SEBI's Power Of Disgorgement: Analysing The Veeram Securities Order

The noticees contended, inter alia, that the penalty under Section 15HB of the Act cannot be imposed on them in addition to the direction for disgorgement, and they cited certain orders passed by the Securities Appellate Tribunal (“SAT”) in this regard. However, the WTM held that since disgorgement is an equitable remedy and not a penalty, directions for both disgorgement of profits as well as imposition of monetary penalty can be undertaken.

The Veeram Order appears to be in divergence of the SAT's position on the Regulator's power of disgorgement in the securities market. To understand why, it is essential to take a look at: recent SAT orders in light of the Veeram Order (A); SEBI's power of disgorgement and imposition of penalties (B); and lastly, the nature of disgorgement in the Indian context (C).

Analysis of Recent SAT Orders in light of the Veeram Order

In the landmark case of SnehalataTiwari vs. SEBI of 2021, referenced by the noticees in the Veeram case, the Appellant, Ms. Snehalata Tiwari, had approached the SAT against an order passed by the Adjudicating Officer (“AO”) of SEBI imposing a penalty of Rs. 1 lakh for violating the PIT Regulations by entering into contra trade and making a profit of Rs. 348. The AO, despite considering the profit to be insignificant, had imposed a penalty of Rs. 1 lakh for violation of the Regulations under Section 15HB of the Act. The SAT believed that the order of the AO imposing this penalty was erroneous and could not be sustained. Consequently, it held that only the profit earned by Ms. Snehalata Tiwari, could have been disgorged and no separate penalty could be imposed under Section 15HB of the Act. As a result of the SAT's order, Ms. Snehalata Tiwari had preferred an appeal to the Supreme Court which ruled that it was not inclined to hear the appeal; however, the Apex Court has left the question of law open and clarified that this order should not be treated as precedent.

In another case dated December 5, 2022, the SAT passed an order in the case of UdayAgarwal v. SEBI, wherein the appellant had been held guilty for trading while in possession of unpublished price sensitive information, and also for executing contra trades. The appellant had deposited an amount of alleged profit arising from the execution of contra trades in the Investor Protection Fund on the advice of SEBI. Accordingly, the AO imposed a monetary penalty on Uday Agarwal of Rs. 15 lakhs under Section 15G (Penalty for insider trading) of the Act and Rs. 10 lakhs under Section 15HB (Penalty for contravention where no separate penalty has been provided) of the Act.

The SAT upheld the findings of the AO and affirmed violation of Regulation 4(1) of the PIT Regulations by the appellant for insider trading, but reduced the monetary penalty under Section 15G to 10 lakhs, in light of the amount deposited by him in the Investor Protection Fund. Notably the SAT, citing its own order in Snehalata Tiwari (supra), held that a penalty of Rs. 10 lakhs under Section 15HB cannot be imposed, since only the profit earned could be disgorged and no separate penalty could be imposed under Section 15HB.

SEBI's Power of Disgorgement and Imposition of Penalties

Disgorgement is defined as the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion. Thus, to disgorge a person means to deprive him of the value by which he has been unjustly enriched, implying a remedial measure in respect of a violation of the provisions of law.

SEBI's power to disgorge illegal or wrongful gains stems from Section 11B, which makes a provision for disgorgement of an amount equivalent to the wrongful gain made or loss averted by the contravention of the provisions of the Act or regulations made thereunder. Section 12A of the Securities Contracts (Regulation) Act, 1956 and Section 19 of the Depositories Act, 1996 also provide an identical explanation with reference to disgorgement.

As regards SEBI's power to impose penalties for contravention of any of the securities laws, Section 15A to 15HB of the Act provides the Regulator with that power. Section 15HB, particularly, provides for imposition of penalty for contravention where no separate penalty is provided.

Nature of Disgorgement in the Indian context

Traditionally, in India and in the USA, disgorgement has been held to be an equitable remedy (in line with the ordinary meaning of the term), and not a punitive measure. We may note, however, that the distinction between the two terms seems to be blurred upon amendments incorporated to Section 11B of the Act, vide introduction of the Finance Act, 2018. In USA, as well, in Kokeshv. SEC, the Supreme Court of USA expressed a divergent opinion and held disgorgement to be a penalty. In spite of this fact, the SAT in India, seems to consistently hold, and stand by, its perception of disgorgement as an equitable remedy. This is evident from its order in KarvyStock Broking Ltd. v. SEBI, wherein the SAT clarified that disgorgement is not a punishment but a monetary equitable remedy; it is the forced giving up of profits obtained by illegal or unethical acts, with the object of preventing wrongdoers from unjustly enriching themselves. The Tribunal held that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity. Similar views have been taken by the Tribunal in its subsequent orders in Dhaval Mehta v. SEBI and Shailesh S. Jhaveri v. SEBI.

Notwithstanding this debate, we may take note of the judicial precedence in India concerning the imposition and quantification of penalties. The Supreme Court in Hindustan Steel Ltd. vs. State of Orissa had held that the decision of whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion; and even if a minimum penalty may be prescribed, the competent authority will be justified in refusing to impose the penalty. This decision was referred to by the SAT in the case of ShriramMutual Fund vs. SEBI, wherein the order of the AO of SEBI imposing monetary on an asset management company was set aside. The Tribunal, in that case, also took note of the phrase “shall be liable to a penalty” appearing in the relevant sections of the Act, and held that this particular expression does not convey the sense of an absolute obligation or penalty but merely imports a possibility of such obligation or penalty.

Way Forward in respect of the Veeram Order

Evidently, the SAT has held through its past orders that disgorgement is an equitable remedy distinct from a penalty or penal measure. To that extent, WTM of SEBI, in the Veeram Order, has correctly recognised that disgorgement is an equitable remedy and not a penalty. However, to contend that since disgorgement is an equitable remedy, a separate monetary penalty in addition to the amount disgorged can be imposed on the wrongdoer, can be construed to be a drawn-out interpretation, taking into account the facts and circumstances of the case.

In the context of the Veeram Order, having regard to the facts of this particular case, the author believes that if the noticees decide to appeal the WTM Order at the SAT, the Tribunal, as per its stance on this issue in its recent orders, may not accept this line of reasoning of the WTM of SEBI. While disgorgement for executing contra trades is rightfully directed to the noticees, the SAT may decide to reduce or altogether remove the monetary penalty imposed by the WTM on the noticees under Section 15HB of the Act, as the Act does not contain a specific provision for imposition of penalty for executing contra trades, unlike for insider trading or fraudulent and unfair trade practices.

Reference can be made to the findings of the SAT in BhargavRanchhodlal Panchal & Anr. Vs. SEBI, wherein it was held that if imposition of penalty is mandated as a punishment for the failure to comply with the directions issued by the Board, then subsequent failures to comply would result in subsequent recurring punishment directions, further resulting in a piquant situation of creating an endless loop of penalty directions as punishment for failure to comply; this situation was never intended by the Parliament while enacting Section 15HB enabling the Board for repetitive punishment orders for recovering the disgorged amount.

Therefore, the author believes that the scope of Section 15HB is wide and can invite additional penalties for almost any offence for which the Act does not contain a provision for imposition of penalties; however, if it remains the approach of SEBI to issue directions to wrongdoers for both the imposition of monetary penalties under this Section as well as for disgorgement, wrongdoers will have to comply with both directions for almost every offence committed in the securities market. This may be excessive, because generally in cases where disgorgement is applicable, the two-fold objective of compensation to the aggrieved parties and of deterrence to other wrongdoers is already met. To impose an additional monetary penalty in cases where it may not be warranted could cause grave and disproportionate loss to the wrongdoer. For this reason, SEBI must exercise its power to impose penalties with careful consideration and on a discretionary basis, by taking into account the nature and severity of the violation.

Views are personal.