Provisions of Section 11-B of SEBI Act, 1992 can be applied retrospectively

The Supreme Court of India (“the SC”) in the case of SEBI v. Ajay Agarwal has ruled that the provisions of section 11 B of the Securities and Exchange Board of India Act, 1992 (“the Act”) can be applied retrospectively by SEBI. The SC has also stated that an order by SEBI restraining a person from associating with any corporate body in accessing the securities market and prohibiting a person from buying, selling or dealing in securities would not amount to a ‘penalty’ or ‘punishment’ for the purposes of the protection against ex post facto laws.

The facts which lead to the case are as follows. Mr. Ajay Agarwal (“the Respondent”) was the joint managing director of Trident Steel Limited (“the Company”). SEBI initiated certain preliminary investigations into the affairs relating to the public issue done by the Company on the basis of a complaint received from a member of BSE. The complaint alleged misstatement of facts by the Company in the prospectus issued in furtherance of the proposed public issue. In the course of investigations it appeared that the Directors of the Company had pledged their personal holdings of 7,50,000 shares with the Bank of Baroda and the same was not disclosed in the prospectus of the Company. On 22.12.99 SEBI issued a show cause notice to the Respondent asking him to show cause why directions under Section 11−B of the Act restraining the Company and its directors from accessing the capital market for a suitable period should not be issued. The Respondent filed his reply and was also given an opportunity of personal hearing. On March 31, 2004 the Chairman of the SEBI passed an order, under Section 4(3) read with Section 11 and Section 11B of the Act, restraining the Respondent from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities for a period of five years. The said order was challenged before the Securities Appellate Tribunal (“SAT”). It was contended by the Respondent that section 11−B of the Act came by way of amendment with effect from January 25, 1995 whereas the public issue of the Company in respect of which the impugned order was passed was of November 1993 and the prospectus was of October 1993. Both the public issue and the prospectus were prior to 1995. Respondent argued that the alleged misconduct if any was for a period of time when Section 11−B was not on the statute book. Thus, the question which arose before SAT was whether any direction can be issued under Section 11−B for the alleged misconduct said to have been committed prior to introduction of Section 11−B. SAT was of the view that the provision of Section 11−B could not be invoked in respect of the alleged misconduct which took place at a point of time when Section 11−B was not on the statute book. The said order of the SAT was challenged by SEBI before the SC wherein it argued SAT was erroneous in holding that powers under Section 11−B could only be used prospectively and not retrospectively.

The SC in the judgment said that the right of a person of not being convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence and not to be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence, is a fundamental right guaranteed under our Constitution only in a case where a person is charged of having committed an ‘offence’; and is subjected to a ‘penalty’. The SC stated that:

“The respondent has not been held guilty of committing any offence nor has he been subjected to any penalty. He has merely been restrained by an order for a period of five years from associating with any corporate body in accessing the securities market and also has been prohibited from buying, selling or dealing in securities for a period of five years.
The word ‘offence’ under Article 20 sub−clause (1) of the Constitution has not been defined under the Constitution. But Article 367 of the Constitution states that unless the context otherwise requires, the General Clauses Act, 1897 shall apply for the interpretation of the Constitution as it does for the interpretation of an Act.
If we look at the definition of ‘offence’ under General Clauses Act, 1897 it shall mean any act or an omission made punishable by any law for the time being in force. Therefore, the order of restrain for a specified period cannot be equated with punishment for an offence as has been defined under the General Clauses Act.”

As regards the retrospective application of the Section 11 – B of the Act, the SC stated that Section 11−B came up by way of amendment in 1995 to empower SEBI to issue certain directions. The statements of objects and reasons of amendment show that one of the objects is to empower the Board to issue regulations without the approval of the Central Government. The SC stated that:

“Section 11−B of the Act thus empowers the Board to give directions in the interest of the investors and for orderly development of securities market, which, as noted above, is one of the twin purposes to be achieved by the said Act. Therefore, by the 1995 amendment by way of Section 11−B Board has been empowered to carry out the purposes of the said Act.”

The SC concluded that the provisions of Section 11−B being procedural in nature can be applied retrospectively (relying on a plethora of established caselaws). The SC quashed the order of SAT and upheld the order of Chairman of SEBI restraining the Respondent from associating with any corporate body in accessing the securities market and prohibiting him from buying, selling or dealing in securities for a period of five years.