TaxTMI 
TaxTMI 
TaxTMI 
2014 (2) TMI 1437
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the members of the public to invest in Teak saplings on the land owned or leased directly or on behalf of others. The Company commenced its business on 9.2.1997. It came out with the schemes named as Glitter Teak Unit 1 and Glitter Teak Unit II and collected Rs. 14.06 lakh from the investors till 30.11.1997. It was stated in the Brochure that the Company shall give Teak trees to the unit holders after 20 years and the share per unit, which at the time of offer was 2,500/-, was likely to be Rs. 3.00 lakh per unit at the time Teak trees are given to the investors. Thus, it was represented to the investors that investment of Rs. 2,500/- was likely to grow to Rs. 3.00 lakh in 20 years. 2. Section 12(1B) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the Act'), which came to be inserted w.e.f. 25.1.1995, provides that no person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme (for short 'CIS') including mutual funds, unless he obtains a certificate of registration from the Securities and Exchange Board of India (for short 'SEBI) in accordance with the regulati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent to the investors latest by 28.2.2000. However, neither the Company submitted any application to SEBI for registration of its CIS nor did it comply with the letters of SEBI dated 15.12.1999/ 29.12.1999 and its public notice dated 10.12.1999. 5. On 7.12.2000, SEBI in exercise of the powers conferred under Section 11(B) of the SEBI Act, directed the Company to refund the money collected under its CIS to the persons who had invested therein within a period of one (1) month from the date of the said direction. 6. Vide its letter received by SEBI on 9.1.2001 (Ex.CW1/16), the Company through its Director Shri Deepak Jain informed SEBI that the number of their investors was 1029 and since April, 1998, itself they had started refunding money to their investors. It was further stated in the letter that 95 per cent of the investors were jhuggi dwellers with whom no correspondence was possible and that the Company had made full refund to 503 out of 1029 investors and had given Indira Vikas Patras (IVPs) to the remaining 526 investors. It was further stated that full refund was in progress from the side of the Company and only Rs. 5,18,100/- was left with it out of the amount of Rs. 14,07....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Being aggrieved from their conviction and the sentence awarded to them, the appellants, Pankaj Jain, Deepak Jain, Sachin Gupta & Yashwant Jain are before this Court. The Company is also an appellant in Crl. A. No.567/2010. 9. The first question which comes up for consideration before this Court as to whether the scheme under which a sum of Rs. 14.06 lakh was collected by the Company from various investors amounts to CIS or not. The expression 'Collective Investment Scheme' has been defined in Section 2(ba) to mean any scheme or arrangement which satisfies the conditions specified in Section 11AA. Sub-section (2) of Section 11AA provides that any scheme or arrangement made or offered by any company under which- (i) the contributions, or payment made by the investors, by whatever name called, are pooled and utilized for the purposes of the such or arrangement; (ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement; (iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n from SEBI, in accordance with its Regulations on the subject. Admittedly, no such registration was even applied for by the Company before it came out with its scheme. As far as the proviso is concerned, it is evident from its bare perusal that it applies to only those schemes which were already in operation on 25.1.1995 when Security Laws (Amendment) Act, 1995, came into force. Though really not necessary, a reference in this regard may be made to a judgement of the Allahabad High Court in Paramount Biotech Industries Limited Vs. Union of India 2003 LawSuit (All.) 1206 where noticing that petitioner No.1 was incorporated in 1996, and, therefore, was not carrying on business on 25.1.1995, it was held that the proviso to sub-section (1B) of Section 12 of the Act was not applicable to it and was not entitled to the benefit of the said proviso. Therefore, by coming out with its CIS, the Company contravened the provisions of Section 12(1B) of the Act which is punishable under Section 24 of the Act. 12. Regulation 74 of the SEBI CIS Regulations, which came into force on 15.10.1999, provides that an existing CIS which is not desirous of obtaining provisional registration from the Board....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y of which is Ex.CW1/14. 15. There is no evidence of the Company sending the Information Memorandum to its investors, within two (2) months from the date of receipt of intimation from SEBI. The said memorandum was required to give details such as state of affairs of the scheme, the amount repayable to each investor and the manner in which the said amount was determined. No copy of the information memorandum, if any, sent to the investors has been proved by the appellant. As noted earlier, in terms of Regulation 73, the payment to the investors was to be made within three (3) months from the date of the information memorandum. This is not even the case of the appellants that the Company had actually sent information memorandum in terms of the Regulations to all its investors within two (2) months of receipt of intimation from SEBI and the said memorandum envisaged payment to the investors within three (3) months from its date. 16. The letter Ex.CW1/19, sent by the Company to SEBI would show that even on the date this letter dated 10.11.2005, was sent a sum of Rs. 2,75,600/- was still due to the investors as on 31.3.2005. This was further admitted by the Company in its letter dated....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erefore, no fault can be found with the conviction of the Company. 19. Coming to the vicarious liability of the appellants, the question which comes up for consideration is as to whether they, at the time the provisions of Section 12(1B) and/or CIS Regulations were contravened by the Company, were in-charge of and responsible to the Company for conduct of its business or not. Of Course, even if they were in-charge of and responsible to the Company for conduct of its business they would not to be guilty of commission of offence if they are able to prove that the offence by the Company was committed without their knowledge or that they had exercised all due diligence to prevent the commission of such offence. If SEBI is able to prove that the offence by the Company was committed with the consent or connivance of any of the appellants or is attributable to any neglect on their part, they shall be guilty in terms of sub-section (2) of Section 27 even if they were not persons in- charge of and responsible to the Company for conduct of its business. 20. It was held by this Court in Vishnu Prakash Bajpai versus Securities and Exchange Board of India [2010 (2) Crimes 394 (Del.)] that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce has been led by the appellants - Deepak Jain or by Pankaj Jain to prove that the contravention of sub section (1B) of Section 12 of SEBI Act and the CIS Regulation of SEBI was committed by the company without their knowledge or that they had exercised all due diligence to prevent the commission of the said offence by the company. In these circumstances, it can hardly be disputed that being the directors and persons in-charge and responsible to the company for conduct of its business, they are vicariously liable for the contravention of the provisions of SEBI Act and the Regulations framed thereunder. Therefore, no fault can be found with their conviction. 22. However, as far as the appellants - Yashwant Jain and Sachin Gupta are concerned, admittedly they have never been the directors of the company. There is no evidence to show that either of them was the person in-charge and responsible to the company for conduct of its business. This is not the case of SEBI that the offence by the Company was committed with the consent or connivance of Mr. Yashwant Jain and Mr. Sachin Gupta and is attributable to any neglect on their part. Moreover there is no evidence of their even being a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r SEBI to verify the payment which they claimed to have made to their investors. 25. Not only was it imperative for the appellants to refund the entire money collected from the investors along with the return promised by them while raising deposits, within the time stipulated in the Regulations, they should also have submitted the proof of such payments to SEBI in order to enable it to verify the alleged payments. That having not been done, SEBI had no opportunity to verify their claim. Even during the course of trial, neither the appellants examined any of the investors nor did they produced the receipts obtained from the investors. Thus, no genuine attempt was made by them to satisfy the learned trial Judge that they had refunded the substantial deposits to the investors. 26. The learned counsel for the appellants has filed affidavits of the appellant - Pankaj Jain enclosing thereto the details of the refund alleged to have been paid to the investors. As per the said statement, out of the principal sum of Rs. 14,07,500/- an amount of Rs. 12,56,900/- was paid to the investors who were traceable. It is further stated that a sum of Rs. 4,25,208/- was paid as interest to the inves....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."Pioneer" and "Veer Arjun", neither of which can be said to be the leading newspapers and neither of which has a vide circulation in Delhi where the registered office of the company is situated. It is thus quite clear that the company issued a public notice only for the sake of complying with the letter of SEBI without really meaning to refund money to its investors. In these circumstances, no ground either for reducing the substantive sentence awarded to the appellants - Deepak Jain and Pankaj Jain or for reducing the fine imposed upon any of the appellant is made out. 28. The learned counsel for SEBI drew my attention to the report of the Chartered Accountant appointed by SEBI to examine the balance sheet of the appellant company. The CA, in the aforesaid report, inter alia, stated as under: c) As pointed out in earlier paragraphs the company has not maintained any register of unit holders detailing the addresses. d) The company has not maintained the records of application form received from the unit holders detailing the addresses. e) All the repayments to the unit holders were made in cash only for which documentary evidence was not available. f) We have observed that....