SC remark makes Sebi levy heavy penalties

The Securities and Exchange Board of India (Sebi) has started slapping higher penalties following a ruling by the Supreme Court (SC) in the matter of Roofit Industries. The judgment has come as a body blow for companies that seek a relaxation in penalties from the Securities Appellate Tribunal (SAT).

“Sebi has already started imposing penalties according to the judgment and now, one can see penalties running into crores for even less serious violations such as delay in making disclosures,” says Tejesh Chitlangi, partner, IC Legal, a law firm. “Reductions will not be possible since the adjudicating officer and the tribunal will have to impose the highest penalty.”
 

In its November 26 ruling, the SC had observed that the formula used for the reduction of penalty by SAT was not forthcoming, making the exercise arbitrary.

SAT had modified the order of the adjudicating officer under Sebi and reduced the penalty payable by Roofit Industries under Section 15A of the Securities And Exchange Board of India Act, 1992 (Sebi Act) from Rs 1 crore to Rs 60,000.

The Supreme Court pointed out that penalties should not be reduced on extraneous grounds other than that mentioned under Section 15J. Apart from the Roofit case, the penalty imposed by Sebi was reduced from Rs 75 lakh to Rs 15,000 in five other cases, the court observed.

Sebi has now asked for a review of the SC decision after being criticised for levying high penalties, said sources.

An email sent to Sebi did not elicit a response.

According to the November 26 ruling, the 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. Prior to this 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.

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

However, this quantum of penalty will be applicable only for offences committed between October 2002 and September 2014, as the penal provisions of the Sebi Act have since been amended with effect from September 2014. Certain sections such as Section 15HB of the Sebi Act left the discretion on the adjudicating officer to impose penalties for violation, but most of the penal provisions did not have any discretion till they were amended in 2014.

“Unlike the flat penalty of Rs 1 lakh per day earlier, the amended provisions provide for a penalty of ‘up to’ Rs 1 lakh per day for the period of default,” said R S Loona, managing partner, Alliance Corporate Lawyers.

Recently, Sebi had slapped a penalty of Rs 3 crore on three promoters of Presha Metallurgical for failing to make timely disclosures about sale of shares in the company as required under Sebi norms.

In December, Sebi had slapped a fine of Rs 4 crore on one Vipul Shah for failing to make the necessary disclosures with regard to changes in the shareholding of Safal Herbals.

The factors to be taken into account by the adjudicating officer under Section 15J include the amount of disproportionate gain or unfair advantage made as a result of the default; the amount of loss caused to an investor or group of investors and the repetitive nature of the default.

---

FEELING THE PINCH

• 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 from SAT
   
• Flat penalty of Rs 1 lakh a day for breaches such as delayed/non-filing of return or non furnishing/delayed furnishing of information
  

 

If the delay is of more than 100 days, the penalty is Rs 1 crore