Case Note & Summary
The Bombay High Court considered a criminal application under Section 482 of the Code of Criminal Procedure, 1973 challenging an order of the SEBI Special Court which had rejected an application for compounding of offences under Section 24A of the Securities and Exchange Board of India Act, 1992. The applicants were directors and nominal shareholders of Avani Plantation Ltd., which had obtained provisional registration under the SEBI (Collective Investment Schemes) Regulations, 1999. SEBI initiated prosecution alleging violations of Sections 11(B) and 12(1B) of the SEBI Act and Regulations 9, 71, 73 and 74 of the Collective Investment Schemes Regulations, punishable under Section 24(1) of the SEBI Act, for failure to comply with directions to refund investors' money. The applicants contended that all investors had been repaid and the company had been wound up, as per a winding up report dated 22 February 2019, and therefore sought compounding under Section 24A. The SEBI opposed the application stating that its High Powered Advisory Committee had recommended against compounding and the Whole Time Members had approved that recommendation. The Special Court, vide order dated 28 August 2019, declined to compound the offence on the ground that without SEBI's consent it was not possible to compound, relying on the Bombay High Court decision in N H Securities Limited v. SEBI, 2018 SCC OnLine Bom 4040. The applicants argued before the High Court that the Special Judge failed to exercise jurisdiction vested in the court under Section 24A and merely relied on SEBI's refusal, without independently assessing the material. The High Court discussed the Supreme Court's decision in Prakash Gupta v. SEBI, Criminal Appeal No. 569/2021, which clarified that while the power to compound is entrusted to the SAT or the Court, the views of SEBI as an expert regulator must be elicited and given high deference, but SEBI does not have a veto. The Supreme Court held that the court must obtain SEBI's views for guidance, and unless those views are manifestly arbitrary or mala fide, they should be accorded high deference, but the court must not substitute its own wisdom on market impact. The High Court observed that the Special Judge's reasoning in paragraph 8 of the impugned order, which stated that without SEBI's consent it is not possible to compound, was based on the earlier overruled position. The provided judgment text does not include the final operative direction of the High Court, but the Court's discussion indicated that the Special Court had misdirected itself in treating SEBI's refusal as binding and failing to independently consider the compounding application in light of the guidelines set out in SEBI's circular dated 20 April 2007 and the accompanying FAQs.
Headnote
A) Criminal Procedure - Inherent Jurisdiction - Section 482 CrPC - Challenge to SEBI Special Court Order - Application under Section 482 CrPC sought quashing of SEBI Special Case No. 51/2014 and order dated 28 August 2019 rejecting compounding. Court examined whether Special Judge failed to exercise jurisdiction under Section 24A SEBI Act. Held that Special Judge's reasoning relied solely on SEBI's refusal, thereby possibly abdicating judicial discretion (Paras 3, 11-12). B) Securities Law - Compounding of Offences - Section 24A SEBI Act - Nature of Power - Section 24A vests compounding power in SAT or Court before which proceedings pending, not SEBI. SEBI's views must be elicited and given high deference but do not constitute a veto. Court must independently consider factors such as SEBI circular dated 20 April 2007 and FAQs. Held that prior Bombay High Court view requiring SEBI consent in N H Securities was superseded by Supreme Court's Prakash Gupta ruling (Paras 13-15). C) Securities Law - Compounding Guidelines - SEBI Circular dated 20 April 2007 and accompanying FAQs - Factors such as nature and gravity of offence, protection of investors, market stability must be weighed. The Court must obtain SEBI's views but may not substitute its own wisdom on market impact discarding expert opinion unless views manifestly arbitrary or mala fide. Held that the Special Court was required to independently assess the application based on these guidelines rather than treat SEBI's refusal as conclusive (Paras 14-15). D) Precedent - Binding Effect - N H Securities Limited v. SEBI, 2018 SCC OnLine Bom 4040 and Prakash Gupta v. SEBI, Criminal Appeal No. 569/2021 - Change in Legal Position - While N H Securities held SEBI consent necessary, Supreme Court in Prakash Gupta clarified SEBI does not have veto over compounding under Section 24A. The Special Court erroneously followed N H Securities without considering subsequent Supreme Court guidance. Held that the Special Court's reliance on the earlier consent requirement was misplaced (Paras 13-14).
Issue of Consideration
Whether the SEBI Special Court erred in rejecting the application under Section 24A SEBI Act by relying solely on SEBI's refusal to compound; whether SEBI's consent is necessary for compounding offences under Section 24A; whether the court should independently consider compounding despite SEBI's adverse recommendation
Law Points
- Section 24A SEBI Act vests compounding power in Securities Appellate Tribunal or Court before which proceedings are pending
- not in SEBI
- SEBI's views must be elicited but do not have veto
- SEBI expert opinion entitled to high deference unless manifestly arbitrary or mala fide
- factors in SEBI circular dated 20 April 2007 and FAQs must be considered
- court must independently decide compounding
- consent of SEBI not necessary for compounding under Section 24A after Supreme Court's Prakash Gupta ruling
- earlier Bombay High Court view in N H Securities requiring SEBI consent no longer binding
