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2014 (2) TMI 1437 - HC - SEBICompany collected funds amounts to a Collective Investment Scheme (CIS) - vicarious liability of the appellants for the contraventions by the Company - whether the scheme under which a sum was collected by the Company from various investors amounts to CIS or not? - HELD THAT - A perusal of the brochure issued by the Company clearly shows that the Schemes floated by the Company were meant for mobilization of funds by way of contribution of public at large and the corpus was sought to be invested in property with a view to share the benefits arising out of deployment of such common corpus. Therefore the Teak Unit Schemes of the Company were in fact CIS. The Company could not have come out with such a scheme without obtaining a certificate of registration 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. 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. Company has rightly been convicted for contravening sub-section (1B) of Section 12 of SEBI Act by collecting money from the investors under its CIS schemes without registration with SEBI and it also committed contravention of the provisions of Section 24 of the Act by not complying with the Regulations framed by SEBI and the directions issued by the Chairman. Therefore no fault can be found with the conviction of the Company. Vicarious liability of the appellants - Persons as 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. 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 Director Manager Secretary or officer of the Company. SEBI fairly conceded during the course of arguments that the charge against them could not be established during the course of trial. Mr. Yashwant Jain and Mr. Sachin Gupta therefore liable to be acquitted. As regards the sentence the appellants Pankaj Jain and Deepak Jain have been sentenced to undergo imprisonment for three months each appellants Pankaj Jain and Deepak Jain are directed to surrender forthwith before the trial court in order to undergo the sentence awarded to them. The appellants Pankaj Jain and Deepak Jain shall surrender forthwith. The trial court shall take necessary steps to procure their presence and commit them to prison to undergo the sentence awarded to them.
Issues Involved:
1. Whether the scheme under which the Company collected funds amounts to a Collective Investment Scheme (CIS). 2. Whether the Company contravened Section 12(1B) of the SEBI Act by not obtaining a certificate of registration. 3. Whether the Company complied with SEBI's Regulations and directions regarding the repayment to investors. 4. The vicarious liability of the appellants for the contraventions by the Company. 5. The appropriateness of the sentence awarded to the appellants. Issue-wise Detailed Analysis: 1. Collective Investment Scheme (CIS): The Court examined whether the Company's scheme qualifies as a CIS under Section 2(ba) and Section 11AA of the SEBI Act. The scheme involved pooling contributions from investors for profit, with the investors lacking day-to-day control over the management, thus satisfying the CIS criteria. The Court referenced the understanding of CIS prior to the statutory definition, noting that such schemes were generally understood to involve the mobilization of public funds for investment in property, with shared benefits. The Court concluded that the Company's Teak Unit Schemes were indeed CIS. 2. Contravention of Section 12(1B) of the SEBI Act: The Company was incorporated after the insertion of Section 12(1B), which prohibits operating a CIS without SEBI registration. The Company did not apply for such registration, contravening the Act. The proviso to Section 12(1B) did not apply as the Company was not operating before the cut-off date of 25.1.1995. The Court found the Company guilty of violating this provision, which is punishable under Section 24 of the Act. 3. Compliance with SEBI Regulations and Directions: The SEBI Regulations, effective from 15.10.1999, required the Company to either seek registration or repay investors. The Company failed to submit an information memorandum to investors and did not complete repayments as directed by SEBI. Despite several communications from SEBI, the Company did not comply, and substantial amounts remained unpaid to investors. The Court noted the lack of evidence for repayments and the failure to follow SEBI's procedural requirements, confirming the Company's non-compliance with SEBI's directives and regulations. 4. Vicarious Liability of Appellants: The Court assessed whether the appellants, as Directors, were in charge of and responsible for the Company's business conduct. Pankaj Jain and Deepak Jain, as whole-time Directors, were actively involved in the Company's operations and corresponded with SEBI regarding the CIS. They failed to demonstrate that the contraventions occurred without their knowledge or that they exercised due diligence to prevent them. Thus, they were held vicariously liable. In contrast, Yashwant Jain and Sachin Gupta, who were not Directors and lacked evidence of involvement in the Company's management, were acquitted due to insufficient evidence of their responsibility or involvement in the contraventions. 5. Appropriateness of Sentence: The Court upheld the three-month imprisonment and fines imposed on Pankaj Jain and Deepak Jain, considering the seriousness of the contraventions and the legislative intent to deter such violations. The Court found no grounds for reducing the sentence, emphasizing the need for accountability and the lack of credible evidence of repayments to investors. The sentence was deemed appropriate to reflect the gravity of misleading investors and failing to comply with SEBI's regulations. Conclusion: The appeals by Pankaj Jain and Deepak Jain were dismissed, affirming their conviction and sentence. The appeals by Yashwant Jain and Sachin Gupta were allowed, resulting in their acquittal. The Company was directed to deposit the outstanding amount raised from investors, reinforcing the importance of compliance with regulatory frameworks in protecting investor interests.
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