Recently, in Adjudicating Officer (SEBI) v. Bhavesh Pabari, Supreme Court adjudicated the question revolving around the interpretation of Section 15-J of the SEBI Act, 1992 in relation to Section 15-A to Section 15-HA of the Act. Section 15-J elucidates the factors to be taken into account by the Adjudicating officer while adjudging the quantum of penalty to be imposed for violation of Sections pertaining to Chapter VI-A of the SEBI act, 1992. The issue, broadly speaking, pertains to the impact Section 15-J of the act would have on the penalty proceedings initiated for violation of Section 15-A to Section 15-HA of the Act. The need for greater discretion was felt and was in fact canvassed for by both the parties as Section 15-A(a) of the act could technically even apply to defaults of small amounts and thereby result in imposition of mandatory minimum penalty of Rs. 1 Lakh per day subject to maximum of Rs. 1 Crore. Such imposition was held in Siddharth Chaturvedi & Ors v. Securities and Exchange Board of India to be “completely disproportionate and arbitrary so as to invade and violate fundamental rights”.

The issues framed for adjudication of the Court were

(i) Whether the conditions stipulated in clauses (a), (b) and (c) of Section 15-J of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “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?

(ii) Whether the power and discretion vested by Section 15-J of the SEBI Act to decide on the quantum of penalty, regardless of the manner in which the first question is answered, stands eclipsed by the penalty provisions contained in Section 15-A to Section 15-HA of the SEBI Act?

In Conclusion, the Court held that clauses (a), (b) and (c) of Section 15-J of the act were illustrative in nature and have to be taken into account whenever such circumstances exists. However, the same was not be construed as holding that there can be no other circumstances beyond those enumerated in clauses (a), (b) and (c) of Section 15-J that AO is precluded in law from considering while deciding upon the quantum of penalty to be imposed. Insofar as eclipse of Section 15-J by absence of discretion vested in AO under penalty proceeding is concerned, it was held that the question of eclipse stands answered by the clarification appended to Section 15-J vide Act No. 7 of 2017 which states that the AO shall always have been deemed to have exercised and applied the provision when adjudging the quantum of penalty to be imposed under Chapter VI-A of the SEBI Act, 1992. In doing so, the Court expressed its disagreement with the ruling of M/s. Roofit Industries Ltd case wherein it was held that Section 15-J would not be applicable after Section 15-A(a) was amended with effect from 29^th October, 2002 till 7^th September, 2014 when Section 15-A(a) of the SEBI Act was again amended.

ANALYSIS

The present judgment focused on resolving procedural ambiguity and streamlining the process as to principles governing adjudication of penalty by harmonizing the operation of Section 15-J with Chapter VI-A of the SEBI Act, 1992.

1. WHETHER THE CONDITIONS OF SECTION 15-J OF SEBI ACT, 1992 ARE EXHAUSTIVE TO GOVERN THE DISCRETION OF THE AO TO DECIDE THE QUANTUM OF PUNISHMENT?

Insofar as expansive interpretation of Section 15-J is concerned, the Court ruled that clauses (a), (b) and (c) of section 15-J are merely illustrative in nature and they admit of other circumstances beyond those hitherto recognized when considering the quantum of penalty to be imposed. In furtherance thereto, the court also opined that the circumstances enumerated in clauses (a), (b) and (c) of Section 15-J may not fully encapsulate all manner or all facets of penalty proceedings provided for in the SEBI Act, 1992. In other words, the court ruled that the Clause (a), (b) and (c) of Section 15-J does not exhaustively define the relevant considerations that should be given due regard to by the AO for the purpose of determination of penalty under Chapter VI-A of the Act. The judgment illustrates failure to furnish information or failure to redress investors’ grievance as few instances that may requires additional factors to be given ‘due regard’ by AO for the purpose of determination of penalty. It must however be noted that the expansive interpretation of Section 15-J does not in any way impacts as to what may be construed as ‘penalty’ under Chapter VI-A of the Act. In other words, the discretion that is vested onto the AO pertains only to adjustments being made on the amount of penalty and the same has to conform to the scheme of penalty that is prescribed by the Act.

On this count, the judgment is a welcome step as it was seen in many instances that minor irregularities and errors in returns, documents etc. often resulted imposition of punitive penalty upon the party concerned. Additionally, the judgment adds teeth to power of AO to recognize aggravating circumstances which warrant imposition of additional or higher penalty upon the party concerned.

2. WHETHER THE POWER AND DISCRETION VESTED BY SECTION 15-J OF THE SEBI ACT STANDS ECLIPSED BY THE PENALTY PROVISION CONTAINED IN SECTION 15-A TO SECTION 15-HA OF THE SEBI ACT, 1992

Given the multitude of amendments, the process of interpretation and eventual adjudication must be mindful of shifting standards of norms governing adjudication of the penalty proceedings under the Act. In this specific context, it is imperative to recognize the nature of penalty imposed and whether the said penalty can be construed as a case of mandatory minimum penalty under Chapter VI-A of the Act.

The central complexity for the court pertained to interpreting and harmonizing the Amendment Act No. 59 of 2002 within the scheme of operation of Section 15-A(a) and Section 15-J of the SEBI Act. The Court explicitly held that the phrase “whichever is less” in Section 15-A(a)/(b)(c) of the Act would not result in minimum mandatory imposition of penalty of one lakh for each day during which such failure continues due to the introduction of Explanation to Section 15-J of the SEBI act. It was opined that the insertion of the explanation reflected the legislative intent that Section 15-A(a) as it existed during the period 29^th October, 2002 till 7^th September, 2014 was not to curtail the discretion of the Adjudicating officer by prescribing a minimum mandatory penalty of not less than Rs. 1 Lakh per day till compliance was made by the party concerned. In light of clarificatory explanation to 15-J, it was held that section 15-A(a) as amended by Act No 59 of 2002 (in operation from 29^th October, 2002 till 7^th September, 2014) was not intended to prescribe minimum mandatory penalty of Rs. 1 Lakh per day during which the default and failure had continued. As for time period covered by post 2014 amended Section 15-A(a), the legislative intent was clear so as provide that the penalty could extend to Rs. 1 Lakh for each day during which the failure continues subject to a maximum penalty of Rs. 1 crore.

The Judgment appears to proceed based on a misclassification as to the character of the explanation appended to Section 15-J insofar as its controlling effect upon penalty proceedings under Section 15-A to 15-E, clauses (b) and (c) of section 15-F, 15-G, 15-H and 15-HA is concerned. It is submitted that the content of Section 15-J does not annul, invalidate a pre-existing mandatory minimum penalty as Section 15-J is postulated to provide for a graded regime of penalty. Section 15-J provides for the determination of “quantum of penalty” while the question “quantum of penalty” is a sub-set of broader provisions providing for penalty to be imposed under the Act. Therefore, the question of “quantum of penalty” cannot override the express mandate concerning what may be prescribed as penalty under Chapter VI-A of the Act. A mandatory minimum herein, if statutorily enacted as is the case in Section 15-A (a) of the Amendment Act of 2002, is immune from non-application or invalidation on account on operation of Section 15-J of the SEBI Act, 1992.

CONCLUSION

The judgment is a welcome addition to the existing jurisprudence since it clarifies the inter-se operation of Section 15-J with penalty proceedings under Chapter VI-A of the SEBI Act, 1992. There are considerable grounds to contest the merits of the policy of mandatory minimums penalties, however, the court’s approach is present case was mindful of both the unnecessary injury caused to the aggrieved parties as well as limits of judicial interpretation.