SEBI Vs Ajay Agarwal (Supreme Court of India)
FACTS
Securities and Exchange Board of India (Appellant) initiated investigations against Trident Steel (company) on receipt of a complaint by a BSE member relating to public issue of the company. The complaint alleged misstatement of facts by the Company in the prospectus issued in furtherance of the proposed public issue. Mr. Ajay Agarwal (Respondent) was the joint managing director of the company. In the course of investigation, it appeared that the company’s directors had pledged their personal holding of 750,000 shares with Bank of Baroda, and a director and Dowell Leasing and Financing Ltd had given non-disposal undertaking to Bank of Baroda, lead manager to the issue. This was not disclosed in the prospectus of the company. This appeared to be a violation of SEBI guidelines on disclosure for investor protection. Thus, an important aspect of the capital structure of the company was not disclosed in the prospectus as a result of which investors were misguided.
On 22.12.99 SEBI issued a show cause notice to the Respondent asking him to show cause why directions under Section 11−B of the Securities and Exchange Board of India Act, 1992 (“the Act”) restraining the Company and its directors from accessing the capital market for a suitable period should not be issued. The Respondent filed his reply and was also given an opportunity of personal hearing. After hearing the replies of persons concerned to the show cause notice, on March 31, 2004 the Chairman of the SEBI passed an order, under Section 4(3) read with Section 11 and Section 11B of the Act, restraining the Respondent from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities for a period of five years. The order was contested in the appellate body, i.e., the Securities Appellate Tribunal (SAT).
PROCEDURAL HISTORY
In the proceeding before the Securities Appellate Tribunal (SAT), it was contended by the Respondent that Section 11B of the Act came by way of amendment with effect from January 25, 1995 whereas the public issue of the Company in respect of which the impugned order was passed was of November 1993 and the prospectus was of October 1993. Both the public issue and the prospectus were prior to 1995. Respondent argued that the alleged misconduct if any was for a period of time when Section 11B was not on the statute book. Thus, the question which arose before SAT was whether any direction can be issued under Section 11B for the alleged misconduct said to have been committed prior to introduction of Section 11B. SAT was of the view that the provision of Section 11B could not be invoked in respect of the alleged misconduct which took place at a point of time when Section 11B was not on the statute book. It quashed the SEBI’s order on the ground that the board had not followed the procedures existing at the time of the offence. The said order of the SAT was challenged by SEBI before the SC wherein it argued SAT was erroneous in holding that powers under Section 11B could only be used prospectively and not retrospectively.
ISSUES
1. Whether the provisions of Section 11B of the Act can be applied retrospectively by SEBI.
2. Whether an order by SEBI restraining a person from associating with any corporate body in accessing the securities market and prohibiting a person from buying, selling or dealing in securities would amount to a ‘penalty’ or ‘punishment’ for the purposes of the protection against ex post facto laws.
RULES
- Section 11B of the Act thus empowers the Board to give directions in the interest of the investors and for orderly development of securities market.
The amendment of 1995 was made to overcome certain shortcomings which were in the existing structure of law. The main reason behind the amendment was to strengthen the mechanisms available to SEBI for investigation and enforcement, so that it is better equipped to investigate and enforce against market malpractices. The statements of objects and reasons of amendment show that one of the objects was to empower the Board to issue regulations without the approval of the Central Government. Therefore, by the 1995 amendment by way of Section 11B Board has been empowered to carry out the purposes of the said Act. Hence, the provisions of Section 11B being procedural in nature can be applied retrospectively.
- The word ‘offence’ under Article 20 sub−clause (1) of the Constitution has not been defined under the Constitution. But Article 367 of the Constitution states that unless the context otherwise requires, the General Clauses Act, 1897 shall apply for the interpretation of the Constitution as it does for the interpretation of an Act.
If we look at the definition of ‘offence’ under General Clauses Act, 1897 it shall mean any act or an omission made punishable by any law for the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an offence as has been defined under the General Clauses Act.
The right of a person of not being convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence and not to be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence, is a fundamental right guaranteed under our Constitution only in a case where a person is charged of having committed an ‘offence’; and is subjected to a ‘penalty’. In the present case, the respondent has not been held guilty of committing any offence nor has he been subjected to any penalty. He has merely been restrained by an order for a period of five years from associating with any corporate body in accessing the securities market and also has been prohibited from buying, selling or dealing in securities for a period of five years.
ANALYSIS
There was an alleged misstatement of facts in the prospectus of company, thereby misguiding the investors. Because of which restraint order was received from accessing the securities market. SEBI restrained Director of Company from accessing securities market on prima facie case that facts were misstated in the prospectus of the company during the public issue of shares and therefore, investors were misguided.
The appellate Board ruled in favour of the respondent on the ground that provision of Section 11B cannot be invoked in respect of the alleged misconduct which took place at a point of time when Section 11B was not on the statute book. The issue is whether Section 11B of the Securities and Exchange Board of India Act, 1992 could be invoked. However, It was held by the SC that Provisions of Section 11B being procedural in nature can be applied retrospectively. Even if the law applies prospectively, the Board cannot be prevented from acting in terms of the law which exists on the day the Board passed its order. Also, there is no challenge to those provisions which came by way of amendment in 1995 and in the absence of any challenge to the provisions of section 11B, it cannot be said that even though Board is statutorily empowered to exercise functions in accordance with the amended law, its power to act under the law, as amended, will stand frozen in respect of any violation which might have taken place prior to the enactment of those provisions. The board hasn’t exercised those powers in respect of a proceeding that was initiated prior to the enactment of those provisions. In fact, Board has issued the show cause notice in terms of Section 11-B and considered the reply of the Respondent. SEBI restrained the Respondent from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities for the alleged violation of SEBI guidelines.
The Appellant Tribunal held the restrain as violative of Article 20(1) of the constitution. Whether the Appellant Tribunal justified in quashing the restraining directions of SEBI given under amended Section 11B of the Act, due to the allegations against the company which surfaced prior to the coming into effect of those amendments in 1995 and 2002 on the grounds of violative of Article 20(1) of the constitution of India. It was Held, Article 20(1) provides protection only in a case where a person is charged with having committed an “offence” and is subjected to a penalty. An offence would always mean an act of omission or commission which would be punishable by any law for the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an ‘offence’ or ‘penalty’. Even if penalty imposed after an adjudicatory proceeding, persons who is penalised cannot be called accused. Herein, the Respondent has not been held guilty of committing any offence nor has he been subjected to any penalty. He has merely been restrained by an order Thus, protection under Article 20(1) of the Constitution in respect of ex-post facto laws is not available to the Respondent.
CONCLUSION
The Supreme Court of India in the case of Securities and Exchange Board of India v. Ajay Agarwal has ruled that the provisions of section 11B of the Securities and Exchange Board of India Act, 1992 can be applied retrospectively by SEBI. The SC has also stated that an order by SEBI restraining a person from associating with any corporate body in accessing the securities market and prohibiting a person from buying, selling or dealing in securities would not amount to a ‘penalty’ or ‘punishment’ for the purposes of the protection against ex post facto laws.
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