Sunday, March 20, 2016

SEBI’s Discretion (or Lack Thereof) in Imposing Penalty – A Twist in the Tale

[The following guest post is contributed by Vaneesa Agrawal, Securities Lawyer and former Legal Officer, SEBI. She can be reached at

A previous post on this Blog relating to the subject matter can be found here.]


There has been much furore in the corporate world due to the Supreme Court’s order in SEBI v. Roofit Industries Limited, [(2015 (12) SCALE 642, Order dated November 26, 2015, hereinafter “Roofit Judgement”], wherein it had held that the Securities and Exchange Board of India (“SEBI”) did not have discretion while imposing penalty under certain sections of the SEBI Act, 1992 (including section 15A, 15HA, etc.) after the amendment to the SEBI Act in 2002. Due to this judgment, one saw many matters pending before the Securities Appellate Tribunal (“SAT”) being withdrawn by the appellants in recent months. Other matters were remanded to SEBI by the SAT for passing a fresh order in light of the Roofit Judgement.

Interestingly, SEBI had itself filed a review application [Review Petition – Civil 1676 -1691 Of 2016] in this case. While SEBI’s review application is still pending before the Supreme Court (with the next date of listing being March 30, 2016), another recent judgment of the Supreme Court Division Bench has dealt with the same issue, and has referred the matter to larger bench of Supreme Court to authoritatively decide the issue.

A division bench of Supreme Court of India while hearing the matter of Siddharth Chaturvedi v SEBI, in Civil Appeal No(s). 14730 / 2015 [order dated March 14, 2016] has differed with the views in the Roofit Judgement.


The Supreme Court was hearing appeals against three SAT Orders (here, here and here) wherein appellants (Siddharth Chaturvedi, Ankur Chaturvedi and Jay Kishore Chaturvedi) are promoters/directors of Brijlaxmi Leasing and Finance Company Ltd. It was an admitted position before SAT that these appellants had purchased the shares of the company in question from time to time, but they failed to make disclosures to the stock exchange as stipulated under Regulation 13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Although the appellants argued that the violation was technical in nature, and hence warranted reduction in penalty amount, SAT dismissed these appeals upholding SEBI’s orders.

While analyzing the Roofit Judgement, Supreme Court observed the following:

10. Prima facie, we find it a little difficult to subscribe to both the views contained in paragraph 4 as well as in paragraph 5 of the said judgment. The expression “shall have due regard to” is a very known legislative device used from the time of Julius v Bishop of Oxford (1880) LR 5 AC 214 (HL), and followed in many judgments both English as well as of our Courts as words vesting a discretion in an Adjudicating Officer. The question which arises in the present appeals is whether the expression “namely” fixes the discretion which can be exercised only in the circumstances mentioned in the three clauses set out in Section 15J, or whether it would also take into account other relevant circumstances, having particular regard to the fact that it is a penalty provision that the Court is construing. As this needs to be authoritatively decided for the future, it would be better if we refer it to a larger Bench for such authoritative pronouncement.

11. We also find it a little difficult to accept what is stated in paragraph 5 of the judgment. It is very difficult, keeping in view, particularly, two important legal facets – one the doctrine of harmonious construction of a statute; and two, the fact that we are construing a penalty provision of a statute which is to be strictly construed, Section 15A, post amendment in 2002, is suddenly given a pride of place, and Section 15J is made to yield entirely to it. The familiar expression “notwithstanding anything contained” does not appear in the amended Section 15A. This being the case, it is a little difficult to appreciate as to how one can construe Section 15A, as amended, in isolation, without regard to Section 15J. In fact, the facts of the present case would go to show that where there is allegedly only a technical default, and the three parameters of Section 15J would allegedly be satisfied by the appellants, namely, that no disproportionate or unfair advantage has been made as a result of the default; no loss has been caused to an investor or group of investors as a result of the default; and there is in fact, no repetitive nature of default, no penalty at all ought to be imposed. What has been done by the appellants here is to fail to adhere to Regulation 13, as alleged in the show cause notice, which failure has occurred on three days and consequently, has allegedly not been repeated by the appellants anytime thereafter. If we were to read Section 15A, as amended in 2002, in the manner suggested by the Division Bench of this Court, it may lead to anomalous results in that the effect of continuing failure to adhere to statutory regulations alleged to have been continued well beyond the period of three days, and which continues till this day, has Rs.1 lakh per day as the minimum mandatory penalty under the provisions, which would culminate in the appellants herein having to pay Rs.1 crore in each of the three appeals. We do not think that this could have been the intention of the Parliament in enacting Section 15A, as amended in 2002. We also feel that on the assumption that paragraph 5 of the judgment is correct, it would be very difficult for Section 15A to be construed as a reasonable provision, as it would then arbitrarily and disproportionately invade the appellants' fundamental rights. This being the case, on both the conclusions reached by this Court in paragraphs 4 and 5, as stated by us hereinabove, these matters deserve consideration at the hands of a larger Bench. The Registry is, accordingly, directed to place the papers of these appeals before Hon'ble the Chief Justice of India for placing these matters before a larger Bench.”


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. Further, it a well-settled legal position that if there is a conflicting judgement of another coordinate bench (both being Division benches in this case), the decision which comes later in time should be followed.

- Vaneesa Agrawal

1 comment:

vswami said...


The subject matter is in regard to the power of ‘discretion’ vested in SEBI to levy ‘penalty’; and on the observations of the SC in a recently reported case . The point (s) of issue is reported to have now been referred to a larger bench.
In the context, one may prudently wish to draw, for inspirational guidance, pointed attention to a new development; which, of course, pertains to the income-tax regime . That is, the newly introduced penalty provision in the recent 2016 fiscal Budget. The details of the new provision brought in , in the income-tax regime, are noted to be covered in the write-up @Budget 2016: Rationalisation of Income Tax penalty provisions. As regards the power of discretion vested in the income-tax authority in the referred provision by way of ‘rationalisation’ of the extant enactment, the nuances thereof are noted to have been highlighted by an eminent tax expert; for more, may be listened to @…/eminent-jurist-s-e-dastur-expl…/