The Securities and Exchange Board of India Act, 1992 (“SEBI Act”) was essentially introduced to protect the interests of investors and to regulate and promote the development of the securities market in India. As a direct consequence of this legislative intention, the SEBI Act lays down that contravention, attempt to contravene and abetment of contravention of the provisions of the SEBI Act would be punishable with imprisonment and fines of varying quantum.
Pertinently, Section 24A of the SEBI Act stipulates that an offence not punishable with imprisonment only, or with imprisonment and fine, may be compounded by a Securities Appellate Tribunal or a court before or after the institution of any proceedings. The contours and the essential elements of Section 24A of the SEBI Act were recently explored and elaborately explained by the Hon’ble Supreme Court (“Court”) in Prakash Gupta v. Securities and Exchange Board of India (“Prakash Gupta”). The Court held that while the consent of Securities and Exchange Board of India (“SEBI”) is not required for the compounding of offences under Section 24A, its views must be elicited and accorded a high degree of deference, unless manifestly arbitrary or mala fide.
Jurisprudential Basis for Compounding
Compounding of an offence is understood to be an agreement to not continue with the prosecution of the crime by the state, while having knowledge of the actual commission of the crime, in return for consideration, usually monetary or reparative in nature, from the person having committed the offence. While compounding of offences is provided for, not only in financial statutes, but also in penal statutes being the Indian Penal Code, 1860, it has been jurisprudentially established that only an offence of a private nature, and not an offence against the public at large, is compoundable. Further, it has been discussed and held in Prakash Gupta that the power of compounding must be expressly conferred by the statute which creates the offence.
Compounding of criminal offences under the Code of Criminal Procedure, 1973 (“CrPC”) is done under Section 320 wherein categories of offences are delineated and the process of compounding for each category is explained. The principle of allowing certain offences to be compounded is two-fold – firstly, private parties should be allowed to settle a dispute if the aggrieved party has been adequately restituted and secondly, offences of public nature cannot be compounded.
In relation to offences under financial statutes, in the process of compounding the same, while the broad principles of compounding as mentioned above continue to hold good, additional considerations such as the perceived seriousness of the offence and the nature of remedy provided also apply. For instance, in relation to Section 147 of the Negotiable Instruments Act, 1881 (“NI Act”), which is the compounding provision for offences under the said Act, it was interpreted by the Court in JIK Industries Limited v. Amarlal Jumani that although the offences are compoundable under the NI Act, the essential principle of compounding, being the consent of the person aggrieved to the compounding of the offence, cannot be disregarded.
Additionally, while adjudicating upon compounding of offences under the Companies Act, 1956, in VLS Finance Limited v. Union of India, the Court allowed the compounding of the offence in relation to non-compliance of laying down accounts before the board and pertinently held that the requirement of prior permission of a court cannot be implied if it is not expressly provided in the statute.
In the light of the above understanding of compounding of offences across various statutes, the principles of compounding remain consistent. Offences that are private in nature and the punishment for which is payment of fine are compoundable. The consent or, at the very least, the views of the aggrieved party are to be respected by the authority adjudicating upon the compounding. Lastly, the requirements of compounding under a specific statute are a product of the statute itself, and therefore such provision must not be enlarged by reading additional terms into the provision.
Compounding Under the SEBI Act: Critical analysis of the Prakash Gupta judgment
The factual background to Prakash Gupta was that Mr. Prakash Gupta, director of Ideal Hotels & Industries Limited (“Company”), was accused of having engaged in price rigging and insider trading during the Initial Public Offer (“IPO”) of the Company, in violation of Regulations 4(a) and (e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, along with other provisions of the Takeover Regulations, 1994 and 1997. Pursuant to an investigation by SEBI, it was established that six entities, directly or indirectly controlled by Mr. Gupta, were responsible for the upward movement of the share prices of the Company and that the funds for the purchase of shares by these entities were from the proceeds of the IPO itself. A criminal complaint was filed against Mr. Gupta before the Trial Court alleging the above violations and an Adjudicating Officer under the SEBI Act was appointed. Prior to any orders in the aforesaid proceedings, the Chairman of SEBI, under the provisions of the SEBI Act, allowed Mr. Gupta to purchase the shares of the shareholders at a higher price than that fixed during the IPO, thereby supposedly resolving the issue. However, the AO, pursuant to noting the offences committed by Mr. Gupta, levied a fine of INR 20,000 on him and other co-promotors. This penalty too was paid by the accused.
Thereafter, a compounding application under Section 24A of the SEBI Act was filed by Mr. Gupta before the Trial Court which was objected to by the High Powered Advisory Committee (“HPAC”) of SEBI. The Trial Court rejected the compounding application on the grounds that SEBI had not provided its consent to the same, which was upheld by the High Court of Delhi. Hence, the present appeal before the Court.
The main issue in this judgment was whether under section 24A of the SEBI Act, the express consent of SEBI is required prior to the compounding of offences by the Securities Appellate Tribunal or the court before which proceedings are pending. Justice DY Chandrachud and Justice MR Shah, in this judgment, and rightly so, have given primary importance to the legislative intent behind every component of this section. While a plain reading of the section does not provide for the consent of SEBI, it was considered whether such consent should be read into Section 24A, on the grounds of casus ommisus. The Court contrasted Section 24A with Section 24B of the SEBI Act wherein specific recommendation from SEBI is required for the grant of immunity from prosecution and held that in contrast to Section 24B, Section 24A is conspicuously silent on the requirement of SEBI’s consent. Further, the Court also relied on SEBI’s circular on ‘Guidelines for Consent Order and for considering requests for composition of offences’ dated April 20, 2007 and the Frequently Asked Questions appended thereto to hold that while SEBI does not have a veto, the views of SEBI must be taken into serious consideration and courts must be wary of discarding SEBI’s expert opinion.
At first blush, the holding of the Court appears to be diametrically opposite to that of the High Court of Delhi in the same matter, however, on a closer reading, it is clear that while the rationale may be different, the final ruling of the Court remains the same and the judgment of the High Court of Delhi has been upheld. Further, while the legal acumen and precise analysis delivered by Justice Chandrachud in the present judgment, and even otherwise, is unrivalled, the holding that the view of SEBI is to be given paramount importance unless arbitrary or mala fide may have the effect of diluting the non-requirement of the consent of SEBI in the compounding of offences under the SEBI Act, as it amounts to an additional procedural requirement that may have been avoided. Further, it may be observed that there was a drafting lacunae in Section 24A of the SEBI Act, with respect to lack of clarity on whether SEBI’s consent is required, which the Supreme Court has used its extraordinary power to correct and hold that SEBI’s opinion must be treated with sacrosanct deference, thereby effectively making SEBI’s consent in relation to compounding of offence mandatory.
Conclusion: Setting A Benchmark
Notably, the Supreme Court in Prakash Gupta deemed it important to lay guidelines which the Securities Appellate Tribunal and courts may take into account while deciding a compounding application under Section 24A of the SEBI Act and the same are summarised below:
- The factors as listed in the Frequently Asked Questions (Question No. 11) in relation to the ‘Guidelines for Consent Order and for considering requests for composition of offences’ dated April 20, 2007 should be adhered to;
- The opinion of SEBI and its HPAC must be given due deference as the same indicates their position on the effect that non-prosecution of the offence may have on market structures. The Securities Appellate Tribunal or the courts should only differ from the opinion of SEBI/ the HPAC, if it has reasons to believe that the said opinion is mala fide or manifestly arbitrary;
- The principle behind the compounding proceeding should be that the aggrieved party has been restituted and that it has consented to end the dispute. Since the aggrieved party may not be before the court, and that the offences are usually of public nature, it becomes even more essential to rely on SEBI’s opinion to understand if restitution has taken place; and
- Even if restitution has taken place, but the offence is of public character and non-prosecution of the same would affect the public at large, such offence should not be compounded.
The judgment of the Supreme Court in Prakash Gupta is significant as it not only underlines the importance of the role played by SEBI in market regulation and addressal of investors, but also appreciates the intention of the legislators while doing so. Further, it fills in the lacune that earlier existed by providing detailed guidelines on the factors to be take into consideration while passing an order under Section 24A of the SEBI Act.
 2021 SCC OnLine SC 485
 (2012) 3 SCC 255
 (2013) 6 SCC 278
 Regulations 6(1), 6(3), 8(1), 10(1) and 10(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 and Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.