By Shashank Prabhakar

The Finance Act, 2017 which has been passed by both the houses of Parliament and which was assented to by the President of India on April 3, 2017, has amended certain provisions of the SEBI Act, 1992 (“SEBI Act”) and the Securities Contracts (Regulation) Act, 1956 (“SCRA”).

Here we are only concerned with the amendments carried out to Section 15J and Section 23J of the SEBI Act and the SCRA, respectively. The interpretation of Section 15J of the SEBI Act was a substantial question of law in two recent Supreme Court cases, namely, SEBI v. Roofit Industries (“Roofit”) and Siddharth Chaturvedi v. SEBI (“Chaturvedi”). The two benches of the Supreme Court did not agree with each other on its interpretation and had referred it to a larger bench. The amendment to the SEBI Act now partially settles the questions raised by the two cases.

Background

In may be recalled that Roofit involved certain disclosure violations under Section 15A(a) of the SEBI Act and it raised questions as to the maximum penalty that SEBI could impose for offenses 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. Section 15J lays down the factors that an adjudicating officer of SEBI (“AO”) may consider while determining the quantum of penalty to be paid by the offendor.

The Roofit case raised two important questions of law, which are: (a) whether the 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; 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 no extraneous factors could influence the decision of the AO 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 Section 15F(a) and Section 15HB. This led to an absurd situation where SEBI imposed enormous penalties for simple disclosure violations without any regard for the nature of the transaction or for 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 offenses committed between 2002 and 2014. Strangely, SEBI applied the ratio of Roofit only 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 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 and whether factors laid down in Section 15J could be applied to determine the quantum of penalty. 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 offenses 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 offenses committed thereunder, are exactly similar to the language of Sections 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.

Conclusion

The amendments to the SEBI Act and the SCRA 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. These amendments will nevertheless bring relief to those who were slapped with enormous penalties by SEBI in accordance with Roofit. SEBI will now have to revisit those cases to determine the penalties by considering Section 15J.

Shashank Prabhakar is a Senior Associate at Finsec Law Advisors.