“Interest Clock Starts Ticking From Adjudication Order, Not From Demand Notice” in SEBI Penalty Recovery Case: Supreme Court

“Demand Notice Is Merely a Reminder; Liability to Pay Interest Arises Immediately After Adjudication Order”, In a landmark ruling Supreme Court of India settled the legal debate on when interest begins to accrue on unpaid penalties imposed by the Securities and Exchange Board of India (SEBI). Dismissing the appeals of promoter-directors of a listed company, the Court categorically held that the statutory liability to pay interest starts from the date of expiry of the compliance period mentioned in the adjudication order itself, and not from any subsequent demand notice. The Court observed that, “the adjudication order itself constitutes an enforceable demand for payment, and the failure to comply within the stipulated period attracts statutory interest by operation of law.”

This decision affirms SEBI’s power to levy interest from the original default date, rejecting the appellants’ plea of postponing the liability to the later date of demand notice, and sets an important precedent for penalty recovery under securities law.

The case involved promoter-directors of M/s. Brijlaxmi Leasing and Finance Limited, a Bombay Stock Exchange listed company engaged in financial services. SEBI, after investigating the company’s trading activity, concluded that the appellants committed insider trading violations between October 2012 and July 2013, breaching Regulation 13(4), 13(4A), and 13(5) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.

On 28th August 2014, SEBI’s Adjudicating Officer imposed financial penalties on the appellants under Section 15I of the SEBI Act, directing payment within 45 days. The penalties were upheld by the Securities Appellate Tribunal (SAT) in 2015, and later affirmed by a three-judge Bench of the Supreme Court on 28th February 2019.

Despite the finality of these orders, the appellants neither paid the penalties nor complied within the specified period. Consequently, SEBI issued demand notices in May 2022, recalculating the amounts by adding interest at 12% per annum from 28th August 2014. The appellants approached SAT challenging the recovery actions, but the Tribunal dismissed their pleas, prompting the present appeals before the Supreme Court.

The central legal controversy revolved around two interrelated questions. Firstly, whether SEBI was justified in imposing interest on unpaid penalties. Secondly, and more crucially, from which point in time such interest should commence—whether from the date of adjudication order or the later demand notice.

The Supreme Court answered both these questions conclusively in favour of SEBI, laying down authoritative pronouncements on the interplay of SEBI Act, Income Tax Act provisions, and the doctrine of legislative reference.

The Court underlined, “Section 28A of the SEBI Act incorporates by reference the recovery machinery of the Income Tax Act, specifically Sections 220 to 227, including the liability to pay statutory interest on default.”

Interpreting Section 28A read with Section 220 of the Income Tax Act, the Court observed, “Once an adjudication order is passed imposing penalty with a specified compliance period, the order itself crystallizes the liability, and any non-compliance triggers interest liability from the expiry of that compliance period.”

Rejecting the appellants’ argument that absence of express interest provision in the adjudication order absolved them from paying interest, the Court declared, “The liability to pay interest flows directly from the statute and does not depend on whether the adjudication officer specifically mentions it in the order.”

On the attempt by appellants to invoke Section 156 of the Income Tax Act, which mandates issuance of a formal demand notice before interest accrues, the Court made a decisive clarification, “Section 156 is not incorporated into the SEBI Act; therefore, no fresh demand notice is necessary to activate interest liability. The adjudication order itself performs the function of demand notice under the SEBI Act framework.”

The Court dismissed the appellants’ contention that Explanation 4 to Section 28A, inserted in 2019, was being applied retrospectively. It clarified that the Explanation merely clarified the already existing legal position.

In a significant observation, the Court stated, “Explanation 4 did not introduce a new substantive liability but clarified the point from which interest becomes payable, namely the date the amount became payable under the adjudication order.”

On the nature of interest, the Court unequivocally pronounced, “Interest is compensatory, not penal. It compensates the public exchequer for the deprivation of timely payment rather than punishing the defaulter.”

The Court dismissed the appellants’ reliance on precedents like J.K. Synthetics Ltd. v. CTO, clarifying, “Those judgments pertain to cases where the liability itself was crystallized only upon assessment, whereas under the SEBI Act, liability crystallizes upon adjudication and statutory interest applies automatically after the stipulated payment period.”

Importantly, the Court pointed out the fundamental flaw in the appellants’ reasoning: “To accept the argument that interest accrues only from the 2022 demand notice would result in a situation where defaulters escape interest liability for years merely by non-compliance, effectively encouraging deliberate default.”

The Court concluded, “The demand notice of 2022 is merely a reminder of an already crystallized liability and does not create fresh liability.”

Referring to the decision in Dushyant Dalal v. SEBI, the Court reiterated that the statutory interest serves to safeguard public funds and ensure timely enforcement.

The Court held that the recovery of penalties with interest at 12% per annum from 28th August 2014 till the date of payment was fully lawful.

In a stern directive, the Court concluded, “The appellants must pay the outstanding interest within 15 days from receipt of this judgment.”

The Supreme Court has decisively settled that under the SEBI Act, the obligation to pay interest on penalties arises immediately after expiry of the compliance period mentioned in the adjudication order. Demand notices issued years later are simply reminders and do not delay the onset of interest liability.

The ruling serves as a stern reminder to corporate defaulters that penalties imposed by SEBI are to be complied with promptly, failing which interest continues to accrue from the statutory compliance deadline.

As the Court summed up unequivocally, “Statutory dues, once determined, carry with them statutory consequences including compensatory interest, which no defaulter can wish away by delaying payment.”

Date of Decision: 15th July 2025