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TMI Blog2018 (1) TMI 1095X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no substance in the submissions advanced by the applicants. The obligations of the directors in listed companies are particularly onerous especially when the Board of Directors makes itself accountable for the performance of the company to shareholders and also for the production of its accounts and financial statements especially when the company is a listed company. The directors of the company or the person incharge directly or indirectly use or employ in connection with the issue, purchase or sale of any securities listed in stock exchange, any manipulative or deceptive device or contrivance in contravention of SEBI Act or the Regulations made thereunder, have necessarily to be dealt with in accordance with the provisions of SEBI Act and the Regulations which is absolutely necessary for the investors' protection and to avoid market abuse. In paragraph 33 of the said decision, it is observed that the company, though a legal entity, cannot act by itself, it can act only through its directors. The directors are expected to exercise their power on behalf of the company with utmost care, skill and diligence. For the reasons stated hereinabove, find that there is no meri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The accused nos.2 to 5 were the directors/officers of the accused no.1 company and were directly responsible for the conduct of its business; (c) Investigation was conducted by SEBI in respect of acquisition of shares of a company namely M/s.Shonkh Technologies International Limited by certain entities in excess of the threshold limits prescribed under Regulations 7 and 10 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (`SEBI SAST Regulations, 1997). The acquisition of shares of accused no.1 company was found to be in violation of the aforesaid regulations; (d) In exercise of powers under Section 15 I of SEBI Act read with Rule 3 of SEBI (Procedure for holding inquiry and imposing penalties by Adjudicating Officer), adjudicating officer was appointed to conduct the inquiry; (e) The adjudicating officer conducted the adjudication proceedings in terms of provisions of the adjudication rules and ensuring the principles of natural justice and after considering the facts and circumstances of the case, and vide order dated 22nd April 2003 imposed a penalty of ₹ 5,00,000/ on the accused. The said penalty was imposed for violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court as well as this Court in support of the prayer for discharge. The relief sought by the applicants was refused vide order dated 6th January 2018. Hence, the applicants had filed present revision applications assailing the said order. 7. Mr. Amit Desai, learned Senior Advocate, appearing for the applicant in Criminal Revision Application No.29 of 2018 submitted that the Trial Court has committed an error in passing the impugned order. It is submitted that the applicants cannot be held vicariously liable for the alleged default committed by accused no.1 company in the absence of any evidence on record. Learned counsel submitted that the show cause notice was issued in the year 2002 pertaining to alleged violations of SEBI Regulations. The said notice was issued to accused no.1 company and not to its directors/officers as they were not in charge and responsible for the day to day affairs of accused no.1 company. It is submitted that with a view to cause harassment to the applicants, they were implicated as accused by invoking Section 24(2) of SEBI Act. It is further submitted that the demand draft making part payment towards penalty was forwarded to the complainant on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the complaint with regards to the involvement of the applicants/directors as in charge and responsible to the company for conduct of business of the company as well as company, the applicants cannot be prosecuted for the said offences. Merely being directors of a company, is not sufficient to hold the directors vicariously liable for the act of company. The learned Senior Advocate also pointed out observations of the Special Court in paragraph 9 of the impugned order and submitted that the Special Court has committed an error in law by observing that the provisions under Negotiable Instruments Act and those under SEBI Act, are not analogous or synonymous. It is submitted that Section 27 of SEBI Act and Section 141 of Negotiable Instruments Act, are pari materia and there was no question of distinguishing the provisions on the basis of scope and object of the Act. It is further submitted that the complaint was filed after a period of about five years. There was no reason for initiating the prosecution belatedly. Mr.Desai places reliance on the decisions of Hon'ble Supreme Court in the case of Monaben Ketanbhai Shah and another Vs. State of Gujarat and others (2004) 7-SCC-15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises for consideration is whether there is sufficient evidence to frame a charge against the applicants for offence under Section 24(2) of SEBI Act by invoking vicarious liability under Section 27 of the SEBI Act. There was no such material and, therefore, the Special Court has committed an error in passing the impugned order. It is submitted that the Court has drawn an erroneous distinction between the stage of issuance of process and the stage under Section 227 of Cr.P.C to consider the scope of Section 27 of SEBI Act. The concept of lifting of veil resorted to by the Special Court, is not applicable in the present proceedings. Learned counsel further submitted that there is no specific averment to indicate that the applicants accused were incharge of and responsible for the conduct of the business of accused no.1 company, as well as the company. This averment is an essential requirement and must be reflected in the complaint. Without the said averment in the complaint, the requirement of Section 24 read with Section 27 of SEBI Act, cannot be said to be satisfied. It is submitted that merely stating that the accused nos.2 to 5 were the directors/ officers of the accused no.1 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the object of Negotiable Instruments Act. The Special Court failed to consider that under various enactments, there are provisions relating to vicarious liability of the officers or the directors and the judicial pronouncements enunciated by the Courts are applicable to all the Acts and there cannot be any distinction qua the prosecution under SEBI Act. The Special Court has committed an error in observing that the provisions of SEBI Act are not analogous with the provisions of Negotiable Instruments Act. It is submitted that the provisions of both Acts are pari materia and the law does not make any distinction. It is further submitted that the Special Court has committed an error in drawing an inference on the basis of adjudication order. When the complaint itself does not satisfy the requirement of law for invoking vicarious liability, there was no question of resorting to adjudication order. In any case, according to Mr.Ponda, the adjudication order does not determine that the applicants being directors, were in charge and responsible for the acts of accused no.1 company at the time of commission of offences, and are deemed to be guilty for the said offences. It is also sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complainant must be given an opportunity to lead the evidence and prove that the accused -applicants are vicariously liable for commission of offences alleged. At the stage of framing of charge, the Special Court is not expected to enter into roving inquiry and a prima facie evidence is required to proceed with framing of charge. It is submitted that merely on the ground that the words in charge of is not spelt out in the complaint, the applicants cannot be exonerated of the prosecution, as there is sufficient material to prosecute them. It is submitted that the Special Court was at the stage of Sections 226 and 227 of Cr.P.C.. The Court is required to see the complaint and all the documents relied upon by the complainant to come to the conclusion that the charge is required tobe framed. It is submitted that the annexures to the complaint were sufficient to frame the charge and, therefore, there is no error in the order passed by the Special Court. It is submitted that the accused were tried for offence under Section 24(2) of SEBI Act for not complying with the order of the Adjudicating Authority. The investigation conducted by the adjudicating authority shows the involvement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s.Shonkh Technologies International Limited and that they are desirous of applying for consent order offered by SEBI and requested for keeping in abeyance the prosecution and provide them two weeks time to file consent terms application with SEBI. It is, therefore, submitted that there is sufficient evidence to prosecute the applicants. It was submitted that the applications are devoid of any substance and the same may be dismissed. 12. Ms. Rastogi also relied upon following decisions : (i) Standard Chartered Bank Vs. State of Maharashtra and others (2016) 6-SCC-62; (ii) Radheshyam Surajmal Khandelwal and another Vs. SEBI and another Criminal Writ Petition No.4223/2016, decided on 20th April 2017 by Bombay High Court; (iii) N.Narayanan Vs. Adjudicating Officer, SEBI Civil Appeal Nos.4112-4113 of 2013 decided on 26th April 2013 by Supreme Court of India 13. Perused the complaint, it's annexures, the impugned order and other documents which are part of the record. The complaint is filed by respondent no.2 SEBI alleging offences under Section 26 read with Sections 24(2) and 27 of SEBI Act. The applicants are impleaded as accused. The accused no.1 is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Trial Court were about to commence, the applicants filed applications for discharge, which came to be rejected vide common order dated 6th January 2018. The Special Court has refused to discharge the applicants accused for the reasons stated in the impugned order. In the averments made in the complaint, the words in charge of are not specifically stated. In view of that, the learned counsel for applicants have vehemently submitted that the complaint does not satisfy the requirement of Section 27 of SEBI Act. Section 27 of SEBI Act reads as follows : 27. Offences by companies. (1) Where an offence under this Act has been committed by a company, every person who at the time the offence was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly : Provided that nothing contained in this sub section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to preve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he documents on record. Apart from the contents of the complaint, there was additional material before the Court to issue summons to the accused. Similarly, while framing the charge, apart from the contents of the complaint, the documents in the nature of decision taken by the adjudicating officer, which is foundation for the initiation of proceedings, cannot be overlooked. It is not the case of the applicants that there was absolutely no assertion in the complaint qua vicarious liability of the applicants accused. The complaint will have to be read as a whole and in conjunction with the adjudication order. In the complaint it was stated that the accused nos.2 to 5 were the directors/officers of accused no.1 company and were directly responsible for the conduct of its business. It is also pertinent to note that in paragraph 13 it has been stated that the accused are intentionally avoiding payment of penalty amount imposed on them as stated in the complaint. Paragraph 14 of the complaint also states that failure of the accused in making payment of the penalty amount, is a clear and deliberate violation of the orders of adjudicating officer by all accused persons, who deserve to be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the violations committed by the entities mentioned in the annexure annexed to the appointment order, which mentions the names of companies and the names of directors including the accused nos.1 company and accused nos.2 to 5 (as directors/officers of accused no.1). The adjudicating officer thereafter conducted an inquiry and passed an order on 22nd April 2003. On perusal of the said order, it is apparent that the accused no.1 company was charged with the allegation that the said entity is acting in concert with other entities. It was further observed that the allegation against the entities are with regards to violation of Regulation 7(1) and Regulation 10 of SEBI (SAST) Regulations 1997 and that the entities have been treated as the persons acting in concert for the purposes of acquisition of shares of the target company as per show cause notice. The gravamen of the inquiry indicates that accused no.1 company had acquired 7 lakh shares of the target company in the preferential allotment. The names of the directors of accused no.1 company (applicants herein) are also reflected in the adjudicating order which clearly indicate the involvement of the accused no.1 company and its dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on available with SEBI, the applicants are the directors and responsible for the affairs of the company and are liable under Section 27 of SEBI Act. However, in spite of the said communication, the penalty was not paid and an attempt was made to make part payment subsequently, which was not accepted by the complainant SEBI. 21. Taking into consideration the aforesaid aspects, it is clear that apart from the assertions in the complaint, there is supportive material available in the form of adjudication order passed by the adjudicating officer, which is the basis of complaint u/s 24(2) of SEBI Act. It is true that the provisions u/s 141 of Negotiable Instruments Act and Section 27 of SEBI Act are pari materia, however, as stated above, there were averments in the complaint which attributes the liability to the applicants accused being responsible to the conduct of company and intentions/malice is also attributed to the applicantsaccused and reading the averments in the complaint together with document in the form of adjudication order, it cannot be said that the applicants cannot be prosecuted by invoking Section 27 of SEBI Act. 22. Careful reading of the adjudication order dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of SEBI (SAST) Regulations, they are deemed to be persons acting in concert and nothing contrary is shown. Even otherwise, in view of the acquisition of shares in the preferential allotment as on a common date, it can be concluded that they are persons acting in concert for acquiring the shares of the target company even in terms of Regulation 2(3)(1). The concept persons acting in concert (PAC) is action oriented. What is to be seen is the effect of their actions and whether having regard to the attendant circumstances. It can be reasonably concluded that they are acting in concert for a common objective. Acting in concert is something about which actual evidence is normally difficult to come. The Hon'ble Supreme Court in the case of CIT Vs. East Coast Commercial Co. Ltd. AIR 1967 SC 768 (Kedia Family case) had dealt with the question in the context of Section 23A of the Indian Income Tax Act, 1922 wherein the question was whether Kedia Family had acted in concert to control the affairs of the concerned company. In the facts of that case, there was no evidence of any overt act showing that they were acting in concert and thereby constituted and acted as a block. In pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reality of the transaction. From the juristic point of view the company is the legal personality distinct from the members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. The adjudicating officer has power to disregard the power of corporate entity (i.e. accused no.1) if it is used for committing violation of Regulation 7(1), 7(2) of SEBI (SAST) Regulations, 1997. 24. The applicants have vehemently criticised the order passed by the Special Court with regards to the observations vis a vis lifting of corporate veil, as stated hereinabove. It was argued that the concept of lifting of corporate veil has been erroneously applied by the Special Court in the present case. In paragraph 15, however, the Special Court has observed that the principle of lifting corporate veil is referred to because in the adjudication order, the applicants were mentioned as directors of accused no.1. They are family members and formed many companies and also acted as directors of those companies, as observed in the adjudication order. Analysing the observations made by the Special Court in relation to lifting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons for so doing. The provision is followed by Section 228 of Cr.P.C, which relates to framing of charge. The said provision contemplates that after consideration and hearing as stipulated under Section 227 of Cr.P.C; if the Court is of the opinion that there is ground for presuming that the accused has committed an offence, the Court shall frame in writing the charge against the accused. While framing the charge, the Court is empowered to look into the documents submitted therewith and after hearing the accused and the prosecution, the Judge considers that there is no sufficient ground for proceeding against the accused, he shall discharge the accused and record his reasons for the same. The adjudication order dated 22nd April 2003 can be looked into while considering the application for discharge and it would be within the parameters of Section 227 of Cr.P.C to do so. The Special Court has, therefore, considered the adjudication order, the findings given in the said order and thereafter came to the conclusion that there is sufficient ground for proceeding against the accused and thereby rightly refused to discharge the accused. I do not find any illegality in the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istrate of the First Class and direct the accused to appear before the Chief Judicial Magistrate, or, as the case may be, the Judicial Magistrate of the First Class, on such date as he deems fit, and thereupon such Magistrate shall try the offence in accordance with the procedure for the trial of warrant cases instituted on a police report; (b) is exclusively triable by the Court, he shall frame in writing a charge against the accused. (2) Where the Judge frames any charge under clause (b) of sub section (1), the charge shall be read and explained to the accused, and the accused shall be asked whether he pleads guilty of the offence charged or claims to be tried. After analysing the provisions of Sections 227 and 228 of Cr.P.C, it was observed that if the Court is of the opinion that there is ground for presuming that the accused has committed an offfice, is free to direct the accused to appear and try the offence in accordance with the procedure after framing of charge in writing. In paragraph 21 of the said judgment, the Supreme Court has summarised the principles which emerge qua the scope of Sections 227 and 228 of Cr.P.C. Paragraph 21 of the said decision reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this stage, he is not to see whether the trial will end in conviction or acquittal. 28. In the light of the principles enunciated in the aforesaid decision as well as several other decisions of Hon'ble Supreme Court, the documents, record and averments in the complaint, justify the rejection of the application of discharge of applicants. 29. In the case of Monaben Ketanbhai Shah and another (supra), the Hon'ble Supreme Court has held that the primary responsibility is on the complainant to make necessary averments in the complaint and thereupon the fact that when the offence was committed the accused was in charge and responsible for the conduct of business. The obligation of the accused to prove the contrary arises thereafter. In the case of S.M.S. Pharmaceuticals Limited (supra), it was observed by Supreme Court that in a case of dishonour of cheque u/s 138 of Negotiable Instruments Act, in case of offence by a company, it is necessary to aver that at the time when the offence was committed, the person accused was in charge of and responsible for the conduct of the business of company. When this averment being made in the complaint, the requirement of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the prosecution can at any stage produce evidence which satisfies the Court that other accused or those who have not been arraigned as accused against whom proceedings have been quashes, have also committed an offence. The Court can take cognizance against them and try them along with other accused. The observations were made in connection with Section 319 of Cr.P.C. Relying on the said decision, it was argued by Mr.Ponda that the Court can proceed against the accused, if any evidence is found against them at a latter stage in exercise of powers u/s 319 of Cr.P.C, however, presently there is no evidence to proceed against the accused. 31. In the case of State of Karnataka (supra), the Hon'ble Supreme Court observed that a partner of a firm is liable to be convicted for an offence committed by the firm if he was in charge of and was responsible to the firm for the conduct of the business of the firm. In the decision of this Court in case of Shri S.F.J.Vaz, Manager of M/s.Zuari Industries Limited (supra), heavily relied upon by learned counsel for the applicants, the Court had considered the scope of Section 207 of Cr.P.C. The Court had distinguished between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 24(2) of the SEBI Act. The said document forms part of the complaint and certainly can be looked into by the Court. In V.M. Shah (supra), the Supreme Court has held that in case of conflicting findings of Civil and Criminal Courts, the findings recorded by the Civil Court prevails, unless reversed by the appellate Court after duly considering the same and weighing the evidence afresh. For the reasons stated above, even this decision cannot be used against the prosecution. 33. In another decision relied upon by Mr.Ponda in case of Hardeep Singh Vs. State of Punjab and others (supra), the Supreme Court has observed that there are series of cases wherein this Court while dealing with the provisions of Sections 227, 228, 239, 240, 241 and 242 of Cr.P.C has consistently held that the Court at the stage of framing of charge has to apply its mind to the question whether or not there is any ground for presuming the commission of an offence by the accused. The Court has to see as to whether the material brought on record reasonably connects the accused with the offence. Nothing more is required to be inquired into. In the same decision, however, the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuments and in the present case the adjudication order was part of the complaint and the basis of the complaint, violation of which has resulted into prosecution and commission of offence u/s 24(2) of SEBI Act. The said order depicts role of the applicants which was inquired into along with accused no.1 company and, therefore, there was sufficient grounds to proceed against the applicants and no case for discharge was made out. Apart from that, the Supreme Court and this Court in the aforesaid decisions had considered the fact that there was no basic averments in the complaint constituting the vicarious liability and in the absence of the basic averments, the Court ought not to have issued process against the accused. In the present case, it is noted that the words in charge of are missing in the complaint, however, reading the existing averments in the complaint read with adjudication order, prima facie makes out a case against the applicants and they are not entitled for the discharge. It is also pertinent to note that in paragraph 13 of the complaint it is submitted that the accused are intentionally avoiding payment of penalty amount. The said allegation is attributed to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole, are not sufficient to show that at the relevant point of time, the accused are not alleged to be the persons in charge of the affairs of the company. In the case of K.P.G. Nair Vs. Jindal Menthol India Limited (2001) 10-SCC-218, in paragraph 9, it was observed that the words of Section 141(1) of Negotiable Instruments Act need not be incorporated in a complaint as magic words, but it cannot also be disputed that substance of the allegations read as a whole, should answer and fulfil the requirements of the ingredients of the said provision for being proceeded against for an offence which he is alleged to have committed. 40. Learned counsel for respondent no.2 SEBI had relied upon the decision in case of N.Narayanan (supra) of Hon'ble Supreme Court, which deals with the scope and object of SEBI Act. It was observed that the obligations of the directors in listed companies are particularly onerous especially when the Board of Directors makes itself accountable for the performance of the company to shareholders and also for the production of its accounts and financial statements especially when the company is a listed company. The directors of the company or the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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