I am always pleased to be able to publish updates on important developments in other jurisdictions. In following guest post, I reproduce two articles about important developments in India. The first article discusses the widening scope of India’s Prevention of Corruption Act. The second article discusses a recent decision of the Supreme Court of India with respect to the imposition of penalties under the Indian securities laws. The two articles were submitted by Rohan Negandhi, who is a Financial Lines Underwriter with Tata AIG General Insurance Company Limited, which is an Indian General insurance Company, and a joint venture between the Tata Group and American International Group (AIG). I would like to thank Rohan for submitting his articles. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here are Rohan’s articles.
Widening scope of India’s Prevention of Corruption Act – Employees of Private Banks to be considered “public officials” under the Act, employees of Private Insurance companies may be next in line.
In what could be deemed to be a landmark judgment, the Supreme Court of India, brought all private bank employees within the ambit of the anti-corruption law, which had so far been applied only against corrupt government officials.
The judgment came in the matter of – Central Bureau of Investigation, Bank Securities & Fraud Cell versus Ramesh Gelli and Others.
A bench comprising Justices Ranjan Gogoi and Prafulla C Pant, in separate yet concurrent judgments, overturned a Bombay High Court verdict endorsing a trial court decision that cognisance of Prevention of Corruption Act charges could not be taken against ex-chief Ramesh Gelli and ex-MD Sridhar Subasri of the erstwhile Global Trust Bank in the Rs 41-crore corruption case which they were facing, as they were not public servants.
The Central Bureau of Investigation had lodged an First Information Report against Gelli and Subasri based on a complaint filed by Oriental Bank of Commerce’s chief vigilance officer.
The matter had taken place before Global Trust Bank merged with Oriental Bank of Commerce in 2004, but had surfaced subsequently.
The judge was of the opinion that since the legislature had said that Section 46A of Banking Regulation Act was applicable only with respect to Indian Penal Code offences; operation of Prevention of Corruption Act for the same offences could not be shut out. Here the court, taking exception to the rule of casus omissus (what has not been provided for in the statute cannot be supplied by the Courts), held that the legislative intent to widen the ambit of the country’s anti corruption law and the definition of “public servant” cannot be defeated due to a mere omission in Section 46A of the Banking Regulation Act.
The court stated that the object of enactment of Prevention of Corruption Act, 1988 was to make the anti-corruption law more effective and widen its coverage.
Before the amendment to Section 46A of Banking Regulation Act in 1994, only the chairman, director and auditor of a bank were regarded as public servants in connection with offences under Indian Penal Code, 1860. But the amendment brought within its purview chairman appointed on a whole-time basis, managing director, director, auditor, liquidator, manager and any other employee of a banking company, terming them as public servants for offences under the Indian Penal Code.
The court ruled that if they were public servants in connection with offences under Indian Penal Code, they would be deemed to be so under Prevention of Corruption Act as well.
The objective was to ensure that the legislative intent to widen the definition of ‘public servant’ by enacting Prevention of Corruption Act should not be defeated by interpreting and understanding the omission in Section 46A of the Banking Regulation Act to be incapable of being filled up by the court.
If private banks fall under the purview of the PREVENTION OF CORRUPTION ACT, will private insurers be made to follow suit?
Considering the above facts, it is now clear that the Indian Anti-Graft Law will now be applicable to Private Banks. But if the same is applicable to private banks, by virtue of their employees being deemed public servants under the Banking Regulation Act, the question that should arise is whether, applying the same principle would lead to officers of Private Insurers being held liable under the provisions of the Prevention of Corruption Act.
Similar to how the BANKING REGULATION ACT provisions are applicable to the Banking Industry in India, the provisions of the Insurance Act, 1938 (hereinafter “IA”) are applicable to the Insurance Companies operating in India.
On going through the provisions of the Insurance Act, one would chance upon Section 107 A which reads:-
“Chairman, etc. to be public servant
107A. Every whole-time Chairman, whole-time director, auditor, liquidator, manager and any other employee of an insurer shall be deemed to be a public servant for the purposes of Chapter IX of the Indian Penal Code (45 of 1860).”
The case could be made that if the provisions of Prevention of Corruption Act are applicable to private banks, by virtue of S 46 A, the provisions of the Prevention of Corruption Act should be applicable to insurers by virtue of S 107 A of the Insurance Act.
Banks, Insurance Companies and other large Financial Institutions, due to their size and service that they provide, are of high public importance. If the regulations are applicable to one category of financial institutions, i.e. Banks, the same should be made applicable to the other significant financial institutions, which are the backbone of the economy to ensure greater corporate governance.
Compared to the US FCPA and the UK Bribery Act, the Prevention of Corruption Act does not have such far reaching implications but this seems to be a step in the right direction.
Further, there is a proposal to introduce the Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill, 2015 in Parliament. This Bill is a revised version of an earlier Bill introduced in Parliament in 2011, but which lapsed with the dissolution of the 15th Lok Sabha. The 2015 Bill has three key parts and deals with:-
- the offences;
- the processes for investigation and prosecution of the offences; and
- the interrelation of the Bill with other laws and miscellaneous matters.
To keep in line with other countries, the 2015 Bill criminalises the offence of active bribery, that is, the offence of giving bribes to foreign officials.
However, unlike most other jurisdictions, the Indian draft law also criminalises the offence of passive bribery, which deals with the acceptance of bribes by foreign officials. Very few countries, such as Malaysia and Switzerland have criminalised the offence of passive bribery. The bill also introduces provisions regarding attachment and forfeiture.
One may be optimistic of these developments but there is a lot more that needs to be done in terms of preventing corruption and bribery.
India Risk Survey 2015 reported that ‘Corruption, Bribery and Corporate Frauds’ are the top most risk faced by Indian corporates for the second straight year.
The report further states that ‘Corruption, Bribery and Corporate Frauds’ is one of the top three risks across the four zones of India and the top most risk in two out of the four zones.
Renowned Indian economists Bibek Debroy and Laveesh Bhandari, have stated that Indian officials are estimated to earn as much as 1.26% of the country’s GDP through corruption. 
As per Kroll Global Fraud Report 2015, India has one of the largest fraud problems of any of the countries covered in its report, India, with an 80% overall prevalence of ‘Corruption, Bribery and Corporate Frauds’ is third in this group, behind only Colombia’s 83% and Sub-Saharan Africa’s 84%.
We consider the current judgment a step in the right direction, keeping in mind the rising Non Performing Assets in the Banking Sector. As mentioned earlier, it would be a rational step that private insurance companies too will be made to fall under the ambit of the Prevention of Corruption Act. During the global financial crisis of 2007-2012, the concept of a systemically important financial institution (SIFI) was introduced. A systematically important financial institution is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. The concept of a systemically important financial institution in the U.S. extends well beyond traditional banks and is often included under the term Non-banking financial company. It includes large hedge funds and traders, large insurance companies, and various and sundry systemically important financial market utilities.
India too, should ensure that these financial institutions are not prone to corruption and bribery, as they are critical to the Indian financial ecosystem, institutions which in other words, are “too big to fail.”
 Criminal Appeal Nos. 1077-1081 OF 2013 with Central Bureau of Investigation through Superintendent of Police, BS & FC & Anr. Versus Ramesh Gelli, Writ Petition (CRL.) NO. 167 of 2015.
 Approximately USD 6 Mn
 See, http://lawcommissionofindia.nic.in/reports/Report258.pdf
 See, http://ficci.in/Sedocument/20328/India-Risk-Survey-2015.pdf
The only zone where ‘Corruption, Bribery and Corporate Frauds’ are not among the top two risk is the South Zone.
 See, ‘Corruption in India: The DNA and RNA’ , authored by Bibek Debroy and Laveesh Bhandari
 See, http://anticorruzione.eu/wp-content/uploads/2015/09/Kroll_Global_Fraud_Report_2015low-copia.pdf
Supreme Court expresses conflicting views on levy of penalties for violation of SEBI Act.
A recent Supreme Court judgment has caused certain raised eyebrows in the corporate world and the legal fraternity at large, as it held that the Securities and Exchange Board of India (“SEBI”)(The securities regulator/the Indian counterpart of the SEC), did not have discretion while imposing a penalty under the certain provisions, subsequent to SEBI Act’s 2002 amendment.
The judgment has come as a huge setback for companies that seek a relaxation in penalties from the Securities Appellate Tribunal, and can have several implications on the D&O market in India.
The verdict was delivered by Supreme Court’s order in SEBI v. Roofit Industries Limited, [(2015 (12) SCALE 642, Order dated November 26, 2015, hereinafter “Roofit Verdict”].
The Appeals had come before the Supreme Court against the decision of the Securities Appellate Tribunal (SAT) which modified the order of the Adjudicating Officer under SEBI, reducing the penalty payable by the Respondent, Roofit Industries Ltd., under Section 15A of the Securities And Exchange Board of India Act, 1992 (SEBI Act) from Rs. 1 crore to Rs. 60,000.
In the connected matters, the penalty imposed by the Appellant, SEBI was reduced from Rs. 75,00,000 to Rs. 15,000 in five cases and Rs. 60,000 in one case.
The Supreme Court did not find any rationale/ or gauge what formulae, if any, had been followed in these reductions, making the exercise prone to the possibility of arbitrariness, if not inconsistency or caprice and stated that penalties should not be reduced on extraneous grounds other than that mentioned under Section 15J.
The following legal provisions were considered :-
The Supreme Court found merit in the contentions made on behalf of the Appellant, that the penalty imposed by the Adjudicating Officer should not have been reduced on wholly extraneous grounds not mentioned in Section 15J of the SEBI Act. Section 15J reads thus:
While adjudging quantum of penalty under Section 15-I, the adjudicating officer shall have due regard to the following factors, namely:-
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b)the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default. ”
The court was of the opinion that the use of the word “namely” indicates that these factors alone are to be considered by the Adjudicating Officer. It laid emphasis on the definition as of “namely” as per Black’s Law Dictionary which reads – “by name or particular mention. The term indicates what is to be included by name. By contrast, including implies a partial list and indicates something that is not listed.”
Hence, the court found no reason read “namely” as “including”, and stated that it would be apposite for the court to begin their analysis of the penalty to be imposed by laying out Section 15A(a) as it stood subsequent to the 2002 amendment, for the facility of reference:
If any person, who is required under this Act or any rules or regulations made thereunder,–
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less;…”
The court was of the opinion that the intention of the amendment is to impose harsher penalties for certain offences, and we find no reason to water them down.
It is important to add here that SEBI had itself filed a review application [Review Petition – Civil 1676 -1691 of 2016] in this case. While SEBI’s review application is still pending before the Supreme Court (with the next date of listing being March 30, 2016), another recent judgment of the Supreme Court Division Bench has dealt with the same issue, and has referred the matter to larger bench of Supreme Court to authoritatively decide the issue.
A division bench of Supreme Court of India while hearing the matter of Siddharth Chaturvedi v SEBI, in Civil Appeal No(s). 14730 / 2015 [order dated March 14, 2016] has differed with the views in the Roofit Verdict.
The Supreme Court was hearing appeals against three SAT Orders ,wherein appellants (Siddharth Chaturvedi, Ankur Chaturvedi and Jay Kishore Chaturvedi) are promoters/directors of Brijlaxmi Leasing and Finance Company Ltd. It was an admitted position before SAT that these appellants had purchased the shares of the company in question from time to time, but they failed to make disclosures to the stock exchange as stipulated under Regulation 13 of the SEBI (Prohibition of Insider Trading) Regulations, 1992.
Despite the appellant’s argument that the violation was technical in nature, and hence warranted reduction in penalty amount, SAT dismissed these appeals upholding SEBI’s orders.
While analyzing the Roofit Verdict, Supreme Court observed the following:-
“10. Prima facie, we find it a little difficult to subscribe to both the views contained in paragraph 4 as well as in paragraph 5 of the said judgment. The expression “shall have due regard to” is a very known legislative device used from the time of Julius v Bishop of Oxford (1880) LR 5 AC 214 (HL), and followed in many judgments both English as well as of our Courts as words vesting a discretion in an Adjudicating Officer. The question which arises in the present appeals is whether the expression “namely” fixes the discretion which can be exercised only in the circumstances mentioned in the three clauses set out in Section 15J, or whether it would also take into account other relevant circumstances, having particular regard to the fact that it is a penalty provision that the Court is construing. As this needs to be authoritatively decided for the future, it would be better if we refer it to a larger Bench for such authoritative pronouncement.
- We also find it a little difficult to accept what is stated in paragraph 5 of the judgment. It is very difficult, keeping in view, particularly, two important legal facets – one the doctrine of harmonious construction of a statute; and two, the fact that we are construing a penalty provision of a statute which is to be strictly construed, Section 15A, post amendment in 2002, is suddenly given a pride of place, and Section 15J is made to yield entirely to it. The familiar expression “notwithstanding anything contained” does not appear in the amended Section 15A. This being the case, it is a little difficult to appreciate as to how one can construe Section 15A, as amended, in isolation, without regard to Section 15J. In fact, the facts of the present case would go to show that where there is allegedly only a technical default, and the three parameters of Section 15J would allegedly be satisfied by the appellants, namely, that no disproportionate or unfair advantage has been made as a result of the default; no loss has been caused to an investor or group of investors as a result of the default; and there is in fact, no repetitive nature of default, no penalty at all ought to be imposed. What has been done by the appellants here is to fail to adhere to Regulation 13, as alleged in the show cause notice, which failure has occurred on three days and consequently, has allegedly not been repeated by the appellants anytime thereafter. If we were to read Section 15A, as amended in 2002, in the manner suggested by the Division Bench of this Court, it may lead to anomalous results in that the effect of continuing failure to adhere to statutory regulations alleged to have been continued well beyond the period of three days, and which continues till this day, has Rs.1 lakh per day as the minimum mandatory penalty under the provisions, which would culminate in the appellants herein having to pay Rs.1 crore in each of the three appeals. We do not think that this could have been the intention of the Parliament in enacting Section 15A, as amended in 2002. We also feel that on the assumption that paragraph 5 of the judgment is correct, it would be very difficult for Section 15A to be construed as a reasonable provision, as it would then arbitrarily and disproportionately invade the appellants’ fundamental rights. This being the case, on both the conclusions reached by this Court in paragraphs 4 and 5, as stated by us hereinabove, these matters deserve consideration at the hands of a larger Bench. The Registry is, accordingly, directed to place the papers of these appeals before Hon’ble the Chief Justice of India for placing these matters before a larger Bench.”
When two conflicting judgments are delivered, with respect to the same issue, it is well settled by law, that the decision which was delivered at a later date would supersede the previous one. Since the Roofit issue has been referred to a larger bench, it may not act as a precedent, as it awaits final settlement, though there has been no stay on the operation of the same.
* 1 USD = INR 68 (approx.); 1 Lakh = 100,000 ; 1 Crore = 10,000,000.
The author of the article is a Bachelor of Business Administration and a Bachelor of Law from Symbiosis International University.
Currently the author is working with Tata AIG General Insurance Company Limited, which is an Indian General insurance Company, and a joint venture between the Tata Group and American International Group (AIG)., as a Financial Lines – Underwriter.
The author can be contacted at firstname.lastname@example.org
The views expressed in this article are solely of the author and are not representative of the organisation where he currently works.