Absolute bar on new collective investment schemes and limited director liability under SEBI law;

Section 12(1B) of the SEBI Act imposed an absolute bar on commencing collective investment activity after 25 January 1995 without registration, and the later Collective Investment Regulations did not dilute that prohibition. However, the complaint against the respondents could not stand on a factual basis inconsistent with that theory, since it proceeded as if they were operators of an existing scheme. Criminal liability of resigned directors under Section 27 required specific pleadings that they were in charge of and responsible for the company at the relevant time; absent that basis, liability could not be fastened for later defaults. In one matter, prosecution was also time-barred under Section 468 CrPC. The proceedings against the resigned directors were therefore unsustainable.

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Issues: (i) Whether Section 12(1B) of the SEBI Act imposed an absolute bar on new collective investment activities after 25.1.1995 unless registration was obtained, and whether the complaint could proceed on that footing. (ii) Whether the criminal proceedings against the resigned directors, including the challenge based on vicarious liability and limitation, were sustainable.

Issue (i): Whether Section 12(1B) of the SEBI Act imposed an absolute bar on new collective investment activities after 25.1.1995 unless registration was obtained, and whether the complaint could proceed on that footing.

Analysis: Section 12(1B) created two classes: persons already carrying on collective investment activity before 25.1.1995, who could continue temporarily under the proviso, and persons not so engaged, who could not commence such activity without registration. The bar on new entrants was held to be absolute and mandatory, and the later framing of the Collective Investment Regulations did not postpone or neutralise that bar. However, the complaint in the cases involving the directors who had resigned before the regulations came into force proceeded on the basis that they were operators of an existing scheme and had failed to comply with the regulatory regime applicable to existing schemes.

Conclusion: Section 12(1B) barred new collective investment ventures after 25.1.1995, but the complaint could not be sustained against the respondents on a contrary factual basis.

Issue (ii): Whether the criminal proceedings against the resigned directors, including the challenge based on vicarious liability and limitation, were sustainable.

Analysis: Liability under Section 27 of the SEBI Act depends on the accused being in charge of and responsible for the company's business at the relevant time. A director who had resigned before the relevant default could not be fastened with liability for later acts. In the case of one appellant, the complaint and notice did not disclose the necessary particulars to prosecute him as a new operator, and the alleged default under the regulations arose after he had resigned. In the case of the other appellant, the prosecution was additionally barred by limitation under Section 468 of the Code of Criminal Procedure, 1973, because cognizance was taken beyond the permissible period.

Conclusion: The proceedings against the resigned directors were unsustainable and were rightly quashed or set aside.

Final Conclusion: The appeals were disposed of by sustaining the quashing of proceedings against the respondents in the connected matters, while allowing the appeals of the resigned directors and setting aside the conviction and sentence where limitation and absence of liability were established.

Ratio Decidendi: A statutory bar that is expressly mandatory applies from the date of insertion, but criminal liability of company directors under a vicarious-liability provision can arise only where the complaint specifically discloses the relevant factual basis and the accused was in charge at the time of the alleged default; proceedings are also barred where cognizance is taken beyond the applicable limitation period.

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