Thursday, June 4, 2015

Dissecting SEBI’s Powers Under Section 11B of the SEBI Act, 1992: Part 3

[The following guest post is contributed by Kanwardeep Singh Kapany, and is a continuation of previous posts in Parts 1 and 2]

Direction to disgorge does not amount to double jeopardy

The expression disgorgement is a common term in developed markets across the world, though it is new to the securities market in India. The said expression connotes repayment of ill-gotten gains that is imposed on wrongdoers by the courts. In commercial parlance, the said expression has been construed to mean the forced giving up of profits obtained by illegal or unethical acts. In other words, it is “The act of giving up something such as profits illegally obtained on demand or by legal compulsion.”[1] Disgorgement is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. It is a monetary equitable remedy designed to prevent a wrongdoer from unjustly enriching himself as a result of his/her illegal conduct. Disgorgement of ill-gotten gains may be ordered under section 11B[2] against one who has violated the provisions of the Act, rules or regulations (collectively called “Securities Laws”). However, SEBI cannot ask every violator to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. It will thus be seen that the order for disgorgement can be passed by SEBI only after a delinquent has been found guilty of violating the Securities Laws. The innate objective in the ordering of disgorgement is to make sure that the wrongdoers do not profit from their wrong doing. Therefore, the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity. In a disgorgement action, the burden of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on SEBI.[3]

Experience has shown that SEBI’s directions with respect to disgorgement have been resisted on account of the said directions leading to double jeopardy.[4] The Constitution of India provides for a fundamental right which frowns upon double jeopardy as the said fundamental right states in unequivocal terms that no person shall be prosecuted and punished for the same offence more than once.[5] The basis for resisting direction(s) to disgorge is that where a direction or set of directions have already been issued by SEBI under section 11B, if SEBI still proceeds to issue another direction in the form of disgorgement with respect to the same contravention of Securities Laws, then SEBI is punishing the wrongdoer for the same violation again. However, the said plea attempting at preventing initiation of disgorgement proceedings by SEBI with respect to the same contravention in respect of which the Board has already issued a direction or set of directions, is completely misplaced. The proceedings under section 11B are neither criminal proceedings nor the direction of disgorgement is a penal action. Instead, disgorgement is in fact a continuation of the earlier proceedings under which a person has been held guilty of violating the Securities Laws and the said person has benefited illegally and SEBI decides to disgorge the delinquent of the unlawful gains.[6] Also, there is no legal bar in initiating action for violating different provisions of the SEBI Act. The SEBI Act itself permits adjudication proceedings under Chapter VIA of the SEBI Act, issue of directions under sections 11 and 11B of the SEBI Act and prosecution under section 23 of the SEBI Act for violating provisions of the SEBI Act or the rules made thereunder. Therefore, direction to disgorge does not amount to double jeopardy.    

Directions can be issued against Professionals not regulated by SEBI Act

There is no doubting the proposition that SEBI cannot regulate the profession of Chartered Accountants/Company Secretaries/Cost & Work Accountants and the like (collectively called “Professionals”) who are regulated by various acts of the Parliament specifically dealing with the said Professionals. However, to put forth that SEBI has absolutely no power to undertake remedial or preventive measures against the acts or omissions of Professionals, which is detrimental to the interest of investors will be untenable in law, as it is the statutory duty of the SEBI to see that the interests of the investors are protected. Similarly, the mere taking of remedial and preventive measures by SEBI in the interest of investors and for regulating the securities market will not amount to regulating the Professionals. If the said Professionals, whether appointed by shareholders of a company or otherwise do not discharge their duties in the manner required by law, as a consequence of which they are not able to fulfill their duty towards the said share holders, it becomes extremely important for SEBI to step in and take all remedial and protective measures. [7]

As a matter of common knowledge, an investor invests his money by considering the financial health of the Company and in order to find out the same, one will naturally bank upon the accounts and balance­ sheets of the Company. Nowadays for financial gains, even small investors are investing money, which might include even retired persons who end up investing their retiral dues in the purchase of shares and ultimately if such a person is defrauded, he/she will be totally ruined and may be put in a situation where his/her life savings are wiped out. Now, if it is unearthed that a particular Professional was in connivance and in collusion with the officers/directors of the Company in undertaking something that has violated the law, there is no reason as to why to protect the interests of investors and regulate the securities market, SEBI cannot prevent such a Professional from undertaking acts that could have otherwise been performed by the said Professional.[8]   

Directions issued run concurrent with Companies Act

There is no denial of the fact that there are several other legislations like the erstwhile Companies Act, 1956 or the present Companies Act, 2013 (“collectively called the “Companies Act”) with certain provisions to protect the interests of investors. Also, in the field of investor protection, there is an overlap of jurisdiction of authorities under the Companies Act and the SEBI Act. SEBI's power to take measures to protect the interests of investors and the requirement under Companies Act intending to protect the interest of investors is concurrent. There is no inhibition of any sort on exercising measures for investor protection by SEBI in view of the specific mandate given by the SEBI Act. The Supreme Court[9] while shedding light on role of dual agencies where enforcement power is found overlapping laid down that the Companies Act does not carve out an exclusive jurisdiction for itself to the exclusion of other authorities in the field of investor protection.

There can be no dispute that SEBI is not at all competent to exercise powers under the Companies Act, as it is not a designated enforcement authority thereunder. However, SEBI is competent to issue directions for enforcement independent of the provisions of Companies Act. For instance, if investors have not been returned there share application money even after the designated stock exchange has refused the listing permission, SEBI will be absolutely justified in issuing directions in the nature of a relief measure for the benefit of investors.[10] Moreover, issuance of such a direction in the instant case can very well be a speedy and summary measure for the benefit of the investors. The Companies Act is a general statute relating to companies in general, inter alia investor protection is also covered therein, whereas the SEBI Act is a special statute focused mainly for protecting the interests of investors. One cannot and should not ignore this aspect while examining the ambit of the powers bestowed on SEBI by the SEBI Act.


SEBI has been battling various scourges prevalent in the securities market in order to avert erosion of investor confidence. The menace of Securities Laws violations has been attempted to be neutralized inter alia with the aid of directions which SEBI is empowered to issue under section 11B of the SEBI Act. Therefore, the heart of the said power is in the right place. However, certain unintended consequences which have ensued have definitely put the said power in the spot light. An illustrative and not an exhaustive list of such consequences is absence of clarity with respect to certain core expressions used in section 11B; absence of timelines with respect to reviewing the continuation of a certain direction; expansive effect of certain directions, on occasions even without the investigation having been completed. These consequences have had a profound impact on persons associated with the securities market, irrespective of whether the said persons are actually held to have violated Securities Laws or not.

Although, I have defended the constitutionality of section 11B hereinbefore when the same was being questioned due to the said consequences, however I still remain an ardent supporter, of ideally speaking, to completely eradicate the said consequences, practically speaking, to mitigate the said consequences as much as possible. Be it formulating a new legislation or amending an existing one, in order to attain the intended objective of the new enactment or of the amendment to an existing one, it is very thoughtful and fruitful to inter alia invite all the stakeholders on board and draw from there invaluable experience and advice, to take into account previous adjudications, if any, with respect to the said legislation. SEBI had at hand a ripe opportunity to address the aforementioned concerns through the Securities Laws (Amendment) Act, 2014. However, with all due respect, the said opportunity has not at all been put to use. The only amendment introduced with respect to section 11B is insertion of an explanation to the said section, which provides that SEBI has and has always had the power to direct disgorging, subject to fulfillment of certain conditions. Therefore, the wait, to see the heart of the power and the consequences flowing from use of the said power, in sync, has been prolonged.  


- Kanwardeep Singh Kapany

[1] Karvy Stock Broking Ltd. v. SEBI , [2008] 84 SCL 208 (SAT- MUM).
[2] Shailesh Jhaveri  v. SEBI,  [2013] 117 SCL 210(SAT-MUM).
[3] Dhaval Mehta v. SEBI, [2010] 2 CLONLINE 42 (SAT-MUM).
[4] Dushyant N. Dalal v. SEBI, [2011] 105 SCL 139 (SAT – Mum); In Re: IL and FS Ltd. (ILFS) and Ors., MANU/SB/0027/2011.
[5] The Constitution of India, 1949, art 20(2).
[6] Shailesh Jhaveri  v. SEBI,  [2013] 112 CLA 547 (SAT).
[7] Price Waterhouse and Co. and Ms. Sharmila Karve, v. SEBI, [2010] 160 Comp Cas 324 (Bom).
[8] Price Waterhouse v. SEBI, [2011] 108 SCL 216 (SAT).
[9] Radheyshyam Khemka v. State of Bihar, (1993) 77 Comp Cas 356 (SC).
[10] Bank of Baroda v. SEBI,  [2000] 26 SCL 532 (SAT – MUM).

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