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Pending appeal at SAT, SEBI increases penalty imposed by AO

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These are interesting times for securities law enthusiasts. SEBI WTM passed an order on 09.09.22 enhancing the penalty imposed by an AO, stating that the penalty imposed by AO was less than the minimum penalty proposed under S. 15HA of the #SEBI Act, 1992 for violation of PFUTP Regulations.

The order relates to certain transactions in the shares of KALPA COMMERCIAL LIMITED. SEBI found that SMS of guaranteed returns were sent to investors on investments made in KCL. This led to an increase in the price of shares which were used by the noticees to sell their shares. Hence, proceedings for violation of PFUTP Regulations and SCRA were initiated and all noticees were found guilty.

However, in case of 7 noticees the penalty imposed by AO under S. 15HA was INR 4 lakh, but the minimum penalty under it is INR 5 lakh.

SEBI then decided to proceed under S. 15I(3), which empowers SEBI to enhance the penalty imposed by an AO if the order is erroneous and not in the interest of the securities market.

The noticees argued that the proceeding under S. 15I(3) is not maintainable as orders violating principles of natural justice or those tainted by non-application of mind can be relooked. Further, AO has discretion to impose a penalty lower than the amount prescribed if it deems fit. Moreover, several noticees had already filed an appeal against the order of AO before SAT and thus, SEBI cannot invoke its power under S. 15I(3) now.

WTM rejected all the contentions of the noticees. It held that an AO has a discretionary power to determine the amount of penalty subject to the min. and max. amount of penalty prescribed. Thus, AO had committed an error in determining the amount of penalty by imposing a penalty lower than the minimum penalty prescribed. Hence, it was a fit case for proceedings under S. 15I(3).

WTM also held that SEBI has power to enhance the penalty under S. 15I(3) even if the original order of an AO has been challenged in an appeal. WTM held that the limitation provided in second proviso of S. 15I(3) is applicable only in cases where 90 days have expired from the date of order or where an appeal filed before SAT has been disposed of. Since, in the present case, the appeal is pending before SAT, SEBI can exercise its power under S. 15I(3). Thus, WTM enhanced the penalties imposed on the noticees.

The order raises the question whether SEBI can use its power under S. 15I(3) to pass an order in a matter which is sub-judice and whether the legislative intent was to provide SEBI with such power. There are certain observations in the SEBI Order contrary to what the Supreme Court of India and SAT has held in the cases of review. This is a larger policy issue. Sumit Agrawal, our founder, has often advocated against the practice of review of AO orders, without transparent guidelines for selection of such cases.

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