The High Court of Bombay, in a writ petition, considered the extent of SEBI's power to arrest defaulters. The matter commenced when SEBI passed orders against the petitioner imposing penalties amounting to Rs. 1.10 cr. (11 million) for violations of the PFUTP Regulations. Subsequently, in accordance with the powers under Section 28A of the SEBI Act, SEBI initiated recovery proceedings against the petitioner and directed him to show cause as to why he should not be committed to civil prison for the default in payment of the dues. The Recovery Officer, in his order, stated that the petitioner failed to establish substantial cause for not committing him to the civil prison and directed that the petitioner be arrested. The Recovery Officer justified the arrest on the grounds of non-payment of dues, as only an amount of Rs 5,160 was recovered from the sole bank account in the name of the petitioner, and for not making a proposal for payment.

The High Court observed that Section 28A of the SEBI Act provides that during the exercise of powers for recovery of dues, the provisions of the Income Tax Act, 1961 are applicable. The Income Tax Act provides a detailed procedure which the Recovery Officer is required to strictly comply with in cases of arrest and detention. It was further observed that these powers may be exercised only in situations where the Recovery Officer is satisfied that (1) the defaulter, with the object or effect of obstructing the execution of the certificate, has dishonestly transferred property; or (2) the defaulter, despite having means, refuses or neglects to pay the dues.

In relation to the facts of the present case, the High Court held that the Recovery Officer is not empowered to arrest and detain the defaulter simply for non-payment of dues or for not giving a proposal for payment of dues. It was held that the Recovery Officer must also satisfy himself that either of the conditions stated above is met and must record reasons for reaching this conclusion in his order. The High Court termed the order of the Recovery Officer to be an instance of sheer abuse of power and held that the arrest was patently illegal and arbitrary.