Company and managing director convicted for operating unregistered collective investment scheme under SEBI Act

Delhi HC upheld conviction of company and managing director for operating unregistered collective investment scheme under SEBI Act. Managing director sentenced to one year rigorous imprisonment and Rs. 1 lakh fine, being primarily responsible for business conduct. Three other directors acquitted due to insufficient evidence of their involvement in business operations. Court dismissed managing director's appeal, emphasizing deterrent effect against misleading investors, and ordered immediate surrender to trial court.

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Issues Involved:

1. Compliance with SEBI Act and Regulations by the Company.
2. Vicarious liability of the directors of the Company.
3. Admissibility of documents and evidence.
4. Sentencing and penalties imposed on the appellants.

Issue-wise Detailed Analysis:

1. Compliance with SEBI Act and Regulations by the Company:

The core issue was whether the Company complied with the SEBI Act, 1992, specifically Section 12(1B), which prohibits sponsoring or carrying on any venture capital funds or collective investment scheme (CIS) without registration. The Company failed to apply for registration or wind up its schemes as required by SEBI's CIS Regulations, 1999. The Company raised Rs. 0.29 crore from investors under its CIS without obtaining the necessary registration, thus violating Section 12(1B) and Regulation 74 of the SEBI CIS Regulations, which mandates repayment to investors if provisional registration is not sought. Despite SEBI's directives, the Company did not refund the collected money, contravening the SEBI Act and Regulations.

2. Vicarious Liability of the Directors of the Company:

The judgment examined whether the directors were responsible for the Company's non-compliance. Mr. P.S. Chaudhary, as the Managing Director, was found to be in charge of and responsible for the Company's business operations, making him vicariously liable for the contraventions. He did not claim ignorance or due diligence to prevent the offence. However, for other directors like Mr. D.S. Thakur, Mr. S.S. Thakur, and Mr. Roop Lal Kaundal, there was no evidence proving they were in charge of the Company's business, leading to their acquittal. The court emphasized that SEBI needed to demonstrate that these directors were responsible for the Company's conduct or that the offence was committed with their consent or connivance.

3. Admissibility of Documents and Evidence:

The appellants contested the admissibility of documents (Exhibits CW1/2, CW1/4, and CW1/5) submitted by SEBI, arguing they were not proven since the witness had no personal knowledge. However, the court found the documents admissible as they originated from SEBI's custody and were acknowledged by Mr. P.S. Chaudhary and Mr. S.S. Thakur, establishing their authenticity. The letters and accompanying documents were deemed sufficient evidence corroborated by admissions from the directors.

4. Sentencing and Penalties Imposed on the Appellants:

The court upheld the conviction and sentencing of Mr. P.S. Chaudhary, imposing rigorous imprisonment for one year and a fine of Rs. 1 lakh, due to the lack of evidence of repayment to investors and the seriousness of the contravention. The judgment highlighted the legislative intent to deter such violations, as reflected in the amended Section 24 of the SEBI Act, which increased penalties. The court dismissed the appeal by Mr. P.S. Chaudhary, directing immediate surrender and fine payment, while the appeals by other directors were allowed, resulting in their acquittal due to insufficient evidence of their involvement in the contravention.

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