Offences & Prosecution under SEBI Act

Topic 20 — Sections 24, 26 & 26A: Criminal Penalties, Prosecution, Corporate Liability & Compounding | SEBI Law Officer

Sections 24 to 26A of the SEBI Act create the criminal enforcement framework — supplementing the civil penalty adjudication mechanism of Sections 15A-15HB. While civil penalties are imposed by SEBI's Adjudicating Officer for monetary deterrence, criminal prosecution under Section 24 results in imprisonment. The restriction on cognizance under Section 26 (only SEBI-authorised persons can initiate criminal proceedings) and the compounding provision under Section 24A reflect a balanced approach — using criminal law as a last resort while providing a settlement mechanism for cooperative offenders.

1. Section 24 — Criminal Offences and Penalties

Section 24(1): Without prejudice to any award of penalty by the Adjudicating Officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, or with both.

Section 24(1) Maximum Criminal Penalty: 10 Years Imprisonment + Fine (or both)

Section 24(1) has four critical features:

'Without prejudice to AO penalty': Civil penalty and criminal prosecution are concurrent — both can be pursued for the same violation. They serve different purposes: civil penalty is monetary deterrence; criminal prosecution is punitive and carries imprisonment.
'Contravenes OR attempts to contravene OR abets': Wide ambit — actual violation, attempted violation, and abetment are all criminal offences under Section 24.
'Any provision of this Act or rules or regulations': The offence is general — violation of any SEBI Act provision, any SEBI Rule, or any SEBI Regulation attracts criminal liability.
Imprisonment up to 10 years OR fine OR both: The court has discretion — imprisonment alone, fine alone, or both. The maximum fine quantum is not specified in Section 24(1) itself — courts apply general fine provisions.

2. Section 24(2) — Enhanced Penalty for Certain Repeat Offences

Section 24(2): If any person, who has been convicted under sub-section (1) is again found guilty of a similar offence under that sub-section, such person shall be punishable with imprisonment for a term which shall not be less than one month but may extend to ten years, or with fine which shall not be less than one lakh rupees but which may extend to twenty-five crore rupees, or with both.

Feature	Section 24(1) — First Offence	Section 24(2) — Repeat Offence
Minimum imprisonment	None (discretionary)	1 month (mandatory minimum)
Maximum imprisonment	10 years	10 years
Minimum fine	None (discretionary)	₹1 lakh (mandatory minimum)
Maximum fine	Not specified	₹25 crore
When applicable	Any first-time contravention	Second conviction for similar offence

⚠️ Mandatory Minimum for Repeat Offenders

Section 24(2) introduces mandatory minimum sentences for repeat offenders — a significant departure from Section 24(1)'s fully discretionary regime. Courts MUST impose at least 1 month imprisonment AND at least ₹1 lakh fine for a second conviction. This removes judicial discretion to impose nominal sentences on repeat violators.

3. Section 24A — Compounding of Offences

Section 24A: Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending on application made by the accused.

Compounding allows the accused to settle criminal proceedings by paying a sum. Key rules:

Who compoundes: SAT (if proceedings are pending before SAT) or the court before which criminal proceedings are pending.
Eligible offences: Offences punishable with fine (alone or with imprisonment). Offences punishable with imprisonment ONLY cannot be compounded.
Bar on repeat compounding: Cannot compound the same offence if it has been compounded previously within the last three years.
Compounding sum: Determined by SAT/court — typically related to the gravity of violation, profit made, and investor loss.
Effect of compounding: Acquittal of the accused for that offence — criminal proceedings are discharged.
IPEF credit: Compounding amounts are credited to SEBI's Investor Protection and Education Fund.

4. Section 26 — Offences by Companies

Section 26(1): 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.

Section 26 creates the corporate criminal liability framework under the SEBI Act:

Dual liability — company AND officers: Both the company (fined) and the responsible persons (imprisoned and/or fined) are simultaneously liable.
'In charge of and responsible to the company': This covers MD, CEO, whole-time directors, CFO, Company Secretary, and any other KMP responsible for the company's operations.
Defence available: Section 26(2) — an officer can escape liability by proving: (i) the offence was committed WITHOUT their knowledge; OR (ii) they exercised ALL DUE DILIGENCE to prevent the offence.
Director defence: A non-executive director who was not involved in day-to-day management can argue lack of knowledge and due diligence.

5. Section 26A — Restriction on Cognizance (SEBI-Authorised Complaints Only)

Section 26A: No court shall take cognizance of any offence punishable under this Act or any rules or regulations made thereunder, except upon a complaint in writing made by the Board or by any person authorised by the Board.

Section 26A is the jurisdictional gatekeeper for criminal prosecution under the SEBI Act:

Private complaints NOT maintainable: A private investor, even if harmed, cannot file a criminal complaint for SEBI Act violations. Only SEBI (or a SEBI-authorised person) can initiate criminal proceedings.
Centralised enforcement: This prevents multiplicity of complaints and ensures that criminal process is used judiciously — SEBI evaluates each case before initiating prosecution.
'Written complaint': The complaint must be in writing — oral complaints to a Magistrate are not sufficient to trigger cognizance for SEBI Act offences.
SEBI Act vs SCRA: Section 26A of SEBI Act mirrors Section 26 of SCRA — both restrict cognizance to SEBI-authorised complaints. Know both section numbers.

6. Special Court — Section 26B

Section 26B: The Central Government may, for the purpose of providing speedy trial of offences under this Act, by notification, establish or designate one or more Special Courts.

Special Courts for SEBI Act offences ensure faster prosecution. Key features:

Special Courts are designated at the Central Government's discretion — not mandatory.
Special Courts bypass the ordinary Sessions Court / Magistrate's Court system.
Where a Special Court is designated, SEBI's complaints are filed directly there — not in an ordinary criminal court.
Appeals from Special Court: to the High Court.

7. Civil vs Criminal Enforcement — Comparison

Feature	Civil Penalty (Sections 15A-15HB)	Criminal Prosecution (Section 24)
Forum	SEBI Adjudicating Officer	Special Court / Magistrate / Sessions Court
Standard of proof	Preponderance of probability	Beyond reasonable doubt
Initiated by	SEBI (adjudication order — internal)	SEBI-authorised person's written complaint (Section 26A)
Outcome	Monetary penalty — paid to SEBI/IPEF	Imprisonment + fine; criminal record
Can both proceed?	Yes — concurrent civil and criminal proceedings for same act	Yes
Compounding	No specific compounding for civil penalties	Section 24A — compounding of criminal offences before SAT/court
Appeal	SAT (45 days from AO order)	High Court → Supreme Court

8. Landmark Cases

📖 SEBI v. Gaurav Varshney (2023) 12 SCC 1

Facts: Whether SEBI's complaint under Section 26A is required to be filed before a Special Court or a Magistrate's Court, and what is the limitation period for filing such complaints.

Held: The Supreme Court clarified that SEBI complaints should be filed before the court having jurisdiction — including Magistrate's Courts where no Special Court has been designated. SEBI's power to prosecute is not limited by ordinary limitation periods; SEBI acts in the public interest as a regulatory body.

Ratio: SEBI's prosecutorial authority under Section 26A is a public function. Procedural requirements must be construed to facilitate effective enforcement — not to create technical barriers to prosecution of securities fraud.

📖 SEBI v. Ajay Agarwal (2010) 3 SCC 765

Facts: Whether civil (adjudication) and criminal (Section 24) proceedings can run simultaneously for the same violation — double jeopardy challenge.

Held: The Supreme Court held that civil adjudication and criminal prosecution are not in conflict — they serve different purposes. Civil proceedings seek monetary deterrence; criminal proceedings seek punishment for the offence. The principle of double jeopardy (Article 20(2) of the Constitution) does not apply since civil penalty proceedings are not 'prosecution' for a criminal offence.

Ratio: Double jeopardy does not bar simultaneous civil and criminal proceedings under SEBI Act for the same violation. This is a foundational case on the concurrent civil-criminal enforcement model of Indian securities regulation.

9. Model Examination Questions

Q1. Discuss the criminal offence provisions under Section 24 of the SEBI Act. How does Section 26A restrict the taking of cognizance?

Section 24 — Criminal Offences & Section 26A — Cognizance Restriction

Model Answer — Section 24(1) creates a general criminal offence for contravention of, attempt to contravene, or abetment of any SEBI Act provision, Rule, or Regulation — punishable with imprisonment up to 10 years and/or fine. Section 24(2) provides enhanced mandatory minimum penalties for repeat offenders: minimum 1 month imprisonment + minimum ₹1 lakh fine (maximum 10 years + ₹25 crore). Civil and criminal proceedings are concurrent — Section 24 expressly states 'without prejudice to any award of penalty by the Adjudicating Officer'. Section 26 creates dual corporate-individual liability — both the company and responsible officers are deemed guilty; officers can escape liability by proving lack of knowledge OR exercise of due diligence. Section 26A restricts cognizance: no court can take cognizance of SEBI Act offences except on a written complaint by SEBI or a SEBI-authorised person. This prevents private complaints and centralises prosecution in SEBI. Section 24A allows compounding (not the same offence within 3 years) before SAT or court. In SEBI v. Ajay Agarwal (2010 SC), the Supreme Court confirmed that civil and criminal proceedings are concurrent — double jeopardy does not apply.

🎯 EXAM POINTERS — Topic 20: Offences & Prosecution [Sections 24-26]

Section 24(1): Criminal penalty — 10 years imprisonment + fine (or both). First offence — no mandatory minimum.
Section 24(2): REPEAT offence — mandatory minimum 1 month imprisonment + ₹1 lakh fine; maximum 10 years + ₹25 crore.
'Without prejudice to AO penalty' — civil and criminal proceedings are CONCURRENT for same violation.
Section 24: Covers CONTRAVENTION + ATTEMPT + ABETMENT — all three are separate offences.
Section 24A: Compounding — before SAT or court; no repeat compounding within 3 years; amounts to IPEF.
Section 26: Corporate dual liability — company + officers. Officer's defence: no knowledge OR due diligence.
Section 26A: SEBI-authorised WRITTEN complaint ONLY — no private prosecutions for SEBI Act offences.
Section 26A SEBI Act = Section 26 SCRA — both restrict cognizance; know both section numbers.
Section 26B: Special Courts — designated by CG for speedy trial of SEBI Act offences.
SEBI v. Ajay Agarwal (2010 SC): double jeopardy does NOT bar concurrent civil + criminal proceedings.

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