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[Sneha Rath is a 3rd-year student at National Law University Odisha]


In this part, the author’s concern is restricted to the issuance of disgorgement as a sanction in terms of equitable remedy by the SAT in situations where companies or individuals have violated the SEBI orders and rules to cause wrongful loss to investors and/or wrongful gain for themselves from off-market transactions. Therefore, the aim is to critically identify if the SAT’s reasoning was reasonable and not directed by arbitrariness and/or non-application of mind.

Delineating The Scope of ‘Reasonableness’ in Securities Law of India

The Regulatory Authorities such as the SEBI and SAT while exercising their power to monitor the securities market in India, are required to ensure proper care and exercise of independence and fair professional judgment, to observe natural justice, to protect the interests of the investors and entities operating in the securities market by following a fair procedure for delivery of justice. These standards for reasonableness and prudence expected on the part of the securities regulators have been upheld on several occasions such as when courts in India have established that matters can be intervened in if an authority has not reasonably arrived at its decision, and the Supreme Court has ruled that despite being a regulatory authority, SEBI has to act prudently under circumstances as per its statutory limitations.

Critiquing SAT’s Ruling in Pawan Kumar’s case

While delivering the Order, the SAT made the following observations: that a spot delivery contract had taken place between Heena Ltd. and Mr. Pawan Kumar (Appellant) in an off-market transaction, that Heena Ltd. did not receive any consideration against the transfer of shares in an off-market transaction to the Appellant, that the transaction concluded between the Noticees and Heena Ltd. was not in conformity with Section 2(i) of the SCR Act which required the former to make the payment either on the same day or on the next day of the transaction, and thus, the Noticees (including Pawan Kumar) were in contravention of Section 15 of the SCR Act.

Nevertheless, having identified the cause of the issue, the SAT went ahead to opine that the imposition of a fine of Rs.11,76,600 on Pawan Kumar (also referred to as the Appellant) was disproportionate and lacked reasoning. Interestingly, the SAT did presume that the AO had imposed the fine based on the value of the shares at the time of purchase by the Appellant. It is implicit here that the AO reckoned the principles of disgorgement through correction of the wrongs that were committed to Heena Ltd. by imposing a penalty that was equivalent to the loss that was caused by the Appellant. At this point, reference can be made to the principle of awarding damages in contracts that embody the objective of putting the party who has suffered loss back in the same position had he not suffered the loss at the hands of the party who wronged him in the first place.

In the present case, reducing the penalty from 12 lakhs (the amount owed by the Appellant to Heena Ltd) to 2 lakhs does not conform either to the objective of disgorgement embodied in the SEBI legislations or to the principle of damages in contract law. Spot delivery contract being an agreement between two or more parties is a private arrangement that embodies the rights and obligations of the parties to such agreement. The SCR Act aims at protecting the interests of those investors who might suffer at the hands of those parties who do not honour the arrangement in a spot delivery contract, thus resulting in causing monetary damages to the investor parties.[1]

A one-off instance, as has been claimed by the SAT in the case of the Appellant, is subjective in determining whether the act committed by a wrongdoer deserves a heavy penalty. In such situations, circumstances have to be taken into consideration when assessing the penalty to be imposed. However, when there exist legislations such as the SEBI Act and SCR Act that have codified the measures to be taken when an unfair activity takes place in the security market, efforts should be made to interpret the same in line with the intent of the drafters. Thus, SAT erred in its judgment in the present matter through its decision to reduce the penalty, when the evidence on record suggested a different course.


The legislative amendment of Section 11B of the SEBI Act which was with the objective of crystallizing disgorgement as a penal power of the Board, could be read into Section 12A of the SCR Act due to commonality in the wordings of both these provisions. Given this commonality, it is reasonable to infer that the intent of the drafters of both the provisions was to further a common objective i.e. to introduce disgorgement as a punishment for the wrongdoers who make a profit for themselves or cause loss to investors in the security market. At this point, the author is of the opinion that if two provisions are worded exactly the same with the mere absence of the word ‘disgorge’ in one of the two provisions, then the inherent meaning of those provisions does not necessarily change.

Upon reading Section 12A of the SCR Act in its entirety, it can be noted that the Board is empowered to issue directions on being satisfied that there is a necessity to prevent any affairs in the securities market that are detrimental to investors, class of persons or any company dealing with securities in the market. It can thus be safely concluded that the objective of disgorgement i.e. to protect investors against unfair or illegal activities in the securities market, as encapsulated in Section 11B of the SEBI Act, has been crystallized into Section 12A of the SCR Act. Therefore, the mere absence of the word ‘disgorge’ does not take away the objective codified in both these sections.

While concluding the first issue [A], the author has attempted to introduce a nexus between two existing provisions of SEBI’s legislations on disgorgement. Thus, the fundamental question around the SAT’s observation in Pawan Kumar around disgorgement needs a revisit. Thereafter, in the second issue [B], the author has sought to establish that reducing monetary penalty while a party is found in contravention of the provisions of SCR Act, has resulted in the SAT delivering a non-reasoned and arbitrary Order. In furtherance of this, the author has reasoned through the principles of damages in contract law that disgorgement aims to uphold the rights of a party trading in a stock market through an agreement, by holding the wrongdoer accountable for his unfair activities through monetary compensation.

At this point, after having analysed the existing jurisprudence on disgorgement in India and abroad followed with a contextual interpretation of Sections 11B of the SEBI Act and 12A of the SCR Act, the author is of the opinion that there is a scope for the SAT to revisit its Order delivered in the matter of Pawan Kumar and discuss the scope of disgorgement in light of investor rights. After all, investors rely on the regulatory authorities like that of SEBI and appellate authorities like SAT to protect their rights in a stock market.

[1]‘Escape legally’ (2009) N.D.A <> accessed 21 October 2021.

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