SEBI

Imposition of penalty under the SEBI Act for any defaults in case of AIFs

The Securities Exchange Board of India (“SEBI”) regulates the securities market in India. It safeguards the interests of the investors and promotes the development of the securities market. To allow the SEBI to regulate the securities market, the Central Government enacted the Securities Exchange Board of India Act of 1992 (“SEBI Act”). This Act empowers SEBI to regulate all kinds of securities including the Alternate Investment Funds (AIF) which is a privately pooled investment vehicle that collects funds from investors and invests them in accordance with the investment policy. AIF is governed under an independent regulation formulated by SEBI, namely the Securities Exchange Board of India (Alternate Investment Fund) Regulation, 2012 (“SEBI (AIF) Regulation, 2012”). However, in case of any default in the case of AIF, the power to adjudicate is provided under section 15-I. The process to carry out the adjudication is provided under the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995. If at the end of the adjudication, it is believed that any person has committed a default in the case of AIF, then a penalty shall be imposed under section 15EA of the SEBI Act.

Section 15-I of the SEBI Act: Power to Adjudicate

If the SEBI is of an opinion that a default in any AIF has been made, then SEBI may first call upon the concerned person whom the SEBI suspects by sending him a notice and give him a reasonable opportunity to justify his actions. If after giving him an opportunity to be heard, SEBI is not satisfied then SEBI may appoint an adjudicating officer who shall be of any rank not below a Division Chief. The adjudicating officer is appointed under section 15-I read Rule 3 of the Securities Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 (“SEBI Rules”).

Powers of the Adjudicating Officer

The adjudicating officer shall have the same power as that of a civil court. The adjudicating officer can summon and enforce the attendance of any person who is aware of the facts and circumstances of the case to provide evidence relevant to the subject matter of the inquiry.

If, after the inquiry, the adjudicating officer is satisfied that the person has failed to fulfil the requirements of any of the provisions, then a penalty may be imposed as may be necessary.

Power of SEBI

SEBI has the power to call for the records of the inquiry proceedings if it believes that the order of the adjudicating officer is erroneous or is contrary to the interest of the securities market. SEBI can examine the order and after making an inquiry, the SEBI may either pass an order enhancing the quantum of penalty if the circumstances justify or uphold the order of the adjudicating officer. However, an order enhancing the quantum of penalty can be passed only after giving a reasonable opportunity of being heard to the person concerned. In addition, an inquiry by SEBI cannot be made after the expiry of 3 (three) months from the date of the order by the adjudicating officer or disposal of an appeal under section 15T, whichever is earlier.

Process of Holding an Inquiry

Rule 4 of the SEBI rules prescribes the process for holding an inquiry for any default in case of AIF. The process is as follows:

1. The first step towards holding an inquiry either by SEBI or by the adjudicating officer is to issue a show cause notice (SCN) to the concerned person seeking to show cause as to why an inquiry should not be held against him. It has to be done within a period not less than 14 (fourteen) days from the date of service of notice.
2. The notice issued should state the nature of the offence alleged to have been committed by the concerned person.
3. If the SEBI or adjudicating authority is not satisfied with the reply of SCN, then it will issue a notice fixing a date and calling upon the concerned person to appear either personally or through an authorized representative.
4. On the date fixed, SEBI or the adjudicating officer has to explain to the concerned person or his authorized representative about the offence he has been alleged of and the laws which have been violated by the alleged person.
5. After this, the SEBI or the adjudicating officer shall again give an opportunity to the alleged person to produce relevant evidence necessary for conducting the inquiry.
6. The SEBI or adjudicating officer shall have the power to summon and enforce the attendance of any person who is aware of the facts and circumstances of the case to produce evidence relevant to the inquiry.
7. In case of failure, negligence, or refusal on the part of the person to appear, the SEBI or adjudicating officer may after recording reasons, proceed with the inquiry.

Section 15EA of the SEBI Act: Penalty for Default in Case of AIF

There are two circumstances in which penalty for default in case of AIF arises, they are:

1. When any person fails to comply with the regulations formulated by SEBI relating to AIF; or
2. When any person fails to comply with any direction issued by SEBI regarding AIF.

In the above two circumstances, the person shall be liable to a penalty of a minimum of Rs. 1 lakh, further extendable to Rs. 1 lakh per day for the period during which the failure continues. However, the penalty cannot exceed Rs. 1 crore or 3 times the amount of gains made during the period of failure, whichever is higher.

The circumstances of default may in the practical sense include circumstances where the AIF fund fails to fulfil its obligation of filing reports regarding the activities carried on by the AIF to the SEBI; or when the manager of the AIF fund fails to fulfil his duty under regulation 24 of the SEBI (AIF) Regulation^[1], 2012. The SEBI or the adjudicating officer has the power to impose a penalty on the noticee/alleged person unless reasonable and sufficient cause is shown by the noticee/alleged person for such default.

Conclusion

In summation, AIF regulations and directions have to be followed strictly otherwise penalties will be imposed. Adjudicating officers and SEBI act as a watchdog to ensure no default goes unseen. If the proper inquiry is conducted and it is found that the default was committed without any reasonable explanation then the penalty is imposed. The quantum of the penalty prescribed under section 15EA is also kept high to deter people from making any default in the case of AIF. This step is taken by SEBI to safeguard the interest of the investor.

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