Penalties and Adjudication

Chapter VIA - Penalties & Adjudication

Section 15A. Penalty for failure to furnish information, return.

• If any person who has the following duties under this Act or under the rules or regulations made under it then:

• (a).

  1. A person who is required to submit documents, returns, or reports to the Board fails to:

     1. Submit them, or submits false, incorrect, or incomplete information, returns, reports, books, or other documents then:

        1. He will be liable to a penalty.

        2. The minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, even if the default continues for a long time.

• (b).

  1. A person who is required to file returns or submit information, books, or other documents within the time prescribed under the regulations but:

     1. He fails to file or submit them within the specified time.

     2. He files or furnishes false, incorrect, or incomplete information, returns, reports, books, or other documents then:

        1. He will be liable to a penalty.

        2. The minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, even if the default continues for a long period.

• (c).

  1. A person is required to maintain books of account or records under the law but:

     1. If he fails to maintain those books or records then:

        1. He will be liable to a penalty.

        2. The minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. However, the maximum penalty cannot exceed ₹1 crore, even if the failure continues for many days.

Section 15B. Penalty for failure by any person to enter into agreement with clients.

• A person who is registered as an intermediary under the Act is required by law to enter into an agreement with his client.

• If he fails to enter into the required agreement then:

  1. He will be liable to a penalty.

  2. The minimum penalty is ₹1 lakh.

  3. The penalty may increase by ₹1 lakh for each day the failure continues.

  4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

Section 15C. Penalty for failure to redress investors’ grievances.

• A listed company or a registered intermediary is directed by the Board either in writing or electronically)to redress investor grievances.

• The Board specifies a time limit for redressing the grievances.

• If the company or intermediary fails to redress the grievances within that time then:

  1. The company or the intermediary will be liable for a Penalty.

  2. The Minimum penalty is ₹1 lakh.

  3. The penalty may increase by ₹1 lakh for each day the failure continues.

  4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

Section 15D. Penalty for certain defaults in case of mutual funds.

• The following provisions are with respect to the following persons:

• (a).

  1. A person who is required under the Act, rules, or regulations to obtain a certificate of registration from the Board.

     1. Such registration is mandatory for sponsoring or carrying on a collective investment scheme (including mutual funds).

     2. If the person sponsors or carries on a collective investment scheme without obtaining the required certificate then:

        1. The person is liable for a penalty.

        2. The Minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

• (b).

  1. A person who is registered with the Board as a collective investment scheme, including mutual funds.

     1. Such registration is granted for sponsoring or carrying on an investment scheme.

     2. If the person fails to comply with the terms and conditions of the certificate of registration then:

        1. The person is liable for a penalty.

        2. The Minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

• (c).

  1. A person who is registered with the Board as a collective investment scheme, including mutual funds.

     1. The regulations require an application for listing of its schemes.

     2. If the person fails to apply for listing as required under the regulations then:

        1. The person is liable for a penalty.

        2. The Minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

• (d).

  1. A person is registered as a collective investment scheme, including mutual funds.

     1. The regulations require despatch of unit certificates in a prescribed manner.

     2. If the person fails to despatch unit certificates as required under the regulations then:

        2. The Minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

• (e).

  1. A person is registered as a collective investment scheme, including mutual funds.

     1. The regulations require refund of application money to investors within a specified period.

     2. If the person fails to refund the application money within the prescribed time then:

        1. The person is liable for a penalty.

        2. The Minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

• (f).

  1. A person is registered as a collective investment scheme, including mutual funds.

     1. The regulations specify the manner and time period for investing the money collected.

     2. If the person fails to invest the collected money as required under the regulations then:

        1. The person is liable for a penalty.

        2. The Minimum penalty is ₹1 lakh.

        3. The penalty may increase by ₹1 lakh for each day the failure continues.

        4. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

Section 15E. Penalty for failure to observe rules and regulations by an asset management company.

• With respect to an asset management company (AMC) of a mutual fund registered under this Act:

  1. If the AMC fails to comply with regulations that impose restrictions on its activities, it is deemed to be in default.

  2. Upon such failure, the AMC becomes liable to a monetary penalty.

  3. The minimum penalty prescribed is ₹1 lakh.

  4. The penalty may extend to ₹1 lakh per day for each day the non-compliance continues.

  5. The maximum penalty is ₹1 crore, regardless of how long the failure continues.

Section 15EA. Penalty for default in case of alternative investment funds, infrastructure investment trusts and real estate investment trusts

• If any person fails to comply with regulations made by the Board relating to:

  1. Alternative Investment Funds (AIFs).

  2. Infrastructure Investment Trusts (InvITs).

  3. Real Estate Investment Trusts (REITs).

  4. Directions issued by the Board in respect of the above entities,

• Then under those circumstances:

  1. Such person shall be liable to a penalty.

  2. The minimum penalty prescribed is ₹1 lakh.

  3. The penalty may extend to ₹1 lakh per day for each day the non-compliance continues.

  4. The maximum penalty is ₹1 crore, or three times the amount of gains made out of such failure regardless of how long the failure continues.

  Section 15EB. Penalty for default in case of investment adviser and research analyst.

• Where an investment adviser or a research analyst fails to comply with:

  1. The regulations made by the Board.

  2. The directions issued by the Board,

• Then upon such failure:

  1. Such investment adviser or research analyst shall be liable to a penalty.

  2. The minimum penalty prescribed is ₹1 lakh.

  3. The penalty may extend to ₹1 lakh per day for each day the non-compliance continues.

  4. The maximum penalty is ₹1 crore, or three times the amount of gains made out of such failure regardless of how long the failure continues.

Section 15F. Penalty for default in case of stock brokers.

• These provisions are laid down with respect to a person who is registered as a stock broker under this Act:

• (a).

  1. Where a stock broker fails to issue contract notes in the form and manner specified by the stock exchange then:

     1. Such broker shall be liable to a penalty.

     2. The minimum penalty shall be ₹1,00,000 (one lakh rupees).

     3. The penalty may extend up to ₹1,00,00,000 (one crore rupees).

     4. The penalty is leviable for each instance for which a contract note was required to be issued by the broker.

     5. Such broker should be a member of that stock exchange.

• (b).

  1. Where any person fails to deliver any security or fails to make payment of the amount due to the investor:

     1. In the manner, and within the period specified under the regulations then:

        1. Such person shall be liable to a penalty.

        2. The minimum penalty shall be ₹1,00,000 (one lakh rupees).

        3. The penalty may extend to ₹1,00,000 for each day during which such failure continues.

        4. The penalty is subject to a maximum of ₹1,00,00,000 (one crore rupees).

• (c).

  1. Where any person charges an amount of brokerage in excess of the brokerage specified under the regulations:

     1. Such person shall be liable to a penalty.

     2. The minimum penalty shall be ₹1 lakh.

     3. The penalty may extend to five times the amount of brokerage charged in excess of the specified brokerage.

     4. The penalty shall be the higher of ₹1,00,000, or five times the excess brokerage charged.

Section 15G. Penalty for Insider Trading

• The following activities are all prohibited and there is penalty applicable on such activities.

• (i). Understanding Insider Trading

  1. If a person trades while in possession of UPSI, and uses that information to make the trading decision then such trading is prohibited.

  2. The securities must be of a body corporate that is listed on a stock exchange.

  3. The dealing in securities may be done on his own behalf (for his personal account), or on behalf of another person.

  4. The key condition is that the transaction is carried out on the basis of Unpublished Price Sensitive Information (UPSI).

  5. Unpublished Price Sensitive Information (UPSI) means:

     1. Information that is not generally available to the public.

     2. If published, is likely to materially affect the price of the securities.

• (ii). Illegal Communication of UPSI

• If information communicated is UPSI & such communication is with a request for such information, or without any request then:

  1. Such communication is prohibited unless it falls within permitted exceptions.

  2. The mode or intention of communication is irrelevant and mere communication is sufficient.

Exception:

• If the communication is made in the ordinary course of business or if it made required under any law to communicate such UPSI then:

  1. For those purposes the communication will not be illegal.

  2. Any communication of UPSI outside these exceptions is treated as illegal insider communication.

• (iii). Counselling, Procuring, or Inducing Insider Trading Based on UPSI.

• Where any person counsels, procures, or induces any other person to deal in securities of any body corporate and:

  1. Such dealing is carried out on the basis of unpublished price-sensitive information (UPSI) then:

  2. Such dealing is considered to be insider trading and is prohibited.

• Penalty:

  1. The minimum penalty shall be ₹10 lakh.

  2. The penalty may extend to ₹25 Crore or three times the amount of profits made out of insider trading,

  3. The maximum penalty shall be whichever is higher of the above two amounts.

Section 15H. Penalty for non-disclosure of acquisition of shares and takeovers.

• There are certain obligations to be followed while acquisition of shares.

• Failure to comply with these obligations shall render such persons liable to the imposition of a penalty.

• These obligations are as follows:

• (i). Mandatory Prior Disclosure of Aggregate Shareholding as a Pre-Condition to Acquisition

  1. A person is under a legal obligation to disclose the aggregate of his shareholding in a body corporate.

  2. This obligation arises before the acquisition of any shares in that body corporate.

  3. “Aggregate shareholding” means the total shareholding held or proposed to be held, including existing holdings.

  4. The disclosure is required to be made prior to the acquisition of the shares.

  5. No acquisition may be undertaken before such disclosure is duly made.

  6. This disclosure operates as a pre-condition to the acquisition.

  7. Any acquisition made without prior disclosure is considered to be non-compliance with the law.

• (ii). Mandatory Obligation to make a Public Announcement

  1. A person is under a legal obligation to make a public announcement.

  2. The public announcement relates to the proposed acquisition of shares of a body corporate.

  3. The acquisition is required to be made at or above the minimum price prescribed under the applicable law or regulations.

  4. The public announcement must specify the intention to acquire shares at the prescribed minimum price.

  5. The public announcement must be made strictly in accordance with the applicable requirements, including:

     1. The prescribed form.

     2. The prescribed manner.

     3. The prescribed timelines.

  6. No acquisition may proceed unless the public announcement is validly and properly made.

  7. Any failure to comply with the prescribed requirements renders the acquisition non-compliant.

• (iii). Mandatory Obligation to make a Public offer

  1. A person is under a legal obligation to make a public offer.

  2. This public offer is required to be made through a letter of offer.

  3. The letter of offer must be sent to the shareholders of the concerned company.

  4. The letter of offer must contain all information prescribed under the applicable law or regulations.

  5. The public offer must be made strictly in the manner prescribed, including:

     1. the prescribed format,

     2. the prescribed procedure, and

     3. the prescribed timelines.

  6. No public offer is valid unless the letter of offer is issued and dispatched in the prescribed manner.

  7. Any deviation from the prescribed manner amounts to non-compliance.

• (iv). Mandatory Obligation to pay Consideration

  1. A person is under a legal obligation to pay consideration.

  2. The payment of consideration is to be made to the shareholders who have sold their shares.

  3. Such sale of shares is pursuant to the letter of offer.

  4. The consideration must be paid strictly in accordance with the letter of offer.

  5. The payment must be made in the prescribed manner, including:

     1. The prescribed mode of payment.

     2. The prescribed procedural requirements.

  6. The payment must be made within the prescribed timelines.

  7. Any delay, short payment, or deviation from the prescribed manner or timelines constitutes non-compliance.

Penalty:

• Any person who commits any of the above failure shall be liable to a penalty.

• The minimum penalty shall be ₹10 lakh.

• The penalty may extend to ₹25 Crores or three times the amount of profits made out of such failure,

• The maximum penalty shall be whichever is higher of the above amounts

Section 15HA. Penalty for Fraudulent and Unfair Trading Practices

• Where any person indulges in fraudulent and unfair trade practices relating to securities then:

  1. Such person shall be liable to a penalty.

  2. The minimum penalty shall be ₹5 Lakh.

  3. The penalty may extend to ₹25 Crores or three times the amount of profits made out of such practices,

  4. The maximum penalty shall be whichever is higher of the above amount

Section 15HAA. Penalty for alteration, destruction, etc. of records and failure to protect the electronic database of Board

• (a). Knowingly Tampering With Records to Obstruct or Influence Regulatory Proceedings

• A person who knowingly alters, destroys, mutilates, conceals, falsifies, or makes a false entry with respect to:

  1. Any kind of Information , Record or Document including Electronic Records.

  2. Such information , record or document should have required to be maintained under the Act or under any rules and regulations.

  3. This act should have been done with the intention to Impede , obstruct or Influence:

     1. An investigation.

     2. An inquiry.

     3. An audit.

     4. An inspection.

     5. The proper administration of any matter.

  4. Provided that:

  5. The investigation, inquiry, audit, inspection, or matter falls within the jurisdiction of the Board.

  6. The conduct involves deliberate interference with regulatory or supervisory process.

• Explanation:

• For the purposes of this clause, a person shall be deemed to have altered, concealed, or destroyed any information, record, or document where he knowingly:

  1. Fails to immediately report the matter to the Board.

  2. Fails to preserve such information, record, or document.

• Such failure relates to information, record, or document which:

  1. Continues to be relevant to any investigation, inquiry, audit, inspection, or proceeding, which may be initiated by the Board & until the conclusion.

• (b). Unauthorised Attempt to Access the Regulatory Data

  1. If any person, without being authorised to do so:

     1. Accesses or attempts to access the regulatory data in the database.

     2. Denies access to such regulatory data.

     3. Modifies the access parameters relating to such regulatory data.

  2. Then such acts are considered to be in violation of the Act.

  3. Provided that such acts relate to regulatory data maintained in a database.

• (c). Unauthorised Attempt to Download, Extract , Copies or Reproduce in Any form

  1. If any person, without being authorised to do so:

  2. Downloads, Extracts, Copies, or reproduces in any form, any regulatory data maintained in the system database:

  3. Then such acts are deemed to be carried out without lawful authority.

• (d). Attempt to Introduce Viruses in System Database

  1. If any person knowingly introduces any computer virus or other computer contaminant then:

  2. Such introduction is made into the system database,

  3. The act may be intended and resulting in bringing about a trading halt.

• (e). Unauthorised Disruption of System Database

  1. If any person, without authorisation:

     1. Disrupts the functioning of the system database.

     2. Such disruption is carried out without lawful authority.

  2. Then such acts are deemed to be carried out without lawful authority.

• (f). Knowingly Damaging or Manipulating Regulatory Data Without Lawful Authority

  1. If any person knowingly:

     1. Damages, destroys, deletes, alters the regulatory data.

     2. Diminishes the value or utility the regulatory data.

     3. Otherwise affects by any means the regulatory data.

  2. Then such acts are deemed carried out knowingly and without lawful authority.

• (g). Unlawful Assistance

  1. Where any person knowingly:

     1. Provides any assistance to.

     2. Causes any other person to commit.

  2. Any of the acts specified in clauses (a) to (f), then:

  3. Such assistance or causation which is done knowingly and intentionally are deemed to be unlawful.

Penalty:

• Any person who commits any of the above acts shall be liable to a penalty.

• The minimum penalty shall be ₹1 lakh.

• The penalty may extend to ₹10 Crore rupees or three times the amount of profits made out of such act,

• The maximum penalty shall be whichever is higher of the above amounts.

Explanation:

• For the purposes of this section:

  1. The expression Computer contaminant.

  2. The expression Computer virus.

  3. The expression Damage.

• Shall have the meanings respectively assigned to them under section 43 of the Information Technology Act, 2000.

Section 15HB. Penalty for contravention where no separate penalty has been provided

• Where any person fails to comply with:

  1. Any provision of this Act.

  2. Any rule or regulation made thereunder.

  3. Any direction issued by the Board.

• And no separate penalty has been specifically provided for such failure then:

  1. Such person shall be liable to a penalty.

  2. The minimum penalty shall be ₹1,00,000 (one lakh rupees).

  3. The penalty may extend up to ₹1,00,00,000 (one crore rupees).

Section 15I. Power to adjudicate.

15I(1).

• For the purpose of adjudication under sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB:

• The Board may appoint an adjudicating officer.

• Such adjudicating officer shall be an officer not below the rank of a Division Chief.

• The adjudicating officer shall:

  1. Hold an inquiry in the prescribed manner.

  2. Do so after giving the person concerned a reasonable opportunity of being heard.

• The purpose of such inquiry is to impose penalty under the relevant provisions of the Act.

15I(2).

• While holding an inquiry, the adjudicating officer shall have the power to:

  1. Summon and enforce the attendance of any person acquainted with the facts and circumstances of the case.

  2. Require such person to give evidence.

  3. Produce any document which, in the opinion of the adjudicating officer, may be:

     1. Useful, or relevant to the subject-matter of the inquiry.

• Upon completion of the inquiry, if the adjudicating officer is satisfied that the person has failed to comply with:

  1. The provisions of any of the sections specified in 15(1) then:

  2. The adjudicating officer may impose such penalty as he thinks fit in accordance with the provisions of the relevant sections

15I(3).

• The Board may call for and examine the record of any proceedings conducted under this section.

• If the Board considers that the order passed by the adjudicating officer is:

  1. Erroneous, and prejudicial to the interests of the securities market then:

  2. The Board may make, or cause to be made such inquiry as it deems necessary.

• Upon such inquiry, the Board may pass an order:

  1. Enhancing the quantum of penalty, if the circumstances of the case so justify.

• No such order shall be passed by the Board enhancing the quantum of penalty, unless the person concerned:

  1. Has been given an opportunity of being heard in the matter.

• Nothing contained in 15I(3) shall apply after the expiry of three months.

• The three-month period shall be from:

  1. The date of the order passed by the adjudicating officer.

  2. The date of disposal of the appeal under section 15T

• Whichever is earlier.

15J. Factors to be taken into account while adjudging quantum of penalty

• While adjudging quantum of penalty under Sections 11 , 11B , 15-I the Boar or the adjudicating officer shall have due regard to the following factors, namely :

• (a).

  1. The amount of disproportionate gain or unfair advantage should be identified.

  2. Such gain or unfair advantage arises should be a direct result of the default.

  3. The gain or unfair advantage is quantifiable, wherever quantification is possible.

  4. The quantifiable amount is taken into account for regulatory assessment.

• (b).

  1. The amount of loss is caused to an investor or a group of investors should be determined.

  2. Such loss should arises directly as a result of the default.

  3. The loss should be identified and assessed, wherever ascertainable.

  4. The quantified loss is taken into consideration for regulatory determination.

• (c).

  1. The repetitive nature of the default.

Explanation:

• For the purpose of removal of doubts:

  1. The authority to adjudge the quantum of penalty is expressly clarified.

  2. This authority extends to penalties imposed under 15A - 15E , 15F(b) , 15F(c), 15G, 15H, and 15HA.

  3. The exercise of such authority is deemed to be under this section.

  4. The deeming provision applies both retrospectively and prospectivel

Section 15JA. Crediting sums realised by way of penalties to Consolidated Fund of India.

• All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund of India.

Section 15JB. Settlement of administrative and civil proceedings.

15JB(1).

• Notwithstanding anything contained in any other law for the time being in force:

  1. Any person, against whom proceedings have been initiated, or may be initiated and:

  2. Such proceedings may be under section 11, 11B, 11D, 12(3), or 15I then:

  3. Such person may file an application in writing to the Board.

     1. The application shall propose settlement of:

        1. The proceedings already initiated.

        2. The proceedings proposed to be initiated,.

     2. The settlement should relate to the alleged defaults.

15JB(2).

• The Board may consider the proposal for settlement.

• While considering such proposal, the Board shall take into account:

  1. The nature of the default.

  2. The gravity of the default.

  3. The impact of the default.

• After such consideration, the Board may agree to the settlement:

  1. On payment of such sum by the defaulter.

  2. On such other terms and conditions as may be determined by the Board.

• Such settlement shall be in accordance with the regulations made under this Act.

15JB(3).

• The settlement proceedings under this section shall be conducted in accordance with the procedure specified,

• Such procedure shall be as laid down in the regulations made under this Act.

15JB(4).

• No appeal shall lie under section 15T:

  1. Against any order passed by the Board.

  2. Against any order passed by the adjudicating officer.

• Such order must be: passed under this section.

15JB(5).

• All settlement amounts realised under this Act excluding the disgorgement amount, and legal costs:

• Shall be credited to the Consolidated Fund of India.