Recently, a major legal issue that was raised in the Supreme Court of India related to the time point when an interest counts on the Securities and Exchange Board of India (SEBI) penalties levied because of the violating security and exchange board regulations. The present case of Jaykishor Chaturvedi & Etc. vs. Securities and Exchange Board of India is all about the interest that should be computed either on the first order of imposing the penalty or on subsequent demand notice issued by Recovery Officer, SEBI. This order brings much clarity to the principles of recovery proceedings under Indian securities law and brings out the interface between SEBI Act and the Income Tax Act.
History of the Conflict
They were promoter-directors of Brijlaxmi leasing and Finance Limited who were the appellants in this case. SEBI made an investigation and stated that these people have purchased company shares in between the months of October 2012 to July 2013 and this is against the various regulations by SEBI namely Prohibition of Insider Trading Regulations. Consequently, SEBI Adjudicating Officer penalized them by issuing orders on August 28, 2014.
These punishments have been appealed by the appellants in different courts all the way to the Supreme Court including the Securities Appellate Tribunal (SAT). A three judge bench decided in the favour of the penalties in February 28, 2019 , and the penalties were final.
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In spite of the fact that the penalties had been settled, the appellants failed to pay the money involved. Accordingly, SEBI Recovery Officer issued demand notices on May 13, 2022. Besides these notices, requiring the original sums in penalties, these notices further sought interest there on at 12 percent interest per annum, since a date as of August 28, 2014, as against the date of issue of the notices that is February 09, 2016. The SEBI then passed orders to attach the appellants bank and demat (dematerialized securities) accounts when they did not still pay up.
The appellants were aggrieved by the amount of interest charged by them since the date of the adjudication orders and following attachment notices and therefore once again moved appeal before the Securities Appeal Tribunal whose appeal was rejected. They thereupon brought the instant appeals to the Supreme Court.
Central Legal Issues that Confront the Court
The two points which the Supreme Court had to determine are:
Can the penalty imposed by the SEBI Adjudicating Officer attract interest?
Provided the answer is yes, then the date on which interest is to be calculated will be the date of the first penalty order (or the subsequent demand notice issued by the Recovery Officer) – which date is the earlier of the two dates?
Legal Clauses and Reasonings
The Position of the Appellants
According to the arguments presented by the appellants, the Recovery Officer had overstepped his mandate by way of levying retrospective interest. They argued that the adjudication orders which were initially rendered to make the penalties did not state any liability of the interest. They cited the Section 28A of the SEBI Act which integrates the provisions of Section 220 of Income Tax Act, 1961 in order to recover.
It was argued by the appellants that Chapter 148 of the Income Tax Regulations prescribed in the ITA (Sections 220(2)) before it was amended after saying that interest would be levied after 30 days of the date of a
demand notice, not as to the date when the amount fell due. However, because the event considered in their adjudication orders was in 2014 prior to the passing of this amendment, they said interest should not be payable until 30 days after the demand notices of May 13, 2022. They also pointed at the fact that application of interest retroactively would be against the principles of substantive law.
SEBI’s Counter-Arguments
SEBI in response through their counsel argued that the matters had already been decided in a case at the Supreme Court in Dushyant N. Dalal v. SEBI. At that, what the Court had done was to uphold the right of SEBI to impose an interest, even on penalty amounts, under Section 28A of the SEBI Act read with Section 220 of the Income Tax Act.
SEBI claimed that the tax was to be paid on August 28, 2014, when the penalties were charged, along with an instruction to make a payment within 45 days. It was argued by them that this heading in the adjudication order itself was the notice of demand as envisaged under the pertinent provisions of the Income Tax Act and interpreted with appropriate changes under Section 28A of the SEBI Act. Hence, appellants were deemed defaulters and thus merited interests since August 28, 2014, since they failed to pay cash 45 days after the adjudication order. They also clarified the fact that the 2022 demand notices were reminding of the remaining amounts.
Analysis and Ranking at the Court
The legal frame was carefully analyzed by the Supreme Court, in Section 28A of SEBI Act which was enacted on July 18, 2013. This section is essential because it includes some of the provisions of the Income Tax Act, like Sections 220 to 227, to recover amounts payable to SEBI which is in the form of penalty etc. The Court observed that although the Chapter VI A of the SEBI dealing with the penalties (Sections 15A-15HB) do not expressly provide that delay in the payment of amount shall attract interest; under Section 28A, Section 220(2) of the Income Tax Act will be applied and any amount due to SEBI, and shall be subjected to the payment of interest thereon under Section 220 (2) of the Income Tax Act, including penalties under Section 15A-15HB of the SEBI.
Section 220(2) of the Income Tax Act has provided a simple interest of 1 percent per month (12 percent a year), on any amount unpaid, within the specified time referred to in a demand notice. The Court explained the difference between the legislating by incorporation and by reference. Legislation by incorporation In legislation by incorporation, the contents of the previous Act are regarded as being incorporated word-to-word into the new Act and any later modifications in the original act do not automatically apply to the incorporating Act. Contrastingly, legislation by reference implies that the later Act refers to the earlier Act in general, and since the referred Act is to be taken to be modified generally, then any amendment to that Act, including any consequential amendment would be applicable.
The Court concluded that a section 28A of SEBI Act supports the provisions of Income Tax Act. Because the adjudication orders of August 28, 2014, actually ordered that the penalties be paid within 45 days, the orders were also the equivalent of the so-called notice of demand in order to accrue interest. The ensuing demand notices by the Recovery Officer were only a part of the recovery course but did not seem to be the event which serviced up the calculation of interest.
The Supreme Court concluded that charges on interest were appropriate. The interest should be based on the expiry of the 45 days compliances period upon decision of the adjudication orders dated the 28th of August 2014. The Court held that by taking the stand of the appellants, the defaulters would be incentivized to not pay until they are caught and by that time, they will have been recorded as having defaulters and this will compromise the system of enforcing the system and cost the revenue finance.
This ruling of the Supreme Court of India has brought great insight as to how interest will be levied in respect to penalties that are imposed by SEBI. It confirms it strongly that after imposing a penalty and prescribing a period of payment in the adjudication order, interest shall be charged on the unpaid sum in the event of the period being exceeded. This ruling strengthens the effectiveness of the recovery system at SEBI and prevents defaulting parties to elude their debt by waiting indefinitely, with this ruling defaulting parties cannot afford to wait and get away with their liabilities. It is clear that the ruling has highlighted the aspect that any financial liability exercised under a regulatory body such as SEBI has a self-understanding that the liability shall be paid in time otherwise, it will carry statutory interest.
