SEBI’s Penalty Powers under Review – Out, Not Out, Third Umpire!

SEBI’s Penalty Powers under Review – Out, Not Out, Third Umpire!

Bar & Bench

By Vaneesa Agrawal

The Supreme Court’s order in the matter of SEBI Through its Chairman v. Roofit Industries [(2016) 1 Comp LJ 1 (SC)] has led to a cascading effect on various matters currently pending before SEBI as well as Securities Appellate Tribunal (SAT).

SEBI’s Adjudicating Officers, under Chapter VIA of SEBI Act, 1992 are empowered to impose penalties for various violations such as penalty for failure to furnish information/return, penalty for default in case of stock brokers, penalty for insider trading, penalty for non-disclosure of acquisition of shares and takeovers and penalty for fraudulent and unfair trade practices etc. In terms of Section 15J, the Adjudicating Officers while imposing penalty “shall have due regard to” certain factors such as repetitive nature of default, the amount of disproportionate gain or unfair advantage, the amount of loss caused to an investor or group of investors.

Discretion is Out!

The Roofit judgement considered 2002 and 2014 amendments to the language of penalty provisions in SEBI Act, 1992 and had held that Adjudicating Officers had no discretion between the period of 2002 – 2014, while imposing penalties under certain sections of the SEBI Act, 1992 (including section 15A, 15HA, etc.). It also held that the scope of Section 15J was drastically reduced, and it became relevant only to the Sections where the Adjudicating Officer retained his prior discretion, such as in Section 15F(a) and Section 15HB. Effectively, Supreme Court held that Adjudicating Officers did not have discretion to decide quantum of penalty and penalty would be absolute and non-discretionary as per sections of SEBI Act if the date of failure is between 29-10-2002 and 8-9-2014.

In recent matters decided after the Roofit judgement, SEBI has imposed significantly higher penalties running into Crores in many cases. On the other hand, after the Roofit judgement came in November, many parties have chosen to withdraw the appeals currently pending before SAT out of fear that the penalty imposed on them would be enhanced significantly if they continue. Many other appellants and noticees have chosen to file applications under the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 for settling matters pending with SEBI.

Since SEBI had been exercising discretion in all cases since 2002, it filed a review application in the matter [Review Petition – Civil 1676 -1691 of 2016] in this case.

Discretion is Not Out!!

While SEBI’s review application is still pending before the Supreme Court, another judgment of the Supreme Court has dealt with the same issue. In the matter of Siddharth Chaturvedi v. SEBI [Civil Appeal No.14730 of 2015], a division bench of the Supreme Court dealt with the interplay between section 15A, as amended in the year 2002, and Section 15J of the SEBI Act, 1992. In its order dated March 14, 2016, the Supreme Court Bench has found it difficult to subscribe to the views contained in the Roofit Industries judgment. It also found it difficult to appreciate as to how one can construe Section 15A, as amended, in isolation, without regard to Section 15J. Supreme Court was concerned now that the interpretation given in Roofit Industries could lead to anomalous results, and such interpretation would then arbitrarily and disproportionately invade the appellants’ fundamental right which seems to be the concern of many market participants as well as the regulator.

Supreme Court order dated March 14, 2016 is attached below.

Referred to Third Umpire!

Due to this, the Supreme Court bench of Justice Joseph and Justice Nariman has directed the Supreme Court registry to place the papers of these appeals before the Hon’ble Chief Justice of India for placing these matters before a larger Bench.

It is well settled legal proposition that in case of conflict between the decisions of the Supreme Court, the decision of the larger bench should be followed.  However, between two decisions of benches of equal strength of the Supreme Court, the later decision should be followed, provided the earlier decision is considered. One hopes that the decision of the larger bench will come soon, so that this controversy is finally put to rest.

Vaneesa Agrawal, Securities Lawyer and former Legal Officer, SEBI. She can be reached at

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