Supreme Court on recovery of interest in penalty and disgorgement orders passed by SEBI

The Supreme Court in this judgment has ruled on an interesting question – whether SEBI can recover interest on orders of penalty and/or orders of disgorgement, when the said amounts have remained unpaid..While clubbing the two cases, SEBI was the appellant in the penalty cases, whereas in the disgorgement case, it was the private individuals..The Bench, comprising Justices Rohinton Nariman and Sanjay Kishan Kaul drew a comparison between provisions of the Interest Act of 1839 and the Interest Act of 1978 to bring about differences between the Court’s power to grant interest on equitable grounds as well its power to grant interest even after the date of institution of proceedings..Penalty Case.In 2009, SEBI passed a penalty order, of Rs. 25 lakhs, under Section 15HA of the SEBI Act, for unfair trade practices on account of the respondents. The respondents had made wrongful and misleading disclosures to the Bombay Stock Exchange, thus depriving the investors of important information at the relevant point of time..This was an unfair trade practice for which the respondents were held liable inasmuch as Regulations 3(a) to 3(d), 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP) had been breached..After the appeal was dismissed by SAT, a recovery certificate was issued in May 2014 demanding the said sum of Rs. 25 lakhs together with interest under Section 28A of the SEBI Act, 1992 for the period commencing from passage of the penalty order (in 2009) till the time the demand notice was issued (in 2014)..While immediately thereafter, the sum of Rs. 25 lakhs was deposited, the question with respect to the chargeability of interest came up before the SAT, where it was ruled that the interest can only be charged from July 2013, which is when Section 28A was introduced, and it cannot be applied retrospectively..The Supreme Court agreed with the reasoning given by the SAT and held that,.“Despite the fact that Section 28A belongs to the realm of procedural law and would ordinarily be retrospective, when it seeks to levy interest, which belongs to the realm of substantive law, the Tribunal is correct in stating that such interest would be chargeable under Section 28A read with Section 220(2) of the Income Tax Act only prospectively.”.However, the Court observed, since provisions of the Interest Act of 1978 had not been accounted for while determining the case, the Court set aside SAT’s findings that no interest could be charged from the date on which the penalty became due..The appeal was thus allowed..Disgorgement case.Dushyant Dalal and Puloma Dalal were found to have manipulated the demand for shares in the retail individual investor (RII) category and thereby distorted integrity of the market. By doing this, they denied other RIIs of allotment of their legitimate shares in IPOs of various companies and, while violating Section 12A (a),(b) and (c), and Regulations 3 and 4(1) of the PFUTP Regulations, made an unlawful gain of roughly Rs. 4.05 crores..SEBI passed an order for disgorgement of the said amount along with a 12% interest for four years, being the period beginning from committing of fraud to the date of passing of order. The interest amounted to roughly Rs. 1.95 crores, making it a total of Rs. 6 crore, failing which, SEBI ordered that they would be barred from the securities market for a period of 7 years..After a failed round of appeals, demand notices were issued in 2013 under Section 28A of the SEBI Act, demanding interest at the rate of 13% from the date of order in 2009 till the date of second demand notice in December 2013..In this case, SAT, in March 2017, supported SEBI’s view and ruled that the interest was payable till date of payment..The Supreme Court, however, in this case was not inclined to agree with SAT. The Court noted that the whole time member being fully cognizant of his power to grant future interest, did not chose to do so. The Court further observed that the absence of the words “along with further interest till actual date of payment” implied that this was an intentional omission and the order clearly granted a 7 years suspension for failure to have paid the said penalty..Therefore, the Court allowed the appeal and set aside SAT’s judgment..Click here to download the Bar & Bench Android App