QUASI JUDICIAL ACTIONS THAT CAN BE TAKEN BY SEBI

[Mr. M. GOVINDARAJAN]

Introduction

Securities and Exchange Board of India (‘Board’ for short) is a regulator of the stock markets formed under the Securities and Exchange Board of India.  The Board has to perform various functions under the Act and regulations made there under.  The Board also monitors the performance of the stock market and intermediaries registered with the Board.  If there is contravention of any of the provisions of the Act or the regulations made there under the Board can exercise its quasi judicial powers - (i) Adjudication of penalties and (ii) Enquiry proceedings.

Adjudication process

The Board is having power adjudication process under Chapter VI A of Securities and Exchange Board of India Act, 1992 (‘Act’ for short) read with-

• SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995;
• Securities Contract and (Regulation) Act, 1956;
• Depositories Act and the rules framed there under.

Penalties

• Section 15A - Failure to furnish return, information etc.
• Section 15B - Failure by any person to enter into agreement with clients;
• Section 15C - Failure to redress investors’ grievances;
• Section 15D - For certain defaults in case of mutual funds;
• Section 15E - Failure to observe rules and regulations by an Asset Management Company;
• Section 15EA - Default in case of Alternative Infrastructure Funds, Infra structure investment fund and Real Estate Investment Fund;
• Section 15EB - Default in case of investment adviser and research analyst;
• Section 15F - Default in case of stock brokers;
• Section 15G - Penalty for insider trading;
• Section 15H - Non disclosure of acquisition of shares and takeovers;
• Section 15HA - Fraudulent and unfair trade practices;
• Section 15HAA - Penalty for alteration, destruction of records and failure to protect the electronic database of Board;
• Section 15HB - Penalty for contravention where no specific penalty is prescribed;

In all these cases the penalty leviable is not less than Rs.1 lakh but which may extend to Rs. 1 lakh for each day during which such failure continues subject to a maximum of Rs. 1 crore.

Adjudication of penalty proceedings

Section 15I provides the procedure for adjudication of penalty proceedings as discussed above.  The Board may appoint any officer not below the rank of Divisional Chief in SEBI to be an Adjudicating Officer to hold an inquiry.  In the inquiry proceeding the Adjudicating Officer shall give reasonable opportunity to the concerned for the purpose of imposing penalty.  The Adjudicating Officer shall have powers to summon and enforce the attendance of any person to give evidence or call for documents/information from any person.   If the Adjudicating Officer is satisfied that the concerned person has failed to comply with the provisions of this Act he impose such penalty as he thinks fit in accordance with the provisions of this Act.

Enhanced penalty

The Board may call for and examine the record of any proceedings under this section.  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 after giving reasonable opportunity of being heard.

The above power cannot be exercised by the Board after an expiry of a period of 3 months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 15T, whichever is earlier.

Factors to be considered for penalty

While adjudging quantum of penalty, the Board or the Adjudicating Officer shall have due regard to the following factors-

• the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
• the amount of loss caused to an investor or group of investors as a result of the default;
• the repetitive nature of the default.

Enquiry proceedings

The Board is having powers to cause against the intermediaries registered with the Board under Chapter V of the SEBI (Intermediaries) Regulations, 2008.

Where any intermediary who has been granted a certificate of registration under the Act and the regulations made there under-

• fails to comply with any conditions subject to which a certificate of registration has been granted to him;
• contravenes any of the provisions of the securities laws or directions, instructions or circulars issued there under;

the Board may take action against such intermediary.

Appointment of authorities

The Board may approve the initiation of proceedings against such intermediary.  The Executive Director shall thereafter appoint an officer not below the rank of a Division Chief, as a designated authority.  However the executive director may, at his discretion, appoint a bench of three officers, each of whom shall not be below the rank of a Division Chief.   Such bench shall be presided by the senior most amongst them and all the decisions or recommendations of such bench shall be by way of majority.

Holding of enquiry

The Designated Authority shall issue a notice along with the documents and the extracts of relevant portions of the reports containing the findings arrived at in an inquiry, investigation or inspection, if any. to the person against whom inquiry proceedings has been initiated with the directions to give reply to the notice within the period specified in the period not exceeding 21 days from the date of receipt of notice.  Such person shall give a reply to the Designated Authority within the time stipulated in the notice along with the documentary evidences.  The Designated Authority may extend the time for giving reply if the noticee gives sufficient reasons.  The Designated Authority shall write reasons for such extension.

The Designated Authority may allow the noticee to cause inspection of documents within 30 days from the date of such request from the noticee.    The designated authority shall grant an opportunity of personal hearing and issue or cause to issue a notice scheduling a date for hearing the notice.    If the noticee does not reply to the notice or fails to appear on the scheduled date of hearing and the designated authority is satisfied that sufficient opportunity has been given to the noticee, the designated authority may conclude the proceedings after recording the reasons for doing so, on the basis of the material available on record.

Report to the Board

The designated authority shall try to submit the report within 120 days from the date of receipt of reply to the notice or date of personal hearing, whichever is later.  The Designated Authority may recommend the Board to take any of the following measures-

• disposing of the proceedings without any adverse action;
• cancellation of the certificate of registration;
• suspension of the certificate of registration for a specified period;
•  prohibition of the noticee from taking up any new assignment or contract or launching a new scheme for such the period as may be specified;
• debarment of an officer of the noticee from being employed or associated with any registered intermediary or other person associated with the securities market for such period as may be specified;;
• debarment of a branch or an office of the noticee from carrying out activities for such period as may be specified;
• issuance of a regulatory censure to the noticee. 

Order

On receipt of the report the Designated Authority shall forward a copy of the report to the noticee to make its submission, in writing, as to why the measures recommended by the designated authority or any other action as contemplated in these regulations, should not be taken.  The noticee shall file submissions within 21 days from the date of receipt of report.  The time limit may be extended by the Authority in writing.   The Competent Authority may remit the matter for fresh enquiry.  The Competent Authority shall pass an order within 120 days from the date of submission for the report or from the date of personal hearing. The copy of the order shall be sent to the noticee and also uploaded in the website of SEBI.