Disgorgement Orders: Making Headway

Published by lexology.
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Smriti Jha

Principal Associate, Juris Corp

Mannat Sabharwal
Associate, Juris Corp

With constant rise in convoluted and intricate transactions being entered in the capital markets space along with the emerging trends by wrongdoers to indulge in white collar crimes with the aid of technology, the timely detection of scams has become a challenge for the Indian regulator, namely, the Securities and Exchange Board of India (“SEBI”).

Considering the quantum of risk involved, with a view to control these crimes, the amended explanation to Section 11B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) grants SEBI the power to direct any person to disgorge an amount equivalent to the disproportionate gain or advantage made or loss averted without prejudice to any other enforcement action.

Ever pondered on the term ‘disgorge’? While the said expression has been elucidated hereinbelow, but at the outset this strong and evolving potent tool in the hands of SEBI essentially refers to an order to give up trading profits, and substantially requires the occurrence of the following events:

  • There has been a violation of law; and
  • The wrongdoer has been profited thereby.

Since the concept is quite at an ever-developing stage in India, the Indian tribunals and courts look to foreign pronouncements for guiding their way ahead.

This article discusses the nature and concept of disgorgement, some noteworthy Indian judicial rulings and shares some suggestions to revamp the disbursal process of disgorged amount to investors.


The term ‘disgorgement’ has been in usage and existence in the developed markets across the world in wide range of areas of law.

Simply put, disgorgement means the repayment of illegal gains by wrongdoers. It means that the funds received through unethical business transactions are to be ‘disgorged’ or paid back by such wrongdoers with interest to those affected by the action. In India, the concept came to be expressly recognized by the Indian legislature in the year 2013 vide insertion of Explanation to Section 11B of the SEBI Act1.

While in most countries, disgorgement has been considered as a penal measure, in India, disgorgement is a gain-based equitable remedy which has been enacted to secure the investors morale as well as to ensure the healthy development of financial markets2.


As a part of the procedure:

  • SEBI has to first satisfy itself that some irregularity or unethical transaction has been undertaken by an entity/person associated in the securities market and that the latter has earned illegal profits basis the said transaction. This may be undertaken by SEBI suo moto or upon a complaint being made by any aggrieved person to SEBI.
  • Once the violations have been committed, then the wrongdoer is not entitled to take defenses such as absence of mens rea or no undue profits earned, etc.
  • There is no limitation period applicable for initiating such proceedings against the wrongdoers by SEBI.3  
  • On the quantification aspect, there is no universally applicable method for computing disgorged amounts. It depends on a case-to-case basis, since there cannot be an exact determination of the actual gains made by the wrongdoer as he is the only person fully aware about the definite amount.
  • The amount ordered to be disgorged should not exceed the total profits realized as the result of unlawful activity4. The onus lies on SEBI to show that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment.
  • The monies collected under the said disgorgement order(s) are required to be credited to the Investor Protection and Education Fund (“IPEF”).
  • Any failure in adherence to the compliance of disgorgement order may lead to a levy of penalty5 and/or attachment and sale of the properties6.


An interesting question that arose for consideration before the Securities Appellate Tribunal (“SAT”) in Gagan Rastogi vs. SEBI7 was “whether a disgorgement order can be passed against a wrongdoer for benefiting third parties from illegal activity, despite wrongdoer having never controlled the funds”.

Whilst answering this question in the affirmative, the SAT observed that:

  • The equitable remedy demands that disgorgement has to be made from the point of unjust enrichment or where the chickens come to roost.
  • If one entity who has unjustly enriched, knowingly transfers those proceeds further to some other entity, it does not prevent the authorities from disgorging the same from the original beneficiary of unjust enrichment.
  • The choice is clearly that of the authority, to pursue and disgorge an illegal gain from any point of a chain, if such a chain exists.
  • Tracing to the last point of the chain is not needed. The SAT in this context further went on to observe that “When the elephant is right in the drawing room, the authorities do not have to go for a round trip around the world looking for a needle in the haystack.”

Thus, SEBI has the power to direct any person who made profit or averted loss in any transaction or activity in contravention of the provisions of the SEBI Act or Regulations thereunder and to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

Having said that, utmost caution ought to be exercised by SEBI while applying the “jointly and severally liable” principle inasmuch as there must not arise a case wherein, a person is being asked to disgorge the amount, when actually such person is not in the possession of unlawful gains, thereby making it difficult for him to disgorge the amount.


The success of disgorgement lies in due regard to the restitution of victims with the sums disgorged and not simply deprivation of the wrongdoer.

Merely getting the State to pocket the ill-gotten gains extracted from the wrongdoer would be akin to penalty and therefore, in order to disgorge monies from private hands, there should be a corresponding intent and effort to identify how to distribute the money. With great power comes greater responsibility. As held by the SAT in Mrs. Ram Kishori Gupta & Anr. vs. SEBI8disgorgement without restitution does not serve any purpose’.

To speed up restitution, the authors attempt to offer some recommendations:

Dedicated online portal should be created on the website of SEBI whereby aggrieved and affected investors can fill and submit ‘Claim Form’ along with their transaction

  • details. This shall not only reduce the significant costs incurred by victims in pursuing the litigation but would also go a long way in paying heed to the investor protection measures.
  • SEBI must deploy cutting-edge technology or hire the best tech companies to track down genuine claimants, collate the data, arrange it in a searchable manner and submit claims online for scrutiny.
  • Once SEBI initiates proceedings, public announcement regarding the same should be made mandatory in national newspapers.
  • There might be situations when disgorgement order has been passed by SEBI and in parallel  the wrongdoer is also undergoing insolvency resolution proceedings under the Insolvency & Bankruptcy Code, 2016, thereby resulting in imposition of moratorium which will ultimately put in question the existence of this remedy. To combat this situation as well as to safeguard the interests of investors participating in the securities market, SEBI must always stay vigilant and file its claim form in a time bound manner with the Resolution Professional.
  • It is also imperative to state that even during the moratorium period, the SEBI is well within its powers to initiate action against the erstwhile management of the Corporate Debtor9. Thus, the efficacy of this remedy lies entirely in the hands of the SEBI and being a regulator, it should assume and exercise its responsibility in a manner which is most beneficial to the investors..

It is plainly clear that the disgorgement tool has conferred immense power and authority on SEBI to hunt down the financial fraudsters effectively and thwart frequent occurrence of frauds, thereby reposing lost confidence of shareholders / investors in the capital markets. The power has been further emboldened up by way of imposing hefty fines for non-compliance with directives to disgorge the ill-gains.

What one cannot lose sight of, is the fact that huge unclaimed amounts pending for years in IPEF are still to see the light of the day in favour of genuine claimants.

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