SEBI levying stiff penalty on wrong doers

There was has been a perception, often rightly so, that wrong doers such as market manipulators, inside dealers, front runners, etc. get away relatively easily. Though law provides for stiff penalty, often a relatively token penalty was levied, which had no relation to the amount of gains made at the cost of investors and the credibility of capital markets. However, recently, two orders were passed by SEBI which hopefully may be the beginning of a new trend to set an example of wrong doers whereby not only they are punished but other persons who may be tempted towards committing such wrongs are effectively deterred.

To be clear, SEBI does disgorge the illicit profits made. It also debars parties. But, in financial terms, a mere taking away of such profits made may not be sufficient deterrent even if topped up by a token penalty. If the recent orders represent a new trend, it would be worth watching their track towards closure as well as more of such orders.

The two recent orders are as follows:

1. An order of SEBI levying a stiff penalty of 16th September 2022 was confirmed by the Securities Appellate Tribunal on June 2023. This allegedly involved a case of market manipulation. SEBI had levied a penalty that was much higher than the amount of gains made.
2. Yet again, SEBI has recently on 12th October 2023 levied stiff penalty of alleged insider trading.

There are several aspects to note here. Firstly, there could be appeals against such orders and the appellate authorities may give a different finding of facts/law. Hence, one would have to keep track to the finality of such cases. Secondly, SEBI has wide powers of levy of penalty which is up to 3 times the profits made/losses avoided or Rs. 25 crores, whichever is higher. Such stiff penalty, if levied, can demotivate the wrong doer and also others potential wrong doers.

Several questions though remain. Whether the same proportion of penalty would be justified at higher levels? For example, in these cases, the amounts involved were less than Rs. 1 crore. What if the gains made were, say, Rs. 25 crores. Would a penalty of Rs. 50 or Rs. 75 crores be accepted by appellate authorities? How would such penalty be justified? One will have to see how the future unfolds.

But this is a positive stance taken by SEBI.

Delhi High Court ruling on powers of SFIO

On 15th September 2023, the Delhi High Court gave a ruling that elaborately discussed the scope of powers and also history of the Serious Frauds Investigation Office (SFIO). It may be recollected that the SFIO was given formal recognition under the Companies Act, 2013, though it has powers to investigate a wide range of violations including under various laws. The objective primarily is that a specialized though high level and inter-disciplinary body takes over the investigation of serious frauds. This is instead of multiple bodies carrying on parallel investigation and proceedings with such body collecting some data and documents. The results may hamper the completion of investigation and punishment, where applicable, due to several reasons. Firstly, each body may have different powers, scope and objective. Secondly, each body may collect documents and information which may not be easily available to other bodies. Finally, an outcome/ruling by one body could potentially affect the findings by other bodies.

SFIO, however, has been given powers to take over the investigation and collect all documents and information at one place. It then can summon persons to seek further information and statements. And carry out further investigation. Finally, it gives a report which covers all areas/laws affected by the wrong doing. This gives a clear sense of direction to all bodies how to proceed.

However, and this is the point of the ruling, some parties, for whatever reasons, may seek to intervene in the matter while it is still under investigation by SFIO. For example, complaints may be filed, as is so in this case, under other laws or under the same law but under another provision. The Delhi High Court noted that a further complaint was filed under the same law but under different provisions. There were certain facts as stated in the ruling that the Court made note of which raised doubts in the mind of the Court as to whether the complaint was original or merely a duplicate. In any event, the Court quashed the action initiated under the second complaint.

In this way, the sanctity and exclusivity of the powers of SFIO were maintained.

The ruling thus serves an educative purpose in terms of a comprehensive discussion of the SFIO’s powers and its officially recognized statutory status. More specifically, the principle that parallel/multiple/duplicate proceedings would be not allowed once SFIO takes charge is reinforced.