2017 (10) TMI 149 - SC - Companies Law

Supreme Court ruling on SEBI Act interest; equitable grounds apply for Interest Act; appeals favor SEBI and appellants

Dushyant N. Dalal And Another Versus Securities And Exchange Board of India

The Supreme Court clarified that while Section 28A of the SEBI Act could not retrospectively impose interest, interest could be awarded on equitable ... Interest recovered on orders of penalty issued - Section 28A of the Securities and Exchange Board of India Act, 1992 - whether interest can be recovered on orders of penalty issued under the Act and/or orders of disgorgement of unlawful gains, when the said amounts have remained unpaid? - Held that:- The Interest Act of 1978 would enable Tribunals such as the SAT to award interest from the date on which the cause of action arose till the date of commencement of proceedings for recovery of such interest in equity. The present is a case where interest would be payable in equity for the reason that all penalties collected by SEBI would be credited to the Consolidated Fund under Section 15JA of the SEBI Act. There is no greater equity than such money being used for public purposes. Deprivation of the use of such money would, therefore, sound in equity. This being the case, it is clear that, despite the fact that Section 28A belongs to the realm of procedural law and would ordinarily be retrospective, when it seeks to levy interest, which belongs to the realm of substantive law, the Tribunal is correct in stating that such interest would be chargeable under Section 28A read with Section 220(2) of the Income Tax Act only prospectively. This is a positive indication that Section 28A was intended only to have prospective application. It must be clarified, however, that interest is chargeable only with effect from 25.8.2014, as Section 220 was not referred to, while enacting Section 28A, in any of the three Ordinances preceding the Amendment Act of 2014.) However, since it has not taken into account the Interest Act, 1978 at all, we set aside the Tribunal’s findings that no interest could be charged from the date on which penalty became due. The Civil Appeals 10410- 10412 of 2017 are allowed insofar as the penalty cases are concerned. Going to the facts in Civil Appeal No. 5677 of 2017 Shri Subramonium Prasad is correct in his submission. If there is default in payment of ₹ 6 crores within the stipulated time, no future interest is payable inasmuch as a much severer penalty of being debarred from the market for 7 years was instead imposed. We have noticed how the appellant has, in fact, suffered the aforesaid debarment and how he made payment of ₹ 6 crores on 6.1.2014 from the sale of shares. The SAT was incorrect in stating that the order dated 21.7.2009 contained an obligation to pay interest at the rate of 12% per annum on the unlawful gain of ₹ 4.05 crores till payment. Issues Involved:1. Whether interest can be recovered on orders of penalty and disgorgement of unlawful gains under Section 28A of the SEBI Act.2. The applicability of interest on penalty orders prior to the introduction of Section 28A.3. The interpretation and application of the Interest Act, 1978 in awarding interest on equitable grounds.Detailed Analysis:1. Interest on Orders of Penalty and Disgorgement:The core issue in the appeals was whether SEBI could recover interest on unpaid penalty orders and disgorgement of unlawful gains under Section 28A of the SEBI Act. In the disgorgement case (C.A. 5677 of 2017), the noticees were found guilty of manipulating share demands in IPOs, resulting in unlawful gains of Rs. 4.05 crores. SEBI's order included the disgorgement of these gains along with simple interest of Rs. 1.95 crores for the period from 2005 to 2009. The noticees were directed to pay the total amount of Rs. 6 crores within 45 days, failing which they would face a seven-year market ban. SEBI later demanded additional interest from 2009 to 2013, which the noticees contested.2. Applicability of Interest on Penalty Orders Prior to Section 28A:In penalty cases such as SEBI v. Ashok Panchariya (C.A. 10410 of 2017), SEBI imposed penalties for unfair trade practices and demanded interest on unpaid penalties under Section 28A. The SAT held that interest could only be charged from the date of the introduction of Section 28A (18.7.2013) and not retrospectively. SEBI appealed, arguing that interest should be payable from the date the penalty became due.3. Interpretation and Application of the Interest Act, 1978:The Court examined whether interest could be awarded on equitable grounds under the Interest Act, 1978. The Act allows courts and tribunals to award interest from the date the cause of action arose until the commencement of proceedings. The Court held that the Interest Act enables the award of interest in equity, especially in cases where public monies are involved, such as penalties collected by SEBI, which are credited to the Consolidated Fund of India.Judgment Analysis:Disgorgement Case (C.A. 5677 of 2017):The Court found that the SEBI order dated 21.7.2009 did not explicitly provide for future interest beyond the initial period specified. The severe penalty of a seven-year market ban was imposed for non-payment within 45 days, indicating that further interest was not intended. The SAT's interpretation that future interest was implied was incorrect. The Court allowed the appeal, setting aside the SAT's judgment and ruling that no future interest was payable beyond the specified period.Penalty Cases (C.A. 10410-10412 of 2017):The Court held that Section 28A, being procedural, could not retrospectively impose interest for periods before its introduction. However, the Interest Act, 1978 allows for the award of interest on equitable grounds from the date the cause of action arose. The Court set aside the SAT's finding that no interest could be charged from the date the penalty became due, allowing SEBI to charge interest from the date of the cause of action.Conclusion:The Supreme Court clarified that while Section 28A of the SEBI Act could not retrospectively impose interest, interest could be awarded on equitable grounds under the Interest Act, 1978. In the disgorgement case, no future interest was payable beyond the specified period due to the severe penalty imposed for non-payment. In penalty cases, SEBI could charge interest from the date the cause of action arose. The appeals were allowed in favor of SEBI in penalty cases and in favor of the appellants in the disgorgement case.