LEGAL ISSUE: Whether the Securities Appellate Tribunal (SAT) or a court can compound an offense under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) without the consent of the Securities and Exchange Board of India (SEBI).
CASE TYPE: Securities Law, Criminal
Case Name: Prakash Gupta vs. Securities and Exchange Board of India
Judgment Date: 23 July 2021
Introduction
Date of the Judgment: 23 July 2021
Citation: 2021 INSC 447
Judges: Dr. Dhananjaya Y Chandrachud, J., M R Shah, J.
Can a court allow the compounding of offenses under the SEBI Act without the consent of SEBI? This was the central question before the Supreme Court in a recent case. The court was tasked with interpreting Section 24A of the SEBI Act, which deals with the compounding of offenses. The core issue revolved around whether SEBI’s consent is mandatory for compounding an offense under the Act.
The Supreme Court bench, comprising Justices Dr. Dhananjaya Y Chandrachud and M.R. Shah, delivered the judgment. Justice Dr. Dhananjaya Y Chandrachud authored the opinion for the bench.
Case Background
The case involves Prakash Gupta, a director and promoter of Ideal Hotels & Industries Limited, a company that owns a 3-star hotel in Varanasi. The company, initially a private limited entity, became a public limited company in 1994. In 1995, the company launched an Initial Public Offer (IPO) of 38 lakh equity shares at ₹10 per share.
In June 1996, SEBI received a complaint alleging that certain brokers, on the instructions of the company, had purchased its shares, leading to outstanding deliveries in the grey market. An anonymous complaint in October 1996 alleged price rigging and insider trading in the company’s scrip. SEBI initiated an investigation in February 1999, focusing on the period between January 28, 1996, and February 29, 1996, just before the company’s listing. During this period, the share price moved from ₹11.25 to ₹23.25, with unusually high trading volumes.
SEBI’s investigation revealed that six entities had purchased approximately 51% of the IPO shares, and ultimately 75% of the post-issue floating stock. These entities were found to be related to the company and its directors, with the appellant managing their day-to-day affairs. Funds for these purchases, amounting to ₹4.5 to 5 crores, came from either the IPO proceeds or inter-corporate deposits raised on the personal guarantees of the appellant.
SEBI issued summons to the appellant in August 1999 for potential violations of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations of 1994 and 1997. An Adjudicating Officer (AO) was appointed in November 1999. Before the AO’s decision, SEBI filed a criminal complaint in March 2000, alleging violations of the 1995 PFUTP Regulations and the 1994 Takeover Regulations, punishable under Sections 24 and 27 of the SEBI Act.
In September 2000, SEBI’s Chairperson ordered the promoters to make an offer to purchase shares from non-promoter shareholders at ₹12 per share. The promoters acquired shares, raising their holding to about 95% of the company, which was subsequently delisted. The AO, in June 2001, found the appellant had violated the 1997 Takeover Regulations but noted that investors had not incurred any loss due to the buyback offer. The AO imposed a penalty of ₹20,000 on the appellant and two co-promoters, which was paid.
Following SEBI’s criminal complaint, the Additional Chief Metropolitan Magistrate summoned the accused in 2000. The appellant filed a petition under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) in 2006-07 to quash the complaint, which was dismissed in 2013.
Timeline
| Date | Event |
|---|---|
| 17 December 1985 | Ideal Hotels & Industries Limited incorporated as a private limited company. |
| 4 May 1994 | Company status changed to public limited. |
| 6 October 1995 | Prospectus for IPO issued. |
| 15 November 1995 | IPO opens. |
| 24 November 1995 | IPO closes. |
| 27 June 1996 | SEBI receives complaint from Mr. Vijay Miglani. |
| October 1996 | SEBI receives an anonymous complaint. |
| 2 February 1999 | SEBI initiates investigation against the Company. |
| 7 June 1999 | Appellant admits to SEBI about entities related to the company. |
| 24 August 1999 | SEBI issues summons to the appellant under Section 11(3) of the SEBI Act. |
| 18 November 1999 | SEBI appoints an Adjudicating Officer (AO). |
| 29 March 2000 | SEBI files a criminal complaint against the appellant. |
| 22 September 2000 | SEBI’s Chairperson passes an order under Section 11B. |
| 19 June 2001 | AO passes an order, levying a penalty of Rs. 20,000 on the appellant. |
| 2006-2007 | Appellant files proceedings under Section 482 of CrPC. |
| 26 August 2013 | High Court dismisses the petition under Section 482 of CrPC. |
| 12 September 2013 | Appellant files a ‘consent application’ with SEBI. |
| 27 September 2013 | SEBI returns the consent application. |
| 14 October 2013 | Appellant files an application under Section 24A of the SEBI Act. |
| 7 May 2016 | HPAC recommends that the offences should not be compounded. |
| 6 November 2017 | Appellant files an application before the Trial Judge to decide the compounding application before further evidence. |
| 15 November 2018 | Trial Judge dismisses the compounding application. |
| 1 April 2019 | High Court of Delhi dismisses the revision petition. |
| 23 July 2021 | Supreme Court delivers its judgment. |
Arguments
Appellant’s Submissions
The appellant, represented by Mr. Shyam Divan, argued that:
- ✓ The Chairperson of SEBI, in an order under Section 11B of the SEBI Act, accepted the appellant’s proposal to buy back shares from existing shareholders at ₹12 per share, providing an exit option to investors.
- ✓ The Adjudicating Officer (AO) acknowledged that the acquirers had acquired 99% of the company’s equity and were planning to delist the company from stock exchanges.
- ✓ The AO noted that all investors were offered an exit route at ₹12 per share, which was higher than the IPO price of ₹10, and therefore, no loss was caused to any investor.
- ✓ The application for compounding was filed in 2013, not at the end of the trial, after the High Court dismissed the petition under Section 482 of the CrPC.
- ✓ The promoters are willing to make a further mop-up offer even at this stage.
- ✓ The criminal complaint was filed before the SEBI Chairperson’s order under Section 11B and the AO’s order, which concluded that no loss was caused to investors.
- ✓ The purpose of the SEBI Act is to protect investors, which has been met by the deposit of penalty.
- ✓ Section 24A of the SEBI Act confers adequate powers on the Securities Appellate Tribunal (SAT) and the Court to compound offenses, without requiring SEBI’s consent.
- ✓ The Trial Judge’s order is erroneous in stating that there is no record to show investors have been compensated and that SEBI’s consent is mandatory.
- ✓ The application for compounding should be allowed because the appellant is a senior citizen, the company has been delisted, and no loss was caused to investors.
SEBI’s Submissions
SEBI, represented by Mr. CU Singh, opposed the submissions, arguing that:
- ✓ The criminal complaint sets out criminality involving the misutilization of IPO proceeds to purchase the company’s shares through six related entities, manipulation of the share price, and artificial increase in the share price.
- ✓ The SEBI Chairperson’s order concluded that the associate concerns were mere front entities of the company and its promoters, and the transfer of public funds was for the purchase of its own shares.
- ✓ SEBI’s investigation revealed that the company had misused IPO funds to buy back its own shares through entities managed by the appellant, leading to an artificial increase in the share price.
- ✓ The appellant’s conduct is significant, as petitions under Section 482 of the CrPC were filed in 2006-07 and remained pending for seven years, while the application for compounding was submitted belatedly in 2013 when evidence was being recorded.
- ✓ There is no case for the Supreme Court’s interference under Article 136 of the Constitution.
Intervenor’s Submissions
Mr. Mahesh Jethmalani, intervening in the proceedings, submitted that:
- ✓ Section 24A of the SEBI Act refers only to SAT and the Court, not SEBI, and does not condition the power of the Court or SAT to compound offenses on SEBI’s prior consent.
- ✓ It is a well-settled principle of statutory construction that no addition or subtraction from a statutory provision is permissible.
- ✓ The submission that SEBI’s consent is mandatory would result in rewriting the statute.
- ✓ The decision in JIK Industries Limited vs Amarlal v. Jumani [(2012) 3 SCC 255] is an authority for the principle that a scheme under Section 391 of the Companies Act, 1956, does not amount to the compounding of an offense under Section 138 of the Negotiable Instruments Act, 1888 (“NI Act”). In the case of the NI Act, Section 147 merely states that offenses under the Act shall be compoundable, whereas Section 24A of the SEBI Act specifically provides for the power of SAT and the Court to compound offenses.
Submissions Table
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Buyback of Shares and Investor Exit | SEBI Chairperson’s order provided an exit option at ₹12 per share. | Appellant |
| AO acknowledged that acquirers held 99% of the equity and planned delisting. | Appellant | |
| No loss to investors due to buyback at ₹12 per share. | Appellant | |
| Promoters are willing to make a further mop-up offer. | Appellant | |
| Timing of Compounding Application | Application filed in 2013 after dismissal of Section 482 petition. | Appellant |
| Criminal complaint filed before SEBI orders finding no loss to investors. | Appellant | |
| Application was submitted belatedly in 2013 when evidence was being recorded. | SEBI | |
| Purpose of SEBI Act | Protection of investors met by deposit of penalty. | Appellant |
| SEBI Act aims to protect investors and ensure market stability. | SEBI | |
| Interpretation of Section 24A | Section 24A confers powers on SAT and Court without SEBI’s consent. | Appellant |
| Section 24A does not require SEBI’s consent for compounding. | Intervenor | |
| Basis of Criminality | Criminality involved misutilization of IPO funds, price manipulation. | SEBI |
| Associate concerns were front entities for buying own shares. | SEBI | |
| Conduct of Appellant | Petitions under Section 482 of CrPC remained pending for seven years. | SEBI |
Issues Framed by the Supreme Court
The Supreme Court considered the following key issue:
- Whether the power to compound offenses under Section 24A of the SEBI Act requires the consent of SEBI.
Treatment of the Issue by the Court
| Issue | Court’s Treatment |
|---|---|
| Whether the power to compound offenses under Section 24A of the SEBI Act requires the consent of SEBI. | The Court held that while Section 24A does not explicitly require SEBI’s consent, the views of SEBI as an expert regulator must be considered by the SAT or the Court. The Court clarified that SEBI does not have a veto power but its views are entitled to a degree of deference. |
Authorities
Cases
The Court considered the following cases:
| Case Name | Court | Legal Point | How the Authority was used |
|---|---|---|---|
| JIK Industries Limited vs Amarlal v. Jumani [ (2012) 3 SCC 255] | Supreme Court of India | Compounding of offenses under the Negotiable Instruments Act, 1888. | The Court distinguished the case, noting that Section 147 of the NI Act is different from Section 24A of the SEBI Act. The court held that the judgment in JIK Industries was not applicable to the present case because the statutory provisions are not in pari materia. |
| VLS Finance Limited vs Union of India [ (2013) 6 SCC 278] | Supreme Court of India | Interpretation of Section 621-A of the Companies Act, 1956. | The Court relied on this case to emphasize that statutory provisions should be interpreted without adding or subtracting words. The Court held that the powers under sub-Sections (1) and (7) of Section 621-A were held to be parallel powers to be exercised by the CLB or the authorities mentioned, and the prior permission of the Court was not necessary for compounding an offence when the power was exercised by the CLB. |
| Damodar S Prabhu vs Sayed Babalal H [2010 5 SCC 663] | Supreme Court of India | Compounding of offenses under Section 147 of the NI Act. | The Court noted that the Damodar S Prabhu case clarified that the scheme under Section 320 CrPC cannot be strictly followed for compounding offences under the NI Act. However, it also noted that JIK Industries held that the guidelines of Section 320 CrPC cannot be wished away. |
| Meters and Instruments Pvt. Ltd. vs Kanchan Mehta [ (2018) 1 SCC 560] | Supreme Court of India | Nature of offense under Section 138 of the NI Act. | The Court noted that this case observed that an offense under Section 138 of the NI Act is primarily a civil wrong. However, this case was later overruled by the Constitution Bench. |
| Re: Expeditious Trial of cases under Section 136 of Negotiable Instruments Act 1881 in Suo Motu Writ Petition (Crl) No. 2 of 2020 | Supreme Court of India | Power of Magistrate to discharge accused under Section 138 of NI Act. | The Court noted that this Constitution Bench overruled the view in Meters and Instruments (supra), holding that the Trial Court does not have the power to discharge an accused based on compensation to the complainant. |
| N H Securities Limited vs Securities and Exchange Board of India [2018 SCC OnLine Bom 4040] | Bombay High Court | Consent of SEBI for compounding under Section 24A. | The Court noted that this case held the consent of SEBI was necessary for compounding under Section 24A. However, the Supreme Court did not comment on this issue in its order. |
| Biswabahan Das vs Gopen Chandra Hazarika [AIR 1967 SC 895] | Supreme Court of India | Principle underlying Section 320 of CrPC. | The Court noted that this case held that the principle underlying Section 320 is that wrongs of certain classes which affects the person mainly in their individual capacity or character may be sufficiently redressed by compounding. |
| Sheonandan Paswan vs State of Bihar [(1987) 1 SCC 288] | Supreme Court of India | Interpretation of Section 321 of CrPC. | The Court referred to this case to draw an analogy between Sections 320 and 321, noting that both sections confer a supervisory power on the court in the matter of compounding of offenses. |
| Keir vs F. Leeman and Pearson [ (1844) 6 Queen’s Bench Reports 308] | Queen’s Bench | Compromise of offences of a public nature. | The Court noted that this case held that if the offence is of a public nature, no agreement can be valid that is founded on the consideration of stifling a prosecution for it. |
| Public Prosecutor vs Norzian bin Bintat [1995] SGHC 207 | Singapore High Court | Public interest in compounding offences. | The Court noted that this case held that in a case where the public interest is involved, it is proper to withhold consent to composition. |
| Union of India vs Rajiv Kumar [ (2003) 6 SCC 516] | Supreme Court of India | Principles of statutory interpretation. | The Court relied on this case to emphasize that the court interprets the law and cannot legislate it. It also stated that the legislative casus omissus cannot be supplied by judicial interpretative process. |
| Sahara India Real Estate Corporation Ltd. vs SEBI [ (2013) 1 SCC 1] | Supreme Court of India | History and role of SEBI. | The Court referred to this case to highlight the importance of SEBI as a regulatory body and its role in protecting investors. |
| B S E Brokers’ Forum vs Securities and Exchange Board of India [ (2001) 3 SCC 482] | Supreme Court of India | Powers and functions of SEBI. | The Court relied on this case to appreciate the extent of the powers and functions that had been entrusted with the SEBI. |
| SEBI vs Kishore R Ajmera [ (2016) 6 SCC 368] | Supreme Court of India | Purpose of SEBI Act and Regulations. | The Court referred to this case to highlight that the SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market. |
| Securities and Exchange Board of India vs Ajay Agarwal [ (2010) 3 SCC 765] | Supreme Court of India | Scope of SEBI’s powers under Section 11(B). | The Court referred to this case to emphasize the special nature of the legislation and implored the Courts to exercise their interpretative role in a manner that furthers SEBI’s statutory objectives. |
Legal Provisions
The Court considered the following legal provisions:
| Legal Provision | Statute | Description |
|---|---|---|
| Section 24(1) | Securities and Exchange Board of India Act, 1992 | Specifies the punishment for contravention of the provisions of the Act or any rules or regulations made thereunder. |
| Section 24A | Securities and Exchange Board of India Act, 1992 | Provides for the compounding of certain offenses under the Act. |
| Section 24B(1) | Securities and Exchange Board of India Act, 1992 | Empowers the Union Government to grant immunity from prosecution on the recommendation of SEBI. |
| Section 11 | Securities and Exchange Board of India Act, 1992 | Stipulates the functions of SEBI. |
| Section 11B | Securities and Exchange Board of India Act, 1992 | Empowers SEBI to issue directions and levy penalties. |
| Section 15A, 15C, 15D, 15F, 15G, 15H, 15HA, 15HAA, 15HB | Securities and Exchange Board of India Act, 1992 | Specifies the penalties for various defaults. |
| Section 15-I | Securities and Exchange Board of India Act, 1992 | Provides the power to adjudicate. |
| Section 15JB | Securities and Exchange Board of India Act, 1992 | Provides for the settlement of administrative and civil proceedings. |
| Section 15T | Securities and Exchange Board of India Act, 1992 | Provides for an appeal to SAT. |
| Section 15Z | Securities and Exchange Board of India Act, 1992 | Provides for an appeal to the Supreme Court. |
| Section 26 | Securities and Exchange Board of India Act, 1992 | Stipulates that no court shall take cognizance of any offense punishable under this Act save on a complaint made by the Board. |
| Section 27 | Securities and Exchange Board of India Act, 1992 | Provides for contraventions by companies. |
| Section 213, 214 | Indian Penal Code, 1860 | Defines the offense of taking gifts or offering gifts to screen an offender from punishment. |
| Section 320 | Code of Criminal Procedure, 1973 | Provides for the compounding of offenses. |
| Section 147 | Negotiable Instruments Act, 1888 | States that every offense punishable under this Act shall be compoundable. |
| Section 621-A | Companies Act, 1956 | Provides for the composition of certain offenses under the Act. |
Judgment
Treatment of Submissions
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that the buyback offer provided an exit option to investors and no loss was caused. | The Court acknowledged the buyback offer but held that it did not negate the alleged wrongdoing of price rigging and manipulation. |
| Appellant’s submission that the application for compounding was filed in 2013, not at the end of the trial. | The Court acknowledged the timeline but emphasized the seriousness of the allegations and the fact that the application was filed after a delay. |
| Appellant’s submission that Section 24A confers adequate powers on SAT and the Court without requiring SEBI’s consent. | The Court agreed that Section 24A does not mandate SEBI’s consent but held that the views of SEBI as an expert regulator must be considered. |
| SEBI’s submission that the criminal complaint sets out elements of criminality involving misutilization of IPO funds and price manipulation. | The Court found merit in SEBI’s submission, stating that the allegations involved serious acts that impinged upon investor protection and market stability. |
| SEBI’s submission that the appellant’s conduct was significant, as petitions were filed in 2006-07 and remained pending. | The Court acknowledged the delay in filing the compounding application, emphasizing the seriousness of the allegations. |
| Intervenor’s submission that Section 24A does not require SEBI’s prior consent. | The Court agreed that Section 24A does not explicitly require SEBI’s consent but clarified that SEBI’s views must be considered. |
Treatment of Authorities
The Court’s view on the authorities cited:
- ✓ The Court distinguished the case of JIK Industries Limited vs Amarlal v. Jumani [(2012) 3 SCC 255], noting that Section 147 of the NI Act is different from Section 24A of the SEBI Act.
- ✓ The Court relied on VLS Finance Limited vs Union of India [(2013) 6 SCC 278] to emphasize that statutory provisions should be interpreted without adding or subtracting words.
- ✓ The Court noted that Damodar SPrabhu vs Sayed Babalal H [2010 5 SCC 663] clarified that the scheme under Section 320 CrPC cannot be strictly followed for compounding offences under the NI Act.
- ✓ The Court noted that the view in Meters and Instruments Pvt. Ltd. vs Kanchan Mehta [ (2018) 1 SCC 560] was overruled by the Constitution Bench.
- ✓ The Court referred to Re: Expeditious Trial of cases under Section 136 of Negotiable Instruments Act 1881 in Suo Motu Writ Petition (Crl) No. 2 of 2020 to note that the Trial Court does not have the power to discharge an accused based on compensation to the complainant.
- ✓ The Court noted that N H Securities Limited vs Securities and Exchange Board of India [2018 SCC OnLine Bom 4040] held that SEBI’s consent was necessary for compounding under Section 24A, without commenting on this issue.
- ✓ The Court referred to Biswabahan Das vs Gopen Chandra Hazarika [AIR 1967 SC 895] to note the principle underlying Section 320 of CrPC.
- ✓ The Court referred to Sheonandan Paswan vs State of Bihar [(1987) 1 SCC 288] to draw an analogy between Sections 320 and 321 of CrPC.
- ✓ The Court referred to Keir vs F. Leeman and Pearson [ (1844) 6 Queen’s Bench Reports 308] to note the principle that no agreement can be valid that is founded on the consideration of stifling a prosecution for an offence of public nature.
- ✓ The Court referred to Public Prosecutor vs Norzian bin Bintat [1995] SGHC 207 to note that in a case where the public interest is involved, it is proper to withhold consent to composition.
- ✓ The Court relied on Union of India vs Rajiv Kumar [ (2003) 6 SCC 516] to emphasize that the court interprets the law and cannot legislate it.
- ✓ The Court referred to Sahara India Real Estate Corporation Ltd. vs SEBI [ (2013) 1 SCC 1] to highlight the importance of SEBI as a regulatory body and its role in protecting investors.
- ✓ The Court relied on B S E Brokers’ Forum vs Securities and Exchange Board of India [ (2001) 3 SCC 482] to appreciate the extent of the powers and functions that had been entrusted with the SEBI.
- ✓ The Court referred to SEBI vs Kishore R Ajmera [ (2016) 6 SCC 368] to highlight that the SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market.
- ✓ The Court referred to Securities and Exchange Board of India vs Ajay Agarwal [ (2010) 3 SCC 765] to emphasize the special nature of the legislation and implored the Courts to exercise their interpretative role in a manner that furthers SEBI’s statutory objectives.
Ratio Decidendi
The Supreme Court held that:
- ✓ Section 24A of the SEBI Act does not explicitly require the consent of SEBI for compounding an offense.
- ✓ However, the views of SEBI, as an expert regulator, must be considered by the SAT or the Court while deciding whether to compound an offense.
- ✓ SEBI’s views are entitled to a degree of deference due to its role in regulating the securities market, but SEBI does not have a veto power in compounding offenses.
- ✓ The power to compound offenses under Section 24A is vested in the SAT or the Court, and they must exercise this power judiciously, considering the nature of the offense, its impact on investors, and the public interest.
- ✓ The Court emphasized that the compounding of offenses should not be allowed if it undermines the integrity of the securities market or the protection of investors.
Final Order
The Supreme Court set aside the orders of the Trial Judge and the High Court, which had rejected the appellant’s application for compounding. The Court directed the Trial Judge to consider the application for compounding afresh, taking into account the observations made in the judgment, and to seek and consider the views of SEBI.
The Court clarified that the Trial Judge should consider the nature of the offense, its impact on investors, the public interest, and the views of SEBI before deciding whether to compound the offense.
Flowchart of Compounding Process
Implications
This judgment has significant implications for stakeholders in the securities market:
- ✓ Clarity on Compounding: The judgment clarifies that while SEBI’s consent is not mandatory for compounding offenses under Section 24A of the SEBI Act, its views must be considered by the SAT or the Court.
- ✓ Role of SEBI: It reaffirms SEBI’s role as an expert regulator in the securities market, whose views are entitled to a degree of deference.
- ✓ Judicial Discretion: The SAT or the Court retains the power to decide on compounding offenses, considering the nature of the offense, its impact on investors, and the public interest.
- ✓ Investor Protection: The judgment underscores the importance of investor protection and the integrity of the securities market in the decision-making process for compounding offenses.
- ✓ Balance of Powers: It strikes a balance between the powers of SEBI and the judicial authorities in the matter of compounding offenses under the SEBI Act.