Fraudulent trade practice liability requires proof of fraud and nexus to the scheme; director penalty was set aside.

An independent non-executive director was found not liable under the fraudulent and unfair trade practice framework because no finding of fraud, misrepresentation or active involvement in the fund-mobilisation schemes was recorded, and the relevant schemes had largely pre-dated his tenure. The presumption that he was an officer in default under the Companies Act could not stand without a finding that the company lacked a managing director or other designated responsible officer. As the foundation for fraudulent-trade liability failed, the penalty under the SEBI Act also could not be sustained. The impugned penalty order was quashed insofar as it related to the appellant.

---

---

Issues: (i) Whether the appellant, an independent non-executive director, could be held liable under Regulation 4(2)(t) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 for illegal mobilisation of funds in the absence of a finding of fraud or involvement in the relevant schemes. (ii) Whether the appellant could be treated as an officer in default under Section 5(g) of the Companies Act, 1956 on the facts found. (iii) Whether penalty under Section 15HA of the Securities and Exchange Board of India Act, 1992 was sustainable against the appellant.

Issue (i): Whether the appellant, an independent non-executive director, could be held liable under Regulation 4(2)(t) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 for illegal mobilisation of funds in the absence of a finding of fraud or involvement in the relevant schemes.

Analysis: Regulation 4(2)(t) operates through the deeming fiction of fraudulent or unfair trade practice only where there is fraud in the illegal mobilisation of funds through a collective investment scheme. The definition of fraud under the regulations requires misrepresentation, concealment, deception or comparable conduct. The order did not record any finding that the appellant committed fraud. The appellant was appointed in 2010, while most schemes had already been launched earlier, and there was no finding that any particular scheme was launched during his tenure or that he played any role in mobilising funds under those schemes.

Conclusion: The appellant was not liable under Regulation 4(2)(t) and the finding of violation on this count was unsustainable.

Issue (ii): Whether the appellant could be treated as an officer in default under Section 5(g) of the Companies Act, 1956 on the facts found.

Analysis: Liability of all directors as officers in default arises only where the company has no managing director or other specified responsible officer, or where the board has not otherwise allocated responsibility. No finding was recorded that the company lacked a managing director or designated person responsible for the relevant conduct. In those circumstances, the presumption that all directors were officers in default could not be sustained against the appellant.

Conclusion: The appellant could not be treated as an officer in default on the material before the authority.

Issue (iii): Whether penalty under Section 15HA of the Securities and Exchange Board of India Act, 1992 was sustainable against the appellant.

Analysis: Penalty under Section 15HA is attracted only where a person indulges in fraudulent and unfair trade practices. Once the finding of fraud and violation of Regulation 4(2)(t) failed, the foundation for invoking Section 15HA also disappeared. The impugned order therefore could not be sustained against the appellant on the basis of that penal provision.

Conclusion: The penalty under Section 15HA could not be imposed on the appellant.

Final Conclusion: The impugned penalty order was quashed insofar as it concerned the appellant, and the appeal succeeded with consequential relief.

Ratio Decidendi: Liability under the fraudulent-trade-practice framework requires a recorded finding of fraud and actual nexus with the impugned mobilisation of funds; in the absence of such findings, a director cannot be fastened with penalty merely by designation or by a generalized presumption of responsibility.

---