SEBI PENALTIES – article on penalty us 15HA:
Penalty for fraudulent and unfair trade practices u.s.15 HA – perception that Rs. five lakh is minimum and compulsory penalty is patently wrong. Orders imposing such penalties deserves to be challenged at appropriate forum depending on facts of case.
General provisions:
Before reading provisions of S.15HA it is necessary to read and understand general ,authorizing and guiding provisions about adjudging and quantifying penalties under various provisions relating to penalties under SEBI Act.
General guiding provisions:
General guiding provisions are discussed below by reproducing the same and highlighting and thereafter provision of S.15HA will be discussed.
Section 15-I with highlights added by author for important catch words and analysis in left column and in right column observations and remarks are given:
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Power to adjudicate.
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15-I. (1) For the purpose of adjudging under sections 15A, 15B, 15C, 15D, 15E, 3[15EA, 15EB,] 15F, 15G 1[,15H, 15HA and 15HB], the Board 4[may] appoint any officer not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.
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S.15HA is covered.
May appoint – means discretionary power. Means penalty is also discretionary and not mandatory.
not below the rank of a Division Chief – this means that an officer is to be appointed and it cannot be outsourced to professionals.
for the purpose of imposing any penalty.
This can be construed that opportunity is a mere formality
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(2) While holding an inquiry the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.
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This means that attendance of such person is essential to obtain evidence and documents. And if such evidence is used against some other person, than that other person must be provided a copy of the same and allowed cross examination of witness.
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[(3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify:
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This is a provision of revision to enhance penalty.
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2Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter:
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Opportunity to be given before enhancement
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Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.]
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This provides limitation for revision.
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**************1 Substituted for “and 15H” by the SEBI (Amendment) Act, 2002, w.e.f. 29-10-2002.
2 Inserted by the Securities Laws (Amendment) Act, 2014, w.r.e.f. 28-03-2014.
3. Inserted vide FINANCE ACT, 2018 w.e.f. 08-03-2019
4. Substituted vide FINANCE ACT, 2018 w.e.f. 08-03-2019 before it was read "shall "
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Section 15-J with highlights added by author for important catch words and analysis in left column and in right column observations and remarks are given:
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2[Factors to be taken into account while adjudging quantum of penalty]
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15J. While adjudging quantum of penalty under 3[15-I or section 11 or section 11B, the Board or the adjudicating officer] shall have due regard to the following factors, namely :-
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As seen earlier S, 15I covers S.15HA so S.15J also apply to S.15HA
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(A) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
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disproportionate gain or unfair advantage - must accrue due to default.
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(b) the amount of loss caused to an investor or group of investors as a result of the default;
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There should be loss caused to others that is investor or group of investors.
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(c) the repetitive nature of the default.
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Repetitive nature will increase quantum within upper limits.
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1[Explanation.-for the removal of doubts, it is clarified that the power 4[*******] to adjudge the quantum of penalty under sections 15A to 15E, clauses (b) and (c) of section 15F, 15G, 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section.]
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Power to adjudge penalty us 15HA is also exercised under S. 15I read with S.15J
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1 Inserted vide Finance Act, 2017 w.e.f April 26, 2017.
2. Substituted vide FINANCE ACT, 2018 w.e.f. 08-03-2019 before it was read as "Factors to be taken into account by the adjudicating officer. "
3. Substituted vide FINANCE ACT, 2018 w.e.f. 08-03-2019 before it was read as "section 15-I, the adjudicating officer"
4. Omitted vide FINANCE ACT, 2018 w.e.f. 08-03-2019 before it was read as "of an adjudicating officer"
Section 15-HA with highlights added by author for important catch words and analysis in left column and in right column observations and remarks are given:
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1[Penalty for fraudulent and unfair trade practices.
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As seen in S.15I, S.15HA is also governed by S.15I
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15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty 2[which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher].
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Entire section need to be read in harmonious manner.
Existence and evidence of fraudulent and unfair trade practices and amount of profits made out of such practices are tow precondition before levying penalty. to impose penalty.
If maximum penalty on higher side is to be fixed with reference to three times of profits made then there is no reason that on minimum side also quantification should depend on profit made out of such practices.
If a person has made profit of say Rs.50K, he should not be burdened with penalty of Rs. five lakh as minimum penalty.
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1 Inserted by the SEBI (Amendment) Act, 2002, w.e.f.29-10-2002.
2 Substituted for the words “twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher” by the Securities Laws (Amendment) Act, 2014, w.e.f. 08-09-2014.
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View of author:
Penalty for fraudulent and unfair trade practices are imposed u.s.15 HA.
From reading of orders of adjudicating authorities it seems that there is a perception in their mind that Rs. five lakh is minimum and compulsory penalty. This appears to be patently wrong. Reasons for lower or nil penalty are:
Legal provision:
As discussed above penalty us 15HA is also governed by provisions of S.15I and 15J.
When it is a matter of penalty, there should be strict interpretation and sufficient evidence proving ill intent and profit made or loss caused to others:
- Involvement of noticee in any unfair trade practice to gain himself or to cause loss to others.
- Such involvement should be to make profits or gains in an unfair manner and to cause loss to other investor or investors.
- Profit to one party and loss to other party must be independent. If profit and loss are gained or suffered by two persons and allegation is of collusion so as to serve purpose of both parties , then there is no profit or gain when considered jointly for both parties, if allegation is that both parties had pre-planned such trades then there should be net profit amongst parties alleged to be in collusion and as a sequel some one must have suffered loss.
- In case unfair trades has caused loss to other parties, then there must be evidence for the same.
- Stock exchanges apply various surveillance measures. Like circuit filters that is upper and lower circuits for buying and selling, categorization of securities for margins, trade to trade method in which carry over position is not allowed and transaction is to be met with delivery and many other means from time to time.
Therefore, an investor who has done some bid or offer for trades at stock exchange terminal and transaction is within permissible limits and is executed on stock exchange terminal then any investor should not be blamed to have indulged into unfair trade practice.
Quantum of penalty:
In case of penalty there must be strict evidence of violation and that too deliberate violation for unfair trading profits or gains. Furthermore, parties must be capable to design such unfair trade practices otherwise one cannot indulge into such practices. In view of surveillance and regulatory measures it is not possible for investors to design and execute unfair trade practices to gain or to cause loss to others. If it be the case then conclusion can only be that stock exchange and regulatory authorities have miserably failed in their duties to regulate markets and protect interest of investors.
Quantum:
15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty 2[which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher].
As noted earlier in analysis entire section is to be read as a whole and with other provisions of S.15I and 15J. Therefore, there must be quantification of profit or gains made by notices. In this case of penalty us 15HA there is no scope of levying penalty for loss caused to other investors.
If there is no profit or gain or it cannot be quantified then there cannot be levy of any penalty.
Two expressions namely “which shall not be less than five lakh rupees” and “ but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher”
Provide a guidance that in case of profits so made maximum penalty can be three times of profits so made.
Rs. twenty- five crores is a maximum limit and it does not mean that in any case this limit can be applied. If three times of profits so made are more than Rs. twenty- five crores , then only this upper limt shall become operational. Otherwise upper limit is three times the amount of profits made out of such practices.
It cannot be said that in a case where profit made is Rs. one lakh still penalty can be levied upto Rs.25 crore.
Adjudicating authorities have imposed penalties considering it to be bare minimal irrespective of any gain made or loss caused. This is patently wrong and in such cases appeal should be filed before appropriate higher forum.
