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SEBI Seeks To Recover Penalties Even When Appeals Are Pending

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Getting foreign exchanges to IFSC the key hurdle.

To ensure its penalties don’t go unpaid, India’s market regulator plans to recover fines even when appeals are pending provided its orders have not been stayed, according to two people with direct knowledge of the matter.

The Securities and Exchange Board of India has submitted a draft to the Securities Appellate Tribunal, the people said requesting anonymity. SEBI has already started implementing it in some cases, though the decision has not been made public yet.

SEBI would wait for the mandatory 45 days for the penalised party to file an appeal against the order, said one of the persons cited above. If the order isn’t stayed by the tribunal by then, the person said, the penalties would be recovered by attaching accounts and properties. If an entity wins an appeal, the person said, the amount would be refunded.

Currently, a fine is recovered only after the tribunal and the Supreme Court dismiss a plea. A recovery during pendency of an appeal can only be ordered by the top court.

The regulator wants to prevent fined parties from getting away without paying. As many as 1,677 entities had defaulted on penalties worth more than Rs 189 crore till March this year, according to data published by SEBI. The amount could be higher as the list didn’t have numbers for some of the defaulters.

“If the regulator seeks to recover penalties even in matters pending in appeals and awaiting stay, it will be defeating the rights of noticees,” Sumit Agrawal, former SEBI official and founder of RegStreet Law Advisors, told BloombergQuint. “This will be akin to suffering the consequences and availing remedy before the SAT.”

And while the market regulator may argue that mere filing or pendency of an appeal doesn’t constitute an automatic stay, he said it would lead to multiple proceedings and harassment of the affected parties.

SEBI is yet to respond to BloombergQuint’s emailed queries.

The regulator’s objective is to recover penalties before it’s too late. When appeals await final judgment, the penalised parties create third-party rights on properties and divert the money to other accounts, said the second person quoted earlier. That makes recovery impossible.

To Sandeep Parekh, managing partner, Finsec Law Advisors, the idea seems sound in principle. “The practical implementation, however, can have unintended consequences for the market entities. What happens in case a market entity doesn’t have the means to pay up the penalty and SEBI moves to recover it.”

The penalties, according to SEBI’s draft, would be put in an escrow account, and remitted to the Consolidated Fund of India only after the appeal is dismissed by the tribunal and courts. That’s in line with Section 15JA the SEBI Act.

The regulator’s plan has a precedence.

In 2013, the Central Board of Excise and Commissions issued a circular to recover dues in all cases where the duty or tax was confirmed but not stayed by tribunals. The circular was challenged in various high courts, leading to its review by the Department of Finance and the CBEC three years later. It was later withdrawn in 2016.

But if a CBEC order is upheld by a tribunal and high court, the finance department will recover penalties after six days even if an appeal is pending before the Supreme Court.

Agrawal, however, said there’s no public disclosure by SEBI of its plan, unlike the CBEC that had come out with a circular.