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Ankur Chaturvedi v. Securities And Exchange Board Of India
Factual and Procedural Background
The appellant, a promoter of Brijlaxmi Leasing and Finance Company Ltd., challenged an adjudication order of the Adjudicating Officer of the Securities and Exchange Board of India (SEBI) dated 28 August 2014. The adjudicating order imposed a penalty of Rs.5,00,000 under section 15A(b) of the SEBI Act for violations of Regulation 13(4) and 13(4A) read with Regulation 13(5) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations), and a penalty of Rs.2,00,000 under section 15HB of the SEBI Act for violating clause 4.2 of the Model Code of Conduct in Part A, Schedule I of the PIT Regulations.
SEBI's investigation found that the appellant purchased 46,437 shares on 9 January 2013 and purchased 45,000 shares on 29 January 2013 and sold 45,032 shares on 29 January 2013. The PIT Regulations required disclosure to the company and to the stock exchange within two working days of the purchase; the appellant failed to make the disclosures to the stock exchange. SEBI initiated proceedings and imposed the penalties noted above. The appeal to this Tribunal challenges those penalties.
Legal Issues Presented
- Whether the appellant's failure to make disclosures under Regulation 13(4) and 13(4A) of the PIT Regulations attracted liability and a penalty under section 15A(b) of the SEBI Act.
- Whether the opposite transactions (sale) after purchases violated clause 4.2 of the Model Code of Conduct and attracted a penalty under section 15HB of the SEBI Act.
- Whether the penalties imposed (Rs.5 lac under section 15A(b) and Rs.2 lac under section 15HB) were excessive or required interference/reduction by the Tribunal.
Arguments of the Parties
Appellant's Arguments
- Admission of failure to make timely disclosures but submission that the penalty under section 15A(b) is excessively harsh and should be set aside or substantially reduced.
- There was no intention to suppress the purchases and sales; no mala fide intention was shown.
- The appellant made disclosures to the company and the omission to disclose to the stock exchange was inadvertent.
- The failure to disclose did not result in any profit to the appellant nor cause loss to investors.
- The violation was not repetitive in nature.
- No finding in the impugned order of disproportionate gain or unfair advantage to the appellant; loss to investors could not be ascertained.
- As regards the sale transactions, they were inadvertently carried out by the appellant's broker and thus should not attract penalty under section 15HB.
- Reliance on this Tribunal's decisions in "National Securities Depositories Ltd. vs. SEBI (Appeal no.147 of 2006 decided on 22.11.2007)" and "DSE Financial Services Ltd. vs. SEBI (Appeal no.153 of 2012 decided on 11.9.2012)" to contend that the penalties were unjustified or should be reduced.
Respondent / Adjudicating Officer's Position (as reflected in the opinion)
- The adjudicating officer recorded that mandatory disclosure requirements under Regulation 13 were not complied with and therefore liability under section 15A(b) arose.
- The adjudicating officer considered mitigating factors under section 15J of the SEBI Act and imposed reduced penalties: Rs.5,00,000 under section 15A(b) (against an imposable Rs.1 crore) and Rs.2,00,000 under section 15HB (against an imposable Rs.1 crore).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| National Securities Depositories Ltd. vs. SEBI (Appeal no.147 of 2006 decided on 22.11.2007) | Decision in that case related to disgorgement. | The court held this decision had no relevance to the present case concerning penalty under sections 15A(b)/15HB; it was distinguishable and therefore not applicable. |
| DSE Financial Services Ltd. vs. SEBI (Appeal no.153 of 2012 decided on 11.9.2012) | Decision in that case related to irregularities in maintaining records noticed during inspection. | The court held this decision was also distinguishable on facts and not relevant to the present case of non-compliance with mandatory disclosure requirements and opposite transactions under the Model Code of Conduct. |
Court's Reasoning and Analysis
The Tribunal examined the factual findings and legal framework without accepting the appellant's submissions. It observed that Regulations 13(4) and 13(4A) of the PIT Regulations are mandatory and that failure to make timely disclosures renders a promoter/director liable under section 15A(b) of the SEBI Act.
The Tribunal explained the statutory penalty framework: as the section stood at the relevant time, section 15A(b) provided for a penalty of Rs.1 lakh for each day of continuance of the failure or Rs.1 crore, whichever was less. Because disclosures were not made at all, the maximum imposable amount would be Rs.1 crore. The adjudicating officer, however, considered mitigating factors under section 15J of the SEBI Act and reduced the penalty to Rs.5,00,000. The Tribunal found that exercise of discretion reasonable and not excessive.
With respect to the alleged opposite transactions in breach of clause 4.2 of the Model Code of Conduct, the Tribunal rejected the argument that broker error absolved the appellant of responsibility. It observed that penalties under section 15HB may extend up to Rs.1 crore; again, the adjudicating officer applied mitigating factors and imposed Rs.2,00,000, which the Tribunal found not to be unreasonable.
The Tribunal distinguished the precedents relied upon by the appellant: NSDL concerned disgorgement and was therefore inapplicable; DSE Financial concerned record-keeping irregularities and was factually different. The Tribunal also refused to admit documents tendered to show the company was incurring losses, noting that penalties for violating section 15A(b) are imposable irrespective of the company's financial position. The Tribunal emphasized the disclosure-based regime of the securities market and the fundamental importance of timely and accurate disclosures to maintain market integrity.
Holding and Implications
Holding: The Tribunal DISMISSED the appeal and upheld the adjudicating officer's penalties. The appeal was dismissed with no order as to costs.
Implications: The direct consequence is that the appellant's penalties stand — Rs.5,00,000 under section 15A(b) and Rs.2,00,000 under section 15HB of the SEBI Act remain payable. The Tribunal found the adjudicating officer's exercise of discretion in imposing mitigated penalties to be reasonable. The opinion does not purport to set a new legal precedent; instead it affirms that mandatory disclosure obligations under the PIT Regulations attract penalties and that inadvertence or lack of demonstrable investor loss does not automatically negate liability.
Jog Singh, Member Per: Justice J.P. Devadhar
1. Appellant is aggrieved by the adjudication order passed by the Adjudicating Officer of Securities and Exchange Board of India (SEBI for short) on 28th August, 2014. By the said order, penalty of Rs.5 lac is imposed on the appellant under section 15A(b) of the Securities and Exchange Board of India Act, 1992 (SEBI Act for short) for violating the provisions of Regulation 13(4) and 13(4A) read with Regulation 13(5) of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations for short) and penalty of Rs.2 lac under section 15HB of SEBI Act is imposed for violating clause 4.2 of the Model Code of Conduct for Prevention of Insider Trading for Listed Companies set out in part A, Schedule I of PIT Regulations (Model Code of Conduct for short).
2. Appellant is a promoter of Brijlaxmi Leasing and Finance Company Ltd (company for short) whose shares are listed on the Bombay Stock Exchange.
3. During the course of investigations it was noticed by SEBI that the appellant had purchased 46,437 shares of the company on 9th January, 2013. It was also noticed that on 29th January, 2013 appellant had purchased 45,000 shares of the company and on the same day i.e. on 29th January, 2013 appellant had sold 45,032 shares of the company. Under Regulations 13(4) and 13(4A) read with Regulation 13(5) of the PIT Regulations it was obligatory on part of the appellant to make disclosure to the company and to the stock exchange in respect of the purchases made on 9th January, 2013 and 29th January, 2013 within two working days from the date of purchase. As the appellant failed to make above disclosures to the stock exchange in which the shares of the company were listed, there was violation of Regulation 13(4) and 13(4A) of the PIT Regulations. Similarly, having purchased shares of the company in January, 2014 entering into opposite transaction i.e. to sell the shares of the company in January 2014 was in violation of clause 4.2 of the Model Code of Conduct. Accordingly, proceedings were initiated and by the impugned order penalty is imposed under section 15A(b) and section 15HB of the SEBI Act.
4. Mr. Chatterji, learned senior counsel appearing on behalf of the appellant while admitting that there was failure on the part of the appellant to make disclosures within the time stipulated under Regulation 13(4) and 13(4A) of the PIT Regulations submitted that the penalty imposed under section 15A(b) is excessively harsh and deserves to be set aside and in any event deserves to be reduced substantially for the following reasons:
a) there is nothing in the impugned order to suggest that there was any intention on part of the appellant to suppress purchase and sale of shares of the company in which the appellant was promoter/director.
b) Making disclosure to the company but failing to make disclosures to the stock exchange was an inadvertent error and there was no malafide intention on part of the appellant.
c) failure to make disclosure has not resulted in any profit to the appellant. (d) failure to make disclosure has not caused any loss to the investors. (e) violation of PIT Regulations committed by the appellant is not repetitive in nature. (f) In the absence of any finding recorded in the impugned order to the effect that there is any disproportionate gain or unfair advantage to the appellant as a result of the default and since loss caused to the investors due to the default could not be ascertained, the adjudicating officer is not justified in imposing the penalty of Rs.5 lac under section 15A(b) of SEBI Act.
5. As regards the penalty of Rs.2 lac imposed under section 15HB of SEBI Act for violating clause 4.2 of the Model Code of Conduct, Mr. Chaterji submitted that the opposite transaction, namely, sale of shares of the company were carried out by the broker of the appellant inadvertently and therefore the adjudicating officer was not justified in imposing penalty of Rs.2 lac under section 15HB of the SEBI Act.
6. Relying upon the decisions of this Tribunal in case of National Securities Depositories Ltd. vs. SEBI (Appeal no.147 of 2006 decided on 22.11.2007) and decision of this Tribunal in the case of DSE Financial Services Ltd. vs. SEBI (Appeal no.153 of 2012 decided on 11.9.2012) Mr. Chatterji submitted that in the facts of the present case imposing penalty under section 15A(b) and section 15HB of the SEBI Act is unjustified and hence deserves to be set aside and in the alternative deserves to be reduced substantially.
7. We see no merit in the above contentions.
8. It is not in dispute that the appellant has violated Regulations 13(4) and 13(4A) of the PIT Regulations which are mandatory in nature. Failure to make disclosures within time stipulated under Regulation 13 of the PIT Regulations renders the promoter/director liable for penalty under section 15A(b) of the SEBI Act. As per section 15A(b) of the SEBI Act (as it then stood) penalty imposable for failure to make disclosures within the stipulated under the PIT Regulations was 1 lac rupees for each day during which such failure continued or Rs.1 crore whichever is less. In the present case, since disclosures have not at all been made, penalty imposable on the appellant would be Rs.1 crore. However, after taking into consideration all mitigating factors as contemplated under section 15J of the SEBI Act, the adjudicating officer has imposed penalty of Rs.5 lac as against the imposable penalty of Rs.1 crore, which cannot be said to be excessively harsh or unreasonable. Various mitigating factors canvassed before us were in fact canvassed before the Adjudicating Officer and it is only after recording those mitigating factors penalty of Rs.5 lac is imposed as against the penalty of Rs. 1 crore imposable under section 15A(b) of the SEBI Act. The discretion exercised by the adjudicating officer being reasonable we see no reason to interfere with the order passed by the adjudicating officer.
9. Argument advanced by the counsel for the appellant that the opposite transactions i.e. sale transactions were inadvertently carried out by the broker of the appellant cannot be a ground to escape penalty for violating the provisions contained in the Model Code of Conduct. Penalty imposable for such violations under section 15HB of the SEBI Act is up to Rs.1 crore. However, after considering all mitigating factors pointed out by the appellant, the adjudicating officer has imposed penalty of Rs.2 lac as against the penalty of Rs. 1crore imposable under section 15HB of the SEBI Act which cannot be said to be unreasonable or excessively harsh.
10. Reliance placed by counsel for the appellant on the decision of this Tribunal in case of NSDL (supra) has no relevance to the facts of the present case. The dispute in that case related to disgorgement whereas in the present case we are concerned with the penalty imposed under section 15A(b)/15HB of the SEBI Act for violating the PIT Regulations and the Model Code of Conduct. Similarly decision of this Tribunal in the case of DSE Financial Services Ltd. (supra) is also distinguishable on facts. In that case the dispute related to certain irregularities in maintaining the records noticed during the course of inspection, whereas, in the present case, appellant is guilty of not complying with the mandatory requirement of making disclosures under Regulation 13 of PIT Regulations and is held guilty of entering into opposite transactions in violation of the Model Code of Conduct. Thus both decisions relied upon by the counsel for the appellant are wholly distinguishable and have no relevance to the facts of the present case.
11. Mr. Chatterji learned senior counsel appearing on behalf of the appellant sought to tender a compilation of documents to show that the company has been making losses year after year and in support of that contentions he wanted to tender various documents in respect thereof. We have not permitted Mr. Chatterji to tender those documents because penalty under section 15A(b) of the SEBI Act for violating the PIT Regulations is imposable irrespective of the fact that the company/promoter-director have been incurring losses or not. Similarly fact that there is no investor losses on account of the violations committed by the appellant and that the violations are not repetitive in nature cannot be a ground to escape penalty imposable section 15A(b)/15HB of the SEBI Act.
12. As rightly pointed out by the adjudicating officer the entire securities market stands on disclosure based regime and accurate and timely disclosures are fundamental in maintaining the integrity of the securities market. Therefore omission on the part of the appellant in failing to make disclosures was detrimental to the interest of the investors in the securities market and hence no fault can be found with the decision of SEBI in imposing penalty of Rs. 5 lac and Rs. 2 lac under section 15A(b)/15HB of the SEBI Act for violating the provisions of PIT Regulations and Model Code of Conduct respectively.
13. As the adjudicating officer has taken into consideration all mitigation factors and has imposed nominal penalty of Rs.5 lac under section 15A(b) and penalty of Rs.2 lac under section 15HB of the SEBI Act we see no reason to entertain the present appeal.
14. For the aforesaid reasons the appeal is dismissed with no order as to costs. Sd/- Justice J.P. Devadhar Presiding Officer Sd/- Jog Singh Member 4.8.2015 Prepared and compared by
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