Basic Idea Behind Disgorgement Is Restitution: SAT Allows Investors' Plea For Compensation

The Securities Appellate Tribunal (SAT) has directed SEBI in a case to compensate victims of an investor fraud scheme by utilising funds either from the disgorgement money received from the wrongdoer, or from its 'Investor Protection and Education Fund'.

The SAT is a tribunal that hears appeals against SEBI rulings.

The direction by SAT came on an appeal filed by two investors, husband and wife, challenging a SEBI order dated 28^th September, 2018. By the said order Vital Communications Limited ('VCL' for short) and certain other entities had been directed to disgorge unlawful gain of over Rs. 4.5 cr. with interest @ 10% per annum for violating various provisions of the SEBI pertaining to prohibition of fraudulent and unfair trade practices.

The investors had invested an amount of Rs. 18,25,041/- in buying the shares of VCL in 2002. On finding out that VCL was indulging in misleading and fraudulent advertisements, the investors filed a complaint with the Securities Tribunal. The SAT vide an order dated 30^th April, 2013, had directed that in case VCL was found guilty of playing fraud on the investors, SEBI may direct VCL to refund the actual amount spent by the Appellants on purchasing the shares in question along with an appropriate interest.

It was the investors' grievance that despite a clear direction of the Tribunal directing SEBI to refund the amount spent by the investors on purchasing VCL's shares, SEBI had passed only a disgorgement order against the VCL and the connected entities, with no direction to pay any amount to the appellants.

Disgorgement is an equitable remedy of repayment of ill-gotten gains that is imposed on wrongdoers, designed to deter future violations of the securities laws. Restitution ensures that the amount by which the wrongdoers were unjustly enriched, is returned to the victims of the wrongdoings.

The investors pressed that it was on the basis of their information to SEBI as well as approach to the National Consumer Disputes Redressal Commission (NCDRC), SEBI and SAT multiple times that SEBI found out about VCL's fraudulent activities. However, despite their efforts and clear direction of the SAT, they were not compensated.

In its defense SEBI submitted that it was not feasible to provide for restitution to a large number of investors who had invested in the secondary market and as there may be a large number of affected investors, and restitution to investors as a class is a complex task beyond the capacity of SEBI.

The Tribunal was however not impressed by SEBI's contentions. The SAT bench observed that according to the direction contained in its order dated 30^th April, if violation by the VCL was proved then the investors' claim was to be considered as per law. The Tribunal clarified that the direction in the April 30 order had to be placed in the context of the order issued by SEBI whereby VCL and other entities had been ordered to disgorge an amount of approx. Rs. 4.5 cr.

The Tribunal held that:

"The basic idea behind disgorgement is restitution. In the given context, we are of the view that as an investor protection measure the appellants needs to be compensated, since disgorgement without restitution does not serve any purpose."

In view of the above, the Tribunal directed SEBI to compensate the investors by Rs. 18,25,041/-, i.e. the amount they invested in the shares of VCL in 2002. However, no interest on the amount was allowed since the bench was of the view that the investors should also bear part of the risk of investing in the securities market.

While partly allowing the appeal, SAT directed SEBI to pay the compensation amount either from the amount being disgorged from VCL and connected entities or from SEBI's Investor Protection and Education Fund within a period of three months.

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