Abstract
This project explores the concept of disgorgement and its utilisation by the Securities and Exchange Board of India (“SEBI”). The research and analysis done through this research project reveals that SEBI’s rationale for employing disgorgement is based on its “equitable” and “remedial” authority, aiming to recover ill-gotten gains from wrongdoers and restore the situation to its original state. However, this differs from disgorgement practices elsewhere, which aim to strip wrongdoers of their gains without necessarily restoring the status quo.
The author observes that SEBI’s disgorgement orders do not consistently align with its stated justification, as none of the orders of the SEBI, till now, actually return the wrongdoer to their original position. Moreover, disgorgement decisions are made at the discretion of whole-time members (“WTMs”), who hold executive authority within the government. This exercise of public power without clear legislative or judicial boundaries raises significant concerns regarding regulatory governance.
Complicating matters further is the destination of disgorgement proceeds, which are directed to the Investor Protection and Education Fund controlled by the SEBI, unlike penalties that contribute to the Consolidated Fund of India. The findings suggest that SEBI needs to reassess how it conceptualises disgorgement, its underlying objectives, and the procedures governing its application. This analysis of disgorgement has implications beyond India and is pertinent to similar discussions in other jurisdictions, including the United States.
Introduction
SEBI’s Objective and Statutory Basis
The primary objective behind the establishment of the Securities and Exchange Board of India (“SEBI”) is outlined in the preamble to the Securities and Exchange Board of India Act, 1992 (“SEBI Act, 1992”). The foremost goal stated in this preamble is to “safeguard the interests of investors in securities.”1
Importance of Investor Protection in Securities Regulation
Protecting investors is paramount in regulating the securities market. Without a robust mechanism to safeguard investors’ interests, there is a heightened risk of wrongdoers exploiting investors’ funds. Such misconduct undermines the integrity of the securities market, eroding investor confidence.
Hence, every securities market necessitates an effective enforcement system that:
- Acts as a deterrent,2
- Fosters public trust, and
- Cultivates a fair market environment.3
Disgorgement as an Enforcement Tool
SEBI, like many other securities regulators worldwide, employs disgorgement as a tool to protect investors and deter wrongful activities in the securities market. Disgorgement entails surrendering profits and wrongful gains under legal compulsion or demand.4
It is rooted in the concept of unjust enrichment, aiming to:
- Deprive individuals of ill-gotten gains, and
- Discourage such misconduct in the future.5
Treatment of Disgorgement Proceeds
In India, disgorgement proceeds are channelled into an Investor Protection and Education Fund, which may not always be utilised for compensating affected investors. In contrast, the statutory framework in the USA directs disgorgement proceeds to compensate wronged investors as damages.
Research Objective and Emerging Concerns
In light with the aforementioned, this research project seeks to analyse the efficacy of disgorgement as an equitable remedy in India, particularly considering that the proceeds are not consistently utilised to compensate investors for their losses.
It is worth noting that despite its utility, the use of disgorgement has prompted concerns. The Dave Committee Report, a recent expert committee commissioned by SEBI,6 recommended clear public guidance on the quantification of profit or loss. The Securities Appellate Tribunal (“SAT”) has also questioned the methodology used to calculate illegal gains,7 urging SEBI to establish relevant norms for determining the amount.
These criticisms primarily focus on the quantification of disgorgement amounts. However, they presuppose that the justification for disgorgement and its application by SEBI are settled matters. This research project contend that this is not the case, and hence, advocate for a re-evaluation of these aspects.
The Jurisprudence Behind Disgorgement: Stripping the Wrongdoer of Ill-Gotten Gains
Meaning and Core Principle of Disgorgement
Disgorgement involves stripping the wrongdoer of their ill-gotten gains. The principle that no one should profit from their own wrong has usually been cited as the principle for profits disgorgement. This remedy is for a wrong or a breach of duty, where the wrongdoer pays to the injured party an amount calculated based on the gains made by the wrongdoer (and does not include the loss, if any, suffered by the injured party). This is different from other remedies of restitution.
Disgorgement Compared with Restitution and Compensation
The comparison between disgorgement and other remedies in private law, like restitution and compensation, reveals distinct principles and justifications. Restitution aims to return property to its rightful owner or restore the “status quo,” rooted in the principle of preventing unjust enrichment. Conversely, compensation seeks to redress the plaintiff’s losses, which may not directly correlate with the defendant’s gains. Disgorgement focuses on stripping wrongdoers of their gains, irrespective of restoring the status quo, and is based on punishing wrongdoing rather than compensating the plaintiff.
Distinction Between Restitution and Disgorgement
While restitution and disgorgement both target the defendant’s gains, they differ in execution. Restitution reverses a transfer of value, while disgorgement ignores whether a transfer occurred and is measured by the actual profits gained by the defendant from the wrongdoing. Despite moral connotations, disgorgement primarily concerns profits from legal wrongs rather than moral judgments.
Rationale and Justification of Disgorgement
The rationale behind restitution lies in reversing transfers based on circumstances the law does not recognise or due to the defendant’s wrongdoing. Disgorgement’s justification is more complex, often attributed to punitive goals rather than compensating the plaintiff’s losses. Disgorgement aims to protect the law’s facilitative institutions and serve public policy goals, not to secure the plaintiff’s interests directly.
Cause of Action and Measurement
In terms of cause of action, restitution applies to both wrongs and unjust enrichment, while disgorgement is only applicable in cases of deliberate or reckless breaches for gain, or breaches of fiduciary duty, particularly due to the extreme trust and confidence in such relationships.
Regarding measurement, restitution is typically based on the objective value received by the defendant, while disgorgement is limited by the gains made or losses averted by the defendant. Disgorgement serves punitive purposes beyond mere compensation, and the entire profit may not necessarily be subject to disgorgement, with considerations given to legitimate gains and equitable goals.
Comparative Summary of Remedies
| Aspect | Restitution | Compensation | Disgorgement |
|---|---|---|---|
| Primary Focus | Restoring the status quo | Redressing plaintiff’s loss | Stripping defendant’s gains |
| Underlying Principle | Prevention of unjust enrichment | Making good the loss suffered | No profit from wrongdoing |
| Basis of Calculation | Value received by defendant | Loss suffered by plaintiff | Actual profits gained by defendant |
| Nature of Remedy | Restorative | Compensatory | Punitive and deterrent |
Judicial Approach and Equitable Goals
The U.S. Supreme Court’s decision in Liu v. SEC underscores the importance of considering equitable goals in disgorgement proceedings, emphasizing the disgorgement of net profits rather than the entire amount.
Conclusion on Disgorgement in Private Law
Overall, while restitution aims to restore the status quo ante, disgorgement serves as a punitive measure against wrongdoing, with its justifications and applications differing significantly from traditional remedies like restitution and compensation in private law.
Disgorgement: Balancing Punishment and Restitution in Regulatory Enforcement
Disgorgement has emerged as a pivotal regulatory tool, marking a departure from the conventional recourse to penalties by regulators. While penalties are primarily understood as punitive measures imposed by the state in response to violations of its laws, disgorgement operates on a different premise, targeting the ill-gotten gains amassed by wrongdoers. This shift in approach reflects a nuanced understanding of regulatory objectives, moving beyond mere punishment to encompass a more comprehensive strategy aimed at deterring misconduct and preserving market integrity.
Penalties Versus Disgorgement: Conceptual Differences
In contrast to penalties, which serve primarily as instruments of deterrence and, to some extent, retribution, disgorgement focuses on the restitution of unlawfully acquired profits. It operates on the principle that wrongdoers should not be allowed to retain the benefits of their misconduct and seeks to restore the status quo ante by requiring them to relinquish their illicit gains.
Further, it has been held that SEBI penalties do not require any mens rea. Therefore, penalties in the SEBI context are more akin to a civil law remedy and are not of a criminal character. While penalties are typically fixed by statutory provisions and may not precisely correspond to the magnitude of the harm caused or the gains obtained, disgorgement amounts are determined on a case-by-case basis, tailored to the specific circumstances of each violation.
Deterrence and Regulatory Objectives
Despite sharing the overarching goal of deterrence, disgorgement and penalties differ significantly in their underlying rationales and practical implications. Disgorgement, with its emphasis on the disgorgement of profits, lacks the compensatory or restitutionary character inherent in penalties. Instead, it serves as a powerful tool for signalling regulatory disapproval, deterring future misconduct, and safeguarding market integrity.
However, its efficacy as a deterrent is contingent upon its ability to impose meaningful financial consequences on wrongdoers, thereby incentivizing compliance with regulatory norms.
Regulatory Nature of Disgorgement Proceedings
In the regulatory landscape, disgorgement proceedings are distinct from traditional legal actions in that they are initiated by regulatory authorities in response to violations of public laws rather than individual grievances. This underscores the regulatory nature of disgorgement, highlighting its role in enforcing compliance with regulatory standards and upholding the integrity of the financial markets.
While disgorgement may partially serve compensatory purposes by requiring wrongdoers to relinquish their ill-gotten gains, its primary function is punitive, aimed at deterring future misconduct and preserving market confidence.
In light of these considerations, the use of disgorgement as a regulatory remedy represents a significant departure from traditional enforcement practices. By targeting the profits derived from unlawful conduct, disgorgement serves as a potent deterrent against misconduct, signalling the regulator’s commitment to enforcing compliance with regulatory standards and upholding the integrity of the financial markets.
However, its effectiveness hinges on its ability to impose meaningful financial consequences on wrongdoers, thereby incentivizing adherence to regulatory norms and fostering a culture of compliance within the industry.
Early Efforts and Legal Challenges: SEBI’s Pursuit of Gain-Based Remedies
It is to be noted that a summary of the disgorgement orders issued by SEBI in recent years. A compiled data from January 1, 2018, to July 15, 2021, comprising 551 orders involving 46 companies and 60 individuals.
| Category | Percentage of Cases |
|---|---|
| Violations of PFUTP Regulations, 2003 | Approximately 80% |
| Violations of PIT Regulations, 2015 or 1992 | Approximately 16% |
| Violations under Both PFUTP and PIT Regulations | Approximately 3% |
SEBI has sought to introduce gain-based remedies since its inception. In instances of insider trading violations, SEBI directed sellers to compensate innocent purchasers, despite lacking explicit statutory authority.
However, this approach faced legal challenges as the appellate authority overturned it, citing the necessity for specific statutory authorization before imposing monetary burdens. In another case, SEBI instructed the deposit of a sum to compensate potential victims of insider trading, yet this too was nullified, leaving the issue of disgorgement unresolved.
N.L. Mitra Report
The N.L. Mitra Report highlighted a significant gap in the statutory framework regarding remedies for securities market investors. While penalties were clearly provided for, there was a lack of provisions addressing the “curative” aspects of remedies.
Gap in Investor Remedies
The report emphasized that investors faced challenges in seeking compensation due to the heavy burden imposed by traditional private law rules and the absence of market-specific regulations in this regard. Additionally, it pointed out the lack of a specific forum for investors to seek compensation, with various regulatory bodies having jurisdiction over different aspects of disputes but none explicitly authorized to award compensation.
Recommendation for a Compensation Forum
The Mitra Report proposed that a single entity, preferably consumer courts rather than SEBI, should be entrusted with the task of awarding compensation to investors. It argued that compensation should be within the purview of the justice delivery system rather than the regulatory framework.
- Preference for consumer courts over SEBI
- Compensation to be part of the justice delivery system
- Clear separation between regulation and adjudication of compensation
Constitutional and Regulatory Concerns
Moreover, the report cautioned that the lack of coordination among regulators regarding compensation could expose them to constitutional tort claims and necessitate compensation payments to investors.
Conclusion
Following the Ketan Parekh scam in 2001, a Joint Parliamentary Committee (JPC) conducted an inquiry into the stock market, which highlighted the need for SEBI to have explicit powers to impose disgorgement to confiscate ill-gotten gains of defaulters.
JPC Findings and Recommendations
While SEBI had been utilizing its general powers under Section 11 and 11B of the SEBI Act, 1992, for such orders, the JPC recommended the enactment of specific legal provisions to address challenges faced in court regarding these actions. Additionally, it suggested that the funds collected through disgorgement should be distributed to affected investors.
| Aspect | Observation / Recommendation |
|---|---|
| SEBI Powers | Need for explicit statutory authority for disgorgement |
| Judicial Challenges | Difficulties faced due to lack of specific legal provisions |
| Use of Funds | Distribution of disgorged amounts to affected investors |
Government Response and Implementation
In response, the Ministry of Finance submitted an Action Taken Report on May 9, 2003, indicating substantial compliance with the recommendations of both the JPC and the Mitra Report. However, no specific amendments concerning disgorgement or investor compensation were enacted at that stage, leaving uncertainty regarding how these recommendations were actually implemented.
IPO Scam and Evolution of Disgorgement
The 2006 IPO scam marked a turning point in SEBI’s approach to disgorgement, showcasing its potential as a remedy within the statutory framework. In response to irregularities in IPO share allocations from 2003 to 2005, SEBI initiated investigations uncovering fraudulent practices where certain individuals manipulated the retail investor allocation.
- Manipulation of retail investor quotas
- Use of multiple fictitious accounts
- Collusion among individuals to corner IPO shares
- Sale of shares for substantial gains upon listing
These individuals, often in collaboration with others, exploited multiple fictitious accounts to secure shares in IPOs, subsequently selling them for substantial gains upon listing. SEBI’s proactive response included issuing interim orders to restrain market dealings, initiating.
References:
- Securities and Exchange Board of India Act, 1992.
- S. N. Ghosh, Protection of Harmed Investors: The Missing Link in the Disgorgement Orders of the SEBI, 14 NALSAR Student Law Review 4 (2020).
- Objectives and Principles of Securities Regulation, International Organization of Securities Commissions, May 2003, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf (last visited Nov 4, 2025).
- Bryan A. Garner, Black’s Law Dictionary, 568 (10th edn., 2014).
- Karvy Stock Broking Co. Ltd. v. SEBI, Appeal No. 6 of 2007 (Securities Appellate Tribunal, May 2, 2008).
- A Report on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues under the Chairmanship of Justice Anil R. Dave dated March 2, 2020, at 222.
- B. Ramalinga Raju v. SEBI, SAT order dated May 12, 2017.
Written By: Hemali Gohil
