Reconsidering SEBI Disgorgement

In this paper, we study the theory of disgorgement and its application by the Securities and Exchange Board of India (SEBI), the Indian securities regulator. We find that the SEBI justification for the use of disgorgement is grounded on the basis of the ‘equitable’ and ‘remedial’ power which claws back the illegal gain made by the wrongdoer and merely returns the wrongdoer to ‘status quo’. This is distinctly different from disgorgement which strips the defendant of its gains and is not concerned with a return to status-quo. We find that SEBI orders do not reflect its own justification of disgorgement, in that not a single order in our period of study returns the defendant to status-quo. Disgorgement is a discretionary action taken by whole time members (WTMs) – a member of the executive wing of government.  Exercise of public power without legislative limits, or conceptual limits that apply to judicial power, raises serious regulatory governance concerns. The use of SEBI disgorgement is complicated by the destination of its proceeds – SEBI disgorgement amounts go to the Investor Protection and Education Fund over which SEBI has control, while those from penalties go into the Consolidated Fund of India. Our results suggest that SEBI must review how SEBI disgorgement is conceptualised, what goals it serves, and the process through which it is applied. The analysis of disgorgement is relevant for similar debates in other jurisdictions, including the U.S.