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, Brijinder Makkar, and Manoj Kapur were held vicariously liable under Section 24 read with Section 27(1) as they were in-charge of business operations and failed to prove due diligence. Director Smt. Sudha Mittal was acquitted as prosecution failed to establish her active involvement beyond being a housewife-director. Shalender Kaushik was acquitted as he was never a director and mere subscription to company documents insufficient for liability. Court maintained original sentences emphasizing deterrent effect against misleading investors.

---

---

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.

---