SEBI consent not pre-condition to compounding offences under SEBI Act — Supreme Court interprets and issues guidelines
Compounding offences under SEBI Act
Offence punishable under the the Securities and Exchange Board of India Act 1992 (SEBI Act) may be settled i.e. compounded vide section 24A of the SEBI Act, either before or after the institution of any proceeding with respect to the offence, by the Securities Appellate Tribunal (SAT) or Court before which such proceedings are pending, provided the punishment prescribed for the offence is not imprisonment, or imprisonment with fine.
SEBI consent not a statutory pre-requirement for compounding under section 24A
In the case of Prakash Gupta v. Securities and Exchange Board of India [Criminal Appeal No.569 of 2021 decided by the Hon’ble Supreme Court of India on 23.07.2021] the Supreme Court has discussed and interpreted section 24A of the SEBI Act to hold that this power to compound is entrusted solely to the SAT or the Court before which the relevant proceedings are pending, and that the non-obstante provision contained in section 24A must be given its natural meaning and effect, accordingly concluding that SEBI consent is not a statutory requirement to compounding in the following manner—
“83. The plain language of Section 24A does not provide for the consent of SEBI. The issue is whether this Court should read the requirement of the consent of SEBI into the provision, on the ground that this is a casus omissus. This would, however, amount to re-writing the statutory provision by introducing language which has not been employed by the legislature. ……“
(emphasis supplied)
Compounding guidelines
In the above matter, due to the statutory vacuum, the Hon’ble Court has also issued guidelines which SAT or the concerned Court must take into account while adjudicating an application under section 24A, reproduced as follows—
“92. …………….
(i) They should consider the factors enumerated in SEBI’s circular dated 20 April 2007 and the accompanying FAQs, while deciding whether to allow an application for a consent order or an application for compounding. These factors, which are non-exhaustive, are:
“Following factors, which are only indicative, may be taken into consideration for the purpose of passing Consent Orders and also in the context of compounding of offences under the respective statute:
1. Whether violation is intentional.
2. Party’s conduct in the investigation and disclosure of full facts.
3. Gravity of charge i.e. charge like fraud, market manipulation or insider trading.
4. History of non-compliance. Good track record of the violator i.e. it had not been found guilty of similar or serious violations in the past.
5. Whether there were circumstances beyond the control of the party.
6. Violation is technical and/or minor in nature and whether violation warrants penalty.
7. Consideration of the amount of investors’ harm or party’s gain.
8. Processes which have been introduced since the violation to minimize future violations/lapses.
9. Compliance schedule proposed by the party.
10. Economic benefits accruing to a party from delayed or avoided compliance.
11. Conditions where necessary to deter future non- compliance by the same or another party.
12. Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them.
13. Compliance of the civil enforcement action by the accused.
14. Party has undergone any other regulatory enforcement action for the same violation.
15. Any other factors necessary in the facts and circumstances of the case.”
(ii) According to the circular dated 20 April 2007 and the accompanying FAQs, an accused while filing their application for compounding has to also submit a copy to SEBI, so it can be placed before the HPAC. The recommendation of the HPAC is then filed before the SAT or the Court, as the case may be. As such, the SAT or the Court must give due deference to such opinion. As mentioned above, the opinion of HPAC and SEBI indicates their position on the effect of non-prosecution on maintainability of market structures. Hence, the SAT or the Court must have cogent reasons to differ from the opinion provided and should only do so when it believes the reasons provided by SEBI/HPAC are mala fide or manifestly arbitrary;
(iii) The SAT or Court should ensure that the proceedings under Section 24A do not mirror a proceeding for quashing the criminal complaint under Section 482 of the CrPC, thereby providing the accused a second bite at the cherry. The principle behind compounding, as noted before in this judgment, is that the aggrieved party has been restituted by the accused and it consents to end the dispute. Since the aggrieved party is not present before the SAT or the Court and most of the offences are of a public character, it should be PART G circumspect in its role. In the generality of instances, it should rely on the SEBI’s opinion as to whether such restitution has taken place; and
(iv) Finally, the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24A is private in nature, or it is of a public character, the non-prosecution of which will affect others at large. As such, the latter should not be compounded, even if restitution has taken place.“
(emphasis supplied)
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Author: Anand Chaudhuri | Advocate @Legalrisk | JD (UNSW) LL.B (CLC, Faculty of Law, University of Delhi) | Website: https://legalrisk.in/. | Email: legalrisk.in@gmail.com.
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