SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

Securities Law Project

Topic – Adjudication and Penalties
under SEBI Act, 1992

Name:- Pulkit Khare

Class: IV Year Division: 'B'
Roll No. 1174

Page | 1
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

TABLE OF CONTENTS

ACKNOWLEDGMENT.......................................................................................................................3

INTRODUCTION...............................................................................................................................4

BACKGROUND.................................................................................................................................4

.......................................................................................................... Before 1995 Amendment

...........................................................................................................................................4

......................................................................................................... Post Amendment scenario

...........................................................................................................................................5

POWERS OF PENALTY UNDER SEBI ACT......................................................................................5

....................................................................................................... Original powers with SEBI

...........................................................................................................................................5

........................................................................................ New adjudicatory powers conferred

...........................................................................................................................................6

.................................................. Types of Monetary penalties prescribed in the amendment

...........................................................................................................................................6

ADJUDICATING OFFICER AND APPEALS........................................................................................6

............................................................................................... Appointment and Qualifications

...........................................................................................................................................6

.................................................................................................................. Adjudicatory powers

...........................................................................................................................................7

................................................................................................... Securities Appellate Tribunal

...........................................................................................................................................7

PENAL PROVISIONS UNDER SEBI ACT..........................................................................................7

FACTORS TO BE TAKEN INTO ACCOUNT BY THE ADJUDICATING OFFICER...............................9

DISCRETION OF THE ADJUDICATING OFFICER.............................................................................9

Page | 2
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

........................................................................................... Why isn’t section 15J mandatory?

.........................................................................................................................................10

.......................................................................................................................... Current position

.........................................................................................................................................10

CONCLUDING REMARKS...............................................................................................................10

Page | 3
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

ACKNOWLEDGMENT

This research project would not have been possible without the support of many people. The
author wishes to express his gratitude to his supervisor, Ms. Manjula R S., who was abundantly
helpful and offered invaluable assistance, support and guidance. The Author would like to
express his gratitude towards his parents and friends for their kind co-operation and
encouragement which helped in completion of the project. The author would also like to express
his heartfelt gratitude and thanks to Library staff for giving attention and time in providing
valuable pieces of Law.

Page | 4
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

DISCRETION OF ADJUDICATING AUTHORITY IN RENDERING

PENALTY

Introduction

The legal reforms in the securities market began with the enactment of the SEBI Act, 1992,
which established SEBI with statutory responsibilities to (i) protect the interest of investors in
securities, (ii) promote the development of the securities market, and (iii) regulate the securities
market. This was followed by repeal of the Capital Issues (Control) Act, 1947 in 1992 which
paved way for market determined allocation of resources.1

Then followed the Securities Laws (Amendment) Act in 1995, which extended SEBI’s
jurisdiction over corporates in the issuance of capital and transfer of securities, in addition to all
intermediaries and persons associated with securities market. It empowered SEBI to appoint
adjudicating officers to adjudicate wide range of violations and impose monetary penalties and
provided for establishment of Securities Appellate Tribunals (SATs) to hear appeals against the
orders of the adjudicating officers.2

Background

Before 1995 Amendment

Before the amendment Act, SEBI was being perceived as ineffective and toothless in protecting
the interest of investors. This was essentially because SEBI did not have any power to control or
regulate the issuers of securities. The SEBI Act listed all kinds of intermediaries to be registered
and regulated by SEBI, but excluded the issuer of securities.

As a result, SEBI could not directly regulate the issuers (Companies) on matters relating to issue
and transfer of securities. In the absence of clear statutory mandate to SEBI to regulate issuers of
securities which are governed by the Companies Act, 1956, SEBI was not able to compel the
issuers to make adequate disclosures. It was rather directing its efforts only at the lead managers

1
Establishment of SEBI, https://www.sebi.gov.in/about-sebi.html
2
Historical perspective of securities laws – ICSI,
http://www.icsi.edu/webmodules/Programmes/31NC/HISTORICALPERSPECTIVEOFSECURITIESLAWS-
MSSAHOO.doc

Page | 5
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

and merchant bankers who are intermediaries and signatories to prospectus requiring them to
make adequate disclosures. Even this was being challenged in courts of law, as this was
perceived beyond the jurisdiction of SEBI.

This debilitating infirmity was done away with by the amendment Act which incorporated
section 11A to SEBI’s regulatory powers over corporates in the issuance of capital, transfer of
securities and other related matters.3 SEBI can now specify by regulations the matters to be
disclosed and the standards of disclosure required for the protection of investors in respect of
issues made by bodies corporate.

Post Amendment scenario

The jurisdiction of SEBI was enlarged to register and regulate a few more intermediaries and
other persons associated with the securities market. The amendment Act empowered SEBI to
register and regulate the working of the intermediaries like depositories, custodians for securities
and also certain other persons associated with the securities market like foreign institutional
investors, credit rating agencies, venture capital funds etc. 4

SEBI was also given blanket authority to regulate other intermediaries or persons, not named
specifically in the statute, by specifying them through a notification. This obviated the need for
amending SEBI Act every now and then to deal with a particular type of intermediary or a
person associated with the securities market that may emerge in future.

Powers of Penalty under SEBI Act

Original powers with SEBI

The SEBI Act originally provided for penalty of suspension and cancellation of a certificate of
registration of an intermediary. Such suspension/cancellation led to cessation of business and
affected innocent third parties, often adversely, who were dealing with the intermediary.5

Besides there were many persons other than intermediaries associated with the securities market
on whom the penalty of suspension/cancellation had no bearing. In order to tackle this, the
amendment Act provided for monetary penalties as an alternative mechanism to deal with capital
market violations.
3
Section 11A, SEBI Act, 1992.
4
Securities Laws (Amendment) Act, 1995.
5
Securities and Exchange Board of India Act, 1992, 15 of 1992. [4th April, 1992]

Page | 6
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

New adjudicatory powers conferred

SEBI was empowered to adjudicate a wide range of violations and impose monetary penalties on
any intermediary or other participants in the securities market. The amendment Act listed out a
wide range of violations along with maximum penalties leviable. It provided for a highest
penalty of Rs.10 lakh and the violations listed were failure to submit any document, information
or furnish any return, failure to maintain required books of accounts or records, carrying on any
Collective Investment Scheme without registration, failure to enter into agreement with clients,
insider trading, failure to redress the grievances of investors, failure to issue contract notes,
charging excessive brokerage by brokers, failure to disclose substantial acquisition of shares and
take-overs, etc.

Types of Monetary penalties prescribed in the amendment

The amendment Act provided for three types of monetary penalties viz., -

(a) a lump sum penalty for a specific violation of the Act,

(b) a penalty for every day during which the violation continued, and
(c) a multiple of the amount involved in the violation.

The amount of penalty was determined, subject to the ceiling, by the adjudicating officer who
would be guided by the factors including 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
any group of investors as a result of default, and the repetitive nature of the default. It amended
section 24 to provide that non-payment of penalty would be an offence punishable with fine or
imprisonment under the Act.6

Adjudicating officer and Appeals

Appointment and Qualifications

The adjudicating officer is required to be appointed by SEBI. He shall not be an officer below
the rank of a division chief of SEBI. He will hold an enquiry after giving a person reasonable
opportunity of being heard for the purpose of determining if any violation has taken place and
imposing penalty. To ensure fair enquiry and penalty, it was provided that appeal against the

6
Section 24, Securities and Exchange Board of India Act, 1992, 15 of 1992. [4th April, 1992]

Page | 7
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

orders of adjudicating officers would lie to the SAT, which was also constituted by the
amendment Act.

Adjudicatory powers

While the suspension or cancellation of registration continued to be regulated by regulations

framed by SEBI and the appeal from the orders of the Board suspending or canceling a
registration would lie to Central Government, the amendment Act provided that the monetary
penalties would be imposed only in cases of violations listed in the Act by an adjudicating officer
as per the Rules prescribed by the Central Government. Appeals from the orders of an
adjudicating officer can be preferred to the SAT. The appeals against the orders of SAT can be
preferred to the High Court.

Securities Appellate Tribunal

An efficient and effective system of regulation calls not only for firmness, but also for fairness.
The amendment Act provided for establishment of one or more SATs to hear the appeals from
the orders of the adjudicating officers. Anybody not satisfied with the orders of the SAT can
prefer an appeal to the High Court. This ensured fairness in the process of adjudication.

Penal provisions under SEBI Act

Chapter VIA of SEBI Act deals with penalties which can be imposed under the Act for various
failures, defaults, non-disclosure and other offences.7

Sl No. Section Particulars

1. Section 15A Failure to furnish information, return, etc.
2. Section 15B Failure by any person to enter into agreement with clients
3. Section 15C Failure to redress investors’ grievances
4. Section 15D Default in case of Mutual Funds
Failure to observe rules and regulations by an asset management
5. Section 15E
company
6. Section 15F Default in case of stock brokers
7. Section 15G Insider Trading
8. Section 15H Non-Disclosure of Acquisition of Shares and Takeovers

7
Chapter VIA, Securities and Exchange Board of India Act, 1992, 15 of 1992. [4th April, 1992]

Page | 8
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

9. Section 15HA Fraudulent and unfair trade practices

10. Section 15HB Contravention where no separate penalty has been provided
11. Section 15I Adjudications
Section 15J-
12. Factors to be taken into account by the adjudicating officer
15JA
13. Section 15JB Settlement of administrative and civil proceedings
A brief look into the quantum of monetary punishment:

 Suspension and cancellation of registration of market intermediaries

 Failure to furnish information and returns to SEBI – Rs. 1 lakh to Rs. 1 crore

 Failure to enter into agreement with clients - Rs. 1 lakh to Rs. 1 crore

 Failure to redress investors’ grievances - Rs. 1 lakh to Rs. 1 crore

 Indulging in insider trading – Rs. 10 lakhs to Rs. 25 crores or three times the amount of
profits made out of insider trading, whichever is higher

 Non-disclosure of acquisition of shares and takeover - Rs. 10 lakhs to Rs. 25 crores or

three times the amount of profits made out of insider trading, whichever is higher

 Fraudulent and unfair trade practices - Rs. 5 lakhs to Rs. 25 crores or three times the
amount of profits made out of insider trading, whichever is higher

 Penalty where no specific penalty is provided - Rs. 1 lakh to Rs. 1 crore

Factors to be Taken into Account by the Adjudicating Officer

Section 15J lays down that while adjudging the amount of penalty, the adjudicating officer shall
have due regard to the following factors, viz. –

15J. 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;

Page | 9
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

c) the repetitive nature of the default.8

Crediting sums realised by way of penalties to Consolidated Fund of India.

15JA. All sums realised by way of penalties under this Act shall be credited to
the Consolidated Fund of India.9
Discretion of the Adjudicating officer

In the case of Adjudicating officer, Securities and Exchange Board of India v. Bhavesh Pabari,
discretionary powers of SEBI were put to consideration.10 The question before the court was

Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15J of
the Securities and Exchange Board of India Act, 1992 are exhaustive to govern
the discretion in the Adjudicating Officer to decide on the quantum of penalty
or the said conditions are merely illustrative?
Supreme Court witnessed in the case of Securities and Exchange Board of India through its
Chairman v. Roofit Industries Limited11 that the powers of Adjudicating officer is narrower. This
view was considered to be in direct conflict with the provisions of Section 15I(2) of the SEBI
Act which vests jurisdiction to impose "such penalty as he thinks fit in accordance with the
provisions of any of those sections."12

The judgment was inclined to take the stand that the provisions of clauses (a), (b) and (c) of
Section 15J are illustrative in nature and have to be taken into account whenever such
circumstances exist.

Why isn’t section 15J mandatory?

The judgment of Bhavesh Pabari (in paragraph 12) observed that Section 15J of the SEBI Act
enumerates by way of illustration(s) the factors which the Adjudicating Officer should take into
consideration for determining the quantum of penalty imposable. The imposition of penalty
depends upon satisfaction of the substantive provisions as contained in Sections 15A to Section
15HA of the SEBI Act.

Current position
8
Section 15J, Securities and Exchange Board of India Act, 1992, 15 of 1992. [4th April, 1992]
9
Section 15JA, Securities and Exchange Board of India Act, 1992, 15 of 1992. [4th April, 1992]
10
Adjudicating officer, Securities and Exchange Board of India v. Bhavesh Pabari, Civil Appeal No(S).11311 of
2013
11
Securities and Exchange Board of India through its Chairman v. Roofit Industries Limited (2016) 12 SCC 125
12
https://www.livelaw.in/top-stories/sc-answers-reference-on-scope-of-discretion-in-imposing-penalty-under-sebi-
act-read-judgment-143242

Page | 10
SECURITIES LAW PROJECT ADJUDICATION AND PENALTY UNDER SEBI ACT

Conditions stipulated in clauses (a), (b) and (c) of Section 15J are not exhaustive and in the given
facts of a case, there can be circumstances beyond those enumerated by clauses (a), (b) and (c) of
Section 15J which can be taken note of by the Adjudicating Officer while determining the
quantum of penalty.

Concluding remarks

The powers of the Adjudication and penalty was a step in the right direction to enforce
compliance of the various provisions of the SEBI Act, 1992 and perform the objective set out in
its preamble. The powers conferred guarantee that any provisions made by SEBI are not
toothless and the authority can enforce the compliance. The penalizing powers under the SEBI
were specifically introduced under Chapter VIA of the Act describing the host of violations of
the Act, however it is upon the Adjudicating officer to lay out the penalty in case of violations.
Therefore, the adjudicating officers are to be conferred with enough powers and discretion to do
substantial justice and appellate provisions are also necessary to oversee the proper position of
the law. SEBI Act through the legislative amendments has reached such position and the only
requirement currently is to adapt to the rapidly changing technological environment and be strict
in enforcement of the Act.

Page | 11