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Section 24A does not stipulate that the consent of SEBI is necessary: SC

It is evident that Section 24A does not stipulate that the consent of SEBI is necessary for the SAT or the Court before which such proceedings are pending to compound an offence. Where Parliament intended that a recommendation by SEBI is necessary, it has made specific provisions in that regard in the same statute…. (Para 84)


Criminal Appeal No 569 of 2021 (Arising out of SLP (Crl) No. 4728 of 2019)

23rd July 2021

The Divisional Bench of Supreme Court consisting of Justice Dr. Dhananjaya Y Chandrachud, and Justice M.R. Shah disposed of the appeal stating that Sebi is not conferred with any authority to veto a decision for proceeding in trial offences, it is a regulatory and prosecuting agency and the Securities Appellate Tribunal (SAT) and the courts must obtain its views since it is an expert body.

The appellant is being prosecuted for an offence under Section 24(1) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). The appellant sought the compounding of the offence under Section 24A. By an order dated 15 November 2018, the Additional Sessions Judge – 02 Central District at Tis Hazari Courts, Delhi (“Trial Judge”), rejected the application, upholding the objection of the Securities and Exchange Board of India that the offence could not be compounded without its consent. By a judgment of a Single Judge of the High Court of Delhi dated 1 April 2019 the order of the Trial Judge has been affirmed in revision. The High Court has held that the trial has reached the stage of final arguments and the application for compounding cannot be allowed without Securities and Exchange Board of India’s (“SEBI”) consent.

Mr. Shyam Divan, learned Senior Counsel appearing on behalf of the appellant has urged the following submissions:

i. The Chairperson of SEBI in the order under Section 11B dated 22 September 2000 accepted the proposal of the appellant and co-promoters, that they would buy the remaining shares of the Company from the allotees/existing shareholders in the public issue at the rate of Rs 12 per share. This has provided an exit option.

ii. The AO took note of the submission of the acquirers that they had already acquired 99 per cent of the total equity share capital of the Company and were planning to get the scrip de-listed from the rolls of the stock exchanges.

iii. In terms of the order under Section 11B, all the investors were offered an exit route at Rs 12 per share, which was higher than the public issue price of Rs. 10; hence, in the ultimate analysis the AO held that no loss has been caused to any investor.

iv. Contrary to the finding of the High Court, the application for compounding was not filed at the end of the trial but in 2013 after the petition under Section 482 of the CrPC was dismissed by the High Court of Delhi.

v. The promoters are, even at this stage, ready and willing to make a further mop-up offer.

vi. The criminal complaint was filed on 29 March 2000, prior to the order of SEBI’s Chairperson under Section 11B dated 22 September 2000 and the order of the AO dated 19 June 2001, which concluded that no loss has been caused to the investors.

vii. The purpose of the SEBI Act is to ensure the protection of the investors, which has been met by the deposit of penalty.

viii. Section 24A confers adequate powers on Securities Appellate Tribunal (“SAT”) and the Court to compound offences, and there is no provision in the statute for the consent of SEBI. Compounding should be allowed if, after an assessment of the overall facts, there is no reason to deny it.

ix. The order of the Trial Judge is manifestly erroneous when it holds that “there is nothing on record to show that the investors have been duly compensated”. Moreover, the observation that the offence could not be compounded under Section 24A without the consent of SEBI is contrary to the plain terms of the statute which do not contemplate the consent of SEBI; and

x. In the facts of the present case, the application for compounding should be allowed since:

a. The appellant is a senior citizen.

b. The Company has been de-listed on the stock exchanges; and

c. No loss is shown to have been caused to the investors.

Mr. CU Singh, learned Senior Counsel appearing on behalf of SEBI opposed the submissions on the ground that:

i. The criminal complaint which was filed on 29 March 2000 sets out the element of criminality involving:

a. Mis-utilization of the proceeds of the IPO to purchase the shares of the Company through the six related entities.

b. Manipulation of the price of the scrip in which the IPO took place.

c. The artificial increase in the price of the shares of the Company to Rs. 23.5 per share, which was subsequently brought down.

d. The IPO was over-subscribed by four times, which implies that 75 per cent of the applicants were unable to obtain the shares of the Company.

ii. The order of the Chairperson of SEBI dated 22 September 2000, in fact arrived at the following conclusions that the associate concern of IHL were mere front entities of IHL and its promoters and the entire exercise of transfer of public proceeds to associate concerns was for the purchase of its own shares. Transfer of shares is a part of their design to manipulate the price of the shares.

iii. SEBI’s investigation revealed that the Company had mis-utilized the funds which were raised in the IPO for buying back of its own shares. These funds of the public issue were made available to the six entities which were group companies managed by the appellant or to promoters or directors of group companies to purchase the shares. The dealing in the shares of the Company by these entities led to an increase in the price of its shares. The purchases by those entitles also cumulatively constituted almost the entire purchase made at the Delhi Stock Exchange, and a substantial part of the floating stock of the Company. Hence, these entities purchased a substantial equity in the shares of the company without disclosures to the public. Therefore, a violation of the 1995 PFUTP Regulations and of the 1994 Takeover Regulations was found to have been committed. This, in substance, constitutes the basis of the criminal complaint.

iv. The conduct of the appellant is also significant: after the criminal complaint was lodged on 29 March 2000, petitions under Section 482 of the CrPC were filed in 2006-07. They remained pending for seven years, until they were dismissed on 26 August 2013 by the High Court of Delhi. Once the Trial Judge took cognizance of the criminal complaint, the application for compounding was then submitted belatedly on 14 October 2013 when the evidence was being recorded; and

v. A case does not exist for the interference of this Court under Article 136 of the Constitution.

Mr. Mahesh Jethmalani, learned Senior Counsel has intervened in these proceedings and has urged submissions on the issue as to whether the power of compounding offences under Section 24A of the SEBI Act requires the consent of SEBI. Learned Senior Counsel submitted that:

i. Section 24A refers to only two authorities – SAT and a Court – before which the proceedings are pending. Section 24A has no reference to SEBI, and it does not condition the power of the Court or SAT of compounding offences to the prior consent of SEBI.

ii. It is a well settled principle of statutory construction that while interpreting a statutory provision, no addition or subtraction from it is permissible.

iii. The submission of SEBI that its consent is mandatory in order to compound an offence under Section 24A would, if accepted, result in rewriting the provisions of the statute. While considering Section 621-A of the Companies Act, 1956, which was inserted by an amending Act of 1988, this Court in VLS Finance Limited vs Union of India3 (“VLS Finance”) held that in the absence of a requirement of the sanction or prior permission of the Court before an offence is compounded by the Company Law Board, such a requirement of prior permission could not be implied since it would be contrary to the terms of the statute; and

iv. The decision in JIK Industries (supra), 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 offence under Section 138 of the Negotiable Instruments Act, 1888 (“NI Act”). In the case of the NI Act, Section 147 merely states that offences 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 offences.

After hearing the learned counsels, analyzing the Structure of the SEBI Act, SEBI circulars in relation to section 24A, Jurisprudential basis for ‘Compounding’, Regulatory role of SEBI and understanding the facts, the court presented its views that:

In the present case, the nature of the allegations against the appellant are such so as to preclude a decision to compound the offences. We have adverted, in a considerable amount of detail, to the circumstances which have been narrated in the counter affidavit filed by SEBI. We find merit in the submissions which has been urged before the Court by learned Senior Counsel who appeared on behalf of SEBI that the allegations in the present case involved serious acts which impinged upon the protection of investors and the stability of the securities’ market. The observation in the order of adjudication of the Chairperson of the SEBI dated 22 September 2000, that no loss has been caused to the investors as a result of the proposal which was submitted by the promoters to purchase the shares at the rate of Rs 12 per share, would not efface the element of alleged wrong-doing. Such alleged acts of price rigging and manipulation of the prices of the shares have a vital bearing on investors’ wealth and the orderly functioning of the securities market. SEBI was, therefore, justified in opposing the request for the compounding of the offences. The matter was referred to the HPAC constituted by SEBI and presided over by a former judge of the Bombay High Court, which denied the request for compounding. This decision which has been taken by SEBI is not mala fide nor does it suffer from manifest arbitrariness. On the contrary, having due regard to the nature of the allegations, we are of the view that an order for compounding was not warranted. (Para 93)

Therefore concluded,

For the above reasons, we affirm the judgment of the High Court of Delhi, however, for the reasons which have been indicated in this judgment. (Para 94)

Subsequently, the appeal stands disposed of in the above terms.

Swadheen Singh



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