The Penalty Paradox, Why India’s Securities Law Is Caught Between Rigidity and Discretion
India’s securities enforcement framework has long faced a contradiction. Parliament has progressively introduced minimum penalties to strengthen deterrence. At the same time, it has retained broad adjudicatory discretion through mitigating factors. The coexistence of these two approaches has not produced balance; it has created uncertainty. This fault line resurfaced in the split decision of the Securities Appellate Tribunal (SAT) in Sukhraj Kaur Rajbans vs. SEBI (January 2026). The central issue is deceptively simple but profoundly consequential: where a statute prescribes a minimum penalty, can an adjudicator reduce it below that threshold, or impose none at all, based on mitigating circumstances?
The case is not an isolated aberration. It reflects a deeper failure to reconcile certainty with fairness in the design of Indian securities law. And now, with the proposed Securities Market Code, 2025 before Parliament’s Standing Committee on Finance, there is an opportunity to resolve this ambiguity. The Code, however, remains silent on the central question. This article examines the statutory framework, the competing interpretations from the SAT split verdict, the jurisprudential principles at stake, and the reforms needed to ensure that India’s securities enforcement is both predictable and proportionate.
Part I: The Statutory Framework – Minimum Penalties Meet Mitigating Factors
The statutory framework appears, at first glance, to admit little ambiguity. Several provisions of the Securities and Exchange Board of India (SEBI) Act follow a familiar formulation: “not less than X, but which may extend to Y.” For example, certain violations attract a penalty of “not less than one lakh rupees, but which may extend to one crore rupees.” This structure suggests a clear legislative intent: fix a minimum floor to ensure deterrence, while allowing discretion within a defined band.
Yet, this structure sits alongside Section 15J of the SEBI Act, which requires adjudicating authorities to consider factors such as disproportionate gain, investor loss, and the repetitive nature of a default. This provision is replicated in the Securities Contracts Regulation Act and the Depositories Act. The tension is immediately apparent. Are mitigating factors relevant only within the statutory range (i.e., between X and Y), or do they permit departure from the minimum altogether?
The problem is not merely academic. In practice, SEBI adjudicators face cases ranging from deliberate market manipulation to technical, bona fide violations with no market impact. A uniform minimum penalty applied to both may produce outcomes that are manifestly unjust in the latter category. Yet, the statutory text does not clearly authorize departure from the minimum.
Part II: The SAT Split Verdict – Two Competing Answers
The SAT’s split verdict in Sukhraj Kaur Rajbans offers two competing answers. The facts of the case are less important than the legal question that divided the tribunal.
The majority view (purposive approach): The majority adopts a purposive approach, treating Section 15J as a substantive safeguard against disproportionate punishment. It recognizes that rigid application of minimum penalties may produce unjust outcomes, particularly in cases involving technical violations, negligible impact, subsequent compliance, or bona fide conduct. The majority therefore allows flexibility to reduce penalties below the statutory floor. In their reading, Section 15J is not merely a guide for selecting a quantum within the band; it is a mandate to ensure that the penalty imposed is proportionate to the violation. Where the minimum penalty would be disproportionate, the adjudicator may depart from it.
The dissent (strict textual approach): The presiding officer takes a stricter view of legislative intent. Once Parliament has prescribed a minimum penalty, that threshold is binding. Section 15J mandates the determination of a quantum within the statutory band but does not authorize deviation below it. To hold otherwise, the dissent argues, would be to dilute the statute through interpretation. If Parliament had intended to allow penalties below the minimum, it would have said so. The minimum is the minimum; anything less is a violation of the law.
Both approaches are defensible—and that is precisely the problem. The law permits two internally consistent but mutually incompatible readings. A regulated entity cannot predict which approach an adjudicator will adopt. Consistency—the cornerstone of the rule of law—is sacrificed on the altar of interpretive preference.
Part III: Supreme Court Precedents – A Clarion Call for Proportionality
The SAT is not writing on a blank slate. The Supreme Court has addressed similar questions in other contexts, though not directly on the SEBI Act’s penalty provisions.
In SEBI vs. Bhavesh Pabari (2019) , the Court held that once a violation is established, the imposition of a penalty is mandatory, though its quantum must reflect statutory factors. The penalty cannot be waived entirely, but the Court did not squarely address whether the minimum is an absolute floor.
In SEBI vs. Bharti Goyal (2023) , the Court cautioned against substituting statutory penalties with warnings or other non-monetary measures. The message was clear: adjudicators cannot simply let violators off the hook. However, again, the Court did not address whether mitigating circumstances could justify a penalty below the statutory minimum.
Beyond securities law, Indian jurisprudence is clear that the power to impose a penalty is not an obligation to penalize in every case. Unless expressly barred by law, adjudicatory discretion extends to imposing a lesser penalty—or none at all—where circumstances justify it. Courts have repeatedly rejected mechanical enforcement, particularly where violations are:
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Technical, bona fide, and non-repetitive
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Harmless, with negligible or no market impact
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Arising from regulatory ambiguity or evolving compliance frameworks
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Involving de minimis impact
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Involving procedural lapses where substantive compliance exists but documentation was deficient
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Promptly rectified upon discovery
These principles are not merely theoretical. In a diverse market with millions of participants—from retail investors with small portfolios to systemic intermediaries—violations vary widely in mens rea, impact, and harm. In such situations, rigid application of minimum penalties may be disproportionate to both the conduct and its consequences.
It is precisely in these cases that SEBI officers have, in practice, stretched interpretive tools to avoid unjust outcomes. Some have imposed penalties below the statutory minimum; others have adhered strictly to the minimum despite recognizing mitigating circumstances. The result is a regime that is formally rigid but functionally inconsistent.
Part IV: The Inconsistency Problem – Undermining Predictability
This inconsistency undermines predictability—the cornerstone of regulation. Market participants cannot assess enforcement risk with confidence when similar violations attract materially different outcomes depending on the adjudicator’s interpretive approach.
Consider two hypothetical cases: a large institutional investor that inadvertently files a delayed disclosure by one day, with no market impact, and a small retail investor who does the same. Under a rigid reading, both face the same minimum penalty. Under a flexible reading, both might receive a reduced penalty or a warning. The problem is not that one outcome is right and the other wrong. The problem is that a market participant cannot know which outcome will apply.
This unpredictability has real economic consequences. Regulated entities must price in enforcement risk. When that risk is uncertain, they may overcomply (wasting resources) or undercomply (assuming leniency). Neither outcome is efficient. Foreign investors, who have choices about where to deploy capital, may prefer jurisdictions with clearer, more predictable enforcement regimes.
Part V: The Proposed Securities Market Code, 2025 – A Missed Opportunity?
The proposed Securities Market Code, 2025 , now before Parliament’s Standing Committee on Finance, is an opportunity to resolve this ambiguity. The Code consolidates and rationalizes India’s securities laws, replacing the SEBI Act, the Securities Contracts Regulation Act, and the Depositories Act with a single comprehensive statute.
The Code retains the same problematic structure. Its penalty provisions (Clauses 97 to 109) continue to prescribe minimum penalties, often linked to fixed amounts or multiples of unlawful gain. Clause III mirrors Section 15J, requiring consideration of gain, loss, and the nature of the default. Yet, the Code remains silent on the central question: are minimum penalties absolute, or can they yield to proportionality in exceptional cases?
This silence is not neutral. By carrying forward both rigid minimums and broad mitigating factors without clarifying their interaction, the Code ensures that the conflicts that divided the SAT will persist. The question that divided the tribunal will continue to divide SEBI adjudicators. The Code will have ratified ambiguity rather than resolved it.
The problem, therefore, is not one of interpretation but of legislative design. Effective enforcement requires both deterrence and proportionality. But these objectives cannot be reconciled through ex post adjudication alone. They must be embedded in the law. The repeated reliance on adjudicatory discretion to correct disproportionate outcomes suggests that penalty provisions are not adequately calibrated.
Part VI: A More Coherent Approach – Legislative Guidance, Not Adjudicatory Patchwork
What would a more coherent approach look like? The authors propose several reforms.
First, Parliament must decide the basic question: Are minimum penalties intended to operate as absolute floors, or should limited departures (including no penalty) be permitted based on clearly articulated factors? If departures are permitted, the factors must be specified in the statute, not left to adjudicatory discretion. The existing Section 15J factors (gain, loss, repetitive nature) are a good start, but they should be expanded to include absence of gain, absence of harm, prompt rectification, bona fide conduct, technicality of the violation, regulatory ambiguity at the time of the violation, and de minimis impact.
Second, penalty frameworks must evolve to reflect the diversity of market participants. Retail investors, intermediaries, and systemic actors do not present identical risks, and enforcement should not treat them as such. A uniform minimum penalty of ₹1 lakh may be negligible for a large institution but catastrophic for a small retail investor. Conversely, it may be insufficient for a systemic actor engaging in deliberate manipulation. The Code should introduce tiered penalty structures based on the nature and size of the participant, the severity of the violation, and the impact on the market.
Third, the Code must move beyond ex post review mechanisms and incorporate structured, ex ante assessments of penalty design. Before a penalty provision is enacted, there should be a legislative impact assessment: Is the minimum penalty proportionate to the likely violations? Does it risk being over-inclusive (penalizing minor infractions too harshly) or under-inclusive (failing to deter serious misconduct)? Without such discipline, enforcement will continue to oscillate between rigidity and discretion, neither of which will operate with sufficient predictability.
Fourth, the Code should include a “proportionality clause” that explicitly authorizes adjudicators to depart from the statutory minimum in exceptional cases, with reasons recorded. This would give adjudicators the flexibility they currently exercise informally, while imposing a discipline of transparency and reasoned decision-making. It would also provide clarity to market participants: the minimum is presumptive, not absolute, but departure requires justification.
Fifth, the constitutional dimension must not be ignored. Uniform minimum penalties, applied without differentiation, risk being challenged under Article 14 of the Constitution (equality before the law). If a penalty is manifestly disproportionate to the violation, it may be struck down as arbitrary. The courts have repeatedly held that legislative classification must be rational and not arbitrary. A penalty that treats a technical, non-repetitive, bona fide violation the same as deliberate market manipulation may fail this test.
Part VII: The Way Forward – From Ambiguity to Certainty
The SAT’s split decision is not an aberration. It reflects a deeper failure to reconcile certainty with fairness in the design of Indian securities law. The proposed Securities Market Code, 2025, is an opportunity to resolve this ambiguity. But the Code, in its current form, does not seize that opportunity. By carrying forward both rigid minimums and broad mitigating factors without clarifying their interaction, it ensures that the conflicts will persist.
Parliament must act. It must decide whether minimum penalties are absolute or subject to proportionality exceptions. It must tier penalties to reflect the diversity of market participants. It must include a proportionality clause that authorizes departure in exceptional cases. And it must conduct ex ante assessments of penalty design to ensure that provisions are calibrated to achieve deterrence without injustice.
A market of India’s scale and ambition should not have to live with this ambiguity. The global investors India seeks to attract, the domestic participants who rely on predictable rules, and the regulators who enforce those rules all deserve clarity. The Securities Market Code is the vehicle. Now is the time.
5 Questions & Answers Based on the Article
Q1. What was the central legal question in the SAT split verdict Sukhraj Kaur Rajbans vs. SEBI (January 2026)?
A1. The central legal question was: where a statute prescribes a minimum penalty (e.g., “not less than X, but which may extend to Y”), can an adjudicator reduce the penalty below that statutory minimum, or impose no penalty at all, based on mitigating circumstances? The SEBI Act’s Section 15J requires adjudicators to consider factors like disproportionate gain, investor loss, and repetitive nature of default. The tension lies in reconciling the mandatory minimum penalty with the discretion to consider mitigating factors. The SAT was split, with the majority allowing departure from the minimum in exceptional cases and the dissent treating the minimum as absolute.
Q2. What were the two competing interpretations of the law offered by the SAT’s majority and the dissenting presiding officer?
A2. The majority adopted a purposive approach, treating Section 15J as a substantive safeguard against disproportionate punishment. They held that rigid application of minimum penalties may produce unjust outcomes for technical, bona fide violations with negligible impact, and therefore allowed flexibility to reduce penalties below the statutory floor. The dissent took a stricter textual approach, holding that once Parliament prescribed a minimum penalty, that threshold is binding. Section 15J mandates determination of quantum within the statutory band but does not authorize deviation below it. To hold otherwise would dilute the statute through interpretation.
Q3. According to the article, why does the current regime’s inconsistency undermine market predictability?
A3. The inconsistency undermines predictability because similar violations can attract materially different outcomes depending on the adjudicator’s interpretive approach. Some SEBI officers impose penalties below the statutory minimum in cases with mitigating circumstances, while others adhere strictly to the minimum. Regulated entities cannot assess enforcement risk with confidence. This unpredictability forces market participants to either overcomply (wasting resources) or undercomply (assuming leniency). Foreign investors may prefer jurisdictions with clearer, more predictable enforcement regimes. Predictability is the cornerstone of effective regulation.
Q4. What are the key reforms proposed to resolve the ambiguity between minimum penalties and mitigating factors?
A4. The article proposes five key reforms: (1) Parliament must decide whether minimum penalties are absolute floors or subject to limited departures based on clearly articulated factors (absence of gain, absence of harm, prompt rectification, bona fide conduct, technicality, regulatory ambiguity, de minimis impact). (2) Tiered penalty structures based on the nature and size of the participant, severity of violation, and market impact. (3) Ex ante legislative impact assessments of penalty design to ensure proportionality. (4) A “proportionality clause” explicitly authorizing departure from the statutory minimum in exceptional cases, with recorded reasons. (5) Recognition of the constitutional dimension under Article 14 (equality before law), as uniform minimum penalties applied without differentiation may be struck down as arbitrary.
Q5. Why does the article argue that the proposed Securities Market Code, 2025, is a missed opportunity in its current form?
A5. The article argues that the Code is a missed opportunity because it retains the same problematic structure as the existing laws. Its penalty provisions (Clauses 97 to 109) continue to prescribe minimum penalties, while Clause III mirrors Section 15J’s mitigating factors. However, the Code remains silent on the central question: are minimum penalties absolute, or can they yield to proportionality in exceptional cases? This silence is not neutral. By carrying forward both rigid minimums and broad mitigating factors without clarifying their interaction, the Code ensures that the conflicts that divided the SAT will persist. The Code will have ratified ambiguity rather than resolved it. The problem is not one of interpretation but of legislative design, and the Code fails to address this design flaw.
