Penalty for Non-Compliance

A recurring puzzle for the exam candidate is this: the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 run to over three hundred regulations and several schedules, yet nowhere do they themselves prescribe a fine of so many rupees or a term of imprisonment. The reason is structural. The ICDR Regulations are subordinate legislation framed under Section 30 of the SEBI Act, 1992; the punitive machinery lives in the parent statute. Regulation 297 is the bridge — it declares that any contravention of the regulations renders the offender liable to action under the SEBI Act, the rules and the regulations. To answer a question on “penalty for non-compliance” you must therefore read Regulation 297 together with Chapter VIA of the SEBI Act (monetary penalties), Section 24 (criminal offences), Section 11B (directions and disgorgement) and the body of Supreme Court law that tells us when a penalty is owed and how much. This chapter assembles that whole apparatus.

Why the ICDR Regulations carry no penalty of their own

The first thing to grasp is that the ICDR Regulations are a code of conduct, not a code of punishment. They tell an issuer what it must do — satisfy the eligibility conditions for a public issue, lock in promoters' contribution, make full and true disclosure in the offer document, complete allotment and listing within prescribed timelines — but they leave the consequence of breach to the SEBI Act, 1992 under which they are made. This is deliberate draftsmanship: a single, uniform penalty architecture in the parent Act governs every set of regulations SEBI frames, so that the sanction for breaching the ICDR Regulations, the LODR Regulations or the Insider Trading Regulations is drawn from the same Chapter VIA toolbox.

Regulation 297, titled “Liability for contravention of the Act, rules or the regulations”, performs the linking function. It provides that an issuer, a person or an intermediary who contravenes any provision of the regulations shall be liable for action under the SEBI Act and the rules and regulations made thereunder. The effect is that the moment a contravention of an ICDR norm is established, the regulator may reach for any of three distinct streams of consequence: monetary penalties through adjudication, criminal prosecution, and remedial or preventive directions including disgorgement. These streams are cumulative, not alternative, and the choice among them is a matter of regulatory discretion calibrated to the gravity of the default. For the conceptual groundwork on how the regulations are structured and what they are meant to achieve, see our chapter on Introduction and Object.

Regulation 297: the gateway to liability

Regulation 297 is short but load-bearing. By providing that a contravention of the regulations attracts “action under the Act”, it imports wholesale the enforcement chapters of the SEBI Act. The provision does not itself quantify a fine; instead it ensures that no contravention of an ICDR obligation can be dismissed as a mere regulatory technicality with no consequence. Whether the default is a defective disclosure in the offer document, a failure to maintain the mandated promoters' contribution, or a breach of a lock-in restriction, Regulation 297 makes the offender answerable under the parent statute.

The practical significance of the linking provision is that the standard of liability and the quantum of sanction are governed by SEBI Act jurisprudence, not by any special standard internal to the ICDR Regulations. So when the Supreme Court lays down, as it did in the mutual-fund litigation discussed below, that penalty for breach of a securities-law obligation is a civil liability attracting no requirement of mens rea, that holding applies with full force to ICDR contraventions even though the Court was construing a different set of regulations. Regulation 297 is, in that sense, the door through which all the SEBI Act case law walks into the ICDR domain. The same gateway applies to breaches of the eligibility norms covered in Eligibility for IPO and the disclosure obligations under the Draft Red Herring Prospectus chapter.

Chapter VIA of the SEBI Act: the monetary penalty stream

The principal civil sanction for ICDR non-compliance is the monetary penalty imposed by an Adjudicating Officer under Chapter VIA of the SEBI Act. Section 15-I empowers the Board to appoint an Adjudicating Officer, who holds an inquiry and, if satisfied that the person has failed to comply or has contravened a provision, may impose the penalty prescribed by the relevant section of Chapter VIA. After the Finance Act, 2018, Section 11B(2) additionally empowers SEBI itself to levy penalty under the Chapter VIA sections after holding an inquiry, so the adjudicatory power is no longer confined to a designated officer.

For ICDR defaults two Chapter VIA provisions matter most. Where the contravention amounts to a fraudulent or unfair trade practice — for instance, a materially false or misleading disclosure in an offer document designed to induce subscription — the penalty section is Section 15HA. Where the contravention is a more routine breach of a procedural or disclosure norm for which no specific penalty is otherwise provided, the residuary Section 15HB applies. Both are examined in detail in the next two sections. The key structural point is that the section chosen dictates the penalty band, and the choice depends on the legal character of the default rather than the regulation number breached.

Section 15HA: penalty for fraudulent and unfair trade practices

Section 15HA is the heavyweight penal provision. As amended by the Securities Laws (Amendment) Act, 2014, it provides that if any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. The three-times-profits limb is what gives the section its deterrent bite: a defaulter cannot treat the penalty as a tolerable cost of wrongdoing because the sanction is pegged to the unlawful gain.

In the ICDR context, Section 15HA is the natural home for the most serious disclosure violations. A draft red herring prospectus that conceals material litigation, overstates the issuer's financials, or misrepresents the object of the issue is not merely a defective disclosure — it is a device to mislead the investing public and falls squarely within the conception of an unfair trade practice in securities. The leading illustration is N. Narayanan v. Adjudicating Officer, SEBI (decided 26 April 2013), arising out of the Pyramid Saimira Theatre matter, where the Supreme Court upheld a penalty of fifty lakh rupees under Section 15HA against a whole-time director and promoter for fraudulent inflation of the company's financial statements, together with a two-year restraint from the securities market. The Court emphasised that directors who allow false financials to enter the public domain undermine the very integrity of the market and cannot escape personal liability by pointing to collective board responsibility.

Section 15HB: the residuary catch-all penalty

Not every ICDR contravention rises to the level of a fraudulent or unfair trade practice. A great many are procedural — a delayed listing application, a failure to appoint a monitoring agency for a large issue, an incomplete disclosure that misleads no one. For these, the residuary provision is Section 15HB. It provides that whoever fails to comply with any provision of the Act, the rules or the regulations, or directions issued by the Board, for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

Two features deserve attention. First, Section 15HB is genuinely residuary: it operates only where no other Chapter VIA section is attracted, so an Adjudicating Officer must first ask whether the default is one of fraud (Section 15HA) or another specifically penalised category before falling back on 15HB. Second, after the 2014 amendment the section carries only an upper ceiling of one crore rupees and no statutory floor, which dovetails with the discretion the Supreme Court has recognised in the Bhavesh Pabari line of authority discussed below. For ordinary lapses in meeting the conditions discussed in Eligibility for FPO or the lock-in mechanics in Promoters' Contribution and Lock-in, Section 15HB is typically the operative penalty provision.

Shriram Mutual Fund: penalty as a civil liability

The single most important proposition for any question on penalty under the securities laws is that breach of a civil obligation under the SEBI Act attracts penalty regardless of intention. The authority is SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361. The mutual fund had, over a two-year period, transacted through associate brokers in excess of the permissible limits on a number of occasions. The Securities Appellate Tribunal had set aside the penalty, reasoning along the lines of Hindustan Steel Ltd. v. State of Orissa that penalty should not follow a technical or venial breach absent deliberate defiance.

The Supreme Court reversed. It held that once the contravention of a statutory obligation is established, penalty must follow, and that mens rea is not an essential ingredient for the imposition of penalty for breach of a civil obligation. The Court distinguished Hindustan Steel as a decision arising in a quasi-criminal context with no application to civil liabilities under the SEBI Act and its regulations. The legislature, it observed, had deliberately not included intention or wilfulness among the factors the Adjudicating Officer was to weigh. The consequence for the ICDR domain is direct: an issuer cannot defend an admitted contravention — say, a failure to lock in the requisite promoters' contribution — by pleading good faith or absence of intent to deceive. The breach itself founds the liability.

Roofit to Bhavesh Pabari: how much discretion does the officer have?

If Shriram settles whether a penalty is owed, the next question is how much. Section 15J lists factors — the gain or unfair advantage made, the loss caused to investors, and the repetitive nature of the default — to be considered while adjudging the quantum. The relationship between 15J and the penalty sections produced a sharp judicial controversy. In SEBI v. Roofit Industries Ltd. (2016), the Supreme Court took the view that for the period when the penalty sections prescribed a fixed minimum, the Adjudicating Officer had no discretion to go below it and the Section 15J factors could not be invoked to dilute the mandated penalty.

That position was reconsidered by a three-judge bench in Adjudicating Officer, SEBI v. Bhavesh Pabari (decided 28 February 2019). The Court held that the factors enumerated in clauses (a) to (c) of Section 15J are illustrative and not exhaustive, and that the Adjudicating Officer retains a controlled discretion to consider relevant circumstances in fixing the quantum, reading down the rigidity of Roofit. The combined effect of the two decisions for the ICDR practitioner is this: liability is near-automatic once breach is shown (Shriram), but the amount is to be calibrated to the facts — the gain made, the loss to investors and the recurrence of the default — with the officer exercising a guided, reasoned discretion (Bhavesh Pabari).

Section 11B: directions, restraint and disgorgement

Monetary penalty is not the only, or even the most powerful, consequence of ICDR non-compliance. Section 11 read with Section 11B empowers SEBI to issue, in the interest of investors or the orderly development of the securities market, directions to any person associated with the securities market. These directions can be remedial and preventive: restraining a person from accessing the securities market, prohibiting a director from associating with a listed company, or directing an issuer to refund subscription money.

Crucially, the Securities Laws (Amendment) Act, 2014 inserted an Explanation to Section 11B clarifying that the power to issue directions “shall include and always be deemed to have been included” the power to direct a person who has made a profit or averted a loss by contravening the Act or regulations to disgorge an amount equivalent to the wrongful gain made or loss averted. Disgorgement is restitutionary, not punitive: it strips the wrongdoer of unjust enrichment and may be ordered in addition to penalty under Chapter VIA, as the courts have repeatedly affirmed. For an issuer that mobilises money through a non-compliant offer, the disgorgement-plus-refund direction can dwarf any Chapter VIA penalty in financial impact.

Sahara: the consequence of treating a public issue as private placement

The most dramatic demonstration of the directions-and-refund stream is Sahara India Real Estate Corporation Ltd. v. SEBI, (2013) 1 SCC 1 (judgment of 31 August 2012). Two Sahara group companies raised over seventeen thousand crore rupees from roughly three crore investors through Optionally Fully Convertible Debentures, characterising the exercise as a private placement and thereby purporting to escape the disclosure and listing discipline applicable to public issues. The Supreme Court held that an offer of securities to fifty persons or more is deemed a public issue attracting the full rigour of the public-issue regime, and that the companies had violated the disclosure and listing obligations.

The Court directed the two companies to refund the entire amount collected to the investors together with interest at fifteen per cent per annum, and affirmed SEBI's jurisdiction over the unlisted companies for the purpose of investor protection. Sahara is the locus classicus for the proposition that the substance of an offer, not its label, determines the regulatory regime, and that the consequence of dressing up a public issue as a private placement is not a token fine but a full restitutionary refund. For the ICDR student it underscores why the eligibility and disclosure conditions for public issues are non-negotiable.

Section 24: the criminal stream

Beyond civil penalty and remedial directions lies the criminal sanction. Section 24(1) of the SEBI Act provides that a person who contravenes, or attempts to contravene, or abets the contravention of the Act, the rules or the regulations shall be punishable with imprisonment for a term which may extend to ten years, or with fine which may extend to twenty-five crore rupees, or with both. Section 24(2) adds a further offence: failure to pay a penalty imposed by the Adjudicating Officer, or to comply with a direction or order, attracts imprisonment of not less than one month extending to ten years, or fine up to twenty-five crore rupees, or both.

Two procedural features are exam-relevant. First, prosecution under Section 24 is launched by the filing of a complaint by SEBI before the designated Special Court, and proceeds independently of, and without prejudice to, the adjudicatory and Section 11B streams — the same default can in principle attract penalty, directions and prosecution. Second, in Prakash Gupta v. SEBI (2021) the Supreme Court examined the compounding of offences under Section 24A and the role of SEBI's view in that process, clarifying that while the court's power to compound is not eliminated, the regulator's stance is a significant consideration. The criminal stream is reserved, in practice, for grave or persistent contraventions, and the limitation and procedural safeguards that attach to a criminal trial do not dilute the parallel civil liability already discussed.

For ICDR defaults specifically, prosecution becomes a realistic prospect where an issuer floats a public issue in deliberate defiance of the eligibility or disclosure regime, or where a promoter abets a fraudulent offer document. The availability of the criminal route alongside penalty and disgorgement reflects the legislative judgment that securities-market wrongdoing harms a diffuse class of investors and warrants the strongest deterrent the statute can muster.

Regulation 298 and the stock-exchange fine mechanism

Layered above the SEBI Act sanctions is a self-executing fine mechanism operated by the stock exchanges for everyday ICDR lapses. Acting under its circular-making power, SEBI has directed the recognised stock exchanges to levy standard fines for specified procedural defaults — for example, a fine of twenty thousand rupees per day of non-compliance for delays in completing a bonus issue, in converting convertible securities within the prescribed period, or in making the listing and trading-approval applications within the stipulated timelines. The fines so collected are credited to the Investor Protection Fund of the concerned exchange.

Regulation 298, titled “Failure to pay fine”, governs the consequence of non-payment. Where a non-compliant entity fails to pay the fine levied, the recognised stock exchange may initiate appropriate enforcement action, including freezing of the holdings of the promoters and promoter group and, ultimately, prosecution. This exchange-administered tier is intended to secure prompt, low-cost compliance with routine timelines without invoking the full adjudicatory machinery, while preserving SEBI's overarching enforcement powers for serious defaults. The two tiers are complementary: the exchange fine deals with the procedural lapse, and the SEBI Act sanctions remain available where the breach is grave.

A point worth flagging for the exam is that this exchange-administered fine is a delegated, standardised levy operating on a per-day basis until compliance is achieved, whereas a Chapter VIA penalty is a discretionary, adjudicated amount fixed after an inquiry. The former secures timeline discipline at scale; the latter responds to the gravity and character of a particular default. Treating them as the same thing is a common error. The exchange fine also does not require any finding of fraud or even of investor harm — the mere lapse of the timeline triggers it — which again illustrates the no-mens-rea character of securities-law liability recognised in Shriram Mutual Fund.

Regulations 299 and 300: removing difficulty and relaxing strict enforcement

The penalty chapter is balanced by two enabling provisions. Regulation 299 (“Power to remove difficulty”) allows SEBI to issue directions or clarifications to resolve difficulties in giving effect to the regulations — it is an administrative facilitation power, not a penal one, and it is under this circular-making and clarificatory authority that SEBI has prescribed the stock-exchange fine schedules referred to above.

Regulation 300 (“Power to relax strict enforcement of the regulations”) is more consequential for a defaulting issuer. It permits the Board, on an application and for reasons to be recorded in writing, to relax the strict enforcement of any requirement of the regulations if it is satisfied that the requirement is procedural in nature, or that its strict enforcement would cause undue hardship, and that the relaxation is in the interest of investors and the securities market. The relaxation power is therefore a safety valve: a technical, non-prejudicial deviation may be condoned rather than penalised. It does not, however, dilute the Shriram principle for unrelaxed contraventions — absent a Regulation 300 relaxation, an established breach attracts liability without proof of intent. For the underlying definitional framework that determines what counts as a relaxable procedural requirement, see Definitions and Scope.

Putting the enforcement streams together

For the exam, the analytical sequence is what earns marks. Faced with an ICDR contravention, work through it in order. First, establish the breach — Regulation 297 makes the offender liable to action under the SEBI Act, and per Shriram Mutual Fund intention is irrelevant to liability. Second, classify the default: if it is fraudulent or misleading conduct, the penalty section is Section 15HA (five lakh to twenty-five crore rupees or three times profits); if it is a routine breach with no specific penalty, the residuary Section 15HB (up to one crore rupees) applies. Third, quantify the penalty using the Section 15J factors, exercising the controlled discretion recognised in Bhavesh Pabari and reading down the rigidity of Roofit.

Fourth, consider the parallel streams: Section 11B directions, including disgorgement of wrongful gain and, where the default is a disguised public issue, a full refund with interest as in Sahara; the exchange-administered fine under the SEBI circulars enforced through Regulation 298; and, for grave or persistent contraventions, criminal prosecution under Section 24. Finally, ask whether Regulation 300 relaxation is available for a purely procedural, non-prejudicial lapse. Mastering this layered structure — and the cases that animate each layer — is the difference between a thin answer that recites a fine figure and a complete answer that maps the regulator's full enforcement arsenal. Return to the SEBI ICDR Regulations hub for the companion chapters.

Frequently asked questions

Do the ICDR Regulations themselves prescribe any penalty?

No. The ICDR Regulations are subordinate legislation under the SEBI Act, 1992 and contain no penalty figures of their own. Regulation 297 makes a contravention liable to action under the SEBI Act, importing the monetary penalties of Chapter VIA, the criminal offences in Section 24 and the directions-and-disgorgement power in Section 11B.

Is intention or mens rea required before a penalty can be imposed for an ICDR breach?

No. In SEBI v. Shriram Mutual Fund, (2006) 5 SCC 361, the Supreme Court held that penalty for breach of a civil obligation under the securities laws follows automatically once the contravention is established, and that mens rea is not an essential ingredient. Good faith or absence of intent to deceive is not a defence to an admitted ICDR contravention.

When does Section 15HA apply rather than Section 15HB?

Section 15HA applies where the contravention amounts to a fraudulent or unfair trade practice in securities — for example a materially false or misleading disclosure in an offer document — and carries a penalty of five lakh to twenty-five crore rupees or three times the profits, whichever is higher. Section 15HB is the residuary provision (up to one crore rupees) for breaches for which no separate penalty is provided, such as routine procedural or disclosure lapses.

How much discretion does the Adjudicating Officer have over the quantum of penalty?

After Adjudicating Officer, SEBI v. Bhavesh Pabari (2019), the factors in Section 15J — gain made, loss to investors and repetition of default — are illustrative, not exhaustive, and the officer retains a controlled, reasoned discretion in fixing quantum. This read down the stricter view in SEBI v. Roofit Industries (2016) that had denied discretion below a fixed statutory minimum.

What happens if a public issue is disguised as a private placement?

In Sahara India Real Estate Corporation Ltd. v. SEBI, (2013) 1 SCC 1, the Supreme Court held that an offer to fifty persons or more is deemed a public issue attracting full disclosure and listing discipline, and directed refund of over seventeen thousand crore rupees to investors with fifteen per cent interest. The substance of the offer, not its label, governs the applicable regime.

Can the same contravention attract penalty, directions and prosecution at once?

Yes. The streams are cumulative. A single default can attract a Chapter VIA monetary penalty through adjudication, remedial directions including disgorgement under Section 11B, an exchange-administered fine enforced through Regulation 298, and criminal prosecution under Section 24 — which provides imprisonment up to ten years or fine up to twenty-five crore rupees, or both, and proceeds independently of the other streams.