Standardised but Structurally Hollow: Advocating for a Principled Proportionality Framework in India’s Securities Enforcement

[Shubhankar and Kushal are students at Gujarat National Law University.]

The Standardised Stock Broker Penalty Notification dated 10 October 2025 was issued by the Securities and Exchange Board of India (SEBI) primarily in recognition that penalties imposed in the capital markets have lacked a uniform framework. The notification introduced an exchange-level reform, adopting the term "financial disincentive" and removed duplicative penalisation of stock brokers. On its own terms, the notification introduces a structured enforcement reform as it caps penalty amounts, substitutes advisories or warnings for monetary penalties in certain first-time lapses, and reclassifies minor procedural violations as financial disincentives rather than punitive fines.

These reforms however leave untouched the far larger body of SEBI enforcement action which the Securities Appellate Tribunal has repeatedly found to be  mechanical, arbitrary, and discriminatory, as showcased in Zenith Steel, where Securities Appellate Tribunal (SAT) reduced SEBI's penalty by over 40 times. Although the notification was issued in recognition that capital-market penalties have lacked a uniform framework, it did not address what needs to change to create one, nor what factors are to be considered to arrive at ‘rationalised penalties’.

The SEBI Act 1992 is not entirely silent on the factors to be considered while adjudicating the magnitude of penalty such as amount of unlawful gain, amount of loss caused and repetitive nature of default. These factors, though necessary, fall far short in terms of adequacy by not elaborating on other important imperatives to be considered such as mental culpability of the wrongdoing entity and differential treatment of procedural errors and substantive illegalities. This gap matters given that the Supreme Court in SEBI v. Bhavesh Pabari held that adjudicating officers have discretion in determining the quantum of penalties and that factors enumerated in 15J are “merely illustrative in nature” indicating an overall shift to “controlled discretion”. The success of this policy depends on whether SEBI adjudicators consider 'all relevant circumstances'. The core problem is that SEBI's framework does not require adjudicators to weigh the full range of factors necessary to arrive at a penalty that is genuinely proportionate rather than merely calculated.

Equality under Article 14 and Economic Consequences of Arbitrary Enforcement

SEBI has routinely been found to have imposed on companies different penalties for similar or identical offences involving near equal amounts showcasing a lack of uniformity in penalties, in violation of the fundamental right against arbitrary legal enforcement guaranteed under Article 14. Arbitrariness refers to actions taken by the state that are based on irrelevant considerations, ignore relevant ones or lack proper reasoning. In the present scenario, SEBI routinely does not take into consideration factors such as the amount of wrongful gain or penalty imposed in similar cases while adjudicating claims and imposing penalties which form core considerations especially in the financial industry leading to the current dilemma of penalties being disproportionate and non-uniform.

The doctrine of proportionality of punishment is a facet of Article 14 based on the principle that sentences must not only fit the gravity of the offence but also the circumstances of the wrongdoer. This is exactly what SEBI in PG Electroplast failed to consider by levying the maximum penalty of Rs. 1 crore under Section 15HB for a technical violation, without regard to the mitigating factors set out in Section 15J. This attracted revision by the SAT whereby it lowered the penalty and termed the SEBI order as “grossly disproportionate to the violation”.

Arbitrary enforcement is not merely a procedural defect but also a substantive failure of SEBI’s statutory mandate, as unpredictability in penalties could allow negative sentiments to accumulate, causing capital outflows leading to decreased market participation. Additionally, profitability of firms would come under pressure as fear and uncertainty would drive up compliance costs ultimately contributing to a volatile market with unpredictable participation. 

Finally, another perspective of regulation which has not been given due importance by SEBI is the economic rationale of scaling penalties with the violator’s capacity to pay. Scaling of penalties allows not only meaningful deterrence but also enables markets to flourish as it removes the uncertainty of randomized existential pressure on market participants alongside creating a ‘level-playing field’.

Comparative Perspective: The SEC and FCA’s Structured Penalty Model

The inadequacy of SEBI's penalty framework becomes most evident in comparative perspective, particularly when examined against the regulatory regimes of the United States and the United Kingdom.

The Securities and Exchange Commission (SEC), which is the principal regulator of the securities market in the United States, derives its authority to levy penalties from Section 21B of the Securities Exchange Act. This provision mandates that the Commission consider a range of factors when adjudicating sanctions, which include, but are not limited to, the gravity of the default, its recurrence, the degree of intent, the harm inflicted upon others, and, crucially, the financial capacity of the entity facing penalties. If the SEC neglects to factor in an entity's financial standing when determining penalties, the fundamental objective of discouraging misconduct is undermined, with the consequence that penalties appear inconsistent and fickle rather than serving as effective instruments for behavioural change. This approach is further substantiated by the SEC's own guidelines, which correlate penalties with the revenue generated from the illicit activity, ensuring that penalties are neither a minor expense for large institutions nor an existential burden for smaller firms. 

In contrast, the Financial Conduct Authority (FCA) of the United Kingdom employs a five-step penalty methodology enshrined in its Decision Procedure and Penalties Manual. The framework commences with the calculation of profits derived from the misconduct, followed by the imposition of a base penalty calculated as a percentage of the firm's relevant revenue. This base figure is then subject to upward or downward adjustment contingent upon the intentionality or recklessness of the conduct, its duration, and the firm's broader compliance culture. Where the resultant penalty is assessed as insufficient to achieve genuine deterrence, it is further increased. Each of these steps must be expressly reasoned and documented, leaving no stage of the calculation to unguided discretion.

What both the SEC and FCA frameworks illuminate is not merely the substance of the factors considered, but the procedural obligation of transparency imposed upon adjudicators. Decision-makers under both regimes are required to demonstrate how each relevant factor was weighed and how the final penalty figure was derived, ensuring that outcomes are the product of structured analysis rather than unconstrained discretion. The broader lesson for SEBI is therefore not limited to expanding the range of relevant considerations, but extends to mandating reasoned orders that trace a logical and visible path from the facts of the violation to the quantum of penalty imposed, a discipline the SAT has sought to impose through corrective intervention but which cannot be effective in the absence of a codified obligation to reason at the adjudication stage itself.

Conclusion: Towards a Principled Enforcement Framework

SEBI’s standardised penalty notification, despite its well-intentioned framing, ultimately represents a missed opportunity for structural reform. The core problem of India’s securities enforcement regime remains unaddressed which is imposition of penalties without a transparent, principled framework that accounts for the violator’s intent, the proportionality of sanction to offence, and the financial capacity of the penalised entity. The persistent recourse to SAT intervention is symptomatic of a framework that substitutes administrative convenience for legal rigour. 

To remedy this, several concrete reforms are warranted: 

1. SEBI ought to codify a multi-factor adjudicatory framework akin to Section 21B of the Securities Exchange Act, expressly incorporating mental culpability, harm caused, degree of cooperation, and the financial standing of the entity into the penalty calculus. 

2. Adjudicating officers must be required to issue reasoned orders that demonstrate, with particularity, how each relevant factor influenced the final quantum mirroring the transparency obligations embedded in the FCA’s Decision Procedure and Penalties Manual. 

3. A penalty scaling mechanism tied to the revenue or net worth of the violating entity should be instituted to ensure that sanctions function as genuine deterrents rather than negligible costs for large institutions or existential burdens for smaller ones, as witnessed in the Zenith Steel matter. 

4. SEBI should establish an internal consistency audit mechanism to identify and correct cross-entity disparities in penalty imposition for comparable violations, thereby operationalising the Article 14 guarantee of equality before law. 

Ultimately, a credible securities regulatory regime derives its authority not from the severity of its penalties, but from their predictability, coherence, and constitutional legitimacy. Until SEBI transitions from a rule-of-thumb enforcement culture to one grounded in structured discretion and reasoned adjudication, SEBI’s penalty framework will remain cosmetic while the SAT continues to serve as a check on arbitrariness.