2023 (5) TMI 771 - HC - SEBI

Public issue of shares - payout to the shareholders - Persons acquiring shares to make public announcement in certain cases - accused offered the public to acquire 20% of the capital of M/s. Damania Airways Limited in terms of Clause 40 B of the listing agreement of the Stock Exchange, Mumbai - non-despatch of consideration amounts to a violation of Regulation 20 - acquirers replied to the show cause notice stating inter alia that the liquidity crunch in the market caused the delay and that they had already despatched more than 70% of the consideration. HELD THAT - All procedures to the offer, including payment of consideration to the shareholders who have accepted the offer, would be completed within four weeks from the date of closure of the offer. The offer closed on 29 February 1996; Khemkas should have made the payments to the shareholders on or before 28 March 1996. the complainant has produced on record letters from the Manager of the Offer and Khemka Brothers dated 9 April 1996, 25 April 1996, 10 July 1996 and 17 August 1996 wherein it is unambiguously admitting that the acquirers, i.e. Khemka Brothers have not been able to pay the shareholders who have accepted the offer and cited liquidity crunch in the market as the reason for their failure. As has been explained above, the Regulation requires that the payout to the shareholders who have accepted the offer is to be made within four weeks from the closure of the offer. Prima facie failure on the part of the acquirer to meet the obligation amounts to a breach of Regulations 20 and 22. Section 24(1) of the SEBI Act makes it clear that any SEBI Act, Rules and Regulations breach would invite prosecution. As there was sufficient material available with the complainant, which prima facie indicates a violation of Regulations 20 and 22. Regulation 33 confers discretion on the Board having regard to the facts and circumstances of the case to investigate into the books of account or other records. Based on the report of such investigation under Regulation 36, the Board has the power to issue directions as contemplated under Regulation 39. Regulation 39 expressly saves the power of the Board to initiate criminal prosecution under Section 24 of the Act. Conjoint reading of Regulation 33, along with Regulation 39, confers discretion on the Board to initiate an investigation if such investigation appears to be necessary to the Board. In the facts of the case, there was sufficient material to demonstrate that there was sufficient material based on correspondence between the Managers of the accused and the complainant wherein the accused admitted that they have not been able to pay the shareholders who had accepted the offer. Furthermore, the accused cited the liquidity crunch in the market as the reason for their failure. Therefore, in the facts of the case, it is not necessary for the Board to lodge an investigation as per Chapter V into the violation of Regulations 20 and 22. In the absence of incontrovertible documents such as Form 32 under the Companies Act, 1932 or other material to show the applicant's resignation, the SEBI Special Judge has rightly held that the applicant has failed to make out a case for discharge. Hence, there is no merit in the criminal applications. No case is made out for quashing the complaint or charges.Both criminal applications are dismissed.

Summary

Issues Involved:
1. Legality of the order rejecting the discharge application.
2. Compliance with procedural requirements under SEBI regulations before initiating prosecution.
3. Sufficiency of evidence for initiating prosecution under Section 24 of the SEBI Act.
4. Applicant's resignation and its impact on the discharge application.

Summary:

1. Legality of the order rejecting the discharge application:

These Criminal Applications under Section 482 of the Criminal Procedure Code, 1973 call into question the legality, propriety, and correctness of the order dated 26 August 2019 passed by the learned SEBI Special Judge, City Civil & Sessions Court, Greater Bombay, on an application below Exhibit 46 in SEBI Special Case No. 183 of 2014 whereby the prayer of the applicant to discharge him from the prosecution came to be rejected.

2. Compliance with procedural requirements under SEBI regulations before initiating prosecution:

Mr. Venegaonkar, learned Advocate for the applicant, argued that the initiation of prosecution under Section 24 of the said Act was vitiated in the absence of holding an investigation under Chapter 5 of the 1994 Regulations. He contended that holding an investigation under the said Chapter is sine qua non before launching prosecution under Section 24 of the Act.

Per contra, Mr. Sancheti and Mr. Subramaniam, learned Senior Advocates, argued that there was no need to investigate Chapter 5 of the 1994 Regulations as there was overwhelming material to support the averments in the complaint, especially letters dated 9 April 1996, 25 April 1996, 10 July 1996, and 17 August 1996, indicating that the acquirers had failed to meet their obligations due to a liquidity crunch, thus breaching Regulations 20 and 22.

3. Sufficiency of evidence for initiating prosecution under Section 24 of the SEBI Act:

Prima facie, the material on record indicates that the Khemka brothers issued a letter of offer to the shareholders of M/s. Skyline NEPC Limited for acquiring shares but failed to make payments within the stipulated time, citing a liquidity crunch. The failure to meet the obligations amounts to a breach of Regulations 20 and 22. Section 24(1) of the SEBI Act makes it clear that any breach of the Act, Rules, and Regulations would invite prosecution.

The court found sufficient material available with the complainant, indicating a violation of Regulations 20 and 22, and held that Regulation 33 confers discretion on the Board to investigate, but it is not mandatory in every case. Hence, the absence of an investigation under Chapter V does not vitiate the prosecution under Section 24 of the Act.

4. Applicant's resignation and its impact on the discharge application:

The SEBI Special Judge rejected the discharge application on the ground that accused No. 3 (applicant) was unable to substantiate his contention of resignation by producing credible material on record. The applicant failed to provide incontrovertible documents such as Form 32 under the Companies Act, 1932, to prove his resignation, and thus, there were sufficient grounds to proceed against him.

The court concluded that there is no merit in the criminal applications, and no case is made out for quashing the complaint or charges.

Conclusion:

Both criminal applications are dismissed. The observations are confined to the consideration of the prayer for discharge, and the Trial Court shall decide the Special case on its own merits and in accordance with the law without being influenced by any of the observations made herein above.