Setting the cat among the pigeons

The securities market is running helter-skelter, regulator downwards. A short judgment of the interpreting the Securities and Exchange Board of India (Sebi) Act, 1992, has ruled that had no discretion at all in computing the quantum of for some violations between 2002 and 2014. Sebi is reported to have sought a review and a clarification from the court, and everyone in the market is waiting with bated breath.

The apex court’s order is an interpretation of carelessly drafted provisions in the that deal with imposition of monetary penalty for failure to furnish information. In 2002, the penalty for such failure (Section 15A) was changed from Rs 1.5 lakh for every failure to Rs 1 lakh per day of failure with a cap of Rs 1 crore. The language used was that a violator “shall be liable” to the stipulated penalty. In 2014, the same provision was amended to provide that the penalty “shall” be at least Rs 1 lakh but “may extend to” Rs 1 lakh per day of continuing non-compliance with a cap of Rs 1 crore.

The Supreme Court has ruled that between 2002 and 2014, there was no scope for Sebi to impose anything but Rs 1 lakh per day and where the violation continued for over a hundred days, the penalty would get capped at Rs 1 crore. Now, the process for imposing such penalties is through the initiation of “adjudication proceedings” under which an “adjudicating officer” adjudicates whether the violation alleged has indeed occurred, and whether the person accused of the violation has any valid defence. Once the occurrence of the violation is established, the officer proceeds to determine the penalty amount.

The Sebi Act provides for three objective criteria for determination of the penalty amount (Section 15J), namely, any unfair advantage or disproportionate gain made as a result of the default, the loss caused to any investor due to the default and the repetitive nature of the default. Disagreeing with Sebi’s plea that Section 15J shows legislative intent for discretion in assessing the quantum of penalty, the Supreme Court ruled that the provision had become redundant between 2002 and 2014, although it had not been repealed.

Now, let’s say the company secretary of a listed company who is in charge of filing a document under the listing requirements dies in an emergency and the company misses the deadline. The filing is forgotten and by the time the other officers get their act together, more than 100 days go by. If the adjudicating officer has no discretion at all, such a company would have to pay a penalty of Rs 1 crore without any gain being made, loss being caused, and even if the default were the first ever in its history. Another violator who deliberately disregards the filing obligation for the same period and complies only after coercive threats would be treated on a par with the former. According to the court’s judgment, all violations of this nature between 2002 and 2014 would enable no discretion at all to vary the penalty on the basis of the gravity of the facts. A person who deliberately defaulted would be treated on the same footing as a person who inadvertently defaulted.

There are numerous decisions of the Supreme Court that point to adopting a purposive interpretation of the law based on which the words “shall be liable” would mean “may be liable”. Indeed, the converse reading, too, would be possible by looking at the purpose of the legislation. Generally, no provision of law is lightly read as being redundant. All provisions are attempted to be read harmoniously to give the legislation its potentially intended meaning. This is how courts have read this provision for nearly 20 years, in a purposive manner, ruling that monetary penalties from Sebi would need to be fair, rational and equitable. They would test the quality of the discretion but not adopt the stance that discretion was absent.

The irony is that the observations of the court have come in a case where the court actually lowered the penalty originally imposed by Sebi. In the case before the court, there was a blatant violation in furnishing information sought by Sebi despite repeated reminders. Sebi imposed a penalty of Rs 1 crore against one person and Rs 75 lakh on five others. The had reduced the penalty to Rs 60,000 in one case and to Rs 15,000 each in five cases, taking into account the reality that the violators were near-bankrupt, had become dormant and were even left with no staff.

The court ruled that the tribunal could not have taken into account such factors. The court also ruled that the original date of the violation was prior to the 2002 amendments and that Sebi, too, was wrong in imposing a penalty of Rs 1 crore. The court reduced the penalties to Rs 1.5 lakh on each person, adopting the pre-2002 position of the law when the reference to non-disclosure being a continuing offence was absent.

Both Sebi and market players are stumped. The outcome of the fight over one case has laid down an interpretation of the law for all alleged violations that took place over this 12-year period – typical of uncertain outcomes for an entire market from litigation involving one case of violation.

The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own.
Published in the Business Standard edition dated February 9, 2016: