29 October 2009

SEBI order of impounding – self goal

SEBI has passed a curious order yesterday ‘impounding’ some money from a person who is alleged to have committed manipulation. Till now SEBI either collected fees which it kept in a fund for running its operations, or it collected penalty which it remitted to the consolidated fund of India. There is a third category which started a few years back – one of collecting disgorgement amounts from the violator – to take away ill gotten gains from a violator. This third category was kept by SEBI to refund back to the investor directly or indirectly (by adding to an investor protection fund). To give away disgorgement money to the government is expropriation from the victims of the violation who have the first right over such sums.

It is settled law – in fact dozens of SAT and high court rulings have held that under the ‘direction’ making power of S. 11 and 11B, SEBI cannot impose penalty. The order under S. 11B curiously orders that the amount (which appears similar to disgorgement) be handed over to the consolidated fund of India – thereby implicitly admitting that the amount is a penalty – and thus ensuring that the order will be set aside by SAT and the violator will go home free. In addition, it takes money belonging to victims of securities crime and gives it to the government – a doubly unfair outcome. Seems SEBI just inflicted a self goal in an otherwise strong case.

Note: See SEBI Board meeting agenda which shows that disgorgement amounts are not given to the Consolidated Fund of India.

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