Equipped with broad statutory powers, the Securities Exchange Board of India (SEBI) has been hard at work for the past 30 years, shouldering the herculean task of managing the Indian securities market, through both regulation and enforcement. Naturally, to help SEBI respond to and deal with evolving challenges, its powers, specifically those under the Securities Contracts (Regulation) Act, 1956 (SCRA) and the SEBI Act, 1992 (SEBI Act), have been continuously at play, allowing it to mete out a wide range of penalties, both monetary and substantive. SEBI’s exercise of such powers, in its capacity as a quasi-judicial authority, has increasingly become a subject-matter of appellate interest, on questions of both jurisdictional remit and proportionality of penal action.
The Powers of SEBI and its Ability to Exercise Discretion
The quasi-judicial powers of SEBI are broadly exercised under two parallel processes: Sections 11 and 11B of the SEBI Act and the adjudication mechanism.
Proceedings under Section 11 and 11B
Sections 11 and 11B permit the regulator to undertake any measures that it deems fit, for the protection of the interests of investors, and the development and regulation of the securities market. While elaborating on the scope of Section 11B in the case of SEBI vs Pan Asia Advisors Limited and Others, the Supreme Court noted that the specific provisions of the SEBI Act provided SEBI with necessary powers, casting a duty on it to protect the interests of Indian investors as well as the stock market in India whenever it finds any fraud or other such misdeeds committed by any person which worked against the interests of Indian investors in securities. Similar provisions, giving ample decision-making powers to SEBI, can also be observed in the SCRA.
In Sahara India Real Estate Corporation Limited and Others vs SEBI as well, the Supreme Court held that, the measures to be adopted by SEBI in carrying out its obligations are couched in open-ended terms and have no prearranged limits.
The adjudication process
The adjudication process on the other hand, is helmed by the adjudicating officer (AO), appointed in terms of Section 15I of the SEBI Act, who is required to comply with certain specific criteria, while adjudging the quantum of penalty being imposed. The Hon’ble Supreme Court though, in the Shriram Mutual Fund case , recognised that SEBI may not always be able to adopt a very discerning approach in this regard and held that as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established, the intention of the parties committing such violation becomes wholly irrelevant. Hence, once the contravention is established then the penalty is to follow. As a consequence, the distinction between violations and culpable violations often blurred before the enforcement authorities, resulting in an automatic levy of significant monetary penalties, without taking into account its proportionality to the transgression in question.
The ambit of the AO’s discretion has been a subject matter of some debate judicially, with sufficient precedent to support that factors outside of what the SEBI Act itself empowered the authority to consider, were irrelevant for determination of penalty amounts. Through its decision in SEBI through its Chairman vs. Roofit Industries Ltd. the Supreme Court held that the AO did not possess any discretionary power for taking into account the factors other than those specified in Section 15J of the SEBI Act, which were exhaustive.
A significant change, however, has come about post the matter of Adjudicating Officer, SEBI vs. Bhavesh Pabari, wherein the Apex Court has clarified that conditions specified in Section 15J are not exhaustive and are merely illustrative in nature, and, hence, are not required to be mandatorily fulfilled for the imposition of a penalty by the AO. Consequently, this has led to the widening of the scope the AO has at its disposal, enabling him to make a full and fair assessment of the penalties that can be imposed.
A Growing Emphasis on Proportionality
Accordingly, a sharp change of tone is evident in the SEBI / AO orders that are being issued subsequently, which acknowledge the varying degrees of culpability in any specific situation and avoid the temptation of doling out standardized penal action. In the adjudication order in the matter of JM Financial Institution Securities Limited, it was held that a violation caused on account of oversight and not deliberately, did not deserve penal consequences. Likewise, in the matter of Kotak Mahindra Mutual Fund, a SEBI whole time member upheld the AO’s view of non-imposition of penalty in the case of a procedural and venial default and also held that a minor and non-serious violation of a circular did not warrant an imposition of monetary penalty.
Even at the appellate level, proportionality of regulatory action is emerging as a resounding theme – hence the underlying emphasis on SEBI, as a quasi-judicial authority, to exercise its discretion in its capacity as the court of first instance. This is evident from multiple Securities Appellate Tribunal (SAT) orders recently such as M/s. DSE Financial Services Ltd. v. SEBI, wherein SAT quashed an AO’s order taking punitive action, against violations committed, which were either mostly technical in nature, or solitary instances or those for which corrective measures had been taken/initiated. Similarly, in the case of Piramal Enterprises Limited vs. SEBI, SAT held that SEBI should function in its capacity of a watchdog and not a bulldog and stated that, in a case of an infraction of a rule, remedial and not punitive measures, should be taken at the first instance. A similar sentiment was echoed in P.G. Electroplast Ltd. & Others vs. SEBI, wherein SAT held that a penalty burden to the extent of INR 1 crore for a mere technical and venial violation was grossly disproportionate.
Jurisdictional Remit – Emergence of New Dimension
In what is a clear indicator of a new dimension emerging around the science of penalty imposition, earlier this month, in the matter of Price Waterhouse & Co. and Ors. vs. SEBI, SAT held that SEBI’s ability to take action against entities primarily regulated by other regulators, could only be remedial and not punitive. Based on this principle, an order banning an auditing firm from practicing was not sustained, as the Tribunal held that its primary domain squarely restedwith the Institute of Chartered Accountants of India.
In doing so, the SAT has flagged off an interesting debate around the standard of proof that SEBI should be held to in cases of fraud. However, regardless of how the decision itself is perceived from an auditor accountability perspective, the Tribunal must be commended for introducing a critical distinction between regulators. This hierarchy is particularly imperative for our times, wherein most entities are subject to (at least) dual or multiple regulation, making it important to understand the perimeter within which each domain operates and the dominion it is capable of exercising over the entity concerned.
Therefore, while there are no legislative fetters around the manner in which the regulator can exercise its powers, like any quasi-judicial body, it is imperative for SEBI to ensure any penalty imposed, is informed of and filtered with (i) its own jurisdictional remit; (ii) the evidence on record; (iii) the specific facts involved and (iv) the degree of transgression and its proportionate relationship to the penal action being imposed, avoiding a mechanised, technical approach. It is only when the discipline of such nuanced enforcement practices become well-entrenched in practice that we can move beyond a blinkered, rule-based approach to crime and punishment in the securities market.
*The authors would like to acknowledge assistance by Khyati Goel, Associate
 (2015) 14 SCC 77
 Under Section 12A of the SCRA, SEBI has been empowered to, inter alia, issue appropriate directions in the interests of investors in securities and the securities market, to stock exchanges, clearing corporations, any agency or person so stated, or to any company whose securities are listed or proposed to be listed in a recognised stock exchange.
 (2013) 1 SCC 1
 Under Section 15J of the SEBI Act, while adjudging the amount of penalty, the AO is required to consider the, (i) amount of disproportionate gain made; (ii) amount of loss caused to the investors; and (iii) repetitive nature of the default.
 AIR 2006 SC 2287
 Section 15J of the SEBI Act deals with the factors to be taken into consideration while adjudging the quantum of penalty.
 This was again brought before the Hon’ble Supreme Court in the matter of Siddharth Chaturvedi vs. Securities and Exchange Board of India, which however, referred the issue to a larger bench.
 2019 (2) Bom CR 517
 Adjudication Order, dated May 10, 2019.
 Order by whole time member, dated May 31, 2019.
 SAT order September 11, 2012.
 SAT order, dated May 15, 2019.
 SAT order, dated August 2, 2019.
 September 9, 2019