Date of Judgement:
14 March 2016
Bench:
Justice Kurian Joseph
Justice Rohinton Fali Nariman
Parties:
Appellant – Siddharth Chaturvedi
Respondent – Securities and Exchange Board of India (SEBI)
Subject
The following judgement deals with the interplay between Sections 15A and 15J of the Securities and Exchange Board of India Act, 1992
Overview
- The appellant had purchased shares of Brijlaxmi Leasing and Finance Company. On 16.06.2014, a show-cause notice was issued to him by SEBI under Rule 4(1) of SEBI (Procedure for holding an inquiry and imposing penalty by adjudicating officer) Rules, 1995 for violating Regulations 13(4), 13(4A), and 13(5) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.
- The appellant replied to the notice saying that there was no intention to violate any regulations or to make any disproportionate gain, unfair advantage, or to cause any loss to investors.
- Hence, the conditions under Section 15J were not satisfied. In addition, he stated that the entire transaction value did not exceed 55,000 Rs. Also if there are any defaults, they are technical.
- However, the Adjudicating Officer imposed a penalty of 5 lakh Rupees on them. When an appeal was made to the Securities Appellate Tribunal (SAT), it held that there was no dispute and that the decision of the adjudicating officer was just and reasonable and not harsh. Aggrieved by the same, the appellant approached the Supreme Court.
Issues
- Was the penalty imposed by SEBI on the appellant justified and warranted?
- Is the list of conditions given under Section 15J of the Act exhaustive?
Legal Provisions
- Rule 4(1) of SEBI (Procedure for holding an inquiry and imposing penalty by adjudicating officer) Rules, 1995 – The adjudicating officer shall have the power to issue notice to show cause within a specific period, for violation of securities law.
- 13(4), 13(4A), and 13(5) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 – Disclosure of interest or holding by directors & officers and shareholders of a listed company.
- Section 15A of SEBI Act – Penalty for failure to furnish information, document, etc.
- Section 15J of SEBI Act – Factors to be considered by the Adjudicating officer while imposing penalty.
Judgement
- The learned counsel for the appellant said that Section 15A has to be read with Section 15J of the SEBI Act,1992. He cleared that the violations were only technical, and did not involve any unfair gain to the appellant, or loss to any investor and that the default was not repetitive in nature. Hence, the penalty imposed by SEBI was unwarranted.
- The learned counsel for SEBI relied upon the judgement of SEBI through its Chairman V. Roofit Industries Ltd. (2015) to support the action taken by SEBI. In the above case, it was held by the Court that Section 15J was not applicable in deciding the quantum of penalty under Section 15A(a) of the SEBI Act.
- Firstly, the Court held that the list of conditions given in Section 15J is exhaustive. The Court also held that the discretionary power of the Adjudicating Officer having been withdrawn, the scope of Section 15J would stand reduced. The Court was of the opinion that since the Section involved penalty provisions, it would be prudent if a larger bench decided on this point.
- The Court pointed out that according to the principles of statutory interpretation, penalty provisions are to be strictly construed. The Court also said it is difficult to construe Section 15A in isolation, as amended, with regard to Section 15J of the SEBI Act, 1992. Hence, the Court refused to accept the rationale laid down by the same Court in the aforementioned Roofit Industries case.
- Lastly, it held that Section 15-A(a) could apply even to technical defaults of small amounts and, therefore, prescription of a minimum compulsory penalty of Rs.1 lakh per day subject to a maximum of Rs.1 crore, would make the Section completely arbitrary leading to invasion and violation of fundamental rights.
- Finally, the Court directed the appeals to be placed before the honorable Chief Justice of India to form a larger bench for its conclusive decision.
- Nevertheless, before the larger bench could give out its decision the Finance Act, 2017 was passed. It amended Section 15J and added an explanation that the power of the AO to adjudicate the quantum of penalty under relevant Sections, including Section 15A, shall always be exercised under the provisions of this Section.
Conclusion
Recently in the Bhavesh Pabari judgement, it was held by the Court that Sections 15A(a) to 15HA have to be read harmoniously along with Section 15J to avoid any inconsistency. It said that provisions of one Section cannot nullify another until and unless it becomes impossible to reconcile them. This judgment made the penalty provisions under SEBI Act just and reasonable because now the AO shall have the power to impose a lesser penalty than the prescribed minimum penalty under the penalty provisions of the Act for technical defaults involving petty amounts.
In addition to this, by holding that the conditions laid down in Section 15J are merely illustrative and not exhaustive, the Apex Court expanded the scope and the powers of the Adjudicating Officers under Section 15J.
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