Supreme Court lays down guidelines for Compounding of Offences u/s 24 of SEBI Act

Supreme Court lays down guidelines for Compounding of Offences u/s 24 of SEBI Act by Securities Appellate Tribunal (SAT) and Trial Courts

Important case law relied referred:
JIK Industries Limited vs Amarlal v. Jumani

ABCAUS Case Law Citation
ABCAUS 3535 (2021) (07) SC

The appellant was a director and promoter of a company. The Company made an Initial Public Offer (“IPO”) for subscription to shares at a par value of Rs 10 per share. The Company got listed in the stock exchanges at Delhi, Mumbai, Ahmedabad and Chennai, with the UP stock exchange being the parent exchange.

Subsequently, SEBI received a complaint alleging that certain Delhi/Bombay based brokers had, on the instructions of the Company, purchased its shares and huge deliveries were kept outstanding in the grey market. SEBI also received anonymous complaint alleging price rigging and insider trading.

SEBI initiated an investigation and found that in the period immediately preceding the listing of the scrip, its price jumped more than double.

SEBI found that six entities had purchased approximately 51 per cent of shares on offering. They were found to have continued buying shares and had ultimately purchased approximately 75 per cent of the post issue floating stock of the Company. 

In a statement given to SEBI, the appellant admitted that these entities were directly/indirectly related to the Company and its directors, and that he managed their day-to-day affairs. 

The appellant also admitted that these entities invested huge amount in purchasing the shares of the Company, for which funds were made available either from funds of the Company out of the proceeds of IPO or from Inter Corporate Deposits raised.

Proceedings were started by SEBI for violation of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (PFUTP Regulations), the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 (Takeover Regulations) and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Regulations).   

The SEBI appointed an Adjudicating Officer (AO) to adjudicate upon the above allegations and also SEBI filed a criminal complaint before the Additional Chief Metropolitan Magistrate.

During the pendency of the proceedings before both the forum, SEBI accepted the proposal of the appellant and others to make an offer to purchase the shares owned by the shareholders of the Company who were not its promoters. Thereafter, the Company also got its shares delisted from various stock exchanges.

With regard to the pending criminal complaint, the appellant and the other accused persons filed a ‘consent application’ with SEBI, which was returned with the intimation that the appellant and other accused persons could file an appropriate application for compounding in the criminal case.

The appellant filed application before the Additional Chief Metropolitan Magistrate seeking the compounding of the offence in the criminal complaint filed by SEBI since they had already purchased the shares from the public in accordance with the order of SEBI Chairperson and had paid the penalty levied by the AO.

The SEBI referred the compounding application for seeking the views of its High Powered Advisory Committee (“HPAC”)   headed by a former Judge of the High Court.  The HPAC has   been constituted for examining proposals for compounding offences.  The HPAC recommended that the offences should not be compounded following which an intimation was furnished to the Trial Judge.

The Trial Court dismissed the compounding application placing reliance on the decision of the Hon’ble Supreme Court Court for holding that no application for compounding an offence could be allowed without the consent of the complainant.

A revision petition was  filed  by  the  appellant  before  the  High  Court  of  Delhi  to  challenge  the  order  of  the  Trial  Judge  which,  as  stated  earlier,  has  been  dismissed  by  a  Single  Judge  of  the High Court of Delhi on 1 April 2019

The revision petition filed by the appellant before the High Court to challenge the order of the Trial Court was dismissed.

The Hon’ble Supreme Court opined that SEBI’s consent is not mandatory before Securities Appellate Tribunal (SAT) or the Court before which the proceeding is pending, for exercising the power of compounding under Section 24A.

The Hon’ble Supreme Court stated that while the statute has entrusted the powers of compounding offences to SAT or to the Court, as the case may be, before which the proceedings are pending, the view of SEBI as an expert regulator must necessarily be borne in mind by the SAT and the Court, and would be entitled to a degree of deference. While SEBI does not have a veto, having regard to the language of Section 24A, its views must be elicited.

The Hon’ble Supreme Court laid down the following guidelines   which SAT or Courts must take into account while adjudicating an application for compounding under Section 24A of SEBI Act 1992:

Supreme Court Guidelines for Compounding of Offences u/s 24 of SEBI Act

(i) They should consider the factors enumerated in SEBI’s circular dated 20 April 2007 and the accompanying FAQs, while deciding whether to allow an application for a consent order or an application for compounding.

These factors, which are non-exhaustive, and only indicative, may be taken into consideration for the purpose of passing Consent Orders and also in the context of compounding of offences under the respective statute:

  1. Whether violation is intentional.
  2. Party’s conduct in the investigation and disclosure of full facts.
  3. Gravity of charge i.e. charge like fraud, market manipulation or insider trading.
  4. History of non-compliance. Good track record of the violator i.e. it had not been found guilty of similar or serious violations in the past.
  5. Whether there were circumstances beyond the control of the party.
  6. Violation is technical and/or minor in nature and whether violation warrants penalty.
  7. Consideration of the amount of investors’ harm or party’s gain.
  8. Processes which have been introduced since the violation to minimize future violations/lapses.
  9. Compliance schedule proposed by the party.
  10. Economic benefits accruing to a party from delayed or avoided compliance.
  11. Conditions where necessary to deter future non-compliance by the same or another party.
  12. Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them.
  13. Compliance of the civil enforcement action by the accused.
  14. Party has undergone any other regulatory enforcement action for the same violation.
  15. Any other factors necessary in the facts and circumstances of the case.

(ii) According to the circular dated 20th April 2007 and the accompanying FAQs, an accused while filing their application for compounding has to also submit a copy to SEBI, so it can be placed before the HPAC. The recommendation of the HPAC is then filed before the SAT or the Court, as the case may be. The   Court must have cogent reasons to differ from the opinion provided and should only do so when it believes the reasons provided by SEBI/HPAC are mala fide or manifestly arbitrary;

(iii)  The SAT or Court should ensure that the proceedings under Section 24A do not mirror a proceeding for quashing the criminal complaint u/s 482 of the CrPC, thereby providing the accused a second bite at the cherry. The principle behind compounding, is that the aggrieved party has been restituted by the accused and it consents to end the dispute. Since the aggrieved party is not present before the SAT or the Court and most of the offences are of a public character, it should be circumspect in its role. In the generality of instances, it should rely on the SEBI’s opinion as to whether such restitution has taken place; and

(iv) Finally, the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24A is private in nature, or it is of a public character, the non-prosecution of which will affect others at large. As such, the latter should not be compounded, even if restitution has taken place.

In view of the above, the Hon’ble Supreme Court held that the nature of the allegations against the appellant were such so as to preclude a decision to compound the offences.

The Hon’ble Supreme Court stated that alleged acts of price rigging and manipulation of the prices of the shares have a vital bearing on investors’ wealth and the orderly functioning of the securities market. SEBI was, therefore, justified in the request for the compounding of the offences.

As a result, the order of the High Court was affirmed.  

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