2014 (1) TMI 1956 - HC - SEBI

SEBI conviction upheld for unregistered collective investment scheme; directors held vicariously liable under Section 24

Delhi HC upheld SEBI's conviction of company and directors for operating collective investment scheme without registration. Directors S.P. Kalia, ... Venturing of capital funds or collective investment scheme (‘CIS’) without certificate of registration from SEBI obtained - vicarious liability of the Directors of the Company - HELD THAT:- As rightly pointed out by the learned counsel for SEBI, the purpose of submitting wind up and repayment report to SEBI is to enable SEBI to verify whether the Company had actually complied with the provisions of the Regulations or not. For this purpose SEBI was entitled to call for the record of the Company to satisfy itself that the payment as alleged in the report had actually been made to the investors. Admittedly, no documentary evidence of payment even of the principal amount to the investors was furnished by the Company to SEBI. As noted in its letter dated 14.7.2008, SEBI could appoint an independent auditor for verification of claims of repayment at the cost of the Company. In fact, even the report submitted to SEBI did not conform to the Regulations since it was not signed by one of the Directors, namely, Mr. Ashwani Berry. Since the Company contravened the provisions of Regulations 73 & 74 of SEBI CIS Regulations, it was rightly convicted under Section 24 of the Act for contravention of the said Regulations. Coming to the vicarious liability of the Directors of the Company - Appellant Shalender Kaushik was one of the subscribers to its Memorandum and Articles of Association. In view of the above-referred bio datas, there can be no dispute that the appellants, S.P. Kalia, Brijinder Makkar & Manoj Kapur were in-charge of and responsible to the Company for conduct of its business. No evidence has been led by them to prove that contravention of sub- section (1B) of Section 12 and CIS Regulations of SEBI was committed without their knowledge or that they had exercised all due diligence to prevent the commission of the said offence by the Company. Therefore, they have rightly been convicted under Section 24 read with Section 27(1) of the Act. Appellant, Smt. Sudha Mittal, as per the bio data furnished to SEBI she was a housewife - mere being a Director of the Company does not render a person liable to conviction with the aid of Section 27 of the Act unless it is shown that such a person was also in-charge of and responsible to the Company for conduct of its business or it is proved that the offence was committed with the consent or connivance or was attributable to any neglect on the part of such a person. No such consent, connivance or neglect on the part of Smt. Sudha Mittal, however, came out during the course of her deposition and no evidence in this regard was produced by SEBI. For the reasons stated hereinabove, the appellant, Smt. Sudha Mittal is given benefit of doubt and is hereby acquitted. For Shalender Kaushik, is concerned, admittedly, he has never been a Director of the Company and there is no evidence to show that he was in-charge of and responsible to the Company for conduct of its business. Sub-section (2) of Section 27 would not apply to him. He cannot be said to be a person in-charge of and responsible to the Company for conduct of its business only because he had subscribed to its memorandum and articles of association. In fact, the learned counsel for SEBI fairly conceded during the course of arguments that the charge against him could not be established during the course of trial. Mr. Shalender Kaushik is, therefore, liable to be acquitted. Sentence awarded to the appellants though it was submitted by the appellants, during the course of arguments that the principal amount stands paid to all the investors - 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. In the facts & circumstances of the case, find no good ground for reducing either the substantive sentence awarded to the individual appellants, or to reduce the fine imposed upon the aforesaid three appellants. Issues Involved:1. Compliance with Section 12(1B) of the SEBI Act, 1992.2. Adherence to SEBI CIS Regulations, 1999, specifically Regulations 5(1), 73, and 74.3. Vicarious liability of the Directors under Section 27 of the SEBI Act.4. Sentencing and penalties imposed on the appellants.Detailed Analysis:1. Compliance with Section 12(1B) of the SEBI Act, 1992:The judgment highlights that Section 12(1B) of the SEBI Act mandates that no person shall sponsor or carry on any venture capital funds or collective investment schemes (CIS) without obtaining a certificate of registration from SEBI. The Company in question was incorporated after the enforcement of this section and launched its CIS without obtaining the necessary registration, thereby contravening the provisions of Section 12(1B). The proviso to this section, which allows pre-existing schemes to continue until regulations were made, did not apply to the Company as it was incorporated after the relevant date. The violation of Section 12(1B) is punishable under Section 24 of the Act.2. Adherence to SEBI CIS Regulations, 1999:The judgment discusses the obligations under the SEBI CIS Regulations, which came into force on 15.10.1999. Regulation 5(1) required existing CIS operators to apply for registration within two months from the date of the regulations coming into force. Regulation 73 mandated that a scheme of repayment be formulated and executed for existing investors. Regulation 74 specified that existing CIS not seeking provisional registration must repay investors as per the specified manner. The Company failed to comply with these regulations, particularly Regulation 73, as it did not send the required information memorandum to investors nor complete the repayment process as stipulated. The Company also failed to provide evidence of repayment to SEBI, leading to a contravention of the regulations, justifying the conviction under Section 24 for these breaches.3. Vicarious Liability of the Directors under Section 27 of the SEBI Act:The judgment examines the vicarious liability of the Directors, determining whether they were in charge of and responsible for the conduct of the Company's business. The Directors, Mr. S.P. Kalia, Mr. Brijinder Makkar, and Mr. Manoj Kapur, were found to be responsible for the Company's operations and failed to prove that the contraventions occurred without their knowledge or despite due diligence. Consequently, they were rightly convicted under Section 24 read with Section 27(1) of the Act. However, Smt. Sudha Mittal and Mr. Shalender Kaushik were acquitted due to lack of evidence showing their involvement or responsibility in the Company's business operations. Smt. Mittal was a housewife with no active role in the Company, and Mr. Kaushik was merely a subscriber to the memorandum and articles of association, not a Director or officer.4. Sentencing and Penalties Imposed on the Appellants:The judgment upholds the sentences imposed on Mr. Brijinder Makkar, Mr. S.P. Kalia, and Mr. Manoj Kapur, which included a fine of Rs. 5 lakh each and six months of rigorous imprisonment. The court emphasized the seriousness of the contraventions and the need to deter similar offenses, noting that Section 24 had been amended to increase penalties. The appeals of these appellants were dismissed, and they were directed to surrender to the trial court. In contrast, the appeals of Smt. Sudha Mittal and Mr. Shalender Kaushik were allowed, and they were acquitted of all charges due to insufficient evidence of their involvement or responsibility in the Company's contraventions.