Disgorgement
Disgorgement is a remedial enforcement tool by which SEBI orders a person or entity that has made gains through illegal or violative conduct in the securities market to surrender those ill-gotten profits to the regulator, with the aim of eliminating the financial incentive for regulatory violations.
Disgorgement is fundamentally different from a penalty: while a penalty is punitive in character and is intended to punish wrongdoing, disgorgement is restitutionary — it seeks to restore the parties to the position they would have been in had the violation not occurred, by stripping the violator of the profit made. In Indian securities law, SEBI's power to order disgorgement is derived from Section 11B of the SEBI Act 1992, which gives SEBI broad remedial powers to protect investors and the integrity of the market.
The Supreme Court of India affirmed SEBI's power to direct disgorgement in the SEBI vs. Rajiv B. Gandhi case and in the Bhavesh Pabari case, holding that the recovery of illegally obtained gains is consistent with SEBI's statutory mandate even in the absence of an explicit disgorgement provision in the SEBI Act. The court noted that allowing violators to retain profits would make enforcement actions ineffective and that Section 11B empowers a wide range of remedial orders.
In practice, SEBI calculates disgorgement amounts based on the profit actually made from the violative trades. In insider trading cases, this typically means the difference between the purchase price (or sale price for short-sellers) and the price that prevailed after the unpublished price-sensitive information became public. In pump-and-dump or market manipulation cases, SEBI traces the price artificially induced by the manipulative activity and computes the differential gain of the manipulator.
Disgorgement amounts are credited to SEBI's Investor Protection and Education Fund (IPEF) or directed towards compensation of affected investors where identifiable. In the Saradha collective investment scheme case and the Sahara OFCD case, disgorgement-linked restitution mechanisms were used to attempt repayment to large numbers of retail investors. Interest is typically charged on disgorged amounts from the date of the violative transaction to the date of actual payment, at the rate of 12% per annum.
SEBI has increasingly used disgorgement alongside other enforcement tools — the combination of disgorgement, debarment, and monetary penalty is designed to be comprehensively deterrent.