Arguing in favour of lack of consent being determinative: A relook at the Prakash Gupta case


Shruti P. Dhonde[i]


 

INTRODUCTION


The Supreme Court (‘SC’) in the case of Prakash Gupta v. SEBI (‘Prakash Gupta case’) held that the consent of SEBI is not necessary for compounding of offences by the Securities Appellate Tribunal (‘SAT’) and courts under Section (‘Sec.’) 24-A of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’). This article firstly, summarises the jurisprudence in which compounding is founded, as discussed by the SC in the Prakash Gupta case, secondly, identifies the essential ingredients of compounding based on the summary, thirdly, emphasises the powers and functions of the Securities and Exchange Board of India (‘SEBI’), and lastly, argues in favour of the lack of consent of SEBI being determinative in compounding offences under securities law.


COMPOUNDING: TRACING THE JURISPRUDENTIAL FOUNDATION


From its very origins in the English common law, compounding has seen the involvement of either the victim or the prosecutor i.e., the legal representative of the victim.[i] It is an activity undertaken by the person who has been “directly injured”.[ii] By way of compounding, such a person must receive some gratification so as to induce abstention from prosecution. Alternatively, the “attitude of the parties towards each other must have changed for good.” Therefore, ‘proper restitution’ of the injured is essential for compounding.


Role of the Court in Compounding


The Code of Criminal Procedure, 1973 (‘Cr.P.C.’), characterises the role of the Court in compounding, as supervisory in nature. When arriving at a decision on whether an offence should be compounded, Courts must be guided by the effect of the offence on the parties as well as the general public.


COMPOUNDING OUTSIDE THE CRPC


Where the Cr.P.C. is inapplicable, the respective statutory provision, governs compounding. A pre-requisite for compounding is for all its ‘features’ to be satisfied. These features can be identified as firstly, compounding is at the instance of the complainant, and secondly, proper restitution of the complainant so as to induce abstention from prosecution. Consent of the complainant is recognised as an omnipresent principle in compounding. The SEBI Act under Sec. 24-A, empowers the SAT as well as other courts to compound proceedings.


POWERS & FUNCTIONS OF SEBI


SEBI is a regulatory body for the securities market with its primary duty being the protection of interest of investors. The SEBI Act by virtue of Sec. 11, bestows wide powers on the SEBI with respect to public as well as private companies. These powers are only limited by the Constitution of India. Sec. 11 reads as follows:


11-B. Power to issue directions [and levy penalty].— [(1)] Save as otherwise provided in Section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary—

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any intermediary or other persons referred to in Section 12 being conducted in a manner detrimental to the interests of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person,

it may issue such directions,—

(a) to any person or class of persons referred to in Section 12, or associated with the securities market; or

(b) to any company in respect of matters specified in Section 11-A,

as may be appropriate in the interests of investors in securities and the securities market.”


In SEBI v. Alka Synthetics Ltd., the Gujarat High Court (‘HC’) characterised Sec. 11 as a remedial provision to be exercised by SEBI in discharging its duty of protecting the interests of the investors. It effectively clothes SEBI with the authority of law. The SAT in Sterlite Industries (India) Ltd. v. SEBI, has endorsed this view of the Gujarat HC adding that Sec. 11 is “designed to achieve the objectives of the Act”.


SEBI’S CONSENT AS DETERMINATIVE: ARGUING IN FAVOUR


The SC has in its judgment in the Prakash Gupta case, analysed the below-mentioned points based on which the following arguments have been put forth. Even so, it has arrived at a contrary conclusion.

Firstly, SEBI’s functions, backed by the principles governing compounding outside of the Cr. P. C., require SEBI’s consent to be determinative. The duty and functions of SEBI mandate it to protect the interest of investors. Hence, it can be reasonably inferred that SEBI is a representative of the investors in preserving their rights. It is SEBI that acts as the complainant in cases of violation of securities law. As discussed above, compounding requires to be initiated by the complainant and should be such that provides proper restitution, sufficient to induce abstention from prosecution. In light of this, the complainant i.e., SEBI’s contention in determining whether the restitution is sufficient so as to induce abstention from prosecution becomes key.


Secondly, the intention of the legislature, as can be gauged primarily from the SEBI Act, and then relevant material such as the Guidelines for Consent Orders and for considering requests for composition of offences (‘the Guidelines’) and case law, appears to require the consent of the SEBI. The intention of the legislature is reflected in the literal meaning of words used in the legislation, and the purpose, object, and reason behind the enactment of the legislation.[iii] As discussed above, the SEBI Act clearly states that it is the duty of the SEBI to protect the interest of the investors. Courts are bound to mould their interpretation in a manner that furthers this objective, especially with regard to Sec. 11. Sec. 11 and the Guidelines indeed fortify the objective by bestowing broad powers, recognised as authority of law, on SEBI, and by conferring on SEBI the power to issue consent orders for the compounding of offences, respectively. The consent orders are envisioned as instruments that allow SEBI to impose appropriate sanctions and create deterrence, and further SEBI’s objective of protecting investor rights. Furthermore, if the Committee does not accept the settlement offer, the Guidelines stipulate that both SEBI and the party are free to resort to legal proceedings. SEBI’s rejection of the settlement offer is equivalent to the withdrawal of the offer by the offeree. Moreover, the SEBI (Amendment) Ordinance 2002, was enacted to strengthen SEBI’s enforcement powers. Additionally, “a consistent line of precedent” suggests that courts have “refrained from substituting their own wisdom with the actions of SEBI”. Hence, the purpose, object, and reason behind the SEBI Act, are to protect the rights of investors by making use of the power bestowed on it. Therefore, the decision on compounding should not be devoid of SEBI’s consent.


In any case, the omission of the legislature in explaining the nature of SEBI’s consent cannot be interpreted to mean that absence of SEBI’s consent is not determinative. In the present case, Sec. 24-A of the SEBI Act, which concerns compounding of offences, merely states that:


“…any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.”


Hence, there is an omission with respect to SEBI’s role in the process of compounding. The SC in Bangalore Water Supply v. A. Rajappa (‘Bangalore Water Supply case’) delineated the duty of courts, limiting it to statutory interpretation of the words used by the legislature in the legislation. The SC clarified that even if a provision seems desirable but has not been provided by the legislature, courts cannot cure the omission by supplying the required words. Moreover, the Guidelines as well do not specify whether the SEBI’s consent or absence of consent is binding. Under these circumstances, the principle laid down by the SC in the Bangalore Water Supply case i.e., refraining from filling gaps, must be abided by. Therefore, the casus-omissus of characterisation of the consent by SEBI should not be filled by judicial interpretation.


CONCLUSION


Therefore, considering the above-mentioned points i.e., firstly, the principles applicable to compounding, secondly, the role of the SEBI as envisioned by the SEBI Act, case law and relevant guidelines, and lastly, principles of interpretation in the Prakash Gupta case, a contrary conclusion can be arrived at. It is urged that this analysis and conclusion be looked at and tested on the anvil of judicial interpretation.


 

[i] Percy H. Winfield, The Present Law of Abuse of Legal Procedure 117 (2013). [ii] Compounding Crime, Black’s Law Dictionary (5th ed. 2016). [iii] A. B. Kafaltiya, Interpretation of Statutes 39 (2021). Shruti Dhonde, a Penultimate year law student at MNLU Mumbai, is currently working as Editor-in-Chief of Arbitration & Corporate Law Review, Blog. Her interests lie in dispute resolution particularly commercial arbitration and IPR. For any discussion related to the article, she can be contacted at shrutidhonde@mnlumumbai.edu.in.



Arguing in favour of lack of consent being determinative A relook at the Prakash Gupta cas
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