The Supreme Court of India (“SC”), in the case of Prakash Gupta v. Securities Exchange Board of India, [Criminal Appeal Number 569 of 2021,  decided on July 23, 2021], arising out of an appeal against a Delhi High Court decision wherein an application by the accused for compounding of offences under Section 24A of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) was declined, held that the consent of the Securities and Exchange Board of India (“SEBI”) is not a pre-requisite for compounding of offences under the provision. The court however, added that due deference must be given to the regulators’ opinion. Furthermore, the SC opined that the Securities Appellate Tribunal (“SAT”) or the court must provide cogent reasons to differ from the opinion of SEBI and should only rule against SEBI’s opinion if seen that the opinion of SEBI is mala fide or manifestly arbitrary. The SC also issued guidelines for compounding of offences by SAT/ court under Section 24A of the SEBI Act.

Brief Facts:

The petitioner was accused with artificially manipulating the prices of shares of his company by retaining the ownership of around 42% of the shares with his related companies. In the present case, the April 1, 2019 passed by the Delhi High Court, Prakash Gupta v. Securities and Exchange Board of India [2019 SCC OnLine Del 7930] was challenged, wherein, the petitioner’s application for compounding of offences under Section 24A of the SEBI Act was declined. The appeal before the Delhi High Court arose when the trial court, upon the perusal of SEBI’s information that it did not consent to compounding of the offences, rejected the petitioner’s application basis the SC’s decision in the case of JIK Industries Limited v. Amarlal Jumani, [(2012) 3 SCC 255] (“JIK Industries Case”) wherein it was held that in cases arising out of the Negotiable Instruments Act (“NI Act”), consent of the complainant to compound a case is sacrosanct.

In the Delhi High Court, the Bench referred to the Meters and Instruments Private Limited v. Kanchan Mehta, [(2018) 1 SCC 560] (“Meters and Instruments Case”) which declared that in case of compounding of disputes under the NI Act, the consent of parties is not required and in absence of such consent, the court may close proceedings and discharge disputes in the interest of justice. The Delhi High Court also relied on the decision of the SC in NH Securities Limited v. Securities and Exchange Board of India, (Criminal Appeal No. 1407 of 2019 [Arising out of S.L.P. (Criminal) No. 1132 of 2019] (“NH Securities”)

However, the request for compounding was rejected by the Delhi High Court, noting that proceedings cannot be compounded during the end phase of the trial and without prior consent of SEBI as it will be contrary to objectives of the SEBI Act.

Issue for consideration:

While dealing with the abovementioned facts, the SC adjudicated on the issue whether consent of the SEBI is necessary for compounding of offences by the court/SAT under Section 24A of the SEBI Act?

Decision of the SC:

1. The Supreme Court Bench comprising Chandrachud, J. and Shah, J., assessed the language of Section 24A of the SEBI Act, which reads:

“…24A. Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.”

The SC, thereon analysed the provision, holding that as per Section 24A, the power to compound any proceedings may be exercised before, or after institution of any proceeding by the SAT in case of the former, and a court, in case of the latter.

2. SEBI Circulars on Section 24A

The SC, while perusing the issues involved, deemed it instructive to also look at the circulars issued by SEBI to better understand the practical implications of Section 24A. The SC referred to the SEBI circular dated April 20, 2007, along with the accompanying FAQs issued by SEBI with the circular as well as the SEBI circular dated May 25, 2012 amending the circular dated April 20, 2007. Thereon, the court held that a combined reading of the two circulars as well as the FAQs issued by SEBI clarify the following:

i) Once a criminal complaint has been filed by SEBI, a party can seek compounding under Section 24A at any stage of the proceedings.

ii) The party seeking compounding shall file the application for the same before the court where the said criminal complaint is pending.

iii) A copy of the compounding application should also be sent to SEBI, which may place it before the High-Powered Committee (“HPAC”).

iv) The HPAC’s decision, either that of objection or acceptance shall be placed before the appropriate court, which shall pass the appropriate order.

The SC added that this makes it clear that while the HPAC’s decision on a party’s application for compounding under Section 24A must be placed before the appropriate court, the final decision with respect to the same shall remain in the hands of the court. Thereon, to understand the merits of SEBI’s argument that its consent must be deemed mandatory for compounding, the SC discussed the jurisprudential background of compounding of offences.

3. Jurisprudential Basis of Compounding

The SC, upon a deliberation of the jurisprudence on compounding as it exists in India, held that legislative sanction of compounding of offences is based upon two principles:

i) Private parties should be able to settle a dispute between them at any stage of court proceedings (with or without permission of the court, depending upon the offence). This power of settlement shall extend even to a case of criminal nature if the aggrieved party’s losses have been provided for.

ii) This power of settlement should not extend to situations where the offence involved is of a public nature. Consequently, the societal interest should be borne in mind by the courts, in cases of crimes involving a wider social dimension.

The SC went on to add that in respect of offences which lie outside of the Indian Penal Code (“IPC”), compounding in relation to the offence must be expressly allowed by the statute which creates the offence.

4. Compounding Outside of the Indian Penal Code, 1960/Code of Criminal Procedure, 1973

In discussing compounding outside of the Code of Criminal Procedure, 1973 (“CrPC”), the Court highlighted provisions from the NI Act and the Companies Act, 1956. First, the SC distinguished the applicability of the JIK Industries Case and highlighted the distinction between Section 147 of NI Act and Section 24A of the SEBI Act. It was held that while Section 24A specifies the authorities vested with the powers to compound, the NI Act merely states that the offences under the act are compoundable. This is because of the nature of offences under the NI Act, which are against an individual.

Moreover, the SC questioned the applicability of Meters and Instruments Case and referred to the judgement of the Constitution Bench in Re: Expeditious Trial of cases under Section 136 of Negotiable Instruments Act 1881, [(Suo Motu Writ Petition (Crl.) No. 2 of 2020)] which disagreed with the view taken in Meters and Instruments case and held:

“The judgment of this Court in Meters and Instruments (supra) in so far as it conferred power on the Trial Court to discharge an accused is not good law. Support taken from the words “as far as may be” in Section 143 of the Act is inappropriate. …Conferring power on the court by reading certain words into provisions is impermissible. A judge must not rewrite a statute, neither to enlarge nor to contract it. Whatever temptations the statesmanship of policy-making might wisely suggest, construction must eschew interpolation and evisceration.”

The SC also referred to the judgement in NH Securities wherein an offence was compounded with the SEBI’s approval, keeping in mind the age of the directors of the appellant. This special leave petition arose from a Bombay High Court judgement between the same parties [(2018) SCC OnLine Bom 4040], where it was held that SEBI’s consent is necessary before compounding may be allowed under Section 24A. It was in this case that the SC noted that they have not commented on need for SEBI’s consent as a pre-requisite for compounding an offence under Section 24A of the SEBI Act. Consequently, the SC observed that the issue in the instant case had not been adjudicated upon in NH Securities.

The Court further delineated the ingredients of Section 24A:

The SC thereon held that upon a perusal of plain language of Section 24A, it is clear that the power to compound is entrusted solely to the SAT or the court before which the proceedings are ongoing. Therefore, the non-obstante provision contained in the beginning of Section 24A must be given its natural interpretation. In consequence, the SC found that Section 24A does not provide for the consent of SEBI and reading the requirement of SEBI’s consent into the provision shall amount to re-writing of the statutory provision by the hands of the court, which cannot be supplied by process of judicial interpretation. The SC, citing Section 24B of the SEBI Act, also added that wherever the legislature intended that the recommendation of SEBI is necessary, it has made specific provisions towards the same. While the statutory provisions do not vest with SEBI, an authority in the nature of a veto power under Section 24A, it is necessary to understand that matters under the SEBI Act are initiated upon SEBI’s complaint and it plays a crucial role in the proceedings.

5. Regulatory Role of SEBI

The SC added that owing to its position as the securities market regulator, great importance must be accorded to SEBI’s opinion in compounding offences. The power to adjudicate matters related to compounding of offences has been entrusted with the SAT/ court before which the proceedings are pending. The opinion of SEBI as an expert regulator must be borne in mind by the SAT/ court when assessing a compounding application. The SC also added that while SEBI does not have a veto power over compounding applications as clear from Section 24A, its views must be elicited.

As per the Court, the power of compounding must be exercised by courts, or the SAT and they have to be considerate that in exercising the power of compounding, the principles of the SEBI Act cannot be defeated. The same may be ensured by adhering with the opinion of the SEBI or a HPAC appointed by SEBI. This has also been entrusted by way of the FAQs accompanying SEBI’s circular dated April 20, 2007. SEBI can provide an expert view on the nature and gravity of the offence and its implication on the safety of investors and the securities market, therefore, its views as placed before the SAT or the court shall prove relevant in assessing whether an application for compounding shall be allowed. The SAT/ court may provide a high degree of deference to the opinion of SEBI unless the court/ SAT has a cogent reason to believe that such opinion suffers from mala fide or is manifestly arbitrary.

Thereon, the SC laid out the guidelines to be followed by courts in adjudicating upon matters under the Section 24A of the SEBI Act.

6. Guidelines provided by the SC

The SC issued the following guidelines:

i) The SC primarily held that the factors enumerated in SEBI’s circular dated April 20, 2007, should be perused and the Frequently Asked Questions (“FAQs”) should be considered while deciding an application for a consent order or an application for compounding of offences under Section 24A. The relevant circular can be found here.

ii) The SC added that the opinion of the HPAC is filed before the court/ SAT, upon receipt of a compounding application under Section 24A of the SEBI Act. This opinion of the HPAC indicates their position, as well as that of SEBI on the effects that non-prosecution may have on maintainability of market structures. Consequently, courts should provide cogent reasons to rule contrary to the opinion filed by SEBI/ HPAC and should only do so if the reasons provided by them are mala fide or arbitrary in nature.

iii) It is also upon the SAT/ court to ensure that proceedings under 24A are not filed under Section 482 of the CrPC thereby providing the accused another chance at compounding. Compounding is based upon the principle that the aggrieved party(ies) have been restituted of their losses. Since the offences in securities markets are that of a public character, only the opinion of SEBI/ HPAC in respect of such restitution can be relied upon.

iv) The SC lastly added that the nature of the offences should be perused. In case of offences of a private character, the proceedings may be compounded if restitution has taken place, however, in case of offences of a public character, no such compounding should be allowed, even if restitution has taken place.

Please find a copy of the judgment here.

This update has been contributed by Gaurav Singhi (Partner) and Aryan Mohindroo (Associate).

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