Disgorgement As A Regulatory Remedy Under SEBI Act

In securities regulation, especially under the system run by the Securities and Exchange Board of India (“SEBI”), disgorgement has become an important tool against insider trading, fraudulent trading practices, market manipulation, and breaches of disclosure rules. SEBI often orders individuals or entities to give back unlawful gains made from breaking securities laws to help restore market integrity and rebuild investor trust.

Indian law now treats disgorgement under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) as an expressly recognised, primarily restitutionary power embedded in Sections 11 and 11B, further strengthened by the Securities Laws (Amendment) Act, 2014 and aligned provisions in the Securities Contracts (Regulation) Act, 1956 (“SCRA”) and Depositories Act, 1996.

The Securities Appellate Tribunal, Mumbai (“SAT”) and the Supreme Court have consistently affirmed SEBI's authority to direct disgorgement of “wrongful gain” or “loss averted”, but have also imposed important limits: (i) disgorgement must correspond to actual unjust enrichment; (ii) it is conceptually distinct from civil penalties; (iii) interest can be awarded to neutralise the time value of illegal gains, but its commencement and rate must be principled; and (iv) SEBI cannot re‑open concluded proceedings merely to superimpose fresh disgorgement orders on the same cause of action.

I. Legal Framework

A. Statutory basis: Sections 11 and 11B of the SEBI Act.

Section 11(1) of the SEBI Act casts a broad mandate on SEBI “to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market”.

Section 11B empowers SEBI to issue directions to intermediaries and persons associated with the securities market where necessary in the interest of investors, market integrity or proper management. The 2014 Amendment inserted an Explanation to Section 11B, declaring that this power “shall include and always be deemed to have been included” the power to direct any person who has made profit or averted loss in contravention of the Act or regulations “to disgorge an amount equivalent to the wrongful gain made or loss averted”. This deeming fiction is important: it retrospectively affirms that disgorgement always inhered in SEBI's Section 11B jurisdiction.

B. Parallel disgorgement and recovery powers in allied statutes

To create a uniform enforcement architecture, the 2014 Amendment also introduced specific recovery provisions in the SCRA and Depositories Act, enabling recovery of unpaid penalties, fees and disgorgement orders through income‑tax recovery machinery:

1.Section 23JB SCRA authorises recovery where a person fails to comply with a disgorgement direction under Section 12A of the SCRA.

2.Section 19‑IB Depositories Act mirrors this framework for disgorgement orders under Section 19.

3.Section 28A of the SEBI Act similarly provides for recovery, expressly referring to “a direction of disgorgement order issued under section 11B”.

C. Penalties vs disgorgement: Section 15J and settlement

Civil monetary penalties under Chapter VI‑A (e.g. Sections 15HA, 15HB) are guided by Section 15J, which requires regard to (a) disproportionate gain or unfair advantage; (b) loss caused to investors; and (c) repetitive nature of default. Disgorgement, although it may use similar metrics of “wrongful gain”, remains conceptually distinct and is not a “penalty” for purposes of Section 15JA (credit to Consolidated Fund) and settlement provisions, which separately carve out “disgorgement amount and legal costs” from settlement sums.

II. Judicial Interpretation and Jurisprudential Development

A. SAT's foundational articulation: Karvy line of cases and IPO scam jurisprudence

1. Conceptual definition of disgorgement.

In Karvy Stock Broking Ltd. Vs. SEBI, by order dated 02.05.2008 in Appeal No. 6 of 2007, SAT set out what has become the canonical definition of disgorgement in Indian securities law. Referring to Black's Law Dictionary, it described disgorgement as “the forced giving up of profits obtained by illegal or unethical acts … a monetary equitable remedy designed to prevent a wrongdoer from unjustly enriching himself”. SAT emphasised that:

1.Disgorgement is not a punishment and is not concerned with damages to victims.

2.Only wrongdoers who have made gains can be asked to disgorge.

3.The amount “should not exceed the total profits realized as the result of the unlawful activity”.

4.The burden lies on SEBI to show that the amount sought “reasonably approximates the amount of unjust enrichment”.

These principles were reiterated in later IPO‑scam related matters such as Dipak J. Panchal by order dated 12.11.2011 in Appeal No. 198 of 2011, where SAT upheld substantial disgorgement against members of the “Panchal group” who had cornered shares reserved for retail investors through thousands of benami demat accounts, calculating “unlawful gains” issuer‑wise by comparing actual sale prices against issue prices and cost of acquisition.

2. Roopalben Panchal IPO manipulation cases

In Roopalben Nareshbhai Panchal v SEBI, by order dated 03.03.2016 in Appeal No. 400 of 2015, SAT upheld both (i) SEBI's disgorgement order directing the appellants (key operators in the IPO cornering scheme) to disgorge unlawful gains with interest, and (ii) separate civil penalties under Section 15HA for fraudulent and unfair trade practices. SAT accepted that disgorgement could legitimately coexist with debarment and monetary penalties where the conduct involved large‑scale fraudulent cornering of retail quota shares across multiple IPOs. This line of authority entrenches the view that disgorgement is cumulative and remedial rather than substitutive of penalty.

B. Nature and limits of SEBI's disgorgement power after the 2014 Amendment

1. Reliance Industries: equitable, not penal

In Reliance Industries Ltd v SEBI, by order dated 05.11.2020 in Appeal No.120 of 2017, arising from a large position‑limit violation and manipulative trading in futures of Reliance Petroleum, SAT squarely addressed the argument that disgorgement is a “penalty” beyond the scope of Section 11B. Relying on the newly inserted Explanation to Section 11B and Section 11(2)(i), SAT held that:

1. Disgorgement is “an equitable remedy; not a penal action”.

2. The 2014 Explanation merely clarifies a power SEBI “always” had; it is not a new substantive head of liability.

3. Equity is further served because amounts disgorged are credited to SEBI's Investor Protection and Education Fund rather than to the Consolidated Fund, distinguishing it from fines.

4. SAT therefore rejected the contention that Section 11B is purely preventive and cannot support monetary directions, affirming a broad remedial jurisdiction encompassing disgorgement with interest.

2. Gagan Rastogi / Asia Texx: unjust enrichment and tracing

In the GDR–fund diversion cases Gagan Rastogi v SEBI order dated 12.07.2019 in Appeal No.91 of 2015 and Asia Texx Enterprises Ltd v SEBI order dated 12.07.2019 in Appeal No. 219 of 2015, SAT applied the Explanation to Section 11B to sustain joint disgorgement of USD 92 million received as an “advance” for refinery machinery that was neither supplied nor refunded. It endorsed SEBI's characterisation of disgorgement as an equitable remedy and upheld the determination that Asia Texx/Gagan Rastogi were “direct recipients” and thus unjustly enriched at the expense of investors.

Interestingly, counsel in these matters invoked the US Supreme Court's decision in Kokesh v SEC, No.16-529 decided on 05.06.2017, to argue that disgorgement is penal; SAT expressly noted Kokesh but held that, given the Indian statutory explanation, Section 11B orders “have always been remedial”, though they may incidentally have deterrent effect.

C. Interest on disgorgement: rationale and constraints

1. Conceptual rationale

SEBI has routinely coupled disgorgement with interest from the date of unlawful gain to avoid conferring a time‑value benefit on wrongdoers. SAT has broadly endorsed this rationale, recognising that without interest, delayed repayment would allow violators to retain an economic advantage inconsistent with the equitable purpose of disgorgement.

2. Commencement of interest: Shailesh Jhaveri and reasonableness

At the same time, SAT has policed the start date and quantum of interest. In Shailesh S. Jhaveri v SEBI order dated 04.10.2012 in Appeal No.79 of 2012, arising from an Ojas Technochem preferential allotment, SEBI had directed disgorgement of unlawful gains with interest at 12% p.a. from January 2000, even though disgorgement proceedings were initiated only in 2008 and the final order was passed in 2012. SAT held that:

1. Disgorgement is a “continuation” of earlier Section 11B proceedings where violation is already established; merits cannot be reopened.

2. However, the amount “became payable” only when quantified in the final order, and SEBI had itself granted 45 days to pay.

3. Interest, if any, can logically run only after expiry of that 45‑day period; charging interest retrospectively from 2000—long before crystallisation of liability—was “arbitrary and bad in law”.

4. SAT therefore restricted interest to run from 45 days after the disgorgement order.

3. Rate of interest and analogies from restitution jurisprudence

While there is no explicit statutory rate for interest on disgorgement, tribunals have typically used simple interest between 10–15% p.a., sometimes by analogy to late fee/penalty circulars (e.g. SEBI's 1998 circular prescribing 15% interest on delayed broker fee remittances) or to equitable restitution case law on interest as “normal accretion on capital”.

Appellate fora such as APTEL, drawing from Supreme Court decisions like Clariant International v SEBI, have stressed that interest is not a penalty but part of restitutive calculus, and that awarding compound interest without a factual basis risks unjust enrichment of the recipient “in the name of disgorgement of benefits purportedly derived” by the other side. Those principles are increasingly being invoked to argue for moderation and reasoned calibration of interest in securities disgorgement as well.

D. Structural and constitutional limits: Res judicata, proportionality and individualisation

1. SEBI v Ram Kishori Gupta: no “second final order” for disgorgement

In SEBI v Ram Kishori Gupta & Anr. [2025] 4 S.C.R. 2789, the Supreme Court considered a fact pattern where SEBI had, in 2014, passed a final Section 11B order in the Vital Communications (“VCL”) matter imposing market access bans but no disgorgement, and then in 2018 initiated fresh disgorgement proceedings on the same show‑cause notices and cause of action. SEBI argued that the 2014 Explanation to Section 11B showed that disgorgement power had always existed, justifying a second order supplementing the first.

The Court emphatically rejected this position:

1. The 2014 order was a final Section 11B determination on the same notices; SEBI had consciously chosen lesser sanctions and allowed the order to work itself out.

2. The Explanation to Section 11B clarifies jurisdiction but cannot be used to reopen or “review” a final quasi‑judicial order by issuing a second final order on the same cause of action; that would violate res judicata and public policy favouring finality.

3. SEBI, as a statutory regulator, is bound by res judicata principles and “cannot pass multiple final orders on the same cause of action”.

4. Ram Kishori Gupta thus introduces an important constitutional constraint: disgorgement, even though remedial, cannot be superimposed through successive orders once SEBI has allowed an earlier Section 11B order to attain finality without such relief.

2. Individual vs joint liability and bar on notional profit

Several recent SAT decisions have refined how disgorgement must be individualised:

1. In Rajesh Ranka v SEBI, by order dated 18.09.2019 in Appeal No. 408 of 2018 and connected appeals, SAT held that under the Explanation to Section 11B “a person can be directed to disgorge amount equivalent to the wrongful gain made by him”; liability is therefore individual, not collective, and directions making multiple noticees “jointly and severally” liable for aggregate gains are contrary to the statute.

2. SAT also accepted that there can be no disgorgement where shares were never sold and no gain was actually made; “disgorgement on the basis of notional profit cannot be made”.

3. Double recovery and interaction with penalties

In several IPO‑scam matters (e.g. Dipak Panchal, Roopalben Panchal), appellants argued that the combined imposition of severe penalties under Section 15HA, multi‑year debarment and massive disgorgement with interest amounted to disproportional “double punishment”. SAT has so far maintained the doctrinal separation: disgorgement aims to remove gain, penalties to deter and denounce market abuse. However, in practice, proportionality concerns are increasingly raised, especially where interest significantly multiplies the disgorged sum over long periods due to regulatory delay.

III. Emerging Themes, Comparative Influences and Future Challenges

A. Influence of US jurisprudence (Kokesh, Liu) and its mediated reception

US Supreme Court decisions in Kokesh v SEC (characterising disgorgement as “penalty” for limitation purposes) and Liu v SEC No. 18–1501, decided on 22.06. 2020 (upholding SEC disgorgement but limiting it to net profits, requiring deduction of legitimate expenses and favouring victim‑focussed distribution) have been repeatedly cited before SAT.

Indian tribunals have selectively engaged with these cases. In the Gagan Rastogi/Asia Texx orders, SAT recorded the Kokesh argument but held that, in view of the Section 11B Explanation and statutory channels for crediting disgorged sums to investor funds, Indian disgorgement remains principally remedial, though some Liu‑style constraints (net profits, unjust enrichment) are already implicit in the Karvy formulation.

B. Quantification challenges in complex and algorithmic markets

Cases such as Reliance Industries (cross‑market futures‑spot strategy) and the co‑location / tick‑by‑tick feed matters involving NSE illustrate the difficulty of attributing “wrongful gain” in the presence of layered transactions, high‑frequency strategies and market‑wide price effects.

While SAT has accepted “reasonable approximation” rather than mathematical precision, it has simultaneously insisted that SEBI must anchor its calculations in concrete trading data and be prepared to explain its methodology, as seen in detailed tabular computations of unlawful gains in Satyam, NDTV and other high‑profile enforcement orders.

C. Constitutional dimensions: Article 14, due process and delay

Decisions like Ram Kishori Gupta and Roofit Industries [2015] 12 S.C.R. 190 (though dealing with penalty provisions) highlight the Supreme Court's growing sensitivity to regulatory delay and its distributive consequences. In Roofit Industries, the Court refused to retrospectively apply a harsher post‑2002 amendment to Section 15A of the SEBI Act on the basis that the “date on which the failure occurred” is determinative, not the date of adjudication.

Transferred to disgorgement, the logic suggests that where SEBI's institutional delays cause interest to balloon far beyond the underlying gain, Article 14 proportionality challenges are likely. Shailesh Jhaveri is an early example of SAT cutting back interest on exactly this ground; Ram Kishori Gupta goes further by barring SEBI from issuing a second disgorgement order years after a final order on the same facts.

D. Interaction with insolvency and recovery regimes

Post‑2014 recovery provisions (Section 28A SEBI Act; Section 23JB SCRA; Section 19‑IB Depositories Act) enable SEBI to recover disgorged amounts through attachment, sale, arrest and receivership, imported wholesale from the Income‑tax Act's Second and Third Schedules.

These statutory mechanisms increasingly intersect with insolvency proceedings under the IBC; appellate fora have noted that while moratorium provisions may not bar continuation of regulatory proceedings instituted earlier, enforcement of disgorgement and penalty claims must still be harmonised with the IBC's creditor hierarchy and the overriding effect of Section 238 IBC.

The evolution of disgorgement under the SEBI Act reflects a broader global trend: regulators moving beyond purely punitive sanctions to restitutionary tools that deprive securities offenders of the economic fruits of wrongdoing. Through expansive readings of Sections 11 and 11B, subsequently codified and clarified by the 2014 Amendment and mirrored in the SCRA and the Depositories Act, Indian law now squarely recognises disgorgement plus interest as a central pillar of market abuse enforcement.

At the same time, the jurisprudence has superimposed several principled constraints:

1. Disgorgement must correspond to actual unjust enrichment, not hypothetical or notional profits.

2. Liability is person‑specific; joint and several directions are inconsistent with the statutory language focusing on “any person who made profit or averted loss”.

3. Interest is legitimate to neutralise the time value of illicit gains, but its starting point and rate must be defensible and cannot be used to punish parties for regulatory delay.

4. SEBI cannot, consistent with res judicata and public policy, pass multiple final orders on the same cause of action merely to retrofit disgorgement after having consciously omitted it earlier.

As Indian markets become more algorithmic, cross‑border and structurally complex, the central challenge for future disgorgement jurisprudence will be methodological: developing robust, transparent techniques to approximate “wrongful gain” in high‑frequency, derivative and systemic‑impact cases without slipping into punitive excess.

The emerging case law from Karvy and the IPO scam matters to Reliance Industries, Gagan Rastogi and Ram Kishori Gupta, suggests that courts and tribunals are increasingly sensitive to both sides of the equation: the need for strong, credible deterrence against market abuse, and the equally compelling imperative of principled limits on discretionary monetary exactions by the regulator.

Author is a Senior Advocate at Supreme Court of India. Views are personal.