High Court Rules That SEBI Can Accrue Interest on Penalties effective from the date of judgment issued
The Securities and Exchange Board of India (SEBI) has been granted the authority to recover interest on unpaid penalties from the date of the adjudication order, even if the original order does not explicitly state interest, according to a recent ruling by the Supreme Court of India.
In a landmark decision, the Court held that interest on penalties or compensation is a substantive consequence when recovery is delayed, and can be imposed from the date of the adjudication order if the penalty remains unpaid. This ruling serves to strengthen SEBI's regulatory enforcement framework by incentivizing timely payment and ensuring that penalties serve their intended deterrent effect.
The case in question involved penalties imposed on Jaykishor Chaturvedi, Siddharth Chaturvedi, and Ankur Chaturvedi in 2014 for violating the SEBI (Prohibition of Insider Trading) Regulations. The penalties, amounting to ₹11 lakh, ₹5 lakh, and ₹7 lakh respectively, were upheld by the Securities Appellate Tribunal (SAT) in 2015 and affirmed by the Supreme Court in 2019.
However, a dispute arose regarding the recovery of interest on these penalties. The appellants argued that no interest was levied in the 2014 orders, and that interest could only run from the 2022 demand notices. The Supreme Court, however, upheld SEBI's power to recover interest on unpaid penalties from the date of adjudication.
The Court's approach suggests that when there is a delay in payment following the penalty order, interest can be claimed retrospectively from the date of the order. This is consistent with common legal principles whereby delayed payments attract interest, as a measure of compensation for the time value of money and a deterrent against non-compliance.
Interest under Section 28A of the SEBI Act is compensatory in nature, not penal. Since Section 28A of the SEBI Act incorporates the recovery framework under the Income Tax Act "with necessary modifications," interest under Section 220(2) - at 1% per month - became automatically payable after the expiry of the 45-day period set out in the adjudication orders.
In May 2022, SEBI issued demand notices seeking recovery of the penalty amounts along with 12% per annum interest calculated from the date of the original adjudication orders. The petitioner was represented by Senior Advocates Purvish Jitendra Malkan and Benni Chatterji with Advocates Dharita Malkan and Khushboo Aakash Sheth, while SEBI was represented by Senior Advocate Pratap Venugopal with Advocates Amarjit Singh Bedi, Surekha Raman, Shreyash Kumar and Imlikaba Jamit from KJ John & Co.
It is worth noting that Explanation 4 introduced in 2019 did not bring about any substantive change but clarified the existing legal position. The Court held that Explanation 4 to Section 28A can apply retrospectively.
The purpose of interest is to account for the loss to the public exchequer from delayed payment. The delay in payment of penalty amounts deprives the Revenue of the timely use of funds that rightfully belong to the public exchequer. The Court stated that one purpose of specifying a period in the adjudication order is to determine the period from which payment of interest is to be calculated, if the assessee commits a default.
In conclusion, the Supreme Court's ruling affirms SEBI’s recovery of interest on unpaid penalties can be enforced from the adjudication date even if the original penalty order does not expressly stipulate such interest. This decision strengthens SEBI's regulatory enforcement framework by incentivizing timely payment and ensuring that penalties serve their intended deterrent effect.
The Supreme Court's ruling reinforces the SEBI's authority to recover interest on unpaid penalties from the date of the adjudication order, therefore influencing the finance-related matters within the regulatory enforcement framework. This ruling encourages timely payment of penalties and ensures that penalties serve their intended deterrent effect in the finance sector.
