SAT | “Disgorgement without restitution doesn’t serve any purpose”, appellants compensated as an investor protection measure

Securities Appellate Tribunal (SAT): Justice Tarun Agarwala (Presiding Officer), Dr C.K.G. Nair (Member), and Justice M.T. Joshi (Judicial Member) allowed an appeal challenging an order by SEBI.

The appellants, who are husband and wife, challenged the order of the Whole Time Member (‘WTM’) of SEBI. They invested Rs 18,25,041 in buying the shares of VCL in 2002. They argued that the said order violates the directions given by this Tribunal by order as well as the mandate given to SEBI by the SEBI Act, 1992 in protecting the investors. Vital Communications Limited (‘VCL’) and other companies were directed to disgorge the unlawful gain of Rs 4,55,91,232 with interest for violation of various provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 (‘PFUTP Regulations, 1995’) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (‘PFUTP Regulations, 2003’). 

The tribunal by an earlier order had directed SEBI to look into the complaint of the appellants for alleged misleading and fraudulent advertisements issued by VCL, along with an investigation. In case SEBI finds VCL guilty of playing fraud on the investors, it may consider directing the concerned entity or VCL to refund the actual amount spent by the Appellants on purchasing the shares in question and with appropriate interest and as per law.

The appellants contended the following:

  • The WTM of SEBI passed a disgorgement order against the Company and the connected entities, when they were directed to refund the amount spent by the appellants on purchasing the shares of VCL with appropriate interest as per law. 
  • SEBI is in breach of not following the directions of the Tribunal, apart from not fulfilling its mandate of protecting the investors as they have been pursuing this matter since 2002 at a very high personal cost. 
  • Based on these reasons, they must be compensated accordingly.

The respondent submitted the following:

  • Tribunal’s order dated was modified by another order. While the first order stated that SEBI may consider compensating the appellants, the second-order of this Tribunal modified it by stating that such considerations must be in accordance with the law. 
  • It is virtually impossible for SEBI to provide for restitution to a large number of investors who have invested in the secondary market and incurred losses and giving compensation on a selective basis would be discriminatory as there may be a large number of affected investors and restitution to investors as a class is a complex task beyond the capacity of SEBI.

The Tribunal held that the appellants highlighted the violations made by VCL and other entities owing to their efforts since 2002 and that SEBI is not a helpless entity as it claims to be in its order. The Tribunal also made clear that direction contained in the amended order was that if violation by the VCL was proved, the appellants’ claim may be considered as per law. They directed VCL and other entities to pay a sum of Rs 4.5 crore (approximately) along with interest holding that the basic idea behind disgorgement is restitution. [Ram Kishori Gupta v. Securities & Exchange Board of India, 2019 SCC OnLine SAT 149, decided on 02-08-2019]

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