2010 (4) TMI 1034 - AT - Companies Law

Issues Involved:
1. Misuse of Initial Public Offer (IPO) by the issuer company.
2. Allotment of shares to non-genuine employees.
3. Unlawful gains by the allottees.
4. Violation of SEBI Regulations.
5. Attribution of fraudulent intent to the company.
6. Applicability of the "directing mind" theory.
7. Civil vs. criminal liability under SEBI Act.
8. Miscellaneous applications by the appellant and intervenors.

Detailed Analysis:

1. Misuse of Initial Public Offer (IPO) by the Issuer Company:
The issuer company misused its IPO to the detriment of genuine investors, including its employees, by allotting 98.5% of the shares reserved under the employee category to seven chosen individuals who were not genuine employees. The company came out with an IPO in December 2006, reserving 4,22,200 shares for its employees. However, 98.5% of these shares were allotted to seven persons who joined just before the IPO and left soon after.

2. Allotment of Shares to Non-Genuine Employees:
The Securities and Exchange Board of India (SEBI) found that the allottees were not genuine employees and that the company had orchestrated the scheme to enable these individuals to appropriate the employees' quota of shares. The company justified the selection and recruitment of these individuals on the grounds of business necessity, but failed to provide credible evidence of their genuine employment. The whole time member found several discrepancies, such as the absence of these individuals' names in the attendance register and payment of salaries in cash, which mitigated against their being genuine employees.

3. Unlawful Gains by the Allottees:
The seven allottees sold the shares within three days of listing on the stock exchange, making an unlawful gain of more than Rs. 2.31 crores. The whole time member concluded that there was no material on record to indicate whether the appellant company shared the ill-gotten gains, but the complicity and connivance of the company were established.

4. Violation of SEBI Regulations:
A common show cause notice was issued to the seven individuals and the appellant company for violating Regulations 3(b) and 3(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The company was found to have used a manipulative or deceptive device in connection with the issue, purchase, or sale of securities, and employed a scheme to defraud in connection with dealings in securities.

5. Attribution of Fraudulent Intent to the Company:
The appellant argued that the company, being an artificial juristic person, could not have a guilty mind and that fraudulent intent could only be attributed to responsible officers of the company. However, the Tribunal rejected this argument, stating that the theory of the "directing mind" applies primarily to criminal liability and not to civil proceedings under the SEBI Act, which are of a civil nature and do not require mens rea.

6. Applicability of the "Directing Mind" Theory:
The Tribunal noted that the theory of the "directing mind" is a criminal law doctrine developed to attribute a state of mind or mens rea of responsible officers to the corporation. However, this theory has no application in civil proceedings under the SEBI Act, where mens rea is not an essential element for imposing penalties for breach of civil obligations.

7. Civil vs. Criminal Liability under SEBI Act:
The Tribunal emphasized that civil action could be taken against a delinquent for a criminal act and that proceedings initiated by SEBI under the Act are civil in nature. It referred to the judgment of the Bombay High Court in SEBI vs. Cabot International Capital Corporation and the Supreme Court's approval of this view in Chairman, SEBI vs. Shriram Mutual Fund, stating that mens rea is not essential for imposing civil penalties under the SEBI Act and Regulations.

8. Miscellaneous Applications by the Appellant and Intervenors:
The appellant company filed an application seeking permission to disinvest shares in its subsidiary, which was rejected as it would contravene the impugned order restraining the company from dealing in securities. Another application by three shareholders to intervene was also rejected, as it appeared motivated and lacked locus standi.

Conclusion:
The appeal was dismissed with costs assessed at Rs. 1 lakh, and the Tribunal upheld the impugned order restraining the appellant from accessing the securities market and dealing in securities for seven years. The Tribunal found the appellant company guilty of violating SEBI Regulations and engaging in fraudulent practices, thereby depriving genuine investors and employees of their rightful shares.

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