Disgorgement proceedings in India: Takeaways from Liu v. SEC
By Akash Kumar Prasad, for Legal Corner LLP. Akash is a final year student of NALSAR University of Law and will be graduating in 2021.
The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) for any legal advice that is specific to your business needs.
In layman’s language, disgorgement implies legally mandated repayment of ill-gotten gains imposed on wrongdoers by the courts. The Black’s Law Dictionary defines disgorgement as ‘the act of giving up something (such as profits illegally obtained) on-demand or by legal compulsion’. To understand it more simply, let’s suppose that Mr. X makes a profit of Rs. 1000 in an illegal manner. The court can now direct Mr. X to ‘disgorge’ the amount of Rs. 1000. This recovery of the profit earned through illegal means is termed as ‘disgorgement’. In India, after the enactment of the Securities and Exchange Board of India Act, 1992, this process has been used to recover the unlawful and unethical profit made by the participants in the capital markets. Initially, it was considered to be an equitable remedy, but with the passage of time it has been observed that the understanding has shaken a bit.
In the securities market, to preserve the interests of the stakeholders, this tool has proved to be a potent tool for the regulatory authorities worldwide. Even though the concept of disgorgement finds a place in the SEBI Act, 1992, specifically speaking, Section 11B of the Act (added by an amendment in 2013), it has been observed that the Indian regulatory authorities have not been able to enforce such powers smoothly due to the lack of clarity in the legislation itself and precedents thereof as to how the computation of disgorgement amount must be done. As a result, the courts and tribunals in India look up to the foreign judgements on the matter.
The Indian regulatory law has been influenced by the US securities law; hence any development in the US securities market becomes very pertinent to the Indian regulatory regime. Recently, the US Supreme Court, in the case of Liu v. SEC [2020], stated that the tool of disgorgement has its roots in the equity principles and that the disgorgement awards are an equitable remedy provided to the wronged investors. It further redefined the computation of the disgorgement amount. Considering the fact that the Indian securities regime takes inspiration from the US securities law, this has initiated discussions regarding its impact on the Indian disgorgement regime.
Takeaways from Liu v. SEC
The first and foremost significant point in the observation was acknowledging the tool of disgorgement as an equitable remedy rather than a punitive measure which should be computed on the basis of net profit earned i.e. the same must be meant to make better the wrong and not to punish the wrongdoer. The Court held: “A disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under 15 U.S.C. § 78 u (d)(5). Same principle was observed by the Securities Appellate Tribunal (SAT) in the case of Gagan Rastogi v. SEBI [2019] and Shadilal Chopra v. SEBI [2009].
Further, another important takeaway from the US ruling is the restitution of amount to the victims of the wrongdoing. It is often observed that the regulatory authorities disgorge the amount and then preach that justice is served. The US Supreme Court has deviated from this practice and held that the purpose would only be served if the amount would be restituted and not if the disgorged amount would be deposited in the government treasury. The court said that doing the latter would amount to a penalty and thus the restitution principle should be followed taking into consideration the number of stakeholders and passing appropriate orders to protect the interests of the victims. SAT in the case of Ram Kishori Gupta v. SEBI [2019] has observed similarly remarking “disgorgement without restitution does not serve any purpose” which further shows the influence of the US security jurisprudence on the Indian securities regime.
The US court further noted that mostly the entire amount from the wrongdoing is disgorged without deducting the legitimate expenses incurred during the wrongdoing. The same has been observed in Indian scenario too. The US court acknowledged the same and directed that the amount to be disgorged should be decided after taking into account the facts and circumstances of every case as then only it would mean that the remedy is truly equitable in nature.
Lastly, the court directed cautioned usage of the “jointly and severally liable” principle. As much as it acknowledged the necessity of its usage, it also directed that there must not arise a case wherein, a person is being asked to disgorge the amount, when actually such person is not in possession of the unlawful gains, thereby making it difficult for him to disgorge the amount.
Conclusion
The understanding of disgorgement is still at a nascent stage and it can be expected that the US ruling would throw some light on the development of the subject in India. It has definitely paved the way for formulating a mechanism and effectively execute the same while pronouncing the judgements. While it might be argued that Indian and US securities markets are different, the principles enunciated by the court form the basic structure and can help develop a better understanding of the subject, thereby showing Indian securities regime a way forward. If you have any questions on choice of law, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.