Wednesday, November 2, 2016

SEBI to Reconsider the Largest Penalty Imposed

On September 22, 2015, an Adjudicating Officer (AO) of SEBI passed an order against PACL Limited and certain other persons imposing a penalty of Rs. 7,269.5 crores in connection with a case involving the illegal and fraudulent mobilization of funds from the public. This is said to be highest penalty that SEBI has ever imposed. Such a penalty was imposed under section 15HA of the Securities and Exchange Board of India Act, 1992, which provides that any personal engaging in fraudulent and unfair trade practices relating to securities may be liable to a maximum penalty of Rs. 25 crores or three times the amount of profits made out of such practices, whichever if higher. The AO had found that the company had illegally mobilized a sum of Rs. 2,423.2 crores, and that this was a fit case to impose the maximum penalty of three times that amount. The AO had observed:

Keeping in view the entire facts and circumstances of the case, I am of the view that there cannot be a better case than this which deserves imposition of maximum penalty and if it is done so, than [sic] it will give a strong message to securities market at large that such type of violations will not be viewed lightly. In the recent past, the country has suffered a lot in the hands of entities who indulge in such illegal money mobilization under various schemes, wherein hard earned money of the common man has been duped. Thus, imposition of deterrent penalty is the need of the hour. …

PACL and other affected parties preferred an appeal to the Securities Appellate Tribunal (SAT) on the ground that the AO had imposed a penalty without computing the profit, if any. This contention was not only accepted by SAT, but SEBI’s counsel offered that SEBI was willing to reconsider the matter afresh.  In a brief order, SAT held:

Even if the A.O. considers the appellants to be highly unscrupulous and that the appellants have indulged in fraudulent and unfair trade practices, it was obligatory on part of A.O. to determine the quantum of profits made in such practice and thereafter proceed to impose penalty under Section 15HA of SEBI Act.

This puts the ball back in SEBI’s court. It may have to discharge a rather unduly high burden if it proposes to impose a penalty of stratospheric proportions.

1 comment:

vswami said...

OFFHAND
As perceived:

Per AO

"......the country has suffered a lot in the hands of entities who indulge in such illegal money mobilization under various schemes, wherein hard earned money of the common man has been duped. Thus, imposition of deterrent penalty is the need of the hour. …"

Per SAT

"....it was obligatory on part of A.O. to determine the quantum of profits made in such practice and thereafter proceed to impose penalty under Section 15HA of SEBI Act."

If were to be simply read and understood, the AO has sought to justify imposition of maximum penalty on the ground of 'economic loss' suffered by the 'country' and/or the 'common man'. The SAT , on the contrary, in forming its opinion, has stressed that the determining factor should be "the quantum of profits made in such practice" (by the penalized party (ies)!)

To say the least, so far as common knowledge goes, there is no standard or norms, mathematically prescribed for determining either the 'loss', or 'profits', that too in real terms and objectively, thereby leaving no scope for any further dispute.

In the ultimate analysis, would the law /other experts, duly equipped, have any solution to offer, to undo the obvious predicament most likely to be faced in the further follow-up proceedings, is any- (or no-?)body's guess !