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Home / Markets / Stock Markets /  Section 11b of Sebi Act cannot be used to impose penalties, SAT rules
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MUMBAI : The authority of the Securities and Exchange Board of India (Sebi) to issue directions under Section 11b of the Sebi Act cannot be used to impose penalties on market intermediaries and participants, according to a recent ruling of the Securities Appellate Tribunal (SAT).

Section 11b gives Sebi the power to issue directions to protect the interest of investors and to promote the development of and to regulate the securities market. Such directions issued under this section are in the nature of orders passed after due enquiry.

“We are of the view that the provisions of Section 15HB cannot be utilized for imposition of penalty for non-compliance of an order of the whole-time member passed under Section 11B of the Sebi Act. Consequently, the impugned order cannot be sustained and is quashed. The appeal is allowed with order as to costs," said a bench led by Justice Tarun Agarwala.

The bench also held that if a person fails to comply with the directions of the order issued under Section 11B the amount could be recovered under Section 28A through the recovery officer, who is allowed to attach the person’s assets or their bank accounts.

The ruling comes against the backdrop of the appellate tribunal quashing Sebi’s April 2020 order that imposed a penalty of 45 lakh and 30 lakh on market individuals under Section 15HB of the Sebi Act for their failure to comply with directions issued by the Sebi’s whole-time member. It was made in the wake of appellants Bhargav Panchal and Hina Panchal filing an appeal before it against Sebi’s order. Section 15HB of the Sebi Act, provides that any person who fails to comply with the Act shall be liable to a penalty that may extend to a crore of rupees.

In 2003-2005 Sebi had found certain irregularities in the issuance of shares through initial public offerings. Consequent to this an ex-parte order was issued by Sebi during 2005-2006 that restrained the appellants from buying, selling or dealing in the securities market.

In 2011, the markets regulator issued directions for not accessing the securities market and also asked the appellants to pay back the unlawful gains and asked them to pay an interest of 10% per annum for 5 years.

The appellants were then also asked to pay back 9.9 lakh and 13.45 lakh respectively. Any discrepancy in payment of these amounts would further restrain the individuals from accessing the securities market for 9 years, Sebi said.

The appellants did not comply and were thus asked by Sebi to show cause as to why penalty should not be imposed on them for not complying with the directions of the whole-time member. The appellants did not respond to the notice or appear for hearing. An ex-parte order was then passed imposing the penalty, the order said.

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