Regulator wants its penalty discretion back

Plans writing to government for urgent change in the Sebi Act, after nod from board

The Securities and Exchange Board of India (Sebi) plans to write to the central government to change the provisions of its securities laws that deal with the quantum of penalty the market regulator can impose. The matter will be discussed at Sebi's board meeting later this week, according to sources. Following a nod from the board, Sebi might write to the government for ‘urgent’ amendments to the Sebi Act, the sources added.

The regulator wants to bring in certain clarifications to ensure that the discretion to impose penalties always lies with its adjudicating officers (AOs). The move could impact cases between 2002 and 2014, a lot of which are still pending before the regulator. The Securities Appellate Tribunal (SAT) has also been remanding back matters to Sebi to re-decide and impose higher penalties.

“We want to insert a clarification that the discretion to impose a penalty has always remained with the adjudicating officer,” said a Sebi official.

A FLAWED PENALTY SYSTEM?

• The regulator wants to bring in clarifications to ensure that the discretion to impose penalties lies with its adjudicating officers
   
• The move could impact cases between 2002 and 2014, several of which are still pending before the regulator
   
• Sebi has started slapping higher penalties following a ruling by the Supreme Court in the matter of Roofit Industries
   
• The SC judgment is a body blow for small/debt-ridden firms that seek a relaxation in penalties
  

 

The penalty for various breaches including delayed/non-filing of return or non-furnishing/ delayed furnishing of information now attract flat penalty of Rs 1 lakh per day

Sebi had issued clarifications in the past. For instance, Sebi’s powers to issue disgorgement orders were earlier questioned on grounds that the Sebi Act did not expressly confer this power on the regulator. Consequently, in 2013, the regulator added an explanation to Section 11B of the Act, clarifying that it has and should be deemed to always have had the power to pass disgorgement orders.

Disgorgement is the forced giving up of profits obtained by illegal or unethical acts and a repayment of ill-gotten gains imposed on wrongdoers by the courts.

In a November 26 ruling in the matter of Roofit Industries, the Supreme Court had ruled that Sebi’s adjudicating officer or SAT can no longer use their discretion to consider any factor other than the factors specified in Section 15J while considering the quantum of monetary penalty. This led to a situation where heavy penalties were imposed by the regulator for even minor breaches (for violations between 2002 and 2014).

Interestingly, in an order dated March 14 in the matter of Siddharth Chaturvedi versus Sebi, a two-member division bench of the Supreme Court questioned the arguments used to arrive at the Roofit judgment. The bench questioned whether penalties be solely decided based on the three clauses set out in Section 15J, or whether other relevant circumstances ought to be taken into account.

The Chaturvedi case has now been referred to a three-member bench whose decision could have a bearing on Sebi’s discretionary powers to impose penalties.

“Until the Supreme Court decides on the issue of discretion in the Siddharth Chaturvedi matter, any interpretation would be premature. However, it is open to the Sebi board to recommend to the finance ministry for taking up a clarification amendment to the Sebi Act and other allied laws to provide clarity to market participants,” said Vaneesa Agrawal, a securities lawyer.

According to experts, the regulator is keen on inserting the necessary clarifications as the Chaturvedi judgment could go either way.

Prior to the Roofit judgment, Sebi and SAT used to examine the facts and the gravity of the offence as well as the conduct and financial condition of the entity before levying the penalty. SAT, at times, reduced the penalty even on humanitarian grounds.