sebi penalty

Compliances Penalties

Laws Regulating Capital Markets

Companies Act, 1956 SCR Act, 1956 SEBI Act, 1992

Public Ltd Co’s Stock Exchanges Intermediaries

Listed Co’s Listed Co’s

Self Regulatory Org

Depositories Act 1996

NSDL

CDSL

DP’s/ RTA

Listed Co’s

11 General Powers

a) Promoting / Development / Regulating Securities Market;

b) Regulating the working of Stock Exchange

c) Registering & Regulating Intermediaries;

d) Promoting & Regulating Self-Regulatory Organizations;

e) Prohibiting Fraudulent and Unfair Trade Practices relating to securities;

f) Prohibiting Insider Trading in securities;

g) Regulating substantial acquisition of shares and take over of the Companies;

11 General Powers Contd..

Power to make orders for :

• suspension of trading in any security;

• restraining to access the market & prohibit any person to sell, buy, deal in securities;

• suspend any office bearer of a Stock Exchange and Self Regulatory Organization from holding such position;

• Impound and retain the proceeds and securities in respect of any transaction under investigation.

11A

Relating to Issue of Securities

In order to protect the investors it has the powers :

• Matters relating to issue of capital, transfer of securities and other incidental matters;

• Manner how the disclosures have to be made by companies;

• Prohibit any company from issuing prospectus, any offer document or advertisement soliciting money from public for issue of securities. specify the conditions based on which the prospectus may be issued

• Specify the requirements of listing, transfer of securities and other matters incidental thereto.

To Issue Directions

If after making or causing to be made an enquiry, the board is satisfied that it is necessary-

In the interest of investors, or orderly development of securities market; or

To prevent the affairs which are detrimental to the interest of investors or securities market.

To secure the proper management of such intermediary or person.

11B

It may issue such directions which are in the interest of the investors and securities market.

to any Intermediary, person or class of persons associated with the securities market;

to any company in respect of matter specified in section 11A.

To Issue Directions Contd.11B

To Investigate

Where the Board has reasonable ground to believe that:

a) Any transaction that are dealt in a manner detrimental to the investors or securities market;

b) Intermediary violates any provision of the Act, rules, regulations made under it or any order passed by the chairman.

It may Direct any person to investigate the affairs of such intermediaries or any other person concerned and to report thereon to the Board.

11C

To Cease and Desist the Proceedings

The board may pass cease & desist order in the following case:

• Where any provision of the Act, rules and regulations has been violated or is likely to be violated.

• In case of insider trading or market manipulation.

11D

Adjudication Powers

For the purpose of adjudging under sections 15A - 15HB,

the Board appoints any of its officer not below the rank of Divisional Chief to be an adjudicating officer for holding an inquiry,

after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

Governed by SEBI (Procedure of Holding Enquiry & Imposing Penalty by Adjudicating Officer) Rules, 1995

15I

15J

Factors to be taken care by Adjudication Officer

While adjudicating the quantum of penalty under section 15-I, the adjudicating officer shall take care of following factors :

the quantum of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

The amount of loss caused to an investor or group of investors as a result of the default.

The repetitive nature of default

ApplicabilityListed Companies / Intermediaries / Any other person

15A

Contravention Penalty

Failure to furnish any document, return or report to the Board

Penalty of Rs.1 Lakh Per Day during which such failure continues or Rs. 1 Crore, whichever is

less

File any return or furnish any information, books or other documents within the time specified therefore in the regulations

To maintain books of account or records

Case law – 15ASECURITIES APPELLATE TRIBUNAL, MUMBAIMukesh Malhotrav.Securities & Exchange Board of IndiaNOVEMBER 17, 2004

• Section 15A - Penalty for failure to furnish information, return, etc. - Pursuant to an order of chairman, SEBI, investigation into case of buying, selling or dealing in shares of ‘S’ Ltd. was started - Subsequently, summons were issued to appellant to appear before investigating officer along with certain specific information - However, appellant failed to respond summons - On reference, adjudication and enquiry officer issued repeated notice to appellant to appear before him but in vain - Resultantly adjudication and enquiry officer passed an ex parte order under section 15A(a) imposing a penalty of Rs. 1 crore on appellant

• Whether since time given to appellant to respond to summons was extremely short and same was true about notice of only 4 days given to him by adjudicating officer in adjudication proceedings, impugned order was liable to be set aside on that ground alone - Held, yes - Whether, further, argument about appellant being a brother of somebody as a justification for imposition of extreme penalty was totally unacceptable - Held, yes

Case law – 15ASECURITIES APPELLATE TRIBUNAL, MUMBAISubhash A. Gandhiv.Securities and Exchange Board of India

• Section 15A, read with, reg 7 of the S EBI (SAST) Reg, 1997 - Penalty - For failure to furnish information, return, etc.

• Appellant informed target company about his shareholding exceeding prescribed limit of 5 per cent by .03 per cent but did not inform about aggregate shareholding and exact percentage of shareholding in company in desired format - Hence, SEBI imposed penalty of Rs. 10,000 on appellant for a delay in submitting information's in prescribed format as prescribed under regulation 7

• Whether since appellant had complied with part of requirements and had exceeded limit only by .03 per cent, this was a case for taking a lenient view and consequently, penalty could be reduced to Rs. 1,000 - Held yes

Case Law – 15ASECURITIES APPELLATE TRIBUNAL, MUMBAINNV Finance Ltd.v.Adjudicating & Enquiry Officer, Securities and Exchange Board of India

• Section 15A, read with reg 7 of the SEBI (SAST) Reg, 1997 - Penalty - For failure to furnish information, returns, etc.

• Appellant had acquired shares representing 14 per cent of paid up equity and voting share capital of target company in two phases - Respondent-SEBI imposed penalty upon appellant for violation of regulation 7(1) on ground that acquirer had not made necessary disclosures to stock exchanges where shares of target company were listed

• Facts revealed that certificate of posting to all stock exchanges was of same date and one stock exchange had admitted of having received communication

• Whether when one of stock exchanges had admitted of receipt of communication, there was a strong presumption that remaining two exchanges would also have received same and since respondent had not produced any evidence to counter said presumption and made no enquiries that said other stock exchanges had denied having received intimation, no case was made out against appellant and, therefore, order imposing penalty was to be set aside - Held, yes

ApplicabilityIntermediaries

15B


Failure to enter into an agreement with his client

Penalty of Rs.1 lakh per day during which such failure continues or Rs. 1 crore, whichever is less

ApplicabilityListed Company / Intermediaries

15C


Failure to redress the grievances of investors, after having been called upon by the Board in writing to redress the grievances of investors.


Case Law – 15CSECURITIES APPELLATE TRIBUNAL, MUMBAIDharnendra Industries Ltd.v.Securities and Exchange Board of India

• Section 15C SEBI Act, 1992 - Penalty - For failure to redress investors’ grievances –

• Appellants companies having failed to redress investors’ grievances, SEBI debarred them from securities market for five years

• Whether since matter involved public interest and appellants’ annual reports for year 2002-03 admitted that there were 121 complaints, which had not been attended to, SEBI was justified in passing impugned order, as it was a clear case of mismanagement and appellants were bound to attend grievances of shareholders within a stipulated time schedule - Held, yes

Case Law – 15CSECURITIES APPELLATE TRIBUNAL, MUMBAIIndo Biotech Foods Ltd.v.Securities and Exchange Board of India

• Section 15C SEBI Act, 1992 - Penalty - For failure to redress investors’ grievances

• SEBI directed certain officials of appellant-company to dissociate themselves from securities market for five years for having not redressed two out of total 108 investors’ grievances

• Appellant-company denied any such grievances pending unredressed and contended that even if there be any such complaint pending, it would attend same to full satisfaction of investors - Whether in view of facts of case, action taken by respondent was totally disproportionate to alleged misdemeanor by company or any of its directors, and, therefore, impugned order was to be set aside - Held, yes

ApplicabilityMutual Funds / Collective Investment Scheme

(CIS)

15D


Doing such activity without obtaining certificate of registration, OR fails to comply the conditions specified in the governing regulations


ApplicabilityAsset Management Company

15E


Fails to comply with any of the regulations providing for restrictions on the activities of the asset management companies


Applicability – Stock Broker15F Contravention Penalty

Fails to issue contract notes

Penalty not exceeding 5 times the amount of contract note .

Fails to deliver any security

Penalty of Rs. 1 lakh per day during which such failure continues or Rs. 1 crore , whichever is less

Charges excess brokerage

Penalty of Rs. 1 Lakh or 5 times the amount of brokerage excess charged, whichever is higher.

ApplicabilityAny Insider

15G


Contravention of provisions of Insider Trading Regulations

Penalty of Rs. 25 crore or 3 times the amount of profits made out of such insider trading, whichever is higher.

Case Law – 15GSECURITIES APPELLATE TRIBUNAL, MUMBAIS. Ramesh and S. Padmalata Asis Bhaumikv.Securities and Exchange Board of India• Section 15G SEBI Act, 1992, read with reg 3 of the SEBI (Prohibition

of Insider Trading) Regulations, 1992 - Penalty - For insider trading

• Appellants, being company secretary and executive director of a company, had bought shares of that company on behalf of their family members on basis of unpublished price sensitive information, which was not known to general public but to appellants as employees of company

• They, later on, tendered said shares in open offer announced by acquirer at higher price, thereby making an unlawful gain - SEBI held appellants guilty of misconduct of insider trading and imposed penalty - Appellants admitted that they had made a mistake and were willing to pay back profit earned by sale of shares

• Whether any violation of provision relating to inside trading will make a person guilty of being an inside trader - Held, yes - Whether however, taking into account said financial position of both parties, their admission and their offer to pay back profit, which they had earned by sale of said shares, penalty was to be reduced - Held, yes

ApplicabilityAny Acquirer / Person Acting in Concert (PAC)

15H


Contravention of provisions of Takeover Code Regulations

Penalty of Rs. 25 crore or 3 times the amount of profits made out of such failure, whichever is higher.

Case Law – 15HSECURITIES APPELLATE TRIBUNAL, MUMBAIVLS Finance Ltd.v.Securities & Exchange Board of India• Section 15H SEBI Act, 1992, read with Reg 10 of the SEBI (SAST) Reg, 1997

• In terms of a pledge document appellant advanced certain amount to ‘T’ Ltd., which, in turn, deposited certain shares with appellant by way of collateral securities As per agreement, acquirer had right to sell shares pledged to realize its dues - Later, parties entered into a fresh MOU whereby shares pledged were transferred in name of pledgee-appellant but those shares continued to be held as collateral securities and pledgee signed a power of attorney in favour of ‘K’ and ‘B’ of ‘T’ Ltd., for purpose of attending and voting on its behalf at all general meetings of ‘T’ Ltd. - Appellant made an application to SEBI seeking for exemption from provisions of Regulations of 1997, which was rejected –

• Thereafter, because of failure of appellant to make public announcement of acquisition of shares of ‘T’ Ltd., Adjudicating and Enquiry Officer imposed penalty under section 15H(ii) - Whether since it was appellant whose name was entered as beneficial owner in register of members of company and, under section 41(3) of the Companies Act, it was appellant who was deemed to be a member of ‘T’ Ltd. with effect from date of transfer of shares, transfer of shares in name of appellant for realizing its lawful dues amounted to acquisition as defined in 1997 Regulations - Held, yes

• Whether, therefore, voting rights vested with appellant and question whether he exercised those rights himself or through ‘K’ and ‘B’ through power of attorney did not alter situation with respect to acquisition in any manner whatsoever - Held, yes - Whether in light of that position, there was nothing objectionable in impugned order and same was to be upheld - Held, yes

Case Law – 15HSECURITIES APPELLATE TRIBUNAL, MUMBAIKrishna Naikv.Securities and Exchange Board of India• Section 15H of the SEBI Act, 1992, read with reg 11 of the SEBI (SAST)

Reg, 1997 - Penalty - For non-discloser of acquisition of shares and takeovers

• Appellant, who was promoter of a company, was holding 30.82 per cent equity shares of said company - In year 2002, when company was facing certain difficulties, appellant advanced it an unsecured interest free loan and approached IDBI for restructuring by converting loan into equity shares

• Accordingly, company reissued to appellant forfeited equity shares which constituted 6.4 per cent of total share capital of company - However, SEBI imposed penalty of Rs. 5 lakhs upon appellant for violation of regulation 11(1) of 1997 Regulation as increase in shareholding was more than creeping limit of 5 per cent and acquisition had taken place without making public announcement - It was found that preferential allotment stood annulled by a subsequent resolution of company and that until 9-9-2002, acquisition by way of preferential allotments was entitled to automatic exemption from discipline of Regulations - Whether since it was first default on part of appellant and gain to appellant or loss to investor, apart from being non-quantifiable, could at most be only notional in an admittedly illiquid scrip, appellant was entitled to be viewed leniently and penalty was to be reduced to Rs. 1 lakh - Held, yes

Case Law – 15HSECURITIES APPELLATE TRIBUNAL, MUMBAIContinental Device India Ltd.v.Securities and Exchange Board of India• Section 15H SEBI Act, 1992, read with regulation 3(1)(c)(ii) of the

SEBI(SAST) Reg, 1997 - Penalty - For non-disclosure of acquisition of shares and takeovers

• SEBI, holding that appellant-company allotted certain shares on preferential basis to promoters without disclosing identity of proposing allottees, consequential changes in voting rights, changes in board of directors and shareholding pattern, imposed penalty of Rs. 1 lakh on appellant-company

• However, from material on record, it appeared that it had disclosed all facts in board’s resolution to SEBI and also informed same details at annual general meeting to shareholders and that only violation was that identity of class of persons was not fully disclosed

• Whether since most of details were correctly disclosed to SEBI; there was no loss to shareholders; management of company had not changed after issue; and issue was listed in two stock exchanges, misconduct was of technical nature and, therefore, fine was to be reduced from Rs. 1 lakh to Rs. 25,000 - Held, yes

Case Law – 15HSECURITIES APPELLATE TRIBUNAL, MUMBAIDiamond Projects (P.) Ltd.v.Securities and Exchange Board of India

• When a person comes forward and makes clean breast of violation of regulation, if such disclosure is bona fide, SEBI should pass a workable order so that it can be implemented

• Section 15H SEBI Act, 1992, read with reg 3(1)(c) of the SEBI (SAST) Reg, 1997 - Penalty - For non-disclosure of acquisition of shares and takeovers

• Appellant- company admitted mistake of having acquired 21.96 per cent equity shares of target company without informing SEBI but denied having any intention to cheat public - It had incurred heavy losses and had not met its liability - SEBI imposed penalty of Rs. 5 lakhs - Whether acquisition of shares in target company by appellant without disclosing it to respondent amounted to violation of regulation 3(1)(c) - Held, yes - Whether however, in matters of strict liability, SEBI must pass a workable order to maintain ability of company to make effective payment - Held, yes - Whether, therefore, taking a practical view of matter and fact that appellant had incurred heavy loss, penalty imposed should be reduced to Rs. 1,50,000 - Held, yes

ApplicabilityListed Companies / Intermediaries / Any Other

Person

15HA


Indulgence in any Fraudulent and Unfair Trade Practices.

Penalty of Rs. 25 crore or 3 times the amount of profits made out of such practices, whichever is higher.

ApplicabilityListed Companies / Intermediaries / Any Other

Person

15HB


Contravention of any of the provision of the Act where no specific penalty is specified

penalty which may be extend to Rs. 1 Crore

ApplicabilityListed Companies / Intermediaries / Stock

Exchanges Any Other Person

23


- trades in contraventions of various sections of the Act, - operating non- recognized exchanges, - non-compliance with the orders of SAT, - non-compliance with the conditions of listing etc.

Imprisonment up to10 years OR Fine up to Rs. 25 crore OR Both

ApplicabilityAny Person

23A


(a) Failure by any person to furnish any information, document, books, returns or report to a stock exchange within specified time

Rs. 1 lakh for each day during which such failure continues

OR Rs. 1 crore

Whichever is LESS (b) Failure by any person to maintain books of accounts or records as per listing agreement or conditions.

ApplicabilityBroker/ Listed Company/Proposed Listed Co.

23C


Failure to redress the grievances of investors

after having been called upon by SEBI to

do so


OR Rs. 1 crore

Whichever is LESS

ApplicabilityListed Company/Collective Investment Scheme/

Mutual Funds

23E


Failure by a company or any person

managing collective investment scheme or mutual fund to comply with Listing / Delisting

Conditions

Penalty notexceeding

Rs. 25 crore


23F


Any person dematerialized

securities more than the issued securities

OR delivers unlisted securities in the

exchange


Rs. 25 crore

ApplicabilityStock Exchange

23G


Failure or neglect by an exchange to furnish

periodical returns to SEBI OR

make or amend its rules/byelaws as directed by SEBI

OR comply with directions

of SEBI


Rs. 25 crore


19A


a). Failure to furnish any information, document, books, returns or report to SEBI b). Failure to file any return or furnish any information, books or other documents under the Act c). Failure to maintain books of accounts or records


OR Rs. 1crore,

whichever is LESS

ApplicabilityIntermediary Including Depository & DP /

Issuer

19B


Failure to enter into agreement required under the Act or any rules or regulations made there under


OR Rs. 1crore,

whichever is LESS

ApplicabilityIntermediary Including Depository & DP /

Issuer

19C


Failure to redress the grievances of investors after having been called upon by SEBI to do so


OR Rs. 1crore,

whichever is LESS

ApplicabilityIntermediary / Issuer

19D


Failure to dematerialize or rematerialize the securities within specified time in the Act or regulations or byelaws or abets delay


OR Rs. 1crore,

whichever is LESS

ApplicabilityIntermediary / Issuer

19E


Failure to reconcile the records of de-materialized securities with all the securities issued by the issuer as specified in the regulations


OR Rs. 1crore,

whichever is LESS


19F


Failure to comply with the directions issued by SEBI under section 19 of DP Act 1996, within specified time


OR Rs. 1crore,

whichever is LESS


19G


Failure to comply with any provision of the Act, the rules or regulations or byelaws made or directions issued by SEBI there under for which no separate penalty has been provided

Penalty not exceedingRs. 1 crore

Independent of penalty imposed by Adjudicating Officer under the Acts.

Authority not lower than Session Court.

The complaint should be filed within the period of Limitation under Limitation Act, 1963

Offences for which prosecution can be launched24 Offence Punishment

Non Compliance of any of the provision of the Act, rules or regulations made hereunder.

Imprisonment may extend to 10 Years; or With fine, which may extend to 25 crore rupees, or With Both

Failure to pay the penalty ORFailure to comply with any directions

Imprisonment not less than 1 month but may extend to 10 Years; or With fine, which may extend to 25 crore rupees, or With Both

Offences for which prosecution can be launched23M Offence Punishment

- Non Compliance of any of the provision of the Act- Non-Compliance of any of the provision for which no punishment is provided elsewhere in this Act.

Imprisonment may extend to 10 Years; or With fine, which may extend to 25 crore rupees, or With Both

Failure to pay the penalty ORFailure to comply with any directions

Imprisonment not less than 1 month but may extend to 10 Years; or With fine, which may extend to 25 crore rupees, or With Both

Offences for which prosecution can be launched20Offence Punishment

Contravenes or attempts to contravene or abets the contravention of the provisions of the Act or of any rules or regulations or byelaws made there under

Imprisonment up to 10 years ORFine up to Rs. 25 crore OR BOTH

Failure to pay the penalty imposed by adjudicating officer or to comply with any of his directions or orders

Imprisonment up to 10 years (not less than one month) OR fine up to Rs. 25 crore OR BOTH

27 Contravention: Non-compliance any of the provisions of Acts, rules or regulations made hereunder.

Applicability:

a.) Every person in charge of and responsible to, the company, at the time the offence,

b.) Where it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, every such person.

Exclusion: Person proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission

Holding inquiry for any contravention by intermediaries

Governed by SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalties) Regulations, 2002.

Regulations 4 specifies the regulations, contravention of which, activates the enquiry proceedings.

APPLICABLE ONLY TO INTERMEDIARIES

Contravention Noticed

Exparte decisionIf no response

SCN to Party

Party to file Reply

Appointment of Enquiry Officer

Notice Issued

Reply within 15 days

Hearing Date Fixed

Enquiry Report by EO

Representation Before EO

Order by Chairman

Impose Minor or Major Penalty

For contravention of the provision of regulations mentioned in Reg 4

Minor Penalties

Warning or censure;

Prohibition to undertake any new assignment for a period of six months;

Debarring from carrying out the activities as intermediaries for a period upto six months.

Suspension of certificate of registration for a period upto 3 months.

Major Penalties

Cancellation of certificate of registration;

Prohibition to undertake any new assignment for a

period exceeding six months;

Suspension of certificate of registration for a period

exceeding three months;

Debarring from carrying out the activities as intermediaries for a period exceeding six

months.

Major Penalties ONLY to be imposed where:

The contravening party has been guilty of:

Price or market manipulation of any scrip, index or of insider trading;

Violation of conditions of registrations;

Failure to obey directions OR failure to comply with the monetary penalty;

Repeated offence by an intermediary.

Appeals can be made in following cases:

Orders passed by SEBI (after Securities Laws amendment Act, 1999)

OR

Orders passed by an adjudicating officer

OR

Refusal, Omission or failure of Stock Exchange to list the securities

Time limit for filing appeal:

In case of orders of SEBI or adjudicating officer, within 45 days from the date on which copy of order is received.

AND

In case of Stock Exchange refusal, failure or omission within 15 days of specified date of section 73(1A) of the Companies Act, 1956

Appearance before SAT

Any person aggrieved by the orders can either appear in person or authorize the following persons to appear before SAT:

Chartered Accountant or;

Company Secretary or;

Cost Accountant or;

Legal practitioner or;

Any of its officers.

Bar of Jurisdiction of Civil Courts:

EXCEPT for the appeals to SAT under section 15 T of or to Central Government under section 20

No civil court shall have the jurisdiction to entertain any matter which the Board or the adjudicating officer is empowered to act

And

No injunction shall be granted by any court or authority in respect of any action taken or in pursuance of any order passed by the Board or the adjudicating officer.

Appeal to Supreme Court:

Aggrieved by the decision of or order of SAT or for determining any question of law arising out of the order,

Appeal can be filed to Supreme Court within 60 days of the date of communication of the decision or order of SAT.

Case Law – 15T SECURITIES APPELLATE TRIBUNAL, MUMBAIB.P. Kananiv.Securities and Exchange Board of India • Section 15T of SEBI Act, 1992, read with section 21, of the Chartered

Accountants Act, 1949 - Securities Appellate Tribunal - Appeals to

• SEBI, while passing order against company and its directors, debarring them from associating with capital market activities and capital market intermediaries, observed that appellant who was a Chartered Accountant, had made misrepresentation about use of funds by company which would amount professional misconduct on part of appellant and, therefore, matter should be referred to Institute of Chartered Accountants of India for appropriate action against him

• Appellant, aggrieved by said observation, filed appeal - SEBI questioned locus standi of appellant to file appeal on ground that order was not passed against him - Whether under section 15T right of appeal is restricted only to parties before SEBI in proceedings - Held, no

• Whether anybody, whether he was party or not before SEBI, is entitled to prefer appeal provided he is aggrieved by that order - Held, yes - Whether, mere decision to refer matter to Institute by itself could be considered cause of grievance to approach Tribunal by way of appeal - Held, no - Whether moreover, since SEBI’s order was operative only against company and its directors, there was no reason to hold that appellant was legitimately aggrieved so as to be entitled to file appeal under section 15T - Held, yes

Offences can be compounded subject to following conditions :

The offence must not be punishable with Imprisonment only or with imprisonment and fine under SEBI Act ,

The offences can be compounded either before or after the institution of proceedings,

The offence can be compounded by SAT or by the Court under which the proceedings are pending,

The provision of SEBI Act shall be applicable notwithstanding any thing stated in Criminal Procedure Code.

24A

Special Powers to grant immunity from Penalty Can be granted by Central Government

Where the alleged person gives a full and true disclosure in respect of the alleged violation

Central government imposes such conditions as it may think fit.

No immunity granted where the prosecution has already been instituted.

Immunity once granted can be withdrawn on non compliance of any condition imposed or giving of false evidence.

24B

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