Guidelines for Compounding under Section 24A

Prakash Gupta vs. SEBI (SC) On 23^rd July 2021

Introduction 

-  What is Compounding of offence ?

 Compounding of an offense refers to a legal process in which a complainant or victim of an offense agrees to settle the dispute or withdraw the charges against the accused in exchange for a payment of a sum of money or other forms of compensation. It is a form of alternative dispute resolution mechanism that allows parties to reach a mutually acceptable resolution without going through a full-fledged trial.

- Introduction of Case.

In 2000, the Securities and Exchange Board of India (SEBI) initiated criminal prosecution against Mr. Prakash Gupta, a director and promoter of Ideal Hotels & Industries Ltd., for alleged violations of SEBI regulations related to fraudulent and unfair trade practices in securities markets, as well as regulations related to substantial acquisition of shares and takeovers. In 2013, Mr. Gupta filed an application under Section 24A of the relevant criminal court, seeking to compound the offenses in the criminal complaint filed by SEBI against him, which means settling the dispute in exchange for a payment or other compensation.

However, SEBI recommended to the criminal court that the offenses committed by Mr. Gupta should not be compounded due to the gravity of the violations. The criminal court dismissed Mr. Gupta's compounding application, citing that an offense cannot be compounded without the consent of SEBI. Mr. Gupta then filed an appeal before the High Court of Delhi, which upheld the decision of the trial court. Mr. Gupta, aggrieved by the decision, subsequently filed an appeal before the Supreme Court.

Legal Provision:

Section 24A of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) provides for the compounding/composition of certain offences which are punishable under the SEBI Act. It stipulates that any offence under the SEBI Act which is not punishable exclusively by imprisonment or by imprisonment and a fine may be compounded, before or after the institution of any proceedings. The offence may be compounded by the Securities Appellate Tribunal (“SAT”) or any Court of law

Brief facts:

The appellant is being prosecuted for an offence under Section 24(1) of the SEBI Act. The appellant sought the compounding of the offence under Section 24A. The Trial Court rejected the application, saying that the offence could not be compounded without SEBI’s consent. Single Judge of the High Court of Delhi upheld the order of the Trial Judge in revision. The High Court has held that the trial has reached the stage of final arguments and the application for compounding cannot be allowed without SEBI’s consent. This issue has now landed to SC.

Decision:

Consent of SEBI is not necessary for the SAT or the Court for compounding an offence. Guidelines issued.

Reason:

In the present case, it is evident that Section 24A does not stipulate that the consent of SEBI is necessary for the SAT or the Court before which such proceedings are pending to compound an offence. Where Parliament intended that a recommendation by SEBI is necessary, it has made specific provisions in that regard in the same statute. Section 24B(1) empowers the Union Government on the recommendation of SEBI, if it is satisfied a person who has violated the Act or the Rules or Regulations has made a full and true disclosure in respect of the alleged violation , to grant an immunity from prosecution for an offence subject to such conditions as it may impose. In contrast, Section 24A is conspicuously silent in regard to the consent of SEBI before the SAT or, as the case may be, the Court before which the proceeding is pending can exercise the power. Hence, it is clear that SEBI’s consent cannot be mandatory before SAT or the Court before which the proceeding is pending, for exercising the power of compounding under Section 24A.

Guidelines for Compounding under Section 24A

Section 24A only provides the SAT or the Court before which proceedings are pending with the power to compound the offences, without providing any guideline as to when should this take place. Hence, we deem it necessary to elucidate upon some guidelines which SAT or such Courts must take into account while adjudicating an application under Section 24A:

Firstly, They should consider the factors enumerated in SEBI’s circular dated 20 April 2007 and the accompanying FAQs, while deciding whether to allow an application for a consent order or an application for compounding. These factors, which are non-exhaustive, are:

1. Whether violation is intentional.

2. Party’s conduct in the investigation and disclosure of full facts

3. Gravity of charge i.e. charge like fraud, market manipulation or insider trading.

4. History of non-compliance. Good track record of the violator i.e. it had not been found guilty of similar or serious violations in the past.

5. Whether there were circumstances beyond the control of the party.

6. Violation is technical and/or minor in nature and whether violation warrants penalty

7. Consideration of the amount of investors’ harm or party’s gain.

8. Processes which have been introduced since the violation to minimize future violations/lapses.

9. Compliance schedule proposed by the party.

10. Economic benefits accruing to a party from delayed or avoided compliance.

11. Conditions where necessary to deter future noncompliance by the same or another party

12. Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them

13. Compliance of the civil enforcement action by the accused.

14. Party has undergone any other regulatory enforcement action for the same violation.

15. Any other factors necessary in the facts and circumstances of the case.”

Secondly, According to the circular dated 20 April 2007 and the accompanying FAQs, an accused while filing their application for compounding has to also submit a copy to SEBI, so it can be placed before the HPAC. The recommendation of the HPAC is then filed before the SAT or the Court, as the case may be. As such, the SAT or the Court must give due deference to such opinion. As mentioned above, the opinion of HPAC and SEBI indicates their position on the effect of non-prosecution on maintainability of market structures. Hence, the SAT or the Court must have cogent reasons to differ from the opinion provided and should only do so when it believes the reasons provided by SEBI/HPAC are mala fide or manifestly arbitrary;

Thirdly, The SAT or Court should ensure that the proceedings under Section 24A do not mirror a proceeding for quashing the criminal complaint under Section 482 of the CrPC, thereby providing the accused a second bite at the cherry. The principle behind compounding, as noted before in this judgment, is that the aggrieved party has been restituted by the accused and it consents to end the dispute. Since the aggrieved party is not present before the SAT or the Court and most of the offences are of a public character, it should be circumspect in its role. In the generality of instances, it should rely on the SEBI’s opinion as to whether such restitution has taken place; and

Finally, the SAT or the Court should consider whether the offence committed by the party submitting the application under Section 24A is private in nature, or it is of a public character, the non-prosecution of which will affect others at large. As such, the latter should not be compounded, even if restitution has taken place.