[Guest post by Shashank Prabhakar, who is a lawyer with Finsec Law Advisors]
The Finance Bill, 2017, which has been passed by both the houses of Parliament and which was assented to by the President of India on 3 April 2017, has amended certain provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and the Securities Contracts (Regulation) Act, 1956 (“SCRA”). The most important among them are the amendments carried out to sections 15J and 23J of the SEBI Act and the SCRA respectively. The amendments have now put paid to the conundrum posed by the Supreme Court decision in SEBI v. Roofit Industries (“Roofit”).
In may be recalled that Roofit involved certain disclosure violations under section 15A(a) of the SEBI Act and the maximum penalty that SEBI could impose for offences under the said provision. Section 15A(a) of the SEBI Act, as amended by the parliament in October 2002, provided that if any person who is required under the SEBI Act to furnish any document, return or report to SEBI failed to furnish the same, he shall be liable to pay a penalty of “one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.” Similar amendments were also carried out to sections 15A(b) and (c), 15B, 15C, 15D, 15E, 15F(b) and (c), 15G, 15H and 15HA.
The Roofit case raised two important questions of law, which are: (a) whether the adjudicating officer (“AO”) is free to consider factors other than the ones laid down under section 15J of the SEBI Act to determine the quantum of penalty under section 15A(a); and (b) whether the language of section 15A(a) provided any discretion to the AO in determining the quantum of penalty.
The Supreme Court answered the first question in the negative and held that only those factors which were mentioned under section 15J could be considered by the AO while determining penalty and that no extraneous factors could influence the decision on the quantum of penalty that may be levied. As for the second question, the Supreme Court held that the 2002 amendment took away the discretion of the AO to determine the quantum of penalty payable under section 15A(a). The court held that the language of section 15A(a) did not provide the AO any scope to consider mitigating factors under section 15J. The court read down the scope of section 15J and held that the AO could only exercise discretion under section 15J while deciding the quantum of penalties under sections 15F(a) and 15HB. This led to an absurd situation where SEBI imposed enormous penalties for simple disclosure violations without regard to any of the factors laid down in section 15J. The ratio of Roofit is applicable to sections 15A(b) and (c), 15B, 15C, 15D, 15E, 15F(b) and (c), 15G, 15H and 15HA, whose language was similar to Section 15A(a).
Although sections 15A to 15HB were again amended in 2014 to its present form, the court in Roofit held that the AO had no discretion in deciding the quantum of penalty under sections 15A(a), (b) and (c), 15B, 15C, 15D, 15E, 15F(b) and (c), 15G, 15H and 15HA for offences committed between 2002 and 2014. Strangely, it is noticed that the ratio of the Roofit decision was only applied to disclosure violations under section 15A(a) and not to violations under other provisions which had similar language.
A few months after Roofit, another bench of the Supreme Court in Siddharth Chaturvedi v. SEBI (“Chaturvedi”) was seized of a matter which dealt with disclosure violations under the erstwhile SEBI (Prohibition of Insider Trading) Regulations, 1992. This case also involved interpretation of section 15A. The bench disagreed with the interpretation offered in Roofit on both the questions of law and held that if the interpretation suggested by the court in Roofit were to be followed “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.” The bench was of the opinion that these questions deserved to be considered by a larger bench and placed the matter before the Chief Justice of India to form a larger bench.
Amendments to the SEBI Act and the SCRA
The Finance Act, 2017 has amended section 15J by inserting an explanation, which reads as follows:
“For the removal of doubts, it is clarified that the power of an adjudicating officer to adjudicate the quantum of penalty under Section 15A to 15E, clauses (b) and (c) of Section 15F, Section 15G, Section 15H and 15I-IA shall be and shall always be deemed to have been exercised under the provisions of this section.”
This explanation makes it clear that the AO will now have to consider the factors laid down under section 15J for determining the quantum of penalty in respect of those provisions mentioned in the explanation for offences which were committed between 2002 and 2014.
A similar amendment was also carried out to Section 23J of the SCRA, which reads as follows:
“For the removal of doubts, it is clarified that the power of an adjudicating officer to adjudicate the quantum of penalty under sections 23A to 23C shall be and shall always be deemed to have been exercised under the provisions of this section.”
The language of section 23J of the SCRA is exactly the same as section 15J of the SEBI Act. The language of sections 23A to 23C, which lay down the penalties for offences committed thereunder, are exactly similar to the language of section 15A(a) as it stood between 2002 and 2014. The language of sections 23A to 23C also does not provide any discretion to the AO while imposing penalties. The amendment pre-empts similar questions of law, under the SCRA, as Roofit from arising in the future.
The proposed amendments to the Finance Act, 2017 will soon take effect, now that they have received the assent of the President of India. However, the amendments lay to rest only one of the two questions raised in Roofit – the second one, to be precise. The first question, i.e., whether the AO is free to consider factors other than the ones laid down in Section 15J of the SEBI Act to determine the quantum of penalty, is still alive. The bench in Roofit was of the opinion that the factors under Section 15J are exhaustive, while the bench in Chaturvedi disagreed. A larger bench will still have to be constituted to determine the answer to this question.
- Shashank Prabhakar