The Supreme Court of India in the Case of Adjudicating Officer, SEBI Vs. Bhavesh Pabari (“Bhavesh Pabari”)has given an expansive and harmonious interpretation to Section 15-J of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) holding that the factors enumerated under Section 15-J are not exhaustive but rather illustrative factors to be taken into account by the Adjudicating Officer (“AO”) while adjudging the quantum of penalty to be imposed under Section 15-I and that the AO may take note of other factors as well, in the same analysis.
In Bhavesh Pabari, the Apex Court had also delved into the question of the conflict of application between Section 15-J and Section 15-A(a) (as it stood between 2002 and 2014) of the SEBI Act in the determination of the quantum of penalty under Section 15-I. This issue is no longer pertinent as all the relevant provisions have since been amended to remove any irregularity or uncertainty. Therefore, this Article only deals with the first issue.
In case of violation of Sections 15-A to 15-HB of the SEBI Act, an AO is appointed under Section 15-I for holding an inquiry for the purpose of imposition of the penalty. If he is satisfied with the existence of a failure of compliance with the relevant provisions, he may impose such penalty as he thinks fit in accordance with the concerned Sections. In determining the quantum of the penalty, the AO shall have due regard to the following factors:
- the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
- the amount of loss caused to an investor or group of investors as a result of the dispute;
- the repetitive nature of the default.
Before its Decision in Bhavesh Pabari, the Apex Court had, in the case of SEBI Vs. Roofit Industries Ltd. (“Roofit Industries”), given a strict interpretation to Section 15-J of the SEBI Act, holding that the factors enumerated therein were exhaustive for the purpose of determination of the quantum of the penalty and any other factor was considered extraneous to that analysis. Thereafter, in order to remove the doubts created as a result of the Court’s pronouncement in Roofit Industries, the SEBI Act was amended in 2017 to insert an Explanation to Section 15-J of the Act to the effect that the same Section shall be and shall always be deemed to have been exercised under the provisions of this Section. The Apex Court, by way of its decision in Bhavesh Pabari, has now overruled its previous holding in Roofit Industries.
Issue Before the Court
- Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15-J of the SEBI Act are exhaustive to govern the discretion in the Adjudicating Officer to decide on the quantum of penalty or the said conditions are merely illustrative?
Decision of the Court
Expanding upon the Scope of Section 15-J of the SEBI Act, the Apex Court held that the factors enlisted under Clauses (a), (b), and (c) of Section 15-J are only illustrative in nature and not exhaustive. The AO, therefore, is free to take note of factors other than those listed under Section 15-J of the SEBI Act for the purpose of determining the penalty under Section 15-I according to the facts and circumstances of the matter at hand. The Court found support of its harmonious construction of Section in two facets. Firstly, Section 15-I(2) of the SEBI Act provides that where the AO is satisfied with the contravention of the relevant Sections, he may impose such penalty as he thinks fit, in accordance with the provisions of that Section. The discretion so provided is in line with the stipulation of Section 15-J and thus, the same applies to the decision regarding the quantum of the penalty under Section 15-A to Section 15-HB, even where the 3 clauses under Section 15-J may not be relevant. Secondly, the Explanation to Section 15-J of the Act provides that this Section shall apply and shall always be deemed to apply in the imposition of a penalty by the AO. This goes to show the mandatory nature of Section 15-J of the Act.
The Court opined against a strict interpretation of Section 15-J by illustrating that if it was to be interpreted as such, the circumstances enumerated in Clauses (a), (b) and (c) of Section 15-J of the SEBI Act may have no relevance and may never arise in case of contraventions contemplated by certain provisions of the SEBI Act, for instance, Section 15A, 15B or 15C of the SEBI Act. Failure to furnish information, return, etc.; failure to enter into an agreement with clients; and failure to redress investors’ grievances cannot give rise to the circumstances set out in clauses (a), (b) and (c) of Section 15-J. This illustrative proposition cannot stand in view of the Court’s harmonious interpretation of Section 15-J stated above.