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Imposition of fine by Financial Sector Regulators*
Posted On: 2020-02-09 Author : R.S. Garg

Penalties have been prescribed in the financial sector for non-compliance /breaches /violations of the statutory provisions including regulations, directions, guidelines, orders or circulars issued under the Securities and Exchange Board of India Act, 1992, Pension Fund Regulatory and Development Authority Act, 2013, Reserve Bank of India Act, 1934 and National Housing Bank Act, 1987. The prescribed penalties include imprisonment or fine or both imprisonment and fine.

Where the prescribed penalty is imprisonment or both imprisonment and fine, the regulatory authority viz., SEBI, PFRDA, RBI or NHB itself or through its authorized officer is required to approach a Court for imposition of such penalty. However, regulatory authorities have also been vested with powers to impose fines instead of imprisonment or both imprisonment and fine, for which also a procedure is duly prescribed in the statute.

In this article, I propose to examine the laid down procedure under the Acts governing financial sector regulators for the imposition of fines and the need for review of the same so that there is no scope of arbitrariness and rules of justice & fair play are applied in the matter of imposition of penalties by these regulatory authorities.

The Securities and Exchange Board of India Act, 1992 (SEBI Act)

Section 15A to 15HB of the SEBI Act prescribes fines by way of penalties for various contraventions and breaches ranging from rupees one lakh to rupees twenty five crore depending upon the type of violations. For the purpose of adjudging under the above provisions, Section 15-I of SEBI Act provides for appointment of an officer not below the rank of Division Chief. The appointed person is required to hold inquiry and if satisfied can impose penalty, after giving opportunity to the aggrieved party. The adjudicating officer has been vested with the power to summon and enforce attendance of any person acquainted with the facts of the case to give evidence or to produce relevant documents.

The Board has also been conferred power to call for the record of the proceedings of the adjudicating officer and empowered to enhance the penalty after affording opportunity of hearing, if the order passed was erroneous. The Act also enumerates the factors which have to be taken into account for adjudging quantum of penalty.

SEBI Act also provide for an appeal against the order of the adjudicating officer before the Securities Appellate Tribunal. In fact, the appeal before this Tribunal also lies against the orders passed by IRDA & PFRDA.

SEBI Act bars the jurisdiction of any civil court to entertain any suit or proceedings which adjudicating officer or Securities Appellate Tribunal is empowered to determine. No injunction can be granted for any action under SEBI Act.

An appeal lies before the Supreme Court against the orders passed by Securities Appellate Tribunal.

Pension Fund Regulatory and Development Authority Act, 2013(PFRDA Act)

Section 28 of the PFRDA Act provides for imposition of penalty by way of fines ranging from one lakh rupees to one crore of rupees. Section 30 of the PFRDA Act provides for appointment of adjudicating officer not below the rank to be specified in the regulations. The adjudicating officer has been vested with the power to summon and enforce attendance of any person acquainted with the facts of the case to give evidence or to produce relevant documents similar to the powers conferred on the adjudicating officer of appointed under SEBI Act. The appointed person is required to hold inquiry and if satisfied can recommend imposition of penalty to the member in-charge of investigation and surveillance. The Act further provides that the penalty shall be imposed by member other than member in-charge of investigation and surveillance.

PFRDA Act also provide for an appeal against the order of the adjudicating officer before the Securities Appellate Tribunal.

PFRDA Act also bars the jurisdiction of any civil court to entertain any suit or proceedings which adjudicating officer or Securities Appellate Tribunal is empowered to determine, No injunction can be granted for any action under PFRDA Act.

An appeal lies before the Supreme Court against the orders passed by Securities Appellate Tribunal.

The salient features of the provisions of SEBI Act and PFRDA Act which promotes justice and fair play are:
  • a) Appointment of an official of certain higher rank to conduct the proceedings.
  • b) Power vested in the officials for smooth conduct of the proceedings.
  • c) Factors which have to be taken into account for adjudging quantum of penalty.
  • d) Opportunity of hearing to the aggrieved party.
  • e) Imposition of penalty by member other than the one conducting the inquiry (PFRDA)
  • f) Appeal provision – to SAT & to Supreme Court.
Reserve Bank of India Act, 1934 (RBI Act)

Section 58G of the RBI Act provides for imposition of penalty by way of fines ranging from twenty-five thousand to ten lakh rupees on a non banking finance company. The provision of the section provides for issue of a show cause notice and for giving reasonable opportunity of being heard to the non-banking finance company. The said penalty is required to be paid within 30 days from the service of notice demanding the penalty. In case of failure in payment, the penalty to be levied by a civil court on an application of the authorized officer of RBI. The Court which issue a direction in this regard is required to issue certificate which is enforceable as a decree of the Court.

National Housing Bank Act, 1987 (NHB Act)

Section 52A of the NHB Act provides for imposition of penalty by way of fines ranging from five thousand to five lakh rupees on a non banking finance company, which is a housing finance company. The provision of the section provides for issue of a show cause notice and for giving reasonable opportunity of being heard to the non-banking finance company. The said penalty is required to be paid within 30 days from the service of notice demanding the penalty. In case of failure in payment, the penalty to be levied by a civil court on an application of the authorized officer of NHB. The Court which issue a direction in this regard is required to issue certificate which is enforceable as a decree of the Court.

Thus, it will be seen that provision of section 52Aof the RBI Act and 52A of the NHB Act are similar except with regard to the quantum of penalty.

The salient features of the provisions of RBI Act and NHB Act which promotes justice and fair play are:
  • a) Opportunity of hearing.
  • b) In case of non-payment, RBI/NHB to approach Court for levy of penalty. However, role of court appears to be to not to adjudge the case but to issue a certificate based on the decision taken by RBI/NHB.
However, compared to SEBI & PFRDA Acts, RBI & NHB Act does not have:
  • a) Provision for appointment of officer of certain level only to consider the issue of levying penalty.
  • b) Factors which should weigh in imposing penalty
  • c) Provision for imposition of penalty by officers other than in the supervision department
  • d) Provision for appeal against the orders.

It is understood that considering the aspect of justice and fair play, RBI has re-organized its Departments into Department of Regulation, Department of Supervision and Enforcement Department. All penalties leviable by RBI under section 58G of the RBI Act are now levied by Enforcement Department. This gives some impartiality to the exercise of imposing penalty.

WAY FORWARD
In view of the forgoing, I am of the view that these penal provisions need to be reviewed in totality as there are many other aspects which needed to be looked into apart from the procedural part. Some of the provisions also needed to be updated. A uniform approach that is what is called for. Provision for appeal must be in-built in the statute to redress the grievance of the aggrieved party.

Pending the above review and amendment of the statutes, it will be appropriate to provide for appeal mechanism within RBI/ NHB at the sufficiently higher level say to DG of RBI or Committee of EDs of RBI /MD or Board of NHB and the same is publicized on the web-site and made known to the affected party through communication in the order imposing penalty. Further, RBI should by means of regulation lay down the factors which should weigh in imposing the fines including the mitigating factors such as whether the error was mala-fide or inadvertent or whether action of HFC resulted into any loss to borrower.

NHB should also have Enforcement separate from Supervision on the lines of RBI. The Enforcement Department of RBI attends to enforcement in case of banks, cooperatives as also NBFCs. For the sake of uniform approach, it will be better if enforcement in case of HFCs is also vested with the Enforcement Department of RBI as now the regulation of HFCs vest with RBI and provisions of Chapter IIIB of the RBI Act (Except 45IA. 45IB & 45IC) have been made applicable to HFCs. Such a step would also result in uniformity of penal action across RBI regulated institutions as is the case with regulation.



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