SEBI
Topic66 PIT Penalties Civil Criminal Consequences
Penalties for Insider Trading — Civil & Criminal Consequences
Topic 66 — Section 15G, Section 24, Disgorgement, Debarment & Complete Enforcement Framework | SEBI Law Officer
The enforcement framework for insider trading in India is multi-layered — combining civil monetary penalties (Section 15G SEBI Act), criminal prosecution (Section 24 SEBI Act), disgorgement of profits (Section 11B SEBI Act), and market access debarment (Section 11B SEBI Act). The dual civil-criminal framework enables SEBI to calibrate its response to the severity of the violation — using civil proceedings for moderate cases and criminal prosecution for the most serious cases. Understanding the quantum of penalties, the standard of proof for each proceeding, and the interaction between civil and criminal processes is essential for the SEBI Law Officer examination.
1. Section 15G — Civil Penalty for Insider Trading
Section 15G, SEBI Act: If any insider who — (i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or (ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or (iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information — he shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. |
Section 15G Civil Penalty: Minimum ₹10 lakh — Maximum ₹25 Crore OR 3× Profit (whichever HIGHER) |
Key features of Section 15G penalty:
- Mandatory minimum: ₹10 lakh. Unlike Section 15HB (catch-all with no minimum), Section 15G has a mandatory minimum — the AO cannot impose less than ₹10 lakh for any insider trading violation.
- Dual maximum formula: ₹25 crore OR 3 times the profits made from insider trading — whichever is HIGHER. This ensures that large-scale insider trading with profits exceeding ₹8.33 crore faces a penalty exceeding ₹25 crore.
- Three offences covered: (i) trading on UPSI (own or another's behalf); (ii) communicating UPSI; (iii) counselling/procuring trading on UPSI.
2. Section 24 — Criminal Prosecution for Insider Trading
Section 24(1), SEBI Act: Without prejudice to any award of penalty by the Adjudicating Officer, 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. |
Feature | Section 15G Civil Penalty | Section 24 Criminal Prosecution |
|---|---|---|
Nature | Monetary penalty — civil/quasi-criminal | Imprisonment + fine — criminal |
Forum | SEBI Adjudicating Officer | Special Court / Magistrate's Court |
Standard of proof | Preponderance of probability | Beyond reasonable doubt |
Maximum penalty | ₹25 crore OR 3× profit (higher) | 10 years imprisonment + fine (no specified maximum for fine) |
Minimum penalty | ₹10 lakh (mandatory minimum) | None specified in Section 24(1) |
Repeat offenders | Section 15G applies | Section 24(2): mandatory minimum 1 month + ₹1 lakh (repeat offenders) |
Concurrent proceedings | Can run simultaneously with criminal prosecution | Can run simultaneously with civil penalty |
Prosecution initiated by | SEBI (adjudication) | SEBI-authorised person's written complaint (Section 26A) |
3. Disgorgement — Section 11B(2)
Section 11B(2), SEBI Act: For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. |
Disgorgement is not a penalty — it is the return of ill-gotten gains. Key distinctions:
- Disgorgement vs Penalty: Penalty punishes (deterrence); disgorgement merely restores the status quo. Both can be ordered simultaneously — disgorgement does not preclude penalty and vice versa.
- Calculated on profit: Disgorgement = the actual profit made from the insider trade OR the loss averted. This may be different from the 3× multiplier in Section 15G.
- SEBI v. Rakhi Trading (2018 SC): Disgorgement and penalty are CUMULATIVE — both can be imposed for the same violation.
4. Debarment — Section 11B(1)
SEBI can debar persons convicted of insider trading from the securities market for a specified period or permanently:
- Debarment orders are issued under Section 11B — directing the debarred person not to buy, sell, or deal in securities.
- Debarment can be from ALL securities or from specific roles (e.g., not permitted to act as director of a listed company, not permitted to register as an intermediary).
- Duration: specified period (e.g., 5 years) or permanent — based on severity and repetitiveness of violation.
- Debarment is communicated to stock exchanges and SEBI-registered depositories — enforced at the trading/DP level.
5. Complete Enforcement Arsenal for Insider Trading
Enforcement Tool | Basis | Effect | Appealable To |
|---|---|---|---|
Civil penalty | Section 15G SEBI Act | ₹10 lakh to ₹25 crore or 3× profit | SAT (45 days) |
Disgorgement | Section 11B(2) SEBI Act | Return of profit from insider trade | SAT (45 days) |
Debarment | Section 11B(1) SEBI Act | Ban from securities market (period or permanent) | SAT (45 days) |
Impounding of assets | Section 11(4) SEBI Act | Freeze bank/demat accounts pending recovery | SAT |
Cease & desist | Section 11D SEBI Act | Stop specified activity (ongoing insider trading) | SAT |
Criminal prosecution | Section 24 + 26A SEBI Act | Imprisonment up to 10 years + fine | High Court → Supreme Court |
Intermediary action | Section 12(2) SEBI Act | Suspend/cancel registration of broker/IA/PA | SAT (45 days) |
6. Section 15J — Factors in Determining Penalty Quantum
Even for insider trading, the AO must consider Section 15J factors when determining the penalty quantum:
- (a) Disproportionate gain or unfair advantage: Actual profit made from the insider trade — quantified where possible.
- (b) Loss caused to investors: Counterparties who sold to the insider at the artificially low price (before positive UPSI became public) were effectively harmed.
- (c) Repetitive nature: A repeat insider trader faces higher penalty — prior violations are a significant aggravating factor.
7. Model Examination Questions
Q1. Describe the civil and criminal penalties for insider trading under the SEBI Act. Can civil and criminal proceedings run simultaneously?
Penalties for Insider Trading — Section 15G & Section 24 Model Answer — CIVIL PENALTY (Section 15G SEBI Act): Adjudicated by SEBI's Adjudicating Officer. Three violations covered: (i) trading on UPSI; (ii) communicating UPSI; (iii) counselling/procuring trading on UPSI. MINIMUM: ₹10 lakh (mandatory). MAXIMUM: ₹25 crore OR 3× profits made from insider trading — whichever is HIGHER. Section 15J factors must be considered: gain, investor loss, repetitiveness. CRIMINAL PROSECUTION (Section 24 SEBI Act): For any contravention of SEBI Act/Regulations including PIT Regulations — up to 10 years imprisonment + fine. Standard: beyond reasonable doubt. Initiated by SEBI-authorised written complaint (Section 26A). CONCURRENT PROCEEDINGS: YES — civil and criminal proceedings can run simultaneously for the same insider trading act. Section 24(1)'s 'without prejudice to any award of penalty' confirms this. In SEBI v. Ajay Agarwal (2010 SC), the Supreme Court confirmed that double jeopardy does not bar concurrent civil and criminal proceedings — they serve different purposes (deterrence vs punishment). ADDITIONAL TOOLS: Disgorgement under Section 11B(2) — return of profit (not a penalty; can be combined with Section 15G penalty — SEBI v. Rakhi Trading 2018 SC); Debarment under Section 11B(1) — market ban; Impounding under Section 11(4) — asset freeze; Intermediary action under Section 12(2). Standard of proof: civil (preponderance) vs criminal (beyond reasonable doubt) — SEBI v. Kishore Ajmera (2016 SC). |
🎯 EXAM POINTERS — Topic 66: Penalties for Insider Trading
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