Of late, there has been a burning dispute on whether SEBI can initiate fresh proceedings even though it has passed a settlement order for the same set of trades but for the violation of other regulations. This issue had finally been settled by the Securities Appellate Tribunal (SAT) in the matter of Globalworth Securities Limited v. Securities and Exchange Board of India (Appeal No. 554 of 2022), wherein SAT held that it was open for SEBI to initiate two separate proceedings, for the same trades and for the same investigation period, as long as the violations alleged are under different regulations.
A short background
SEBI conducted an analysis of the Stock Options segment of the Bombay Stock Exchange (“BSE”) during the period between April 1, 2014, to September 30, 2015, wherein it was observed that out of 21,652 entities that executed trades on BSE Stock Options Segment, a total of 14,720 entities were involved in generation of artificial volume by executing non-genuine/ reversal trades on the same day (popularly known as Illiquid Stock Options Case), including the Appellant.
While proceedings initiated against the Appellant in respect of the above reversal trades were pending, SEBI introduced a settlement scheme with an aim to settle all the cases under the Illiquid Stock Options. The Appellant opted for the settlement scheme and proceedings against the Appellant were settled by way of a settlement order dated January 14, 2021 (“Settlement Order”).
Subsequently, another show cause notice dated June 07, 2022, with respect to the same trade, was issued to the Appellant for violation of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 (“Broker Regulations”). This flummoxed the Appellant as it had already obtained a Settlement Order to that very trade.
The primary contention of the Appellant was that the cause of action is the same in both the proceedings initiated by SEBI -consequently -once a Settlement Order has been passed, no further proceedings can be initiated by SEBI against the Appellant for violation of any regulation pertaining to the contravention settled in the settlement order. SEBI on the other hand contended that the present proceedings have been initiated against the Appellant for violations of Broker Regulations by the Appellant in the capacity of a stock broker. This is independent of the earlier proceedings which were initiated to ascertain the role played by the Appellant, in the capacity of trader/client and subsequent violations pertaining to the SEBI (PFUTP) Regulations.
What is the Question of law?
The substantial question of law raised before the Hon’ble SAT was that once a Settlement Order has been passed under the settlement scheme, is it open for the SEBI to initiate another proceeding for the same investigation period and for the same set of trades? To this, the Tribunal held as follows:
“8…No doubt if a settlement order has been passed no further proceedings can be initiated by the respondent on the same cause of action but this principle is not applicable in the instant case in as much as the settlement order was with regard to violations committed by the appellant under the PFUTP Regulations. The present show cause notice is with regard to violations of Clauses (1),(2),(3) and (4) of the Code of Conduct for Stock Brokers mentioned under Schedule II of the Brokers Regulations read with Regulation 9(f) of the Brokers Regulations, 1992 and violation on the part of the appellant for not taking necessary steps to generate alerts by putting system in place to detect and curb reversal of its proprietary trades. In our opinion the cause of action under the show cause notice dated June 7, 2022, is totally different and distinct from the cause of action which culminated into a settlement order of January 14, 2021.
The Tribunal also cited the relevant part of the Settlement Order to highlight that the settlement was only limited for the violations of the PFUTP Regulations by the Appellant.
Analyses & Conclusion:
This judgment will go a long way in settling the disputes pending in various matters before SAT as there are a lot of instances where for the same set of trades, a person is made liable for violation under different regulations by virtue of his acting in separate roles. For instance, in the present case, the Appellant was charged under two separate regulations for the same set of trades as he had performed his functions under two different capacities i.e., one as broker and another as a trader. While the settled law in relation to multiplicity of proceeding is that two proceedings may not be initiated with respect to same cause of action, however, in the instant case, it can be argued that while the trades are same, the cause of action is different as the parties had acted in two different capacities, thereby attracting violations under two separate regulations.
Having said the above, this decision may also lead to defaulters not opting for settlement in matters where separate show cause notices have been issued for same trades on allegations relating to contravention of different regulations. Considering the pure question of law involved in the matter, the chances of the same being challenged before the Hon’ble Supreme Court cannot be ruled out.
– The article has been published in Business World Legal
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