On October 30, 2018, in the matter of NH Securities v. SEBI, the High Court of Judicature at Bombay issued an order holding that SEBI’s consent is required for compounding of offences by the Securities Appellate Tribunal (SAT) or a court under Section 24A of the SEBI Act, 1992 (SEBI Act).
Section 24A of the SEBI Act provides for composition of certain offences by the SAT or a court before which such proceedings are pending. Compounding is essentially a settlement process by which an accused pays compounding charges in lieu of undergoing prosecution. In this matter, NH Securities was found guilty of violating certain securities laws and was penalized a sum of Rs. 1.5 lakhs (Rs. 0.15 million). On non-payment of the same, SEBI launched a prosecution before the SEBI Special Court against NH Securities under Section 24(2) of the SEBI Act, which provides that if any person fails to pay the penalty imposed by the adjudicating officer, he shall be punishable with imprisonment, or fine, or both. Before the SEBI Special Court, NH Securities filed an application for compounding the offence. On account of opposition by SEBI, the compounding application was rejected by the SEBI Special Court, and NH Securities filed an appeal before the High Court challenging this rejection.
NH Securities contended that the power to compound the offence under Section 24A is provided to the court and the consent of SEBI is not a pre-requisite. Further, it was contended that in cases under Section 138 of the Negotiables Instrument Act (NI Act), which is similar to Section 24(2) of SEBI Act, courts have encouraged compounding of offences over continuation of proceedings.
Rejecting these contentions, the High Court held that existence of an enabling provision does not imply that every application has to be compulsorily compounded. SEBI cannot be compelled to settle the dispute. Further, the High Court observed that an offence under the NI Act is different as it is between private persons, unlike offences under SEBI Act which are initiated by SEBI acting as a custodian of the interest of investors. Therefore, discretion needs to be applied and powers of compounding cannot be exercised in every case.
The High Court has rightly interpreted Section 24A to read SEBI’s powers into it. SEBI is tasked with regulating the market and protecting the interests of investors. Mandatorily accepting every compounding application may not be in the best interests of the investors and the market.
