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Disgorgement: India’s Mix Approach on Vicarious Liability under SEBI

- Chandni Turakhiya



The Securities Exchange Board of India is a powerful body created for the protection of the investors and is empowered to do so by any measures it thinks fit. These obligations are couched on open ended terms and have no pre-arranged limits. When the investors face any loss caused by the fraudulent dealings of any person related to the securities market SEBI has the power to hold them accountable.

Vicarious liability is enshrined in section 27[1] of the SEBI Act which states-

Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or another officer of the company, such director, manager, secretary or another officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation:

(a) ―company means anybody corporate and includes a firm or other association of

Individuals; and

(b) ―director, in relation to a firm, means a partner in the firm.

Therefore, SEBI has the powers to hold any and every person in charge of the company liable for disgorgement. The Securities Exchange Board of India although did not specifically have the powers to give directions for disgorgement in a clarificatory amendment in 2014, w.r.e.f. 18th July 2013 that such power to order disgorgement was explicitly granted to the Board by the insertion of an Explanation to Section 11B of the SEBI Act.

But what is disgorgement? As defined in the Black’s Law Dictionary the term disgorgement is defined as ‘the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.’[2] In simpler terms to disgorge means to deprive a person of the value by which he is unjustly enriched.

We often come across now more than ever several companies coming under the purview of SEBI and being asked to disgorge the unlawful gains. These companies make illegal profits at the expense of the investors. But the parameters for who will be liable for disgorgement in a company is somewhat acute and depends on case to case and the extent of amount. The Securities Appellate Tribunal, in 2019, finally laid down the three basic ingredients for the tracing the unlawful enrichment in the following manner: -

1. The person concern has been enriched:

2. That he has been enriched at the expense of the victim; and

3. That would be unjust to allow him to retain the benefit.[3]

It is interesting to see the numerous stances taken by several Courts in India on holding directors responsible under vicarious liability for disgorgement. The key ingredient to prove an offence under Section 27 is that a direct link has to be established that the person was in charge and responsible for the company.

The Supreme Court in Sunil Bharti Mittal v. Central Bureau of Investigation & Ors[4] has also stressed upon the requirement of sufficient evidence to hold a director liable. The Bombay High Court made it very clear that assertions cannot be made based on inferences and conjectures. Being a director of a company does not make a person liable unless a positive assertion is made and proved that they were in charge.[5]

Being a director, promoter or executive director comes with its own set of roles and duties in a company. It is true that Section 27 has a wide umbrella power of holding anyone in charge accountable. But if it is established and proven that the offence was committed without the director’s knowledge or even if he had in his power exercised due diligence to prevent the commission of offence the court cannot hold such a person liable. Even if a director was in fact in charge on the company the consent or connivance of the Director must be pleaded and not inferred.[6]

Although the Courts have several times taken the stance that proof of profit, motive and or position of authority is required to be established to hold a director liable, the Courts have taken a U-turn on this approach and have interpreted this power in the wider sense.

The Supreme Court in the case of SEBI v. Gaurav Varshney[7] held that a company is a jurist person and all its deeds are the result of acts of others. Therefore, it makes every person who, at the time of the offence was either committed or in charge of the company for its conduct will be liable for the offence. The same was reiterated in Sayanti Sen v. SEBI[8] that if a person was in charge and responsible to the company, he will be held liable under Section 27.

It is possible that the offences may be caused by several other entities in the company without the knowledge of the Board of Directors but that does not deter them from their liability. At the end of the day, the Board of Directors of a company are entitled to exercise all powers and do all such acts and things as the company is authorized to do. Therefore, the board of directors are responsible for the conduct of the business of a company and liable for any non-compliance of law and such liability shall trickle down to individual directors. Accordingly, a director who is part of a company’s board shall be responsible and liable for all acts carried out by a company unless exemptions are so provided[9].

The inconsistent views of the application of Section 27 can be understood by the nature of every case. In such matters it is important that every matter is considered on the factual matrix. At the end of the day, the role of SEBI is to protect the interest of investors and of the Court to correctly interpret the laws and the end goal of both which is justice.


Chandni Turakhiya is a third year student at Pravin Gandhi College of Law, Mumbai.


(chandniturakhiya2001@gmail.com)


[1] Securities and Exchange Board of India Act, 1992. [2] Bryan A Garner, Black’s Law Dictionary (10th edn Thomas Reuters 2014) 568. [3] Gagan Rastogi v. SEBI, 2019 SCC OnLine SAT 79. [4] Sunil Bharti Mittal v. Central Bureau of Investigation & Ors, AIR 2015 SC 923. [5] Kartik Parekh v. SEBI, 2019 SCC OnLine Bom 10762. [6] Sunil Kumar Chapparia v. Dakka Eshwarraraih (2002) 108 Com Cases 687 (AP). [7] SEBI v. Gaurav Varshney, (2016) 14 SCC 430. [8] Sayanti Sen v. SEBI, 2019 SCC OnLine SAT 132. [9] Adorable Agrotech Limited, In re of Mr. Prashanta Gupta, 2015 SCC Online SEBI 301.


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