Amity Law School

Penalty as to SEBI act, 1992.

Investment & Competition Law

Submitted To: Mr. Rahul Mishra Lect., Amity Law School, Jaipur

Submitted By: Tanmay Tiwari B.A. LLB.(h), 8th Sem

Introduction

The Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for the securities market in India. It was established on 12 April 1992 through the SEBI Act, 1992. SEBI is having its Headquarter at the business district of in Mumbai.

Controller of Capital Issues was the regulatory authority before SEBI came into existence; it derived authority from the Capital Issues (Control) Act, 1947. Initially SEBI was a non-statutory body without any statutory power. However in the year of 1995, the SEBI was given additional statutory power by the Government of India through an amendment to the Securities and Exchange Board of India Act 1992. In April, 1998 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India. The SEBI is managed by its members, which consists of following: a) The chairman who is nominated by Union Government of India. b) Two members, i.e. Officers from Union Finance Ministry. c) One member from The Reserve Bank of India. d) The remaining 5 members are nominated by Union Government of India, out of them at least 3 shall be wholetime members. SEBI has to be responsive to the needs of three groups, which constitute the market:

the issuers of securities the investors the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasiexecutive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeal process to create accountability.

Penalties under Security Exchange Board of India Act, 1992 are as follows:

Penalty for failure to furnish information, return, etc.(15A) If any person, who is required under this Act or any rules or regulations made thereunder,(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less]; (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less]; (c) to maintain books of accounts or records, fails to maintain the same, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.]

SECURITIES APPELLATE TRIBUNAL, MUMBAI Mukesh Malhotra v. Securities & Exchange Board of India Section 15A - Penalty for failure to furnish information, return, etc. - Pursuant to an order of chairman, SEBI, investigation into case of buying, selling or dealing in shares of S Ltd. was started - Subsequently, summons were issued to appellant to appear before investigating officer along with certain specific information - However, appellant failed to respond summons - On reference, adjudication and enquiry officer issued repeated notice to appellant to appear before him but in vain - Resultantly adjudication and enquiry officer passed an ex parte order under section 15A(a) imposing a penalty of Rs. 1 crore on appellant

Whether since time given to appellant to respond to summons was extremely short and same was true about notice of only 4 days given to him by adjudicating officer in adjudication proceedings, impugned order was liable to be set aside on that ground alone - Held, yes - Whether, further, argument about appellant being a brother of somebody as a justification for imposition of extreme penalty was totally unacceptable - Held, yes

Penalty for failure by any person to enter into agreement with clients (15B). If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made thereunder to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.]

Penalty for failure to redress investors' grievances (15C). [If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less

SECURITIES APPELLATE TRIBUNAL, MUMBAI Dharnendra Industries Ltd. v. Securities and Exchange Board of India Section 15C SEBI Act, 1992 - Penalty - For failure to redress investors grievances Appellants companies having failed to redress investors grievances, SEBI debarred them from securities market for five years Whether since matter involved public interest and appellants annual reports for year 2002-03 admitted that there were 121 complaints, which had not been attended to, SEBI was justified in passing impugned order, as it was a clear case of mismanagement and appellants were bound to attend grievances of shareholders within a stipulated time schedule - Held, yes

Penalty for certain defaults in case of mutual funds (15D). If any person, who is (a) required under this Act or any rules or regulations made thereunder to obtain a certificate of registration from the Board for sponsoring or carrying on any collective investment scheme, including mutual funds, sponsors or carries on any collective investment scheme, including mutual funds, without obtaining such certificate of registration, he shall be liable to [a penalty of one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds, or one crore rupees, whichever is less.] (b) registered with the Board as a collective investment scheme, including mutual funds, for sponsoring or carrying on any investment scheme, fails to comply with the terms and conditions of certificate of registration, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.] (c) registered with the Board as a collective investment scheme, including mutual funds, fails to make an application for listing of its schemes as provided for in the regulations governing such listing, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees , whichever is less.] (d) registered as a collective investment scheme including mutual funds fails to despatch unit certificates of any scheme in the manner provided in the regulation governing such despatch, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.] (e) registered as a collective investment scheme, including mutual funds, fails to refund the application monies paid by the investors within the period specified in the regulations, he shall be liable to pay [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.] (f) registered as a collective investment scheme, including mutual funds, fails to invest money collected by such collective investment schemes in the manner or within the period specified in the regulations, he shall be liable to [a penalty of one lakh rupees for each day

during which such failure continues or one crore rupees, whichever is less.

Penalty for failure to observe rules and regulations by an asset management company (15E). Where any asset management company of a mutual fund registered under this Act, fails to comply with any of the regulations providing for restrictions on the activities of the asset management companies, such asset management company shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.]

Penalty for failure in case of stock brokers (15F) If any person, who is registered as a stock broker under this Act, - Substituted by the SEBI (Amendment) Act , 2002 , S. 12 (ii) (w.e.f. 29-10-2002), for a penalty not exceeding ten thousand rupees for each day during which such failure continues or ten lakh rupees, whichever is higher. Substituted by the SEBI (Amendment) Act , 2002 , S. 12 (iii) (w.e.f. 29-10-2002), for a penalty not exceeding five thousand rupees for each day during which such failure continues or five lakh rupees, whichever is higher. Substituted by the SEBI (Amendment) Act, 2002 , S. 12 (iv) (w.e.f. 29-10-2002), for a penalty not exceeding five thousand rupees for each day during which such failure continues. Substituted by the SEBI (Amendment) Act, 2002, S. 12 (v) (w.e.f. 29-10-2002), for a penalty not exceeding one thousand rupees for each day during which such failure continues. Substituted by the SEBI (Amendment) Act, 2002, S. 12 (vi) (w.e.f. 29-10-2002), for a penalty not exceeding five lakh rupees for each such failure. Substituted by the SEBI (Amendment) Act, 2002, S. 13 (w.e.f. 29-10-2002), for a penalty not exceeding five lakh rupees for each such failure. (a) fails to issue contract notes in the form and in the manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker; (b) fails to deliver any security or fails to make payment of the amount due to the investor in the manner within the period specified in the regulations, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.] (c) charges an amount of brokerage which is in excess of the brokerage specified in the regulations, he shall be liable to[a penalty of one lakh rupees] or five times the amount of brokerage charged in excess of the specified brokerage, whichever is higher.

Penalty for insider trading (15G). If any insider who,either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; (ii) or communicates any unpublished price- sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; (iii) or counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty [of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. (i)

SECURITIES APPELLATE TRIBUNAL, MUMBAI S. Ramesh and S. Padmalata Asis Bhaumik v. Securities and Exchange Board of India Section 15G SEBI Act, 1992, read with reg 3 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 - Penalty - For insider trading Appellants, being company secretary and executive director of a company, had bought shares of that company on behalf of their family members on basis of unpublished price sensitive information, which was not known to general public but to appellants as employees of company They, later on, tendered said shares in open offer announced by acquirer at higher price, thereby making an unlawful gain - SEBI held appellants guilty of misconduct of insider trading and imposed penalty - Appellants admitted that they had made a mistake and were willing to pay back profit earned by sale of shares Whether any violation of provision relating to inside trading will make a person guilty of being an inside trader - Held, yes - Whether however, taking into

account said financial position of both parties, their admission and their offer to pay back profit, which they had earned by sale of said shares, penalty was to be reduced - Held, yes

Penalty for non-disclosure of acquisition of shares and take-overs (15H). If any person, who is required under this Act or any rules or regulations made thereunder, fails to,(i) (ii) (iii) disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or make a public announcement to acquire shares at a minimum price; [(iii) make a public offer by sending letter of offer to the shareholders of the concerned company; or Substituted by the SEBI (Amendment) Act, 2002, S. 14 (i) (w.e.f. 29-10-2002), for a penalty not exceeding five thousand rupees for each day during which such failure continues. Substituted by the SEBI (Amendment) Act, 2002, S. 14(ii) (w.e.f. 29-10-2002), for a penalty not exceeding five thousand rupees. Substituted by the SEBI (Amendment) Act, 2002, S. 15 (w.e.f. 29-10-2002), for not exceeding five lakh rupees. Inserted by the SEBI (Amendment) Act, 2002, S. 16 (a) (w.e.f.29-10-2002). make payment of consideration to the shareholders who sold their shares pursuant to letter of offer.] he shall be liable to a penalty [ twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.]

(iv)

SECURITIES APPELLATE TRIBUNAL, MUMBAI VLS Finance Ltd. v. Securities & Exchange Board of India Section 15H SEBI Act, 1992, read with Reg 10 of the SEBI (SAST) Reg, 1997

In terms of a pledge document appellant advanced certain amount to T Ltd., which, in turn, deposited certain shares with appellant by way of collateral securities As per agreement, acquirer had right to sell shares pledged to realize its dues - Later, parties entered into a fresh MOU whereby shares pledged were transferred in name of pledgee-appellant but those shares continued to be held as collateral securities and pledgee signed a power of attorney in favour of K and B of T Ltd., for purpose of attending and voting on its behalf at all general meetings of T Ltd. - Appellant made an application to SEBI seeking for exemption from provisions of Regulations of 1997, which was rejected Thereafter, because of failure of appellant to make public announcement of acquisition of shares of T Ltd., Adjudicating and Enquiry Officer imposed penalty under section 15H(ii) - Whether since it was appellant whose name was entered as beneficial owner in register of members of company and, under section 41(3) of the Companies Act, it was appellant who was deemed to be a member of T Ltd. with effect from date of transfer of shares, transfer of shares in name of appellant for realizing its lawful dues amounted to acquisition as defined in 1997 Regulations Held, yes Whether, therefore, voting rights vested with appellant and question whether he exercised those rights himself or through K and B through power of attorney did not alter situation with respect to acquisition in any manner whatsoever - Held, yes - Whether in light of that position, there was nothing objectionable in impugned order and same was to be upheld - Held, yes

SECURITIES APPELLATE TRIBUNAL, MUMBAI Diamond Projects (P.) Ltd. v. Securities and Exchange Board of India When a person comes forward and makes clean breast of violation of regulation, if such disclosure is bona fide, SEBI should pass a workable order so that it can be implemented Section 15H SEBI Act, 1992, read with reg 3(1)(c) of the SEBI (SAST) Reg, 1997 - Penalty - For non-disclosure of acquisition of shares and takeovers Appellant- company admitted mistake of having acquired 21.96 per cent equity shares of target company without informing SEBI but denied having any intention to cheat public - It had incurred heavy losses and had not met its liability - SEBI imposed penalty of Rs. 5 lakhs - Whether acquisition of shares in target company by appellant without disclosing it to respondent amounted to violation of regulation 3(1)(c) - Held, yes - Whether however, in matters of strict liability, SEBI must pass a workable order to maintain ability of company to make effective payment - Held, yes - Whether, therefore, taking a practical view of matter and fact that appellant had incurred heavy loss, penalty imposed should be reduced to Rs. 1,50,000 - Held, yes

Penalty for fraudulent and unfair trade practices (15HA). If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.

Penalty for contravention where no separate penalty has been provided(15HB). Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

Conclusion

Chapter VI A of The Security and Exchange Board of India Act, 1992 speaks about penalties and adjudication of the board. Section 11of the act provides boards the power to impose such penalties on the offenders. Similarly section 11A gives power on issues relating to security, 11B to issue directions, 11C to investigate and 11D to cease and desist the proceedings. From section 15A to Section 15HB of the SEBI act penalties are mentioned. Not only penalties but also on whom they are to be imposed on, when to be imposed.

References

www.sebi.gov.in www.indiankanoon.org http://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India Law of Investment and Securities by S.R. Myneni.