empowered by or under this Act to determine and no injunction shall be granted by any court or
other authority in respect of any action taken in pursuance of any power conferred by or under
this Act.

4.5 CASE LAWS

In Sahara India Real Estate & Ors v. SEBI & Anr,14 Sahara Real Estate and Sahara Housing
floated an issue of OFCDs and collected subscriptions from 30 million investors in the guise of a
“Private Placement” without complying with the requirements applicable to the public offerings
of securities. SEBI passed an order directing the companies to refund the money to the investors
and also restrained the promoters from accessing the securities market. Sahara preferred an
appeal before SAT which confirmed and maintained the said order. Subsequently an appeal was
filed before the Supreme Court. The Court held: (1) As per Section 55A of the Companies Act,
so far matters relate to issue and transfer of securities and non-payment of dividend, SEBI has
the power to administer in the case of listed public companies and in the case of those public
companies which intend to get their securities listed on a recognized stock exchange. (2) OFCDs
issued by the two companies though “hybrid” instruments, does not cease to be a “Security”
within the meaning of Companies Act, SEBI Act and SCRA. (3) Although the intention of the
companies was to make the issue of OFCDs look like a private placement, it ceases to be so
when such securities are offered to more than 50 persons as provided under Section 67(3). (4) As
long as issue of securities is made to more than 49 persons the intention of the companies to get
listed does not matter at all and Sec 73 (1) is a mandatory provision of law with which
companies are required to comply.

In Price Water House & Co. v. SEBI15 the question was whether SEBI has power to issue show
cause notices to the Chartered Accountants in connection with the work which they have
undertaken for a listed Company in the matter of maintaining accounts and balance-sheets.

1414
(2012) 10 SCC 603
15

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“Various measures were available to SEBI that could be employed in regulating the securities
markets. Those powers were of wide amplitude which would take within its sweep a chartered
accountant if his activities are detrimental to the interest of the investors or the securities
market.” If the evidence sufficiently indicates the possibility of there being a role of the auditors
in the alleged fraud, then SEBI, as a securities market regulator, is empowered to protect the
interests of the investors and could proceed to pass appropriate directions.

In SEBI v. Ajay Agarwal16 the issue was whether Section 11-B of SEBI Act, 1992 could be
invoked by in conjunction with Sections 4(3) and 11 for restraining the respondent from
associating with any corporate body in accessing the securities market and prohibiting him from
buying, selling or dealing in securities. Chairman of the Board answered this in the affirmative
following which, an appeal was made to SAT. This order was reversed by the SAT by stating
that Section 11-B cannot be invoked in respect of the alleged misconduct which took place at a
point of time when Section 11-B was not on the statute book. The SC on appeal held that:
“Provisions of Section 11-B being procedural in nature can be applied retrospectively. The
Appellate Tribunal made a manifest error by not appreciating that Section 11-B is procedural in
nature.” In SEBI v. Opee Stock-Link Limited and Anr17 Jet Airways Limited and Infrastructure
Development Finance Company issued IPOs, which were over-subscribed. SEBI discovered that
shares which were meant for RIIs had been cornered through hundreds of benami/fictitious
demat account holders. Most of those demat account holders were not genuine persons. This was
contended to be in violation of the provisions of Section 12A (a), (b), (c) of the SEBI Act, 1992
as also Regulations 3 and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices) Regulations, 2003. The Adjudicating Officer found that an unlawful gain was made
and imposed a penalty. An appeal was filed before the SAT. The SAT set aside the above order.
SEBI then preferred an appeal before the SC. Held: “it is clear that the demat account holders
were not genuine. The entire chain of the transactions of shares and doubtful nature of the demat
holders, establishes the fact that all these transactions were nothing but a scam. As a result of
the afore-stated transactions, the respondents got undue benefit.” Order passed by Adjudicating
Officer was sustained.

16
(2010) 3 SCC 765
17
Civil Appeal No. 2252 of 2010

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 5. APPEAL TO CONSTITUTIONAL COURT

Previous position: Earlier, Section 15Z provided for appeals to the High Court. So, any person
who was aggrieved by any decision or order of SAT could prefer an appeal to the High Court
within sixty days from the date of communication of the decision or order of the SAT to him.
The same could be on any question of fact or law arising out of such order.
Current Position: This position was altered by the SEBI (Amendment) Act, 2002 which now
provides recourse directly to the SC. It states that any person aggrieved by any decision or order
of SAT may file an appeal to the SC within sixty days from the date of communication of the
decision or order on any question of law arising out of such order: Provided that SC may, if it is
satisfied that the applicant was prevented by sufficient cause from filing the appeal within that
period, allow it to be filed within a further period not exceeding 60 days.

In Videocon International Ltd v. SEBI,18 the SC discussed in detail the past position of appeal
to the High Court and current one of redressal directly to the Supreme Court. The issue for
determination was, whether this amendment would operate prospectively or retrospectively. It
was held that “Section 15Z of the SEBI Act prior to the amendment, postulated that the appellate
remedy would extend to "...any question of fact or law arising out of such order." Whereas, the
appellate remedy was curtailed consequent upon the amendment, whereunder the appellate right
was limited to, "...any question of law arising out of such order." Under the amended Section
15Z, it is not open to an appellant, to agitate an appeal on facts.” Though an amendment which
altered the forum, would apply retrospectively, if the appellate remedy had been availed of
before the amendment, the same would constitute a vested right. In N Narayanan v.
Adjudicating Officer, SEBI,19 the SC observed that: “the appellate jurisdiction of the SC is
guaranteed under Section 15Z of the SEBI Act 1992.” This was invoked challenging a joint order
passed by SAT, Mumbai upholding the Adjudication order wherein the appellant was restrained
for two years from buying, selling or dealing in securities and made liable for a monetary penalty
of 50 lakhs under Section 15HA of SEBI Act. In exercise of this appellate jurisdiction, the SC
upheld the orders passed by Adjudicating officer and SAT.

18
(2015) 4 SCC 33
19
AIR 2013 SC 3191

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 6. CONCLUSION

We find that since the inception of the SEBI Act in 1992, several strides have been made in its
evolution. With the numerous amendments that have been made, the Legislature has sought to
widen the regulatory and adjudicatory ambit of SEBI with the best interests of the investors in
mind. Several scams like the Harshad Mehta Securities Fraud, the Sahara Scam etc, have
contributed to its development. Thus the protective, developmental and regulatory functions
entrusted with SEBI ensure fair play in the securities market. In case of violation of the same, it
exercises its power of adjudication and imposing penalties under Chapter VI A and VI B.

BIBLIOGRAPHY

 Amit Vohra, Capital Market and Securities Law

 Dr. S.R Myneni, Law of Investment and Securities

 The SEBI Act, 1992

 SEBI Act, 1992 [As amended by the Banning of Unregulated Deposit Schemes
Ordinance, 2019]

 Simran Chandok, The Growth of SEBI- From Harshad Mehta to Subrata Roy

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