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TMI Blog2010 (4) TMI 1034X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees. 98.5% of these shares were allotted to seven persons who, on the appellant's own showing, joined just before the opening of the public offer and left soon thereafter. The details of the allotment made to these persons including the duration of their employment is shown in the chart below:- Seven Persons No.of Shares Duration of 'Employment' (Months) Applied Allotted Mr. Kishore S. Jain 50,040 48,837 4+ Mr. Jayantilal R. Jain 48,000 46,846 5+ Mr. Shripal J. Shah 18,000 17,567 5+ Mr. Rajesh Prakashchandra Jain 22,020 21,490 5 Mr. Pravin Kumar Devichand Jain 48,000 46,846 5+ Mr. Dheeraj Jain 1,20,000 1,17,115 5+ Mr. Sanjay Jhabak 1,20,000 1,17,115 5+ Total 4,26,060 4,15,816 These allottees sold the shares within 3 days of their listing on the stock exchange(s) and made an unlawful gain of more than ₹ 2.31 crores. 2. The Securities and Exchange Board of India (for short the Board) on investigations found that the allottees were not the genuine employees of the company and that the company had orchestrated the whole scheme to enable the aforesaid persons to appropriate the employees' quota of shares. It further found that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the record to indicate whether the appellant company also shared the ill-gotten gains. Accordingly, by his order dated November 10, 2009 the appellant has been restrained from accessing the securities market and from dealing in securities in any manner whatsoever for a period of 7 years. It is against this order that the present appeal has been filed. 3. We have heard the learned senior counsel on both sides and they have taken us through the records of the case including the impugned order. The fact that the appellant company came out with an IPO in December, 2006 and allotted, among others, 4,15,816 shares to the aforesaid seven persons referred to in the chart above is not disputed. What is asserted by the appellant in the memorandum of appeal and also by its learned senior counsel at the time of arguments is that the seven allottees were its employees and they had been selected and recruited taking into account the best interests of the company with a view to accomplish the key tasks at a fast pace. This fact is seriously disputed by the learned senior counsel for the respondent Board. 4. The primary question that arises for our consideration is whether the allottees wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h this background, would any one leave Mumbai and go to Bangalore to take up a traveling job for a mere paltry salary ranging from ₹ 7,500/- to ₹ 25,000/- per month. The answer has to be in the negative. Interestingly, the applications by some of them for obtaining a job indicate that they were desperate in getting one. Some of them applied for "any office job" or "any suitable job". Again, it is the appellant's own case that each one of the allottees was in the employment from July/August 2006 to December 2006/early January 2007. They all joined a few months before the IPO and left immediately after the issue closed. As per the service rules of the company, every employee is put on probation for a period of 6 months but these allottees were kept on probation for a period of 3 months only to ensure that they become eligible for allotment. It may be mentioned that only permanent employees were eligible to apply for shares in the employee category. They were all allowed to resign and go without serving one months' notice. The jobs advertised by the company and the ones for which the allottees applied were totally different in most of the cases. In this background, the who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mind of the responsible officer could be the mind of the corporate entity for which the latter could be penalized. In short, the learned senior counsel is pressing into service the theory of the "directing mind". The argument is that since the Board has failed to identify the 'directing mind" of the appellant company or the person(s) who had performed the fraudulent act of allotting shares to the non- employees, the fraudulent action or the guilty state of mind could not be attributed to the company and the same is not liable. He relied upon a Division Bench judgment of the Bombay High Court in Esso Standard Inc. vs Uddharam Bhagwandas Japanwalla (1975) 45 Comp Cas 16 and a decision of the Supreme Court in Asstt. Commissioner vs. Velliappa Textiles Ltd. (2003) 11 SCC 405. We have considered very carefully this argument of the learned senior counsel and regret our inability to accept the same. 6. No such objection was raised by the appellant either in its reply to the show cause notice or even before the whole time member at the time of personal hearing. In any case, the theory of the directing mind is a criminal law doctrine which has been developed to attribute to a corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligations. A Division Bench of the Bombay High Court in SEBI vs. Cabot International Capital Corporation [2004] 51 SCL 307 while dealing with the provisions of the Act took the same view when it made the following observations: "25. Thus, the following extracted principles are summarized. (A) Mens rea is an essential or sine qua non for criminal offence. (B) Strait jacket formula of mens rea cannot be blindly followed in each and every case. Scheme of particular statute may be diluted in a given case. (C) If, from the scheme, object and words used in the statute, it appears that the proceedings for imposition of the penalty are adjudicatory in nature, in contra- distinction to criminal or quasi criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word "penalty" by itself will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravenor and the delinquency. (D) Mens rea is not essential element for imposing penalty for breach of civil oblig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reach of civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the Regulations would immediately attract the levy of penalty irrespective of the fact whether contravention must be made by the defaulter with guilty intention or not. We also further held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain whether such a violation was intentional or not." Even though the judgment of the Supreme Court in Shriram Mutual Fund's case (supra) was dealing with chapter VIA of the Act, the ratio laid down and the observations made therein apply to the all the provisions of the Act and the Regulations. Section 24 of the Act makes the contravention of any of its provisions or the Regulations a criminal offence also and the wrong doer could be punished by the criminal court as well. 8. There is yet another reason why the theory of the 'directing mind' will not apply to the case before us. This theory or any other doctrine by which liability is sought to be imposed vicariously upon a corporation for the acts done by its employees would apply only when the corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellip;………………………… (c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include- (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent; (7) deceptive behaviour by a person depriving another of informed consent or full participation; (8) a false statement made without reasonable ground for believing it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer these shares to its shareholders without consideration. In other words, the appellant company wants to disinvest a sizeable part of its portfolio. The prayer made in the application is that this Tribunal should hold that the aforesaid disinvestment by the appellant company is not barred / restricted by the impugned order. We are unable to grant this prayer. For the reprehensible conduct of the appellant, it has, by the impugned order, been restrained from "dealing in securities in any manner whatsoever or accessing the securities market directly or indirectly for a period of 7 years". Transfer of PSPIL shares by the appellant to its shareholders would tantamount to "dealing in securities" and, therefore, in view of the bar contained in the impugned order, it cannot be allowed to do so since we are upholding that order. 11. The other application filed by the three shareholders need not detain us for long. It was filed at the closing stage of the arguments and that too in court. This application deserves to be rejected because it appears to us to be motivated. The applicants in the garb of protecting the shareholders' interests are in fact wanting to protect the appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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