Supreme Court: A Division Bench of Dr D.Y. Chandrachud and M.R. Shah, JJ. declared that SEBI’s consent is not mandatory for compounding of offence under Section 24-A of the Securities and Exchange Board of India Act, 1992. However, the view of the Securities and Exchange Board of India (“SEBI”) as an expert regulator must necessarily be borne in mind by the Securities Appellate Tribunal and the Court before deciding an application to compound the offence. The Court also elucidated certain guidelines for compounding under Section 24-A.
The Court was dealing with a case which concerned alleged acts of price rigging and manipulation of share prices. The task before the Court was to interpret Section 24-A in a manner that furthers the statutory role of SEBI.
The appellant was being prosecuted for an offence under Section 24(1) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). The appellant sought compounding of the offence under Section 24-A. The trial court rejected the application, upholding SEBI’s objection that the offence could not be compounded without its consent. The Delhi High Court also affirmed the judgment of the trial court. Aggrieved, the appellant approached the Supreme Court.
Backdrop and Timeline
The appellant is the director and promoter of Ideal Hotels & Industries Limited (“Company”). In 1995, the Company made an Initial Public Offer (“IPO”). In June 1996, SEBI received a complaint alleging that certain Delhi/Bombay based brokers had, on the instructions of the Company, purchased its shares and that huge deliveries were kept outstanding in the grey market. Again in October 1996, a complaint alleging price rigging and insider trading in the scrip of the Company was received. After a preliminary inquiry, SEBI initiated an investigation against the Company. SEBI identified six entities who were responsible for upward movement in the scrip. These entities were directly/indirectly related to the Company and its directors, and the appellant managed their day-to-day affairs.
In November 1999, the Chairperson of SEBI appointed an Adjudicating Officer to adjudicate upon the allegations. Prior to Adjudicating Officer’s decision, SEBI also filed a criminal complaint in March 2000 before the Additional Chief Metropolitan Magistrate, Tis Hazari Court, Delhi, alleging violation of certain provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
While the proceedings were pending before the Adjudicating Officer, SEBI’s Chairperson passed an order in September 2000 under Section 11-B read with Section 4(iii) of the SEBI Act accepting the proposal of the appellant and others to make an offer to purchase the shares owned by the shareholders of the Company who are not its promoters. In compliance of the order, the promoters/directors of the Company acquired equity shares which raised their holding to the extent of about 95% of the Company (post-IPO). Thereafter, the Company also got its shares delisted from various stock exchanges.
In June 2001, the Adjudicating Officer determined, among other things, that the appellant had failed to comply with the 1997 Takeover Regulations. Penalty was accordingly levied on the appellant.
Application for compounding of offence
In October 2013, an application under Section 24-A of the SEBI Act was filed by the appellant before the trial court, seeking compounding of 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 Adjudicating Officer.
The High Powered Advisory Committee (“HPAC”) of SEBI recommended that the offence should not be compounded. By an order passed in November 2018, the trial court dismissed the compounding application. A revision petition was filed by the appellant before the Delhi High Court to challenge the order of the trial court which was dismissed in April 2019.
Analysis and Observations
Compounding of offences under S. 24-A of SEBI Act
The Court noted that Section 24-A, which provides for the compounding of certain offences, contains certain characteristic features which need to be understood while interpreting its provisions:
(i) Section 24-A begins with a non-obstante clause, “notwithstanding anything contained in the Code of Criminal Procedure 1973”;
(ii) any offence punishable under the SEBI Act can be compounded, provided it is not an offence which is punishable only with imprisonment or with imprisonment and fine. Therefore, only where a fine is an alternative to imprisonment does the provision apply;
(iii) the offence may be compounded either before or after the institution of any proceeding; and
(iv) the offence may be compounded by Securities Appellate Tribunal (“SAT”) or by a Court, before which such proceedings are pending.
The Court further recorded that Section 24-A provides for the compounding of an offence either before or after the institution of any proceeding. It was observed:
“[O]nce a proceeding has been instituted before a Court which is seized of it, it is the imprimatur of the Court that is required in such a situation. The expression ‘or a court before which such proceedings are pending’ would indicate that once proceedings have been instituted before it, the Court has exclusive jurisdiction to compound offences.“
For a better understanding of practical implications of the language of Section 24-A, the Court referred to certain circulars issued by SEBI. After so referring, the Court concluded that:
(i) A party can seek compounding under Section 24-A at any stage once the criminal complaint has been filed by SEBI;
(ii) the party shall have to file the application for compounding before the Court where the criminal complaint is pending;
(iii) a copy of the application for compounding must also be sent to SEBI, which will place it before the High Powered Advisory Committee (“HPAC”); and
(iv) the HPAC’s decision on the application, be it an acceptance or an objection, shall be placed by SEBI before the appropriate court, which will have to pass appropriate orders.
The Court was of the opinion that:
“Hence, this makes it abundantly clear that while the HPAC’s decision on a party’s application for compounding under Section 24-A must be placed before the appropriate Court, the final decision must remain in the domain of the Court.“
However, since SEBI argued that its consent must be deemed mandatory for compounding an offence under Section 24-A, the Court also independently evaluated the argument on its merits.
24-A of SEBI Act not trammeled by S. 320 CrPC
Section 320 CrPC permits compounding of offences. The Court highlighted that Section 24-A of the SEBI Act commences with a non-obstante provision which operates notwithstanding anything contained in CrPC. Sub-sections (1) and (2) of Section 320 CrPC deal with compounding of offences under IPC, while sub-section (9) stipulates that no offence shall be compounded except as provided in the Section. However, the stipulation contained in sub-section (9) of Section 320 ceases to have effect in relation to the compounding of offences under the SEBI Act by virtue of a specific non-obstante provision contained in Section 24-A providing for the compounding of offences punishable under that legislation. Section 24-A, by incorporating a non-obstante provision indicates a legislative intent to the effect that the power to compound offences punishable under the SEBI Act is not trammeled by the provisions of Section 320 CrPC.
Consent of SEBI not mandatory
Noting that the plain language of Section 24-A does not provide for the consent of SEBI, the Court observed that:
“The issue is whether this Court should read the requirement of the consent of SEBI into the provision, on the ground that this is a casus omissus.“
The Court was of the clear opinion that this would amount to rewriting the statutory provision by introducing language which has not been employed by the legislature. Reliance was placed on Union of India v. Rajiv Kumar, (2003) 6 SCC 516.
It is evident, said the Court, that Section 24-A does not stipulate that the consent of SEBI is necessary for the SAT or the Court before which such proceedings are pending to compound an offence. Where Parliament intended that a recommendation by SEBI is necessary, it has made specific provisions in that regard in the same statute. The Court held that:
“Hence, it is clear that SEBI’s consent cannot be mandatory before SAT or the Court before which the proceeding is pending, for exercising the power of compounding under Section 24-A.“
While so declaring, the Court observed that it is also important to remember that proceedings for the trial of offences under the SEBI Act are initiated on a complaint made by SEBI by virtue of Section 26 of the SEBI Act. SEBI is a regulatory and prosecuting agency under the legislation. Hence, while the statutory provisions do not entrust SEBI with an authority in the nature of a veto under the provisions of Section 24-A, it is equally necessary to understand the importance of its role and position.
Interpretation of S. 24-A that furthers statutory role of SEBI
The Supreme Court referred to a consistent line of precedent, where the Court has been mindful of the public interest that guides the functioning of SEBI and has refrained from substituting its own wisdom over the actions of SEBI. Its wide regulatory and adjudicatory powers, coupled with its expertise and information gathering mechanisms, imprints SEBI’s decisions with a degree of credibility. The Court was of the view that:
“The powers of the SAT and the Court would necessarily have to align with SEBI’s larger existential purpose.“
Therefore, the task before the Court was to interpret Section 24-A in a manner that furthers the statutory role of SEBI, rather than one which thwarts its considered course of action.
In Court’s opinion, while the statute has entrusted the powers of compounding offences to the SAT or to the Court, as the case may be, 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. It was held:
“[B]efore taking a decision on whether to compound an offence punishable under Section 24(1), the SAT or the Court must obtain the views of SEBI for furnishing guidance to its ultimate decision. These views, unless manifestly arbitrary or mala fide, must be accorded a high degree of deference. The Court must be wary of substituting its own wisdom on the gravity of the offence or the impact on the markets, while discarding the expert opinion of the SEBI.“
Guidelines for Compounding under S. 24-A of SEBI Act
The Court noted that Section 24-A only empowers the SAT or the Court before which proceedings are pending with the power to compound the offences, without providing any guideline as to when should this take place. Hence, the Court deemed it necessary to elucidate upon some guidelines which the SAT or such Courts must take into account while adjudicating an application under Section 24-A:
(i) They should consider the factors enumerated in SEBI’s circular dated 20-4-2007 and the accompanying FAQs, while deciding whether to allow an application for a consent order or an application for compounding.
(ii) According to the circular dated 20-4-2007 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 High Powered Advisory Committee. The recommendation of the HPAC is then filed before the SAT or the Court, as the case may be. As such, the SAT or the Court must give due deference to such opinion. The opinion of HPAC and SEBI indicates their position on the effect of non-prosecution on maintainability of market structures. Hence, the SAT or 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 24-A do not mirror a proceeding for quashing the criminal complaint under Section 482 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 SEBI’s opinion as to whether such restitution has taken place.
(iv) Finally, the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24-A 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.
The Court was of the view that the nature of allegations in the instant case involved serious acts which impinged upon the protection of investors and the stability of securities’ market. Alleged acts of price rigging and manipulation of prices of shares have a vital bearing on investors’ wealth and orderly functioning of securities market.
It was held that SEBI was justified in opposing the request for compounding of offences. The decision which has been taken by SEBI was not mala fide nor did it suffer from manifest arbitrariness. Having due regard to the nature of the allegations, the Court held that an order for compounding was not warranted. Therefore, judgment of the Delhi High Court was affirmed, though for different reasons as discussed above. [Prakash Gupta v. SEBI, Criminal Appeal No. 569 of 2021, decided on 23-7-2021]
Tejaswi Pandit, Senior Editorial Assistant has reported this brief.