2025 (9) TMI 762 - HC - SEBI

Revision dismissed; regulatory findings don't bar prosecution absent clear innocence; prima facie evidence supports trial under Section 27(1) SEBI Act

Rajiv Ranjan Singh Versus Securities & Exchange Board of India, The State of Maharashtra.

HC dismissed the revision application and upheld the Special Judge's refusal to discharge the accused. The court held that regulatory/adjudication ... Effect of adjudication/regulatory/departmental proceedings on criminal prosecution - Fraudulent and Unfair Trade Practices Relating to Securities Market - accused's role as Chief Executive Officer and his liability u/s 27(1) of the SEBI Act - Unauthorizedly pledged and misused its client's securities and funds - Company failed to exercise due skill, care, and fairness towards its clients, indulged in malpractices - Violation of statutory requirements under Clauses A(1) to A(5) - Offences punishable u/s 24(1) read with Section 27 of the SEBI Act, 1992 - discharge stage under Section 227 CrPC - main argument of the applicant is that he has been exonerated of all wrongdoings in the adjudication proceedings -applicant submitted that the allegations in the complaint have already been adjudicated by the Whole Time Member of SEBI HELD THAT:- Looking at the settled position of law on how findings in adjudication or departmental proceedings affect criminal prosecution. The Constitution Bench of the Supreme Court in Collector of Customs v. L.R. Melwani [1968 (10) TMI 49 - SUPREME COURT] had considered that unless there has been a proper trial before a competent criminal court resulting in acquittal, the rule of autrefois acquit (meaning that no person can be tried twice for the same offence) cannot apply. It was also clarified that proceedings before the Collector of Customs are not criminal trials. Therefore, any finding given by the Collector cannot be treated as an acquittal binding on the prosecution. The same issue came up again before a three-Judge Bench in Radheshyam Kejriwal [2011 (2) TMI 154 - SUPREME COURT]. The majority held that adjudication proceedings and criminal prosecution are independent of each other. A finding in adjudication does not bind the criminal court. It is thus clear that exoneration in departmental or regulatory proceedings will bind criminal prosecution only in very limited situations. Three conditions must be satisfied. First, the adjudicating authority must have examined all the facts and evidence in detail and given a clear finding. An order passed only on technicalities like limitation or jurisdiction cannot bar prosecution. Second, there must be a clear conclusion that the allegations were wholly baseless or not proved at all. Third, the order must contain a clean declaration of innocence, holding the person not guilty of the misconduct. A mere absence of penalty or grant of benefit of doubt does not amount to exoneration on merits. Applying these principles to the present case, it is seen that the adjudication order does not contain any detailed finding of innocence. On the contrary, applicant actively participated in the asset collection drive and, as Chief Executive Officer, failed to exercise the diligence expected of him. These are adverse findings against the applicant and rule out any claim of complete exoneration. The Adjudicating Officer has not held that the allegations against the applicant were baseless or unsustainable. The order only refrains from imposing penalty but does not absolve him of responsibility under the SEBI framework. The order also records that irregular pledging of client securities had taken place and that the applicant, being a senior professional, should have raised concerns. Therefore, the allegations remain prima facie sustainable. Lastly, the order does not contain any clean declaration of innocence. It does not state that the applicant had no role in the misconduct. Instead, it reflects negligence and lack of diligence on his part in discharging his duties as a person in charge of the company’s affairs. Thus, L.R. Melwani [1968 (10) TMI 49 - SUPREME COURT], K.G. Premshanker [2002 (9) TMI 849 - SUPREME COURT], and Radheshyam Kejriwal [2011 (2) TMI 154 - SUPREME COURT], it is clear that the adjudication order cannot operate as a bar to the present prosecution under Section 27(1) of the SEBI Act. On the contrary, the complaint discloses prima facie material to proceed against the applicant, and the findings in the adjudication order reinforce his responsibility as Chief Executive Officer and as a person in charge of the company’s business at the relevant time. Therefore, under Section 27(1) of the SEBI Act, it is not necessary to show that the officer himself committed the wrongful act. The liability arises simply because the person was in charge of and responsible for the conduct of business of the company when the offence took place. It is also well settled that at the stage of discharge under Section 227 of the Code of Criminal Procedure, the Court is not expected to go into the details of the evidence or conduct a minitrial. The limited duty of the Court is to see whether there are sufficient grounds to proceed against the accused. If the material available raises a strong suspicion about the involvement of the accused, that is enough to frame charges and call upon the accused to face trial. Applying these principles, the liability of the applicant under Section 27(1) of the SEBI Act arises from his position as Chief Executive Officer, who was in charge of and responsible for the conduct of the company’s business at the relevant time. The complaint and supporting material, including inspection reports, forensic audit, and findings of the Adjudicating Officer, prima facie show that the applicant had a role in the affairs of the company and failed to exercise due diligence. Therefore, the plea that the applicant stands exonerated in adjudication cannot be accepted as a ground for discharge. The adjudication order does not absolve him. On the contrary, it contains observations which point towards his responsibility. In view of Section 27(1) of the SEBI Act and the law laid down in Ramesh Singh [1977 (8) TMI 152 - SUPREME COURT], there exist sufficient grounds to proceed against him. Any discharge at this stage would amount to a premature assessment of evidence, which the law does not permit. The complaint relies on cogent material such as the SEBI inspection report, reports of NSE, the forensic audit, and relevant bank and DP account statements. All these disclose sufficient grounds to proceed. At this stage, the Court cannot weigh the sufficiency of the evidence as if deciding a trial. Even a strong suspicion based on such material is enough to frame charges. The order of the learned Special Judge rejecting the discharge application is perfectly legal. It does not suffer from any infirmity. On the contrary, it is in full conformity with the settled principles of law. No case is made out for interference in the exercise of revisional jurisdiction. Accordingly, the Revision Application stands dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether findings in regulatory/adjudication proceedings can operate as a bar to criminal prosecution, specifically whether absence of penalty or limited/technical findings in an adjudication order amount to exoneration on merits preventing prosecution. 2. Whether, at the stage of discharge under Section 227 CrPC, the Court ought to discharge an accused who was a senior officer of a company alleged to have unauthorizedly pledged client securities, in light of statutory presumption of liability in the company-regulation statute (i.e., liability of persons in charge under Section 27(1) of the SEBI Act). 3. Whether the material placed with the complaint (inspection reports, forensic audit, exchange reports, bank and depository records) discloses a prima facie case / sufficient grounds to proceed against the accused so as to justify refusal of discharge. ISSUE-WISE DETAILED ANALYSIS Issue 1: Effect of adjudication/regulatory findings on criminal prosecution Legal framework: Administrative/adjudicatory findings are not ordinarily conclusive in subsequent criminal proceedings; only a criminal court's acquittal after proper trial gives rise to autrefois acquit. Findings in non-criminal proceedings may be admissible under evidentiary rules but are not binding to bar prosecution unless they amount to a clear, categorical finding of innocence on merits. Precedent treatment: The Court applied established high-authority principles that (a) administrative/adjudicatory proceedings are distinct from criminal trials and do not create bar under the rule against double jeopardy; (b) finality to bar subsequent criminal prosecution arises only where the prior proceeding examined facts and evidence in detail and recorded a clear declaration that allegations were wholly unsustainable and the person innocent; and (c) orders based on technicalities, jurisdictional issues, or mere absence of penalty do not constitute such exoneration. Earlier authorities to that effect were relied upon and followed as controlling principles. Interpretation and reasoning: The Court examined the adjudication order and found that it did not record a clean, categorical finding of innocence. Instead, specific paragraphs contained adverse observations: participation in the asset collection drive, failure to exercise expected diligence, and knowledge/awareness aspects. The adjudicator's restraint from imposing penalty was not equated with a finding that allegations were baseless; some observations indicated culpable negligence. Therefore, the adjudication order did not satisfy the threefold criteria (detailed examination of evidence; clear conclusion that allegations were wholly unsustainable; explicit declaration of innocence) necessary to operate as a bar to criminal prosecution. Ratio vs. Obiter: Ratio - adjudication orders will bar criminal prosecution only in narrow circumstances where the adjudicator has examined all relevant evidence and has issued an unequivocal finding of innocence on the merits. Obiter - illustrations about when absence of penalty amounts to exoneration (for example, emphasizing that mere absence of penalty is insufficient) are supportive but follow directly from the ratio. Conclusion: The adjudication order in question does not operate as a bar to the present criminal prosecution; it does not amount to exoneration on merits. Cross-reference: See Issue 2 analysis regarding the interplay between those adjudicatory findings and statutory presumption under the company-regulation provision. Issue 2: Liability of persons in charge under the statutory provision making officers in charge liable (statutory/presumptive liability) and scope at discharge stage Legal framework: The statute under which prosecution is pursued contains a provision rendering every person who was 'in charge of and responsible for the conduct of the business' of a company guilty for offences committed by the company. This provision creates a presumption of responsibility by virtue of position and does not require proof of direct personal commission of the wrongful act at the discharge stage. Precedent treatment: The Court relied on established law that statutory provisions making officers liable by virtue of their position permit prosecution of those in managerial charge; discharge applications must be tested against whether material discloses prima facie link between accused's position/responsibilities and the alleged corporate misconduct. Authorities holding that exoneration in other forums will not automatically negate the statutory presumption unless a complete innocence finding was made were followed. Interpretation and reasoning: The Court observed that the adjudication order itself contains findings that the accused, as a senior officer, participated in relevant corporate activities (asset collection drive), was professionally experienced, and failed to raise concerns about large-scale borrowing/pledging of client securities. Given the statutory presumption, it is not necessary at the discharge stage to prove personal commission; being 'in charge' suffices to attract prima facie liability. The adverse observations in the adjudication order reinforce (rather than negate) the statutory presumption and therefore support continuation of criminal proceedings. Ratio vs. Obiter: Ratio - where a statute imputes liability to persons in charge, at the discharge stage the court must determine whether the material discloses sufficient grounds to believe the accused was in charge and that the offence by the company occurred; if so, prima facie liability arises without proof of direct act. Obiter - comments on the policy rationale for such statutory provisions and duties of senior officers are explanatory. Conclusion: The statutory presumption of liability is attracted on the material before the Court; the accused's role as Chief Executive Officer and the adjudicatory observations suffice to negate any claim to discharge on this ground. Issue 3: Sufficiency of material to show a prima facie case at the discharge stage (standard and application) Legal framework: At the discharge stage under Section 227 CrPC, the court's function is limited: it must determine whether there exist sufficient grounds to proceed - not to conduct a mini-trial or weigh evidence exhaustively. If the record discloses strong suspicion or prima facie material against the accused, charges should be framed and the accused called upon to defend at trial. Precedent treatment: The Court applied longstanding principles that a prima facie case or strong suspicion based on documentary and testimonial material suffices to refuse discharge; the court should not assess whether the evidence will inevitably lead to conviction. This approach from criminal procedural jurisprudence was followed. Interpretation and reasoning: The complaint was supported by multiple documentary sources - inspection report, exchange reports, forensic audit, bank and depository records - and the adjudication order contained adverse factual observations. Collectively, this material prima facie supports the allegation that client securities were unauthorizedly pledged and that company officers failed in due diligence. Given the limited scope of inquiry at discharge, these materials raise sufficient grounds to proceed. Ratio vs. Obiter: Ratio - where documentary and investigative materials disclose a plausible link between accused and alleged corporate misconduct creating a strong suspicion, the court must refuse discharge and proceed to trial. Obiter - discussion of particular items of evidence (e.g., which paragraph of adjudication order had what observation) is case-specific illustration. Conclusion: The material filed with the complaint discloses sufficient grounds and a prima facie case to proceed against the accused; refusal of discharge was legally justified. Final disposition-focused headnote (connected to Issues 1-3) The Court concluded that the adjudication order did not amount to exoneration on merits and thus could not bar criminal prosecution; the statutory presumption attaching to persons in charge applied on the material before the Court; and, on the limited inquiry appropriate at the Section 227 CrPC stage, there existed sufficient prima facie material (inspection report, forensic audit, exchange reports, bank/DP records and adverse adjudicatory observations) to justify denial of discharge and continuation of trial.