"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 without its consent, there can be no compounding and where the SEBI can veto any compounding, I have my doubts", expressed Justice D. Y. Chandrachud during the hearing.

The bench of Justices Chandrachud and M. R. Shah was considering an SLP arising out of an April, 2019 order of the Delhi High Court by which the petitioner's application under Section 24A of the SEBI Act for compounding of offences (where the allegations against the petitioner are of artificially jerking the price of the share of petitioner's company) was declined. It may be noted that after the SEBI informed that it did not consent to the compounding of the offence, the Trial court, in the instant case, had rejected the petitioner's application under Section 24A while relying upon Supreme Court's decision in JIK Industries Ltd. (2012)where a2-judge bench had held that obtaining the consent of the complainant to compound an offence for dishonour of a cheque is sacrosanct, and that cannot be wished away by Section 147 of the NI Act (which says that notwithstanding anything contained in the CrPC, every offence punishable under this Act shall be compoundable).

In the impugned order, the Delhi High Court noted that the Supreme Court, in the 2017 Meters and Instruments case, had declared that for compounding in proceedings under Section 138 of NI Act, consent of both parties is not required and even in the absence of such consent, the court, in the interest of justice, can in its discretion close the proceedings and discharge the accused. However, the High Court rejected the application for compounding and disposed off the revision petition, observing that compounding cannot be allowed at the fag-end of the trial- "No doubt, that petitioner had filed an application for compounding way back in the year 2013 and it remained pending, but now, the proceedings before the trial court have reached the stage of final arguments. Compounding at the initial stage has to be encouraged, but not at the final stage. The object of the SEBI Act has to be kept in mind. A stable and orderly functioning of the securities market has to be ensured. It will not be in the interest of justice to discharge the accused at the final stage of the proceedings by allowing the application for compounding without the consent of SEBI Act as it will defeat the objective of the SEBI Act. Though the Adjudicating Officer has found that the alleged violation committed by petitioner has not resulted in any loss to the investors, but this by itself would not justify discharge of accused at the fag end of trial", the High Court said.

Section 24A of the SEBI Act provides that notwithstanding anything contained in the CrPC, any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

"Compounding has the effect of acquittal, it has the effect of dropping the charges. But compounding means that you are admitting the charges, you are admitting the guilt that you have done the offence, and on paying a certain amount, you are let go. Compounding is like plea-bargaining. Even if consent of the SEBI may not be sine qua non for the compounding of an offence, but its concerns have to be heard. Its voice has to be heard if the court is permitting compounding or even if the court is imposing any additional conditions", observed Justice Shah.

"And the SEBI is not a regular complainant, it is the custodian of the investors' interests, it is a regulatory body!", agreed Justice Chandrachud.

But the judge continued to note, "Compounding is the mirror-image of a compromise in civil law. Great importance has to be accorded to SEBI in compounding offences, yes! But to lift it to a point where without its consent, there can be no compounding and where the SEBI can veto any compounding, I have my doubts"

"Section 24A does begin with 'notwithstanding anything contained in the CrPC'. So it seeks to override section 320, CrPC", remarked Justice Chandrachud. It may be noted that section 320, CrPC provides for the compounding of specified IPC offences with the consent of a specified person (who may be the victim/complainant/aggrieved person), with or without the intervention of the court

"In the facts at hand, if we finally decide that no case for compounding is made out, then we may only add a line that the fact that SEBI had refused its consent for compounding need not be gone into. But if we say that the offence in the present case can be compounded, then we will have to squarely deal with the issue", said Justice Chandrachud.

However, the judge also stated, "We can say that the power of compounding under section 24A has to be exercised in public interest. After all, these are not private offences. The power under section 24A of the SEBI Act has to be exercised in the spirit of the Act. The objects of the SEBI Act are to protect the investors' interests and to ensure a stable securities market. The courts have to consider whether in exercising the power of compounding, the Act would be defeated"

Case: Prakash Gupta vs. Securities and Exchange Board of India [CrA 569 of 2021]

Coram: Justices DY Chandrachud and MR Shah

Counsel: Sr. Adv Shyam Divan, Sr. Adv CU Singh, Sr. Adv Mahesh Jethmalani

Citation: LL 2021 SC 320

Click here to download the Judgment