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 raising funds after October 1999 without SEBI registration and failed to make payments within stipulated periods. Directors were held vicariously liable as persons in-charge of business operations. Court found no evidence that appellants exercised due diligence to prevent violations or that offences occurred without their knowledge. Appeals dismissed with original sentences and fines maintained as investors remained unpaid.

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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.

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