TaxTMI 
TaxTMI 
2026 (8) TMI 1004
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....tion 34 and 120B of the Indian Penal Code, 1860 (for short "IPC"). 2) Heard Mr. Nagmuthu, learned Senior Advocate for the Applicant, Mr. Walve, learned APP for the Respondent-State, Mr. Amit Munde, learned counsel for the Enforcement Directorate (Intervener), and Mr. Sunny Udasi for the Applicant in Interim Application No. 4102/2025. 3) Briefly stated, the case of the prosecution is as under: 3.1) The Respondent No.2, an investor is the original complainant who has filed the present FIR on the basis that, she has suffered financial loss due to the alleged fraudulent acts, conduct and schemes orchestrated by the Applicant while he was working as the Chief Dealer with Axis Asset Management Company Limited. It is the allegation of Respondent No.2 that, the Applicant has cheated 66 lakh investors and allegedly caused a loss of over Rs.2.52 lakh crore due to his acts and conduct. 3.2) That, the FIR has been filed under section 477A, 468, 467, 465, 420, 417, 406 read with sections 34 and 120B of the IPC. It is alleged that, the Applicant was the Chief Dealer of the Axis Mutual Fund. That, while in the said position as a Chief Dealer, the Applicant received non-public informat....
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....is own personal benefits. That, the Applicant after receipt of the knowledge of the big orders would forward the information to the others. That, due to the said acts, Respondent No.2 and other investors suffered losses. SUBMISSIONS OF APPLICANT : 4) Mr. Nagmuthu, learned Senior Counsel for the Applicant submitted that:- 4.1) The complaint could not have been filed by the Complainant. That, the procedure under section 26 of the Securities Exchange Board of India Act, 1992 (for short "SEBI Act") ought to have been followed. The Securities Exchange Board of India (SEBI) and its authorized officers alone can prosecute such a complaint. That, the SEBI Act being a Special Act, it is mandatory that the procedure as prescribed in the SEBI Act is followed. That, it was not open for the Complainant to directly approach the Court and file a complaint. The Court ought not to have taken cognizance, except on a complaint by the Board. 4.2) An offence of "front running" is an offence under the SEBI Act and, therefore can be investigated only by and under the provisions of the SEBI Act. It is not that, the offences under the SEBI Act so also the general law i.e. BNS/ IPC have been all....
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....uthority is unable to and has not given the details of any deception. 4.7) To make out an offence under section 408, there has to be an entrustment of property. That, only when there is an entrustment of property, an offence of criminal breach can be made out. That, no property has been entrusted to the Applicant. That, the non-public information cannot be equated to property. 4.8) Reliance was placed on the case of Sunil Kumar v. State of Maharashtra 2009 SCC Online Bom 194, to submit that, the non-public information which is required to allege an offence of front running cannot be equated to property. If the offence of front running is alleged, it cannot amount to any offence under IPC. Front running is an offence under the SEBI Act for which the mode and the procedure for prosecution is provided in section 24 and 26 of the SEBI Act. 4.9) That, the provisions of sections 408, 409 and 420 of IPC cannot be invoked simultaneously. That, the ingredients of the said sections are different and distinct. 4.10) That, SEBI has already issued an interim order cum show cause notice to the Applicant and has taken certain actions in respect of the said offence under the SEBI Act. ....
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....s.93 crore out of which an amount of Rs.29 crore only has been secured. 5.4) The Enforcement Directorate has invoked the provisions of the PML Act and is investigating commission of offences for money laundering as defined in sections 3 and 4 of the PML Act. That, sections 417, 420, 467, 120B of IPC are mentioned in part-A of the Schedule appended to the PML Act and are all scheduled offences. That, the Directorate of Enforcement has recorded an Enforcement Case Information Report i.e. ECIR/HIU-I/01/2025 and that investigation has ensued. That the Applicant has violated the trust of the Axis Mutual Fund by sharing non-public information with the third party individuals and entities for the personal gain and enrichment. 5.5) The Enforcement Directorate is an interested and necessary party which is entitled and required to be heard when the quashing petition is filed in a predicate case. Reliance was placed on the judgment of the Hon'ble Supreme Court- (i) in the case of Vijay Mandal Choudhary v. Union of India reported in 2022 SCC Online SC 929, (ii) in the case of Directorate of Enforcement v. India Bulls Housing Finance Limited, in Criminal Appeal No. 791/2....
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....ets Management Company, the Applicant was duty bound to protect the propriety and non-public information including sensitive information and data that is not in the public domain. That, Applicant was duty bound not to share the Company's trading activities and strategy. REJOINDER 7) Mr. Nagmuthu, the learned Senior Counsel for the Applicant in the rejoinder argument submitted that:- 7.1) A penal statute has to be strictly construed and there is no room for presuming or assuming a particular fact. The fact that the Applicant is a Chief Dealer and employee of the Axis Mutual Fund cannot be disputed nor can any fault be found with the duties and responsibilities of the Applicant while acting as a Chief Dealer. 7.2) In a case of front running, if the Applicant has divulged or disclosed any non-public information, the matter would be investigated by SEBI. That, SEBI has already issued interim order cum show cause notice and the Applicant has replied to the same. That, SEBI has the expertise to investigate the violation under the SEBI Act. SEBI is the expert body and it is the SEBI who will eventually decide whether a case for initiating criminal prosecution is made out or no....
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.... misused his position by disclosing non-public information to unauthorized third parties, facilitating front running trades which were illegal trades executed in advance of the large volume trades by Axis Mutual Fund to gain unlawful profits for himself and his associates. 10) The allegations against the Applicant are in respect of serious and grave offence. Perusal of the FIR and the allegations made therein would clearly indicate that the allegations against the Applicant are serious in nature and that of a fraud played on the investors and also the securities market as a whole. To my mind, considering the allegations a strong prima facie case of "front running" is made out against the Applicant and the co-accused. The intentions of the Applicant are clear from the FIR. The allegations are serious and as a meticulously by a well thought of pre-plan and design to provide non-public information to the co-accused, his acquaintances and known persons. The allegations are of the Applicant and all persons accused acting in concert, by a plan and in conspiracy to make wrongful and undue gains for themselves and at the cost of the investors and the securities market. The securities ma....
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....ade thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees or with both. (2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with fine, which may extend to twenty-five crore rupees or with both." 14.2) Section 24A of SEBI Act reads as under:- "24A. Composition of certain offences.--Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending." 14.3) Section 26 of SEBI Act reads as under:- "26. Cognizance of offences by Courts.-- (1) No court shall take cognizance of any offence punishable under this Act or any rul....
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....tors and small shareholders or have or may have market wide impact, except those defaults where the entity makes good the losses due to the investors; iii. Failure to make the open offer (except where the entity agrees to make the open offer or if in the opinion of the Board, the open offer is not beneficial to the shareholders and / or the case is referred for adjudication); iv. Front-running, for the purpose of this circular, front running means usage of non-public information to directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change; v. Defaults relating to manipulation of net asset value or other mutual funds defaults where the actions of the asset management company (AMC)/mutual fund (MF)/sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of the Board; vi. Failure to ....
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.... [Explanation.- For the removal of doubts, it is clarified that- (i) any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company, or (ii) transactions through mule accounts for indulging in manipulative, fraudulent and unfair trade practice shall be and shall always be deemed to have been included in sub-regulation (1).] (2) Dealing in securities shall be deemed to be a [manipulative] fraudulent or an unfair trade practice if it involves 10[any of the following]:-- ....... (q) [any order in securities placed by a person, while directly or indirectly in possession of information that is not publically available, regarding a substantial impending transaction in that securities, its underlying securities or its derivative;] ......" 20) In order to consider the main argument advanced on behalf of the Applicant that, the offence of front runni....
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.... could have been filed by SEBI Board before the competent Special Court. However, instead of doing so, the police has embarked upon registration of FIR in such a case and by doing so, has travelled beyond the scope of its competence and jurisdiction". The Madhya Pradesh High Court proceeded to quash the FIR in the said case which was registered for offences under Section 406, 418, 419, 420, 109 and 120 IPC and S.6 of PID Act. The Hon'ble Supreme Court in the case of State of Madhya Pradesh v. Alka Shrivastava SLP(Crl) No. 7737/2022 has confirmed the view taken by the Madhya Pradesh High Court. 20.3) In Jitendra Kumar Keshwani v. State of U.P., Application Under Section 482 No. 27298 of 2019 dated 24th September 2024 the Allahabad High Court, in a petition seeking quashing of case for offence u/s 420,409 IPC, has observed that: "16...At the most, from the allegations as made in the FIR, there can be offence under Section 15-F of the SEBI Act... 17. For the aforesaid offences under Section 15F of the SEBI Act, Section 26 of the SEBI Act prohibits registration of the FIR for which only complaint can be filed under Section 26 of this Act, by the Board. ....
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....ly changing the lexical character and describing the same as offences under section 417 of 420 Penal Code..." 21) Considering the provisions of the SEBI Act, I find that an express legal bar is engrafted in the SEBI Act. To institute or continue the present proceedings, which are contrary to the provisions of the SEBI Act and, more particularly, the express prohibition contained in Section 26 of the SEBI Act, would be incorrect. 22) Section 26 of the SEBI Act is clear and unambiguous. The SEBI Act is a Special Act, enacted with the object to provide for the establishment of a Board to protect the interest of the investors in the securities market, to promote the development of and to regulate the securities market. SEBI is an expert body, established with the prime objective of protecting the investors and overseeing an orderly development of the securities market within the regulatory framework as provided under the SEBI Act. To initiate proceedings in contradiction of the Act, would amount to circumvention of the Special Act and its provisions. The same cannot be permitted. 23) The Securities and Exchange Board of India may pursue two streams of enforcement actions, i.e.....
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.... confidence, market integrity and impairs economic growth of the nation. Market abuse also includes manipulation of the system for personal gains. 26) In my opinion, prima facie the complaint relates to an offence of front running. In view of the allegations, the possibility of the acts of the Applicant and other co-accused adversely affecting the right of a small investor and having an adverse market impact cannot be ruled out. SEBI has already issued an interim order cum show cause notice dated 28th February 2023. The acts of the Applicant including the accused if proved are actual public wrongs or offences committed against society. The offences are directly against the interest of the society and public at large. The offence of front running, if prima facie made out clearly has an element of criminality, illegal personal gain at the cost of the public and an act done pursuant to a well planned design/ conspiracy to defeat the system and securities mechanism and is in complete disregard to the law. 27) An offence of front running if made out is a part of criminal conspiracy executed with precision, planning and design with only one objective i.e., the personal profit and p....
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....allegedly used for executing front-running transactions, was obtained from both NSE. This trade data was analyzed in comparison with 34 transactions of Axis Mutual Fund identified by Deloitte during its spike trade analysis. The analysis revealed that the suspected PAN holders executed trades immediately prior to the corresponding orders placed by Axis Mutual Fund. On the buy side, the trading pattern followed the sequence: Buy-Buy-Sell, indicating that the suspects first executed a buy order in their own trading accounts, followed by a significant buy order placed by Axis Mutual Fund, and subsequently squared off their positions at a profit after the price appreciated. On the sell side, a reverse pattern was observed: Sell - Sell - Buy, wherein the suspects initially took a sell position, which was followed by a large sell order from Axis Mutual Fund. Thereafter, the suspects covered their short positions by buying the stock at a lower price, thereby realizing gains. 11. I say that, during the course of investigation, statement of authorized person of Axis Asset Management Company (Axis AMC) Mr. Darshan Kapadia, Compliance Officer, was recorded on 14/05/2025. In addition,....
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....) I have noted that, the acts complained of by the Complainant prima facie relate to an offence of front running. Whether any other offence under the general laws i.e. IPC/BNS is made out would have to be independently considered. 33) I find that, though the FIR is registered under sections 477-A, 408, 468, 465, 420, 417, 406 and 34 and 120B of the IPC, the Investigating Agency in its Affidavit dated 8th December 2025, in paragraph 31 has stated that only offences under Section 408, 420, 120B and 34 of the Indian Penal code are made out. As regards the contention of the Applicant that, no offences under sections 408, 420, 120B and 34 of the IPC are made out or the contention that "information" cannot be equated with "property" to make out the offences under sections 408 or 420 of the IPC/BNS, this Court is not considering the said arguments at this stage, more particularly as the question of maintainability has been raised in view of the provisions of section 26 of the SEBI Act. The FIR primarily deals only with the offence of front running. To a common man, the same offence of front running may be equatable to the offence of cheating or the concept of feeling cheated. Investiga....
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....nd 34 have been made out, and that there is enough prima facie evidence and material on record to make out the offences. But when one considers the provisions of the SEBI Act, particularly Sections 24, 24A and 26 of the SEBI Act, it cannot be in doubt that the complaint, if any, in respect of the offence under the SEBI Act can only be filed by the Board. As regards the complaint of Axis Mutual Fund, it is open for them to also approach the Board if advised for an offence under the SEBI Act or file an independent complaint/FIR in accordance with law, for an independent offence, if any made out under the general law. CONCLUSION 37) Considering the aforesaid discussions, I am of the view that the correct procedure for filing the complaint in respect of an offence under the Special Act i.e. the SEBI Act is that, the complaint is filed by the Board in accordance with section 26 with the concerned Court. It is the SEBI who has to take steps to initiate the proceedings. The SEBI being authorized under the SEBI Act, is entrusted with the responsibility of regulating the market and safeguarding the investors and the security market would have the expertise to analyze the allegations f....