2021 (7) TMI 971 - SC - SEBI

Compounding of offence - Price rigging and insider trading in the scrip of the Company - IPO issues - SEBI s Investigation and the criminal complaint - HELD THAT - 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 ₹ 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. Judgment of the High Court of Delhi Affirmed.

Issues Involved:
1. The Appeal
2. The IPO, SEBI’s Investigation, and the Criminal Complaint
3. Application for Compounding
4. Counsel’s Submissions
5. Analysis (Structure of the SEBI Act, SEBI Circulars in relation to Section 24A, Jurisprudential Basis for ‘Compounding,’ Compounding outside of CrPC, Regulatory Role of SEBI)
6. Guidelines for Compounding under Section 24A
7. Analysis on Facts and Conclusion

Issue-wise Detailed Analysis:

1. The Appeal:
The appellant was prosecuted under Section 24(1) of the SEBI Act, 1992, and sought to compound the offence under Section 24A. The Trial Judge rejected the application, and this decision was upheld by the High Court of Delhi, which emphasized that compounding at the final stage without SEBI’s consent would defeat the SEBI Act’s objectives. The appellant challenged this view.

2. The IPO, SEBI’s Investigation, and the Criminal Complaint:
The appellant, a director and promoter of a company, was involved in an IPO in 1995. SEBI received complaints about price rigging and insider trading, leading to an investigation. SEBI found that six entities related to the appellant purchased a significant portion of the company’s shares, manipulating the share price. SEBI issued summons and filed a criminal complaint alleging violations of the 1995 PFUTP Regulations and the 1994 Takeover Regulations. An Adjudicating Officer (AO) imposed a penalty, which the appellant paid. SEBI’s Chairperson directed the promoters to buy back shares from the public, which they complied with.

3. Application for Compounding:
The appellant filed a compounding application under Section 24A, which was referred to SEBI’s High Powered Advisory Committee (HPAC). The HPAC recommended against compounding, and the Trial Judge dismissed the application. The High Court upheld this decision, leading to the present appeal.

4. Counsel’s Submissions:
The appellant’s counsel argued that the company’s actions did not harm investors, and the purpose of the SEBI Act was met by the deposit of the penalty. They contended that Section 24A does not require SEBI’s consent for compounding. SEBI’s counsel argued that the criminal complaint involved serious violations, including misuse of IPO proceeds and price manipulation, and that the appellant’s conduct warranted prosecution.

5. Analysis:

Structure of the SEBI Act:
SEBI’s role is to protect investors and regulate the securities market. The SEBI Act empowers SEBI to investigate, issue directions, and impose penalties. Section 24A allows for the compounding of offences, excluding those punishable only with imprisonment or with imprisonment and fine.

SEBI Circulars in relation to Section 24A:
SEBI’s circulars outline the procedure for compounding offences, requiring the accused to file an application before the Court and SEBI. The HPAC reviews the application and provides recommendations, which the Court considers.

Jurisprudential Basis for ‘Compounding’:
Compounding allows for the amicable resolution of disputes, emphasizing restitution over punishment. However, offences of a public nature should not be compounded without considering their broader impact on society.

Compounding outside of CrPC:
The Court distinguished between Section 147 of the NI Act and Section 24A of the SEBI Act. Section 24A specifically entrusts the power to compound offences to the SAT or the Court, without requiring SEBI’s consent.

Regulatory Role of SEBI:
SEBI’s role as a regulatory body is crucial in maintaining market stability and protecting investors. While SEBI’s consent is not mandatory for compounding, its views must be considered by the SAT or the Court.

6. Guidelines for Compounding under Section 24A:
The SAT or the Court should consider factors such as the gravity of the offence, the accused’s conduct, and SEBI’s recommendations. SEBI’s views should be given due deference unless found to be arbitrary or mala fide.

7. Analysis on Facts and Conclusion:
The allegations against the appellant involved serious violations affecting investor protection and market stability. SEBI’s decision to oppose compounding was justified, and the High Court’s judgment was affirmed. The appeal was disposed of accordingly.

Conclusion:
The Supreme Court affirmed the High Court’s decision, emphasizing the importance of SEBI’s role in regulating the securities market and protecting investors. The Court provided guidelines for compounding under Section 24A, highlighting the need to consider SEBI’s views and the broader impact of the offence on the market.

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