On July 22, the Supreme Court of India (SC) in the matter of Prakash Gupta v. SEBI while interpreting Section 24A of the Securities and Exchange Board of India Act, 1992 (SEBI Act), held that the power to compound offences under Section 24A of the SEBI Act rests exclusively with the Securities Appellate Tribunal (SAT) or a court before which such proceedings are pending and SEBI’s consent for compounding offences is not mandatory. However, the SC opined that SAT or the concerned courts must seek and consider the view of SEBI on matters related to the compounding of offences.
Compounding of an offence under Section 24A allows a guilty person to avoid a lengthy process of criminal prosecution by paying compounding charges and complying with other directions that may be passed by the concerned court. It is akin to settlement proceedings under the SEBI (Settlement Proceedings) Regulations, 2018 (Settlement Regulations), wherein, administrative or civil proceedings are settled. Section 24A provides that any offence punishable under the SEBI Act, not being an offence punishable with imprisonment only or with imprisonment and fine, may either before or after the institution of any proceedings, be compounded by the SAT or court before which such proceedings are pending.
With respect to the present matter, in 2000, SEBI had inter alia initiated criminal prosecution against a director and promoter of Ideal Hotels & Industries Ltd., Mr Prakash Gupta (Mr Gupta), for alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. Thereafter, in 2013, Mr Gupta filed an application under Section 24A with the concerned criminal court, seeking the compounding of the offences in the criminal complaint filed by SEBI against him. After examining the matter, SEBI recommended to the criminal court that the offences committed by Mr Gupta should not be compounded given the gravity of the violations. Thereafter, the criminal court dismissed the compounding application of Mr Gupta on the grounds that an offence cannot be compounded without the consent of SEBI. Subsequently, the decision of the trial court was upheld by the High Court of Delhi. Being aggrieved by the same, Mr Gupta filed an appeal before the SC.
The basic question that arose before the SC was whether the consent of SEBI was necessary for the compounding of offences under Section 24A of the SEBI Act. In the judgement, the SC firstly, held that the power to compound offences under Section 24A, exclusively rests with the SAT or the courts and obtaining the consent of SEBI for compounding offences is not mandatory. Secondly, SAT or the courts shall mandatorily take into consideration the recommendations/views of SEBI while determining an application for compounding of offences, unless SEBI’s views are manifestly arbitrary and mala fide. Being the regulator of the capital markets, SEBI can provide an expert view on the nature and gravity of an offence and its impact on the protection of investors and the stability of the securities market. Further, the SC opined that if a court diverges from SEBI’s recommendations/views, it must have cogent reasons for the same. Thirdly, to streamline the compounding process, the SC laid down a set of broad guidelines for compounding under Section 24A for the SAT and concerned courts.
Further, in the judgement, the SC inter alia opined that courts while determining whether to compound an offence should consider the impact of the offence on the public at large and whether the non-prosecution of the same can have larger negative ramifications for society. Further, the SC emphasized that courts should always attempt to further the statutory role of SEBI, a financial sector regulator with wide regulatory powers and market expertise. In its guidelines for compounding offences, the SC has broadly provided that:
- A person who wishes to compound an offence must file an application for the same with the criminal court where a complaint has been filed against him by SEBI.
- The person must send a copy of the application to the Prosecution Division, Enforcement Department of SEBI.
- SEBI should review the matter and provide its recommendations (terms of compounding or its objections to the compounding of the offences) to the court for its consideration.
- The court must consider the recommendations/views of SEBI. Further, the Court must take into account the indicative factors listed out in SEBI’s circular dated April 20, 2007, and accompanying FAQ on “Consent Orders & Compounding of Offences” dated April 20, 2007. Such factors inter alia include the gravity of the alleged violations, track record of the violater, harm caused to investors, etc. It is to be noted that the aforementioned SEBI circular was rescinded post the coming into force of the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014.
- In the event the court differs from the recommendations/views of SEBI, the Court should have cogent reasons for the same.
- While determining whether to allow the compounding of an offence, the court should assess whether the offence is private or public in nature and whether non-prosecution of the violater can affect the public at large. Further, the latter should not be compounded even if restitution has taken place.
In the present matter, the SC dismissed the appeal and upheld the decision of the lower courts as the SC considered the offences committed by Mr Gupta to be grave in nature which adversely impacted investor protection and the stability of the securities market.
The SC through its judgement has clarified that though SEBI’s consent is not mandatory, the regulator’s recommendation/view must be solicited and considered by SAT and concerned courts while determining whether to compound an offence under Section 24A. Further, the SC’s guidelines will help courts to better deal with matters related to the compounding of offences.