SEBI's Rs. 447 crore disgorgement order overturned due to lack of vicarious liability and procedural violations

Securities Appellate Tribunal Mumbai allowed appeals against SEBI's order imposing Rs. 447.27 crores disgorgement and one-year derivatives trading ban on a company and entities. The Tribunal held that Section 27 of SEBI Act, prior to 2019 amendment, applied only to criminal proceedings, not civil liability. Managing Director could not be held vicariously liable without proof of direct involvement or knowledge in manipulative trades. The Tribunal found SEBI failed to establish complicity beyond surmises and conjectures. Additionally, inordinate 10-year delay in proceedings and non-supply of investigation documents violated natural justice principles. Appeals were allowed on grounds of lack of vicarious liability, procedural violations, and insufficient evidence of manipulation.

---

---

Issues Involved:
1. Whether Section 27 of the SEBI Act prior to its amendment w.e.f. March 08, 2019 provided for vicarious liability only in respect of criminal proceedings initiated against a Company for contravention of the SEBI ActRs.
2. Whether Section 27 of the SEBI Act after its amendment w.e.f. March 08, 2019 provided for vicarious liability for civil liability of a Company for contravention of the SEBI Act, Rules, Regulations, directions or orders made thereunderRs.
3. Whether in the facts and circumstances of the present case the Managing Director of the Company can be held vicariously liable for penalties under Section 27 of the SEBI Act for contravention of Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP RegulationsRs.
4. Whether there has been undue delay in the initiation of the proceedings by the AORs.

Summary:

Issue 1: Vicarious Liability under Section 27 (Pre-Amendment)
The Tribunal examined whether Section 27 of the SEBI Act, prior to its amendment on March 08, 2019, provided for vicarious liability only in respect of criminal proceedings. It concluded that the term "offence" prior to the amendment related to criminal proceedings. The pre-amendment Section 27 did not include within its scope the levy of civil penalties for the alleged violation of the provisions of the SEBI Act and the PFUTP Regulations. The Tribunal held that the 2018 amendment was substantive and not clarificatory, thus could not apply retrospectively.

Issue 2: Vicarious Liability under Section 27 (Post-Amendment)
Post-amendment, Section 27 of the SEBI Act provided for vicarious liability on both criminal and civil liability for contravention of the SEBI Act, Rules, and Regulations. The amendment enlarged the scope of the section to cover enforcement proceedings, indicating a substantive modification rather than a clarification.

Issue 3: Vicarious Liability of the Managing Director
The Tribunal found that the Managing Director (Noticee No. 2) could not be held vicariously liable under Section 27 of the SEBI Act for contravention of Section 12A and Regulations 3 and 4 of the PFUTP Regulations. The evidence showed that the Board of Directors had specifically authorized two senior officers to explore, identify, and implement funding avenues, excluding the Managing Director from direct involvement in the trades. The Tribunal emphasized that the burden under Section 27 was discharged by the Managing Director, and the onus was on SEBI to prove complicity, which it failed to do.

Issue 4: Delay in Initiation of Proceedings
The Tribunal addressed the issue of undue delay in the initiation of proceedings by the AO. It noted that the trades in question occurred in November 2007, and the show cause notice was issued only in November 2017. The Tribunal held that the delay was inordinate and prejudiced the noticees. It emphasized that the limitation period starts running from the date of the alleged violation and that SEBI's internal decision to await the outcome of Section 11B proceedings was not a valid justification for the delay.

Conclusion:
The Tribunal dismissed Appeal No. 87 of 2021 filed by the Company but quashed the impugned order in so far as it related to Appeal Nos. 88 of 2021, 89 of 2021, and 90 of 2021. It directed that if the penalty amount had been deposited under protest by Noticees Nos. 2, 3, and 4, it should be refunded forthwith.

---