2014 (4) TMI 1315 - HC - SEBI

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

S.S. Thakur, Roop Lal Kundal, S.P. Choudhary and Dalip Singh Versus Security Exchange Board Of India Through Its Chairman

Delhi HC upheld conviction of company and managing director for operating unregistered collective investment scheme under SEBI Act. Managing director ... Collective Investment Scheme ventured without registration - Conviction u/s 24 read with Section 27 of SEBI Act, 1999 - sentenced to undergo rigorous imprisonment for one year each and to pay fine of Rs. 1 lac each or to undergo SI for six (6) months each in default - HELD THAT:- The Company has rightly been convicted for contravening sub-section (1B) of Section 12 of SEBI Act by collecting money from the investors under its CIS schemes without registration with SEBI and it also committed contravention of the provisions of Section 24 of the Act by not complying with the Regulations framed by SEBI and the directions issued by the Chairman. Therefore, no fault can be found with the conviction of the Company. Vicarious liability of the appellants - whether they, at the time the provisions of Section 12(1B) and/or CIS Regulations were contravened by the Company, they were in-charge of and responsible to the Company for conduct of its business or not? - As far as the appellant Managing Director of the Company, was the person primarily concerned with managing the business of the Company. Being the Managing Director, he would be involved in day-to-day business of the Company and raising funds from the investors under the Collective Investment Scheme floated by the Company. Therefore, he would certainly be a person in-charge of and responsible to the Company for conduct of its business. It can hardly be disputed that being the Managing Director and person in-charge and responsible to the Company for conduct of its business, he is vicariously liable for the contravention of the provisions of SEBI Act and the Regulations framed thereunder. Therefore, no fault can be found with his conviction. Other appellants are concerned for conviction of the appellants other than Shri P.S. Chaudhary, SEBI was required to prove not only that they were Directors of the Company at the relevant time, but also that they were the persons in charge of and responsible to the Company for conduct of its business. No evidence to this effect, however, has been led by SEBI. This is also not the case of the SEBI that the offence by the Company was committed with the consent and connivance of the appellants other than Mr. P.S. Chaudhary and is attributable to some neglect on their part. In these circumstances the conviction of the appellants, Mr. D.S. Thakur, Mr. S.S. Thakur and Mr. Roop Lal Kaundal cannot be sustained.Appellants Mr. D.S. Thakur, Mr. S.S. Thakur and Mr. Roop Lal Kaundal are acquitted. Sentence awarded to the appellant Mr. P.S. Chaudhary, considering that neither the Company nor Mr. P.S. Chaudhary produced any documentary evidence of having repaid to the investors and did not examine any investor to prove the alleged payment and also considering that admittedly all the investors do not stand paid, there is no scope for reducing the substantive sentence awarded to him. As regards the quantum of fine, though there was no maximum fine at the relevant time, Section 24 has since been amended so as to enhance the maximum substantive sentence to ten (10) years, and to prescribe a fine up to Rs. 25.00 crore. The amendment clearly indicates the seriousness, which the Legislature attaches to such contraventions. The purpose obviously is to deter persons such as the appellants from trapping the gullible investors, by promising them returns which are unrealistic and can never be given. Any unwarranted leniency towards such persons will be highly misplaced, besides being detrimental to the larger interest of the society. Therefore, no ground made out for reducing the amount of fine imposed upon the appellant Mr. P.S. Chaudhary. The appeal filed by Mr. P.S. Chaudhary is, therefore, dismissed. He is directed to surrender forthwith before the trial court. If he does not surrender forthwith, the trial court shall take necessary steps to procure his presence and commit him to prison to undergo the sentence awarded to him. The fine imposed upon Mr. P.S. Chaudhary, unless already deposited, shall be deposited within a week. If the fine is not deposited within one (1) week, it shall be open to SEBI to take such steps as are open to it in law to recover the amount of fine. 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.