This website is only for informational purposes. Visitors are requested to note that the information is intended to be correct, complete, and up-to-date. Juris Corp does not warrant that the information contained on this website is accurate or complete, and disclaims any and all liability to any person for any loss or damage caused by errors or omissions, whether such errors or omissions result from negligence, accident or any other cause.
This website is not intended to be a source of advertising or solicitation. The reader must not consider the information contained herein to be an invitation for a lawyer-client relationship, must not rely on information provided herein and must seek independent advice. Transmission, receipt or use of any information on this website does not constitute or create a lawyer-client relationship. No recipients of content from this website should act or refrain from acting, based upon any or all of the contents of this website.
Furthermore, Juris Corp does not wish to represent anyone desiring representation based solely upon viewing this web site. Finally, the reader is warned that the use of e-mail for confidential or sensitive information is susceptible to inherent risks of lack of confidentiality associated with sending e-mail over the internet.
By clicking on the "I understand and agree" button below, the user acknowledges that:
We are not liable for any consequence of any action taken by the user relying on information provided under this website. In cases where the user has any legal issues, he/she must seek independent legal advice.
Principal Associate, Juris Corp
Mannat Sabharwal
Associate, Juris Corp
With constant rise in convoluted and intricate transactions being entered in the capital markets space along with the emerging trends by wrongdoers to indulge in white collar crimes with the aid of technology, the timely detection of scams has become a challenge for the Indian regulator, namely, the Securities and Exchange Board of India (“SEBI”).
Considering the quantum of risk involved, with a view to control these crimes, the amended explanation to Section 11B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) grants SEBI the power to direct any person to disgorge an amount equivalent to the disproportionate gain or advantage made or loss averted without prejudice to any other enforcement action.
Ever pondered on the term ‘disgorge’? While the said expression has been elucidated hereinbelow, but at the outset this strong and evolving potent tool in the hands of SEBI essentially refers to an order to give up trading profits, and substantially requires the occurrence of the following events:
Since the concept is quite at an ever-developing stage in India, the Indian tribunals and courts look to foreign pronouncements for guiding their way ahead.
This article discusses the nature and concept of disgorgement, some noteworthy Indian judicial rulings and shares some suggestions to revamp the disbursal process of disgorged amount to investors.
‘DISGORGEMENT’: NATURE AND MEANING
The term ‘disgorgement’ has been in usage and existence in the developed markets across the world in wide range of areas of law.
Simply put, disgorgement means the repayment of illegal gains by wrongdoers. It means that the funds received through unethical business transactions are to be ‘disgorged’ or paid back by such wrongdoers with interest to those affected by the action. In India, the concept came to be expressly recognized by the Indian legislature in the year 2013 vide insertion of Explanation to Section 11B of the SEBI Act1.
While in most countries, disgorgement has been considered as a penal measure, in India, disgorgement is a gain-based equitable remedy which has been enacted to secure the investors morale as well as to ensure the healthy development of financial markets2.
DISGORGEMENT IN PRACTICE
As a part of the procedure:
FRUITS OF POISONOUS TREE
An interesting question that arose for consideration before the Securities Appellate Tribunal (“SAT”) in Gagan Rastogi vs. SEBI7 was “whether a disgorgement order can be passed against a wrongdoer for benefiting third parties from illegal activity, despite wrongdoer having never controlled the funds”.
Whilst answering this question in the affirmative, the SAT observed that:
Thus, SEBI has the power to direct any person who made profit or averted loss in any transaction or activity in contravention of the provisions of the SEBI Act or Regulations thereunder and to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.
Having said that, utmost caution ought to be exercised by SEBI while applying the “jointly and severally liable” principle inasmuch as there must not arise a case wherein, a person is being asked to disgorge the amount, when actually such person is not in the possession of unlawful gains, thereby making it difficult for him to disgorge the amount.
DISGORGEMENT WITHOUT RESTITUTION - JUSTICE SERVED?
The success of disgorgement lies in due regard to the restitution of victims with the sums disgorged and not simply deprivation of the wrongdoer.
Merely getting the State to pocket the ill-gotten gains extracted from the wrongdoer would be akin to penalty and therefore, in order to disgorge monies from private hands, there should be a corresponding intent and effort to identify how to distribute the money. With great power comes greater responsibility. As held by the SAT in Mrs. Ram Kishori Gupta & Anr. vs. SEBI8‘disgorgement without restitution does not serve any purpose’.
To speed up restitution, the authors attempt to offer some recommendations:
Dedicated online portal should be created on the website of SEBI whereby aggrieved and affected investors can fill and submit ‘Claim Form’ along with their transaction
TAKEAWAY
It is plainly clear that the disgorgement tool has conferred immense power and authority on SEBI to hunt down the financial fraudsters effectively and thwart frequent occurrence of frauds, thereby reposing lost confidence of shareholders / investors in the capital markets. The power has been further emboldened up by way of imposing hefty fines for non-compliance with directives to disgorge the ill-gains.
What one cannot lose sight of, is the fact that huge unclaimed amounts pending for years in IPEF are still to see the light of the day in favour of genuine claimants.
To view all formatting for this article (eg, tables, footnotes), please access the original here.