In a development that could provide relief to companies reeling under heavy penalties post the Roofit judgment, a division bench of the Supreme Court has, in a recent case, questioned the arguments used to arrive at the Roofit judgment. The earlier ruling had restricted Securities and Exchange Board of India's (Sebi) discretionary powers in deciding the quantum of penalties under certain sections of the Sebi Act, 1992.
In an order dated March 14 in the matter of Siddharth Chaturvedi versus Sebi, a two-member SC bench has referred the matter to a larger SC bench. 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 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.
“There is currently no stay on the operation of the Roofit judgement. However, since the issue has been referred to a larger bench, it implies that the issue is not fully settled and the Roofit judgement may no longer act as a precedent,” said Vaneesa Agrawal, an independent lawyer.
Experts suggested that in case of conflicting judgements of two division benches, the decision by the larger bench will be followed. Interestingly, the market regulator has already filed a review application to contest the Roofit judgement which is pending before the Supreme Court.
According to experts, SAT has been remanding back matters to Sebi to re-decide and impose higher penalties or asking parties to withdraw their appeal. For instance, in the recent Haresh Ramchandra Posnak versus Sebi case, SAT has quashed the appeals and restored the matter to the adjudicating officer of Sebi for passing fresh orders. In the Arun Kumar Bhangadia versus Sebi case, the appellant has agreed to withdraw the appeal and pay the penalty imposed under the earlier Sebi order.
In its November 26 ruling, the SC had observed that the formula used for the reduction of penalty by SAT in the Roofit case 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 SC bench had 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.
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.