High Court Overturns SEBI Special Court Order on Compounding Offence, Emphasizes Evidence Consideration

The Bombay High Court quashed the SEBI Special Court's order rejecting the application for compounding the offence under Section 24A of the SEBI Act. The High Court directed the Special Judge to independently decide on the compounding based on relevant material, including the winding-up report and SEBI's circular, following the Supreme Court's guidelines. The court emphasized the importance of considering all evidence and obtaining SEBI's views before making a decision, ultimately allowing and disposing of the application accordingly.

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Issues Involved:
1. Quashing of proceedings in SEBI Special Case No. 51/2014.
2. Challenge to the order dated 28th August, 2019 rejecting the application for compounding of offence under Section 24A of SEBI Act.
3. Jurisdiction and discretion of the SEBI Special Court in compounding offences.
4. Interpretation and application of Section 24A of the SEBI Act.

Detailed Analysis:

1. Quashing of Proceedings in SEBI Special Case No. 51/2014:
The applicants sought to quash the proceedings in SEBI Special Case No. 51/2014. The case involved alleged violations of Sections 11(B), 12(1B) of the SEBI Act, 1992, and Regulations 71, 73, and 74 of the SEBI (Collective Investment Schemes) Regulation, 1999, punishable under Section 24(1) of the SEBI Act. The SEBI initiated prosecution after the company failed to comply with directives to refund monies collected under the scheme.

2. Challenge to the Order Dated 28th August, 2019:
The applicants challenged the SEBI Special Court's order dated 28th August, 2019, which rejected their application for compounding the offence under Section 24A of the SEBI Act. They argued that the Special Judge failed to appreciate the material evidence, such as the winding-up report dated 22nd February, 2019, which indicated that the company had refunded the entire amount collected under the scheme to all shareholders/creditors.

3. Jurisdiction and Discretion of the SEBI Special Court in Compounding Offences:
The applicants contended that the SEBI Special Court has exclusive jurisdiction to compound offences once proceedings are instituted before it. They argued that the court should independently decide whether to compound the offence based on the material on record, without solely relying on the SEBI's recommendation. The SEBI opposed the application, citing the High-powered Advisory Committee's (HPAC) recommendation against compounding the offence, which was approved by the SEBI Panel of Whole Time Members.

4. Interpretation and Application of Section 24A of the SEBI Act:
The court examined the interpretation and application of Section 24A of the SEBI Act. The SEBI Special Judge had relied on the judgment in N H Securities Limited Vs. SEBI, which held that SEBI's consent was necessary for compounding an offence. However, the Supreme Court in Prakash Gupta Vs. SEBI clarified that while SEBI's views must be considered and given deference, SEBI does not have a veto power. The court must obtain SEBI's views to guide its decision but can independently decide on compounding the offence.

Conclusion:
The Bombay High Court quashed the SEBI Special Court's order dated 28th August, 2019, and directed the Special Judge to decide the application for compounding the offence in accordance with the guidelines set out by the Supreme Court in Prakash Gupta Vs. SEBI. The court emphasized that the SEBI Special Judge should consider all relevant material, including the winding-up report and SEBI's circular dated 20th April, 2007, and obtain SEBI's views before making a decision. The application was allowed and disposed of accordingly.

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