SEBI has recently leviedthe highest penalty in its history of Rs. 7269 crores on PACL. It has made findings of serious violations of law and hence the maximum of penalty may be justified. However, there are some issues that are of concern.The facts of the case may be quickly summarised here. PACL, as per SEBI’s order, is one of the several so-called Collective Investment Schemes that have illegally collected monies on the pretext that it was running a land sale-cum-development scheme. The underlying facts, the Order states, are wholly inconsistent with such claim.SEBI had already directedearlier the company to refund the amounts collected, which has been upheldby SAT. The present order levies a penalty.The penalty levied is as per the newly inserted clause 4(2)(t) in the SEBI FUTP Regulations with effect from 6th September 2013. Thus, SEBI levied penalty for the period from that date till 15th June 2014 (since SEBI did not have exact figures for the broken period, it actually considered period from 1st October 2013 onwards). There are some concerns about the penalty levied.Firstly, the penalty levied is three times the amounts collected by PACL. Section 15HA permits penalty of three times the gains made, which would be the gross collections less the expenses including the amount spent on buying land, commission, other expenses, etc. Even if the collection is illegal, the law permits levy of penalty on gains, and not gross receipts.Secondly, the penalty levied is in addition to orders made for refund of collections made. In other words, PACL and named directors are not only required to refund the whole amount collected, but also pay three times penalty of the gross amount collected. Thus, if the company’s total grosscollection is Rs. 100, they will have to pay Rs. 400.Thirdly, SEBI’s earlier order directing refund of amount collected states that the company had made gross collections of Rs. 49,100 crores over 15 years, while the assets available appear to be a fraction of such amount. This also seems to be without considering the returns promised. Hence, there already appears to be a huge shortfall of refunding even the basic amount collected. To levy a penalty of three times the gross amount collected is unrealistic and, in practical sense, seems meaningless.Fourthly, it is also worth considering the interpretation that SEBI has adopted of the clause relating to penalty. The relevant clause 4(2)(t), as introduced with effect from 6th September 2013, reads as under:-(2) Dealing in securities shall be deemedto be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:— …(t) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person.”In SEBI’s view, illegal mobilization of funds will be deemed to be a fraudulent or unfair trade practice by itself. There is no need to prove fraud or mens rea. SEBI states, “…the only thing that remains to be decided in this issue is whether the funds were ‘illegally mobilized’…The activities, mentioned under Regulation 4(2), if committed by any person, shall tantamount to fraudulent or unfair trade practices…the argument that to invoke Regulation 4(2), fraud needs to be separately proved, does not hold any strength, whatsoever.”. Penalty, SEBI then holds, follows automatically, by applying the decision of the Supreme Court in Shriram Mutual Fund’s case. Thus, while the penalty may sound like one of the strictest action SEBI may have taken, it seems arbitrary and on paper only. Far from the penalty being recovered, or possibly even the return promised, it appears even the basic amount collected may not be wholly recovered/refunded. A penalty has to serve the purpose of acting as a punishment as well as a deterrent for others. A penalty levied in this manner may thus merely becomes a display of strict action. Even if it may deter future illegal/fraudulent CISs or others, it would not be the type of enforcement action that would result in also relief for investors.