Court’s Decision
The Supreme Court dismissed the appeals filed by the promoter-directors of a listed financial services company challenging the imposition of interest by the Securities and Exchange Board of India (SEBI) on unpaid penalties from the date of the original adjudication order. The Court ruled that the liability to pay interest arises automatically from the expiry of the compliance period stipulated in the adjudication orders, even if no specific demand notice was issued. It clarified, “The liability to pay interest is a consequence of default and flows from the statutory framework under Section 28A of the SEBI Act read with Section 220 of the Income Tax Act, 1961.” The appeals were accordingly dismissed.
Facts
The appellants were promoter-directors of a financial company listed on the Bombay Stock Exchange. SEBI, after examining the company’s share transactions between 2012 and 2013, found violations of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Consequently, SEBI imposed penalties through adjudication orders dated 28 August 2014.
These orders were unsuccessfully challenged by the appellants before the Securities Appellate Tribunal (SAT) and subsequently before the Supreme Court, which upheld the penalties in a judgment dated 28 February 2019. Despite this, the appellants failed to pay the penalties.
In May 2022, SEBI issued demand notices claiming penalty amounts along with 12% interest from 28 August 2014. Upon continued default, SEBI proceeded with attachment orders of bank and demat accounts in June 2022. The appellants challenged the recovery proceedings before SAT, arguing that the levy of retrospective interest was unlawful. SAT dismissed their appeals, leading to the present appeals before the Supreme Court.
Issues
- Whether SEBI can levy interest on penalties from the date of the adjudication orders when such orders did not explicitly provide for interest.
- Whether the appellants’ liability to pay interest commences from the adjudication order date or the later demand notice date.
Petitioner’s Arguments
The appellants contended that SEBI’s Recovery Officer exceeded legal authority by imposing retrospective interest from 28 August 2014 despite the absence of an explicit direction for interest in the adjudication orders. They argued that interest could only accrue 30 days after the demand notice dated 13 May 2022 under Section 220(2) of the Income Tax Act, incorporated into the SEBI Act by Section 28A. They asserted that the insertion of Explanation 4 to Section 28A in 2019 could not apply retrospectively to their case and relied on precedents to argue against retrospective penal consequences, highlighting that liability to pay interest arises only after a valid demand notice is served.
Respondent’s Arguments
SEBI contended that Section 28A of the SEBI Act authorizes recovery of penalties akin to income tax recovery, including interest from the date the liability crystallizes. It argued that the adjudication order itself constituted a demand with a 45-day compliance window, and upon default, statutory interest at 12% per annum automatically became payable under Section 220(2) of the Income Tax Act. Relying on the Supreme Court’s ruling in Dushyant Dalal, SEBI submitted that the liability for interest exists irrespective of the express mention in the adjudication order and the insertion of Explanation 4 merely clarifies this existing position.
Analysis of the Law
The Court analysed the relevant provisions of the SEBI Act and the Income Tax Act, especially Section 28A of the SEBI Act which enables recovery of penalties by incorporating Sections 220-227 of the Income Tax Act. It noted that the statutory incorporation empowered SEBI to recover penalties along with interest similar to tax arrears. The Court distinguished between legislation by incorporation and legislation by reference, concluding that the adoption of Income Tax recovery provisions by Section 28A of the SEBI Act was by incorporation.
The Court observed that Section 220(1) of the Income Tax Act creates a liability to pay within 30 days of a demand, failing which interest accrues under Section 220(2). It held that the adjudication order itself, with a clear 45-day compliance period, operated as a demand notice under the SEBI Act.
Precedent Analysis
The Court relied on its judgment in Dushyant Dalal, which upheld SEBI’s right to recover interest on penalties even prior to the formal incorporation of Section 28A, based on equitable principles. It distinguished other judgments cited by the appellants, such as JK Synthetics Ltd, on the ground that they dealt with different statutory contexts (sales tax and post-assessment liabilities). The Court also referenced Bhai Jaspal Singh and Dhanalakshmy Weaving Works to reiterate that interest is compensatory, not penal, in nature.
Court’s Reasoning
The Court reasoned that adjudication under SEBI Act is triggered by violations, and adjudication orders finalize the liability. The absence of an express mention of interest in the adjudication order does not preclude the operation of statutory interest, which flows from the default in payment after the compliance period. The Court highlighted that interest compensates for the delay in payment of lawfully due sums and is a natural consequence of statutory default. It rejected the argument that a separate demand notice resets the interest computation period, terming it contrary to the legislative intent of ensuring timely compliance.
Conclusion
The Court concluded that:
- The liability to pay interest flows automatically from default post-adjudication.
- Section 28A authorizes recovery of penalty amounts along with statutory interest from the expiry of the compliance period in the adjudication order.
- Explanation 4 to Section 28A is clarificatory and applicable even to pre-2019 cases.
The appeals were dismissed, affirming the validity of SEBI’s recovery proceedings and interest computation.
Implications
This judgment strengthens SEBI’s enforcement powers by confirming that interest liability on penalties arises directly from default post-adjudication, without the need for fresh demand notices. It serves as a deterrent against delayed compliance and underscores the compensatory nature of statutory interest in regulatory frameworks. The ruling aligns the SEBI Act’s penalty recovery mechanism with the robust recovery processes under the Income Tax regime.
FAQs
1. Can SEBI charge interest on penalties from the date of the adjudication order?
Yes, the Supreme Court has upheld that SEBI can levy interest on unpaid penalties from the expiry of the compliance period specified in the adjudication order, without needing a fresh demand notice.
2. Is the 2019 Explanation 4 to Section 28A applicable to past cases?
Yes, the Court clarified that Explanation 4 merely clarifies the existing legal position and applies even to cases where the adjudication order pre-dates the amendment.
3. Why is interest considered compensatory in SEBI penalty recoveries?
The Court held that interest compensates SEBI for the delay in payment of penalties, ensuring public funds are not withheld by defaulters, and is not punitive but remedial in nature.
