Regulator's Consent Not Must For Compounding Offences Under SEBI Act: Supreme Court
The Supreme Court has ruled that the consent of the Securities and Exchange of Board is not mandatory for settling securities-related cases but the regulator's views should be sought and considered.
The ruling by a bench of Justice DY Chandrachud and Justice MR Shah came on Friday on a plea against the decision of the trial court to deny compounding of offences under the SEBI Act as the regulator had not given its consent.
Ideal Hotels & Industries Ltd. had come out with an IPO in 1995 and was subsequently accused of price-rigging and insider trading. Apart from other proceedings, the market regulator also filed a criminal complaint for violation of SEBI regulations.
The company's promoter, Prakash Gupta, later filed an application before a Delhi court for compounding the offence under Section 24A of the SEBI Act. Compounding allows a guilty party to pay and settle certain matters after accepting wrongdoing. Under the SEBI Act, offences that do not result in imprisonment can be compounded by the Securities Appellate Tribunal or a court where the proceedings are pending.
The trial court and the high court upheld SEBI’s objection that the offence cannot be compounded without its consent.
Gupta argued in the Supreme Court that all investors in the company were offered an exit at a price higher than the public issue price. There was no loss shown to have been caused to investors and the company was delisted from exchanges, he said.
The words of the statue nowhere mention the requirement of the regulator's consent and compounding should be allowed if, after assessing the facts, there is no reason to deny it, he argued.
The regulator opposed the request citing "serious wrongdoings" such as misuse of the proceeds of the IPO to purchase the shares of the company through related entities, manipulation of the price of the scrip at which the IPO took place and an artificial increase in the price, which was later brought down.
A case does not exist for the interference of this court, the regulator said.
SEBI Consent Not Mandatory: Supreme Court
The top court noted that after the institution of proceedings, the process of compounding an offence involves the courts. This indicates that the courts have been granted an exclusive jurisdiction to compound offences, it said.
The top court flagged five key components of Section 24A:
The offence which can be compounded (any offence punishable under the SEBI Act).
The exceptions (offences which include imprisonment).
Stage at which the compounding may take place (before or after institution of proceedings).
Forum before which the compounding act takes place (Securities Appellate Tribunal or the court where the proceeding is pending).
The entrustment of the exclusive power to compound offences under Section 24A of the SEBI Act to the SAT or the court before which such a proceeding is pending is evinced by the expression “be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending’’.Supreme Court of India
While analysing the provision, it is also important to understand the role and position of the market regulator, the top court said.
The Supreme Court highlighted its multiple previous judgments where it was mindful of the public interest that guides the functioning of SEBI and refrained from substituting its own wisdom over the actions of the markets regulator.
The powers of the SAT and the court would necessarily have to align with SEBI’s larger existential purpose, said the top court.
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.Supreme Court of India
In the instant case, the court noted the serious nature of the offence and did not grant any relief to Gupta.