DISGORGEMENT PROVISIONS UNDER THE COMPANIES ACT, 2013 AIMS TO PROTECT THE INVESTORS

By K P C Rao, LLB, FCMA, FCS.,

CMA (USA)., FIPA (Australia)

Practicing Company Secretary

kpcrao.india@gmail.com

What is Disgorgement?

‘Disgorgement’ is a remedy requiring a party who profits from illegal or wrongful acts to give up any profits he or she made as a result of his or her illegal or wrongful conduct. In other words Disgorgement is the forced giving up of profits.The purpose of this remedy is to prevent unjust enrichment. A court may order wrongdoers to pay back illegal profits, with interest, to prevent unjust enrichment. Disgorgement is a remedy and not a punishment.

According to Explanation given under Section 125 of the Companies, Act 2013, the disgorged amount refers to the amount received through disgorgement or disposal of securities.

What is the scope of disgorgement?

The scope of disgorgement may include activities such as use of companies' funds for personal gains, diversion or siphoning off funds by managements which raised money from public through deposits, and various illegal activities relating to listed companies including insider trading, market manipulation and misleading people to invest.

What is the legal position as to disgorgement in India?

Earlier, there was no provision in the Companies Act, 1956, SEBI Act, 1992[1], The Code of Civil Procedure, 1908 or Code of Criminal Procedure, 1973 which empowers any authority to attach properties of the shell or vanishing companies and/or their directors and promoters, and distribute the proceeds to their debenture holders or shareholders.

What are the disgorgement provisions under the Companies Act, 2013?

The term ‘Disgorgement’ finds mention across several places in the Companies Act, 2013 and the Securities Laws (Amendment) Bill, 2014. The provisions of the Companies Act, 2013  are  reproduced below:

Sec38. Punishment for personation for acquisition, etc., of securities:

(3)  Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of such person.

(4)  The amount received through disgorgement or disposal of securities under sub-section (3) shall be credited to the ‘Investor Education and Protection Fund’.

Sec.125. Investor Education and Protection Fund:

(3) ( c) distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement;

Sec.224. Actions to be taken in pursuance of inspector’s report:

(5) Where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset, property, or cash, as the case may be, and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability.

Conclusion

In fact, a large number of scams have taken place and hundreds of investors lost their hard earned money in the past 20 years. Now, Section 125 of the Companies Act, 2013 on Investor Education and Protection Fund clearly makes it mandatory for the government to distribute any disgorged amount among eligible and identifiable applicants who have suffered losses due to wrong actions by any person in accordance with the orders made by the court which had ordered disgorgement.  The inclusion of disgorgement in the Companies Act, 2013 is a welcome step and shall be a milestone in investor protection. Further, the Accounts of the Fund shall be audited by Comptroller and Auditor- General of India [Section 125(11)].Without monetary compensation, investor protection would remain a mere rhetoric.

[1]  The Securities Laws (Amendment) Bill, 2014, which was passed by  the Parliament, seeks to amend the Securities and Exchange Board of India Act, 1992, with consequential changes in the Securities Contracts Regulation Act, 1956 and the Depositories Act, 1996. The Bill also provides SEBI with explicit powers to order disgorgement of unfair gains. It also permits SEBI to attach bank accounts and property, and arrest and detain a person for his failure to comply with disgorgement orders or pay any monetary penalty.