Author – Arzoo Srivastava, Student at National Law Institute University, Bhopal

Abstract

Compounding of an offence simply means entering into a compromise where the victim agrees to drop charges against the accused. Under the SEBI Act, only those offences that are not only punished by imprisonment or by imprisonment and a fine can be compounded. Under Section 24A of the SEBI Act, the accused can compound its offence by paying a fine or by any other mode that is prescribed by the SAT or the court in which the proceedings are taking place. In the case that we are discussing here, criminal proceedings were initiated against Mr. Prakash Gupta for violating 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. When, in 2013, Mr. Prakash Gupta submitted an application for compounding his offence, the court denied it on the grounds that the offence can’t be compounded without the consent of SEBI. Now, the point of contention was whether the consent of SEBI is required for compounding an offence or not. The author discusses the details of the case, brief facts, arguments from both sides, and the judgement of the Hon’ble Supreme Court in the above-mentioned matter.

Details of the Case

Case Name	Prakash Gupta v Securities and Exchange Board of India
Citation	2021 SCC OnLine SC 485
Appellant	Prakash Gupta
Respondent	Securities and Exchange Board of India
Coram	Justice Dhananjaya Y Chandrachud, Justice M.R. Shah
Bench	Division Bench.
Number of Opinions	One
Type of Opinion	Unanimous
Counsel from the side of appellant	Adv. Shyam Divan
Counsel from the side of respondent	Adv. CU Singh
Interveners	Shri Mahesh Jethmalani
Name of the Court	The Hon’ble Supreme Court of India

Facts of the Case

1. Hotel & Industries Limited floated an Initial Public Offering (IPO) for 38 lakh shares at a value of Rs 10/share. The company’s promoters owned 22 lakh shares after the IPO, accounting for 32.84% of the equity capital of 67 lakh. Prakash Gupta owned 1400 shares, or 0.02% of the company’s equity capital. Then, the company got listed in the Delhi, Mumbai, Ahmadabad and Chennai stock exchange with UP stock exchange being the parent one.
2. The respondent received two complaints, one from Mr. Vijay Miglani who claimed that on the company’s instructions, some brokers had purchased the company’s share and substantial deliveries were left outstanding in the grey market and second from some anonymous source who claimed that price rigging and insider trading were going on in the scrip of the company. The price of the scrip drastically increased from Rs 11.25 on to Rs 23.25 on and shares as high as 1,00,00 shares per day were traded on many days.
3. On investigation of top brokers and their clients at Delhi and Bombay Stock Exchange, the names of six entities came out and when summons were issued to them, the appellant replied to them. The entities had 28.38 lakh equity shares which is 75% of post issue floating stock of the company. The appellant admitted to the respondent that funds were provided to them by company for purchasing shares. All of it was repaid.
4. The appellant was summoned on 24 August 1999 for a potential violation of ‘Regulations 4(a) and 4(e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,1995 (“1995 PFUTP Regulations”)’; ‘Regulations 6(1), 6(3), 8(1), 10(1) and 10(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994(“1994 Takeover Regulations”)’ and ‘Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997(“1997 Takeover Regulations”)’ .
5. The chairperson of respondent appointed an AO to decide upon the allegations. Before the AO’s decision, respondent filed a criminal complaint on 29 March 2000 before Additional Chief Metropolitan Magistrate, Tis Hazari Court, Delhi alleging violations of Regulations 4(a) and 4(e) of the 1995 PFUTP Regulations, read with Regulations 6(1), 6(3), 8(1), 10(1) and 10(2) of the 1994 Takeover which are punishable under Sections 24 and 27 of the SEBI Act.
6. The appellant proposed an offer to purchase the shares back from the shareholders which were not promoters of the company at Rs 12/share which was higher than Rs 10/share during the IPO. The respondent accepted the offer while the proceedings were pending before the AO. The shares were also delisted by various stock exchanges. The AO passed an order and held the appellant liable. AO also considered respondent’s Chairman order under Section 11B of the SEBI Act and said although no loss was caused to the investors but still the appellant didn’t make the offer on his own accord. So, a fine of 20,000 was imposed on the appellant and co promoters, which was paid.
7. An application for compounding under Section 24A of the SEBI Act was filed by the appellant whom SEBI referred to the High-Powered Advisory Committee (HPAC). HPAC was not in favor of compounding the offence.

Issued raised before the court

Question of law was formulated by the court.

Question of law-

1. Whether the consent of SEBI was necessary for compounding an offence under Section 24A?

Arguments advanced on behalf of the Appellant

1. The proposal made by the appellant to get the scrip delisted from the stock exchanges and buy the shares back at a price of Rs 12 which was higher than the original price of Rs 10 was accepted by the chairperson of the SEBI. No loss was caused to any of the investors which is the purpose of the SEBI Act.
2. The fact that the acquirers are planning to get the scrip delisted and have acquired 99% of the equity share was noted by the AO.
3. The Delhi HC has found that the application for compounding was made at the end of the trial but that is not the case as the application was filed in 2013 just after the petition under Section 482 of CrPC was dismissed by the Delhi HC.
4. There is no provision that says that the consent of SEBI is compulsory for the compounding of the offence. Section 24A of the SEBI Act gives the required authority for compounding the offence to Securities Appellate Tribunal and the court.
5. It was argued that the application for compounding must be allowed on the grounds that the appellant is a senior citizen and the company is already de-listed from the stock exchange. Also, no loss was caused to any of the investors.

Arguments advanced on behalf of the Respondent

• The basis of the criminal complaint is that the funds gathered from proceeds of IPO were given to the six entities to buy the shares which in turn increased the price of shares drastically to Rs 23.5/share. A significant equity in shares was owned by these entities and this information was not in the public domain. 75% people were not able to purchase the shares as the IPO was over-subscribed. There is a violation of 1995 PFUTP Regulations and 1994 Takeover Regulations.

• It was argued that the appellant’s actions are noteworthy: petitions under Section 482 of the CrPC were filed in 2006-07 after the criminal complaint was filed on 29 March 2000. They were waiting for 7 years till the HC of Delhi rejected their petition on 26 August 2013. The application for compounding was presented belatedly on 14 October 2013, when the evidence was being recorded and trial judge had taken cognizance of the criminal complaint.

• It was also argued that there is no basis for this court to intervene under Article 136 of the constitution.

Arguments advanced by the Intervener

• Under Section 24A of the SEBI Act, Securities Appellate Tribunal and the court have the authority to allow compounding of an offence. There is no provision that makes the consent of SEBI compulsory and the addition or subtraction of anything is not permissible in a statutory provision.

• If it is accepted that SEBI’s consent is necessary for compounding then it will lead to changing of the statutory provisions. In VLS Finance Limited v Union of India, it was held that if there is no prior permission from court before the compounding of an offence by the Company Law Board then having prior permission can’t be made compulsory because it will go against the provision of the statute.

• In the case, JIK Industries Limited v. Amarlal V. Jumani which was used by the trial court to dismiss the application for compounding, a distinction is drawn that a scheme under Section 391 of the Companies Act, 1956 does not mean that the offence is compounded under Section 138 of the Negotiable Instruments Act, 1888.

•  Section 147 of the Negotiable Instruments Act states that the offences shall be compoundable while Section 24A of the SEBI Act specifically gives authority to Securities Appellate Tribunal and court to compound an offence.

 

Judgment in Personam

1. SC held that the fact that no damage was suffered to investors as a result of the promoters’ proposal to purchase the shares at a rate of Rs 12 per share, as stated in the SEBI Chairperson’s decision of adjudication dated September 22, 2000, does not negate the element of alleged wrongdoing. Such alleged price rigging and manipulation of share prices has a significant impact on investors’ wealth and the smooth operation of the securities market. As a result, SEBI was justified in resisting the request for the offences to be compounded.                                                                                                       
2. The matter was referred to SEBI’s HPAC, which was presided over by a former Bombay HC judge and declined the plea for compounding. This decision by SEBI was neither mala fide nor manifestly arbitrarily made. It was held that given the nature of the charges, a compounding order was not necessary and the appeal was dismissed.

Judgment in Rem

1. The Supreme Court concluded that, based on the plain meaning of Section 24A, the ability to compound is vested entirely in the SAT or the court before which the proceedings are pending. As a result, the non-obstante requirement at Section 24A’s beginning must be accorded its natural interpretation. As a result, the Supreme Court determined that Section 24A did not require SEBI’s consent, and that putting the requirement of SEBI’s consent into the provision would equate to the court re-writing the legislative provision, which could not be accomplished through judicial interpretation. The Supreme Court, citing Section 24B of the SEBI Act, also stated that when the legislature intended for the SEBI’s recommendation to be required, it has established particular provisions for it. While the statutory provisions do not grant SEBI, an authority in the manner of a veto power under Section 24A, it is important to note that issues under the SEBI Act are launched as a result of SEBI’s complaint, and SEBI plays an important part in the proceedings.
2. Notably, in Prakash Gupta, the Supreme Court felt it was vital to put out parameters that the Securities Appellate Tribunal and courts could consider when evaluating a compounding application under Section 24A of the SEBI Act, which are summarized below:

2. The criteria indicated in the Frequently Asked Questions (Question No. 11)[i]in respect to the April 20, 2007 ‘Guidelines for Consent Order and for Consideration of Requests for Composition of Offenses’ shall be followed;

2. The opinion of SEBI and its HPAC must be respected because it expresses their views on the impact of non-prosecution of the violation on market structures. Only if the Securities Appellate Tribunal or the courts have grounds to suspect that the opinion of SEBI/ the HPAC is mala fide or plainly arbitrary, should the Securities Appellate Tribunal or the courts disagree from it.

2. The concept guiding the compounding procedure should be that the injured party has been compensated and has agreed to resolve the dispute. Because the aggrieved party may not be present in court and because the offences are often of a public nature, it is even more important to rely on SEBI’s opinion to determine whether restitution has occurred; and

2. Even if restitution has occurred, if the offence is of a public nature and non-prosecution of the same would harm the public at large, the offence should not be compound.

Conclusion

This case has completely changed the role of SEBI in making decision relating to the compounding of offences. However, SEBI can express its views and the concerned courts are supposed to take its views in consideration. However, after interpreting Section 24A of the Securities and Exchange Board of India Act, 1992 (SEBI Act), the Supreme Court of India has expressly stated that the power to decide the matter is with the Securities Appellate Tribunal (SAT) or a court where the proceedings are taking place.

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[i] Available at < https://www.sebi.gov.in/sebi_data/commondocs/consentord-faq1_p.pdf > accessed 20 June, 2022.