"Due Deference Must Be Given To SEBI's Opinion": Supreme Issues Court Guidelines For Compounding Offences Under Section 24A SEBI Act

The Supreme Court laid down certain guidelines for Securities Appellate Tribunal ("SAT") in the matter of adjudicating an application for compounding of the offence under Section 24A of Securities and Exchange Board of India Act, 1992.The bench comprising Justices DY Chandrachud and MR Shah observed that though the consent of the SEBI for the compounding is not mandatory Court, it must give due deference to opinion. SAT or the Court must have cogent reasons to differ from the opinion provided and should only do so when it believes the reasons provided by SEBI/HPAC are mala fide or manifestly arbitrary, the Court said. The court also added that in the generality of instances, it should rely on the SEBI's opinion as to whether such restitution has taken place.The court also observed that the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24A is private in nature, or it is of a public character, the non-prosecution of which will affect others at large. In latter case, it should not be compounded, even if restitution has taken place.The guidelines issued by the Court are reproduced as such below:(i) They should consider the factors enumerated in SEBI's circular dated 20 April 2007 and the accompanying FAQs, while deciding whether to allow an application for a consent order or an application for compounding. These factors, which are non-exhaustive, are: "Following factors, which are only indicative, may be taken into consideration for the purpose of passing Consent Orders and also in the context of compounding of offences under the respective statute: 1. Whether violation is intentional. 2. Party's conduct in the investigation and disclosure of full facts. 3. Gravity of charge i.e. charge like fraud, market manipulation or insider trading. 4. History of non-compliance. Good track record of the violator i.e. it had not been found guilty of similar or serious violations in the past. 5. Whether there were circumstances beyond the control of the party. 6. Violation is technical and/or minor in nature and whether violation warrants penalty. 7. Consideration of the amount of investors' harm or party's gain. 8. Processes which have been introduced since the violation to minimize future violations/lapses. 9. Compliance schedule proposed by the party. 10. Economic benefits accruing to a party from delayed or avoided compliance.11. Conditions where necessary to deter future noncompliance by the same or another party. 12. Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them. 13. Compliance of the civil enforcement action by the accused. 14. Party has undergone any other regulatory enforcement action for the same violation. 15. Any other factors necessary in the facts and circumstances of the case."According to the circular dated 20 April 2007 and the accompanying FAQs, an accused while filing their application for compounding has to also submit a copy to SEBI, so it can be placed before the HPAC. The recommendation of the HPAC is then filed before the SAT or the Court, as the case may be. As such, the SAT or the Court must give due deference to such opinion. As mentioned above, the opinion of HPAC and SEBI indicates their position on the effect of non-prosecution on maintainability of market structures. Hence, the SAT or the Court must have cogent reasons to differ from the opinion provided and should only do so when it believes the reasons provided by SEBI/HPAC are mala fide or manifestly arbitrary;The SAT or Court should ensure that the proceedings under Section 24A do not mirror a proceeding for quashing the criminal complaint under Section 482 of the CrPC, thereby providing the accused a second bite at the cherry. The principle behind compounding, as noted before in this judgment, is that the aggrieved party has been restituted by the accused and it consents to end the dispute. Since the aggrieved party is not present before the SAT or the Court and most of the offences are of a public character, it should be circumspect in its role. In the generality of instances, it should rely on the SEBI's opinion as to whether such restitution has taken place; and Finally, the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24A is private in nature, or it is of a public character, the non-prosecution of which will affect others at large. As such, the latter should not be compounded, even if restitution has taken place.The bench laid down these guidelines in its judgment in an appeal against the Delhi High Court by which the accused's application under Section 24A of the SEBI Act for compounding of offences was declined.Background"The SEBI is not a regular complainant, it is the custodian of the investors' interests, it is a regulatory body! Great importance has to be accorded to SEBI in compounding offences. But to lift it to a point where ...

"Due Deference Must Be Given To SEBI's Opinion": Supreme Issues Court Guidelines For Compounding Offences Under Section 24A SEBI Act

Mehal Jain

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