2014 (1) TMI 1957 - HC - SEBI

Company directors' convictions upheld for operating unregistered collective investment scheme under SEBI Act without registration

Delhi HC upheld convictions of company directors under SEBI Act for operating unregistered collective investment scheme. Company violated regulations by ... Venturing of capital funds or collective investment scheme [‘CIS’) w/o obtaining a certificate of registration from the Securities and Exchange Board of India - HELD THAT:- There was violation of Regulations in his case as well, on account of payment having not been made within the period stipulated in the Regulations. As noted earlier, in view of the prohibition contained in Regulation 69, the company could not have raised money under its existing Scheme, after coming into force of the Regulations. It has come in the deposition of DW8 Dinesh Gupta that he invested money in the company in the month of December, 2000 whereas according to DW9 Hari Om Gupta, he had reinvested Rs. 20,000/- in the company on 7.5.2001. In view of the prohibition contained in Regulation 69 of SEBI CIS Regulations, the company could not have raised money from them, after the Regulations came to be notified on 15.10.1999. Vicarious liability of the appellants - As far as the appellant, Ajay Vohra, is concerned, the learned counsel for the appellants did not dispute during the course of arguments that he was a person in-charge of and responsible to the Company for conduct of its business.Even otherwise, not only has, Mr. Ajay Vohra, been corresponding with SEBI, he also signed the balance sheet, profit & loss account, schedule of deposits, schedule of fixed assets, schedule of cash and bank, notes on account forming part of the balance sheet, etc. of the Company for the year 1997-1998. Even when he came in the witness box, Mr. Ajay Vohra did not claim that he was not the person incharge of and responsible to the company for conduct of its business. This would clearly show that he was a person in-charge of and responsible to the Company for conduct of its business. Appellant, Sunita Bhagat is concerned, admittedly she was a Director of the appellant Company and was also was a person in-charge of and responsible to the Company for conduct of its business. No evidence has been led by her to prove that the contravention of sub-section (1B) of Section 12 of the Act was committed without her knowledge or that she had exercised all due diligence to prevent the commission of the aforesaid offence by the Company. Appellant P.C. Thakur the Accountant of the company, he was a director in the company in the year 1999. He resigned from the company only on 20.2.2000 but His name appeared in the list of directors sent by the company to SEBI vide its letter dated 28.5.1998. meaning thereby that he became director prior to the aforesaid date. The fact that Mr. P.C. Thakur was getting remuneration from the company and was also authorized to operate its bank accounts clearly shows that he was also a person incharge and responsible to the company for conduct of its business, during the period he was its director. Mr. Rajan Rai signing the annual return of the company that he was also the person in charge and responsible to the company for conduct of its business. Thus, as no evidence has been led by any of the appellants to prove that offence punishable under section 24 of the Act was committed by the company without their knowledge or that they had exercised all due diligence to prevent commission of the said offence. Therefore, being the persons in charge of and responsible to the company for conduct of its business at the time the offence punishable under Section 24 of the Act committed by the company, the appellants have rightly been convicted under Section 24 of the Act read with section 27 thereof. We find no reason to interfere with the conviction of the appellants under Section 24 of the Act read with Section 27 thereof. As when admittedly all the investors have not been paid and there is no documentary evidence of even a substantial number of them having been paid, I find no good ground for reducing the substantive sentences awarded to the appellants or the fine imposed on them. The appeals are, therefore, dismissed. Issues Involved:1. Compliance with Section 12(1B) of the Securities and Exchange Board of India Act, 1992.2. Classification and regulation of the Company's scheme as a Collective Investment Scheme (CIS).3. Compliance with SEBI (Collective Investment Schemes) Regulations, 1999.4. Vicarious liability of the directors for the contraventions by the Company.5. Sentencing and penalties imposed on the appellants.Issue-wise Detailed Analysis:1. Compliance with Section 12(1B) of the Securities and Exchange Board of India Act, 1992:Section 12(1B) of the SEBI Act, which was inserted with effect from 25.1.1995, mandates that no person shall sponsor or carry on any venture capital funds or CIS without obtaining a certificate of registration from SEBI. The proviso allows schemes in operation before 25.1.1995 to continue until regulations are made. The Company was incorporated on 16.10.1996, after the notification of Section 12(1B), and did not apply for registration before launching its scheme. Therefore, the Company contravened Section 12(1B) by launching its CIS without registration, which is punishable under Section 24 of the Act.2. Classification and Regulation of the Company's Scheme as a Collective Investment Scheme (CIS):The scheme of the Company was classified as a CIS under the SEBI Act, 1992. The definition of CIS, as outlined in Section 11AA, encompasses any scheme where investor contributions are pooled for collective investment, with profits or returns shared among investors. The Company invited public investments in its Plantation Scheme, promising high returns and tax-free income, which constituted a CIS. The Company's scheme was thus subject to SEBI regulations, and it failed to comply with the registration requirements.3. Compliance with SEBI (Collective Investment Schemes) Regulations, 1999:Regulation 74 of the SEBI CIS Regulations required existing CISs to either seek provisional registration or formulate a repayment scheme for investors. Regulation 69 prohibited launching new CIS or raising funds under existing schemes without SEBI registration. The Company failed to comply with these regulations, as it neither sought registration nor formulated a repayment scheme in accordance with Regulation 73. The Company continued to accept funds post-regulation, contravening SEBI's directives. Despite SEBI's notifications, the Company did not adhere to the repayment schedule stipulated by the regulations, leading to further violations.4. Vicarious Liability of the Directors for the Contraventions by the Company:The directors, including Ajay Vohra, Sunita Bhagat, P.C. Thakur, and Rajan Rai, were held vicariously liable for the Company's contraventions. Ajay Vohra was acknowledged as a person in charge of the Company's business, having corresponded with SEBI and signed financial documents. Sunita Bhagat, a director until 20.9.1999, was involved in the initial communication with SEBI and was a promoter of the Company. P.C. Thakur, a director until 20.2.2000, was authorized to operate the Company's bank accounts and received remuneration, indicating his responsibility. Rajan Rai, who signed the annual return, was inferred to be in charge of the Company's business. None of the directors provided evidence to prove the contraventions occurred without their knowledge or that they exercised due diligence to prevent them.5. Sentencing and Penalties Imposed on the Appellants:The appellants were sentenced to rigorous imprisonment for six months each and fined Rs. 10 lakh each, with an additional three months' imprisonment in default of payment. The court emphasized the seriousness of the contraventions, highlighting the legislative intent to deter such offenses. The amendment to Section 24, increasing the maximum sentence to ten years and a fine up to Rs. 25 crore, underscores the gravity of the offense. The court found no grounds to reduce the sentences or fines, given the lack of evidence of repayment to all investors and the absence of documentary proof of substantial repayments. The appeals were dismissed, and the appellants were directed to surrender to the trial court immediately.