2023 (12) TMI 1435 - AT - SEBI

Penalty proceedings u/s 15HB of the SEBI Act - non-compliance of directions issued by the Whole Time Member (WTM) u/s 11B of the SEBI Act - HELD THAT - Directions issued under Section 11B are under Chapter-II of the SEBI Act which gives powers to the Board to issue such directions as are necessary to protect the interest of the investors in securities and to promote the development of and to regulate the securities market by such measures as it thinks fit. Such directions issued under 11B are in the nature of orders which are passed after due enquiry. Black s Law Dictionary Seventh Edition defines direction to mean an order. The word order has also been defined in the same Black s Law Dictionary Seventh Edition as a command direction or instruction a written direction or command delivered by a court or judge. Thus direction and order are synonymous terms and are interchangeable. The word directions issued by the Board under Section 15HB is different and distinct from the directions issued u/s 11B after due enquiry and adjudication. There are many directions issued under the Regulations and the Circulars requiring a person to do an act in a certain manner. For example a person is required to comply with a certain provision within a stipulated period. Failure to comply with such directions issued by the Board under the Act Regulations Rules or Circulars if not complied with may invite penalty. If penalty is not specified under Chapter-VIA from Section 15-A to Section 15-HAA for failure to comply with such type of directions then penalty can be imposed after adjudication under the residuary clause Section 15HB. Section 15HB cannot be invoked for noncompliance of any directions issued under Section 11B after enquiry and adjudication. Thus an adjudicatory order passed under Chapter IV or under Chapter VIA after enquiry and adjudication can be enforced like a decree u/s 28A. Penalty proceedings cannot be initiated for non-compliance under Section 15HB. We are further of the opinion that the appellants having resigned in 2011 were not in a position to comply with the direction of the WTM to bring back the money as they were no longer in-charge of the Company. Thus there is no willful failure on the part of the appellant to comply with the order of the WTM. We are of the view that the provisions of Section 15HB cannot be utilized for imposition of penalty for non-compliance of an order of the WTM passed under Section 11B of the SEBI Act.

The core legal questions considered by the Tribunal are:

1. Whether the Securities and Exchange Board of India (SEBI) can initiate penalty proceedings under Section 15HB of the SEBI Act for noncompliance of directions issued by the Whole Time Member (WTM) under Section 11B of the SEBI Act.

2. Whether directions issued under Section 11B of the SEBI Act constitute "directions" under Section 15HB, thereby attracting penalty for noncompliance.

3. Whether the appellants, having resigned as directors prior to the issuance of directions, can be held liable for noncompliance of the WTM's order.

Issue-wise Detailed Analysis

Issue 1: Can penalty proceedings under Section 15HB be initiated for noncompliance of WTM directions under Section 11B?

The legal framework involves two key provisions:

- Section 11B empowers SEBI to issue directions after enquiry for protecting investors and regulating the securities market.

- Section 15HB provides for penalty where no specific penalty is prescribed for failure to comply with provisions of the Act, rules, regulations, or directions issued by SEBI.

The Tribunal noted that directions under Section 11B are issued after due enquiry and are in the nature of orders. This is supported by authoritative definitions from Black's Law Dictionary equating "direction" with "order," and judicial precedent confirming that a direction is an order issued by a competent authority during adjudication.

Section 15HB, on the other hand, is a residuary penalty provision under Chapter VIA of the SEBI Act, designed to penalize failures not specifically covered by other penalty provisions (Sections 15A to 15HAA). These other provisions deal with failures such as non-furnishing of information, failure to enter into agreements, or failure to redress grievances.

The Tribunal distinguished the "directions" under Section 15HB from the adjudicatory directions under Section 11B. The former refers to general directions issued under the Act, rules, regulations, or circulars that require compliance within stipulated timelines and for which no specific penalty is prescribed. Failure to comply with such directions may attract penalty under Section 15HB.

Conversely, directions under Section 11B are adjudicatory orders passed after enquiry which are enforceable akin to a decree under Section 28A of the SEBI Act. The Tribunal held that penalty proceedings under Section 15HB cannot be initiated for noncompliance of such adjudicatory orders.

This interpretation preserves the distinct procedural and substantive character of Section 11B orders, ensuring that enforcement of such orders follows the prescribed mechanisms rather than penalty imposition under a residuary clause.

Issue 2: Whether directions under Section 11B constitute "directions" under Section 15HB attracting penalty for noncompliance?

The Tribunal analyzed the textual and contextual meaning of "directions" in both sections. It emphasized that the directions under Section 11B are issued post enquiry and adjudication, whereas Section 15HB contemplates penalty for failure to comply with directions issued under the Act, rules, regulations, or circulars where no separate penalty is prescribed.

The Tribunal relied on the legislative scheme and the placement of these provisions within the SEBI Act. Chapter II (containing Section 11B) deals with powers of SEBI to issue directions to protect investor interests and regulate the market, while Chapter VIA (containing Section 15HB) deals exclusively with penalties and adjudication.

Given this scheme, the Tribunal concluded that the "directions" under Section 15HB are distinct from adjudicatory directions under Section 11B. The former are administrative or regulatory directions, whereas the latter are quasi-judicial orders. Hence, penalty under Section 15HB cannot be invoked for noncompliance of Section 11B directions.

Issue 3: Liability of appellants who resigned prior to issuance of directions

Factually, the appellants resigned as directors on June 1, 2011, while the WTM's directions were issued in September 2015. The Tribunal found that since the appellants were no longer in charge or control of the company at the time the directions were issued, they were incapable of complying with the directions.

This factual circumstance negates any finding of willful failure to comply. The Tribunal held that the appellants could not be held liable for noncompliance as they lacked the capacity or control to effect compliance post-resignation.

Treatment of Competing Arguments

The respondent argued that Section 15HB permits imposition of penalty for noncompliance with any directions issued by SEBI, including those under Section 11B, since no separate penalty is prescribed for noncompliance of Section 11B directions. The Tribunal rejected this argument on textual, contextual, and purposive grounds, emphasizing the distinct nature of Section 11B orders and the legislative intent to treat them as enforceable orders rather than mere directions attracting penalty.

The Tribunal also considered the legislative scheme of Chapter VIA, noting the presence of specific penalty provisions for various contraventions, and that Section 15HB is a residuary provision not intended to override the enforcement mechanisms for orders passed under Chapter IV or Section 11B.

Conclusions

The Tribunal concluded that:

- Penalty under Section 15HB cannot be imposed for noncompliance of directions issued under Section 11B, as such directions are adjudicatory orders enforceable through other mechanisms.

- The appellants, having resigned prior to the issuance of directions, were not liable for noncompliance.

- Consequently, the penalty order imposing Rs. 50 lakh under Section 15HB was unsustainable and was quashed.

Significant Holdings

The Tribunal held:

"Directions issued under Section 11B are in the nature of orders which are passed after due enquiry."

"The word 'directions' issued by the Board under Section 15HB is different and distinct from the directions issued under Section 11B after due enquiry and adjudication."

"Section 15HB cannot be invoked for noncompliance of any directions issued under Section 11B after enquiry and adjudication."

"An adjudicatory order passed under Chapter IV or under Chapter VIA, after enquiry and adjudication can be enforced like a decree under Section 28A. Penalty proceedings cannot be initiated for non-compliance under Section 15HB."

"The appellants having resigned in 2011 were not in a position to comply with the direction of the WTM to bring back the money as they were no longer in-charge of the Company."

"The provisions of Section 15HB cannot be utilized for imposition of penalty for non-compliance of an order of the WTM passed under Section 11B of the SEBI Act."

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