Can a person who has filed false and/or misleading information with the Securities and Exchange Board of India be penalised?
Though this would appear to be a rhetorical question whose answer, as all our common sense would scream, has to be in the affirmative, the answer, according to a recent SEBI ruling, is no!
The irony is that this order is not a ruling in court but from SEBI itself. In other words, where it was apparent that false or misleading information had indeed been filed, SEBI had to let the people go unpunished on the grounds that it had no power to take any penal consequences for filing false information.
Numerous SEBI provisions require the filing of information. This information is used by SEBI to keep track of developments, check law compliance, ensure protection of investors' interests and so on. Obviously, if false information is filed, the purpose will be defeated. Thus, a wrong-doer may file false information to avoid detection. Even if the false information is not filed intentionally, the objective of filing the information will not be achieved.
In two orders that were recently passed by SEBI, there were allegations that false/misleading information was filed. The order analyses the provisions which require that information should be filed and the consequences of not filing of such information. The relevant provision section 15A of the SEBI Act makes non-filing of information punishable with heavy penalties of Rs 1 lakh a day of delay or Rs 1 crore, whichever is less.
The interesting question SEBI raised in these orders was whether false filing of information can be equated with non-filing of information. Can it be said that if a person has filed false information, he could be punished with such penalty? The answer given by SEBI is, no.
The adjudicating officer observes, while holding this, that, "I am of the view that Section 15A (a) deals with only those cases where there is a simple failure to furnish any documents, return or report to SEBI and the said provision of law does not cover the cases where the documents, returns or reports so filed were allegedly false and misleading in nature. Also, there is no other specific provision under Chapter VI A of Securities and Exchange Board of India Act, 1992 which provides for imposing monetary penalty in those cases where the information/documents filed by a person are incorrect and misleading in nature."
SEBI also relied on a recent report of the Justice Kania Committee that observed that the SEBI Act lacks a specific provision to levy penalty for filing of false information. This report also suggests insertion of such a specific provision for this purpose.
First, one has to commend SEBI for having taken such a forthright and bold approach admitting this lacuna that, of course, is in the statute formulated by Parliament. The orders demonstrate intellectual honesty and have to be commended.
Having said that, one cannot help, with due respect, disagreeing with the order.
The order states that only non-filing of information is punishable and the filing of false information is not. However, false filing of information also means non-filing of information.
For instance, take a case where a promoter is required to give his holdings in a company. His actual holding is 15 per cent. He tells SEBI that his holding is, say, 75 per cent. Has the promoter filed the information of his holding or has he not filed? In my view, he can be said to have filed the information only if he has given his correct holding. If he has given false information, he has not filed the information.
Take another instance. The same section 15A provides that if a person does not maintain books of accounts as required, he would be penalised. Would maintenance of books of records with false entries amount to maintenance of books? I think the answer is a clear no! A person buys 50,000 shares and records of Company X, and records that he has acquired 1,000 shares of Company Y. Has he maintained the books of account? Unless he has clearly recorded the entry of having acquired 50,000 shares of Company X, he cannot be said to have maintained his books.
I would also rely on the decision of the Mumbai High Court in Cabot International's case (123 Comp. Cas.), where a distinction was made between civil liabilities and criminal liabilities. A distinction was made between the two and it was held that non-filing of information was of the former type and punishment of such violation cannot require the same strict criteria and measures as for violation of criminal statutes. Filing of false or misleading information defeats the whole purpose of the law that is admittedly for protecting the interests of investors. When only monetary penalty is sought to be levied and not prosecution, the law does not require a strict and narrow interpretation to be taken.
As the Mumbai High Court observed in the above case, "The provisions and scheme of penalty under the SEBI Act and the Regulations, there is no element of any criminal offence or punishment as contemplated under criminal proceedings. Therefore, it is not an essential element for imposing penalty under the SEBI Act and the Regulations."
The reliance on the Justice Kania Committee also seems to be misplaced.
There is an important distinction between filing of false information and non-filing of information, and the consequences of each of them. What the Committee appears to have in mind is the reprehensive act of filing false information has no specific legal provision punishing such act. Filing false information is akin to perjury but if such a reprehensible act is not specifically punishable, the law should provide for it.
However, filing of false information and non-filing of information are not mutually exclusive or inconsistent. If a person has furnished false information, he has, of course, also not filed the information. One violation involves a criminal breach and the other, a civil breach. In my view, the Committee has not said that filing of false information would still mean information has filed and therefore one cannot be punished with even civil penalties for not filing the information.
To conclude though, it is a pity that the SEBI Act does not contain a provision to penalise the criminal act of filing of false or misleading information. SEBI's bold approach of candidly confronting this lacuna is, I repeat, commendable. However, it is unfortunate that such people have also been given a clean chit for non-filing of information. No person would thus now be penalised for having filed false and misleading information.
This would apply not only to those cases where false or misleading information has been filed in the past but even to future cases. Will not malicious people and companies now feel bold enough to merrily file false information knowing that they will go unpunished? SEBI should consciously revise this interpretation and at least levy civil monetary penalties in appropriate doses. Simultaneously, one also hopes that the legislature wakes up quickly and amends the law to allow criminal consequences of filing false/misleading information.
The writer is a chartered accountant
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