Minimum Penalty Under SEBI Act Can Be Reduced In Appropriate Cases: SAT Majority

The Securities Appellate Tribunal at Mumbai has, by a 2:1 majority, held that penalties imposed under the SEBI Act can be reduced below the statutory minimum in appropriate cases after considering mitigating factors.

Setting out its reasoning upfront, the majority said that the scheme of the Act itself allows such flexibility.

“In our considered opinion, the provisions of section 15J come to the rescue in appropriate cases and, in our interpretation, have the power to reduce the penalty below the minimum amount prescribed in specific provisions. In view of the above, we hold that the penalty can be reduced below the extent prescribed in the specific provision by considering the mitigating factors in terms of section 15-J,” the tribunal held.

The ruling was delivered by Technical Members Meera Swarup and Dheeraj Bhatnagar, who formed the majority. Presiding Officer Justice P.S. Dinesh Kumar dissented and held that the minimum penalty prescribed under Section 15HA of the SEBI Act cannot be reduced. The outcome followed the majority view

The case arose from a batch of appeals filed by investors against penalty orders passed by SEBI for trading in illiquid stock options. These are stocks or contracts that see little or no genuine trading and can be easily influenced through pre-arranged transactions. SEBI had imposed the minimum penalty of Rs 5 lakh under Section 15HA, which deals with fraudulent and unfair trade practices.

Before the tribunal, the appellant-investors argued that they were small investors and, in some cases, had not made substantial gains from the trades. They said the adjudicating authority ought to have considered mitigating factors under Section 15J of the Act, such as the actual profits made, the loss caused to investors, and whether the conduct was repetitive. According to them, these factors give the authority discretion to impose a penalty lower than the statutory minimum in appropriate cases.

Agreeing with this position, the majority cautioned that a rigid reading of the penalty provisions would disproportionately hurt small investors with limited financial and legal understanding. It noted that many such investors had been swept into illiquid stock option trades often driven by more sophisticated market players.

“We are afraid that any other interpretation might adversely impact small investors, who without adequate financial and legal literacy, might have been caught in ISO scam and similar innovative devices created by unscrupulous players of securities market and invested small sums such as Rs 50,000 but will be essentially charged by the SEBI with the minimum penalty of Rs 500,000,” the majority said.

It added that the securities market involves very different kinds of participants and that the law does not require them all to be treated alike.

“In the complex and dynamic universe of the securities market, involving differential roles and implications for various stakeholders, all players cannot be treated in the same manner and small investors need to be given what law allows them,” the tribunal observed.

The tribunal also took note of the large number of pending cases relating to illiquid stock options and recalled that SEBI had earlier introduced settlement schemes to deal with such matters. It urged the regulator to consider launching another settlement scheme to help bring closure to pending cases.

Applying the majority view, the tribunal allowed two of the appeals and set aside the penalty orders passed against those appellants.

The third appeal, where the tribunal found clear evidence of non-genuine trades, was dismissed on its merits.

For Appellants: Advocate Saurabh Bachawat, Vikas Bengani, Sachchida Nand Pandey and Kamal Agrawal, FCA

For Respondent: Senior Advocate Gaurav Joshi, Advocates Manish Chhangani, Sumit Yadav, Abhay Chauhan and Atul Agrawal