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TMI Blog2014 (4) TMI 1315X X X X Extracts X X X X X X X X Extracts X X X X ..... arge of and responsible to the Company for conduct of its business or not? - As far as the appellant Managing Director of the Company, was the person primarily concerned with managing the business of the Company. Being the Managing Director, he would be involved in day-to-day business of the Company and raising funds from the investors under the Collective Investment Scheme floated by the Company. Therefore, he would certainly be a person in-charge of and responsible to the Company for conduct of its business. It can hardly be disputed that being the Managing Director and person in-charge and responsible to the Company for conduct of its business, he is vicariously liable for the contravention of the provisions of SEBI Act and the Regulations framed thereunder. Therefore, no fault can be found with his conviction. Other appellants are concerned for conviction of the appellants other than Shri P.S. Chaudhary, SEBI was required to prove not only that they were Directors of the Company at the relevant time, but also that they were the persons in charge of and responsible to the Company for conduct of its business. No evidence to this effect, however, has been led by SEBI. This is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby the appellants were convicted under Section 24 read with Section 27 of SEBI Act, 1999 and were sentenced to undergo rigorous imprisonment for one year each and to pay fine of Rs. 1 lac each or to undergo SI for six (6) months each in default. 2. Section 12 (1B) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'the Act'), which came to be inserted w.e.f. 25.1.1995, provides that no person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme (for short 'CIS') including mutual funds, unless he obtains a certificate of registration from the Securities and Exchange Board of India (for short 'SEBI) in accordance with the regulations. The proviso to the aforesaid sub-section, permits any person, sponsoring or causing to be sponsored, carrying or causing to be carried on any such fund or scheme operating in the security market immediately before 25.1.1995, for which no certificate of registration was required prior to the said date, to continue to operate till such time Regulations are made under clause (d) of sub-section (2) of Section 30. 3. The Securities and Exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhary, Mr. D.S. Thakur, Mr. S.S. Thakur, Mr. Roop Lal Kaundal, Mr. K.C. Kaundal and Mr. S.C. Mahajan. 6. SEBI examined one witness CW1 - Ms. Varsha Aggarwal and also proved documents including the letter Ex.CW1/5 which had been received from the company. No witness was examined in defence. 7. The expression 'Collective Investment Scheme' has been defined in Section 2(ba) to mean any scheme or arrangement which satisfies the conditions specified in Section 11AA. Sub-section (2) of Section 11AA provides that any scheme or arrangement made or offered by any company under which-- (i) the contributions, or payment made by the investors, by whatever name called, are pooled and utilized for the purposes of the such or arrangement; (ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement; (iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors; (iv) the investors do not have day-to-day control over the management and operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the total funds raised by the Company under its various schemes amounted to Rs. 29,16,200/- and his co-accused Mr. D.S. Thakur, Mr. K.C. Kaundal, Mr. S.S. Thakur, Mr. Roop Lal Kaundal & Mr. S.C. Mahajan were the Directors of the Company. He also admitted that the Company did not file winding up and repayment report as per CIS Regulations and also failed to comply with the directions under Section 11(B) of the SEBI Act. In reply to question No.11, he stated that the Company was ready to return monies to the investors if anyone of those approaches its Directors, admitting thereby that the Company had not refunded the dues of all the investors. In reply to question No.13 he stated that the Company had made payment in respect of 90-95 per cent of the investors. 9. The appellant Mr. S.S. Thakur also admitted that Mr. P.S. Chaudhary was the Managing Director of the Company and the letters Exhibits CW1/2, CW1/4 & CW1/5 were sent by the Company. He also admitted that along with Ex.CW1/5, the Managing Director of the Company Shri P.S. Chaudhary had filed a copy of the offer document, copy of agreements with investors, funds raised in different schemes and the names, details and backgroun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh really not necessary, a reference in this regard may be made to a judgement of the Allahabad High Court in Paramount Biotech Industries Limited Vs. Union of India 2003 LawSuit (All.) 1206 where noticing that petitioner No.1 was incorporated in 1996, and, therefore, was not carrying on business on 25.1.1995, it was held that the proviso to sub-section (1B) of Section 12 of the Act was not applicable to it and was not entitled to the benefit of the said proviso. 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. 13. Regulation 74 of the SEBI CIS Regulations, which came into force on 15.10.1999, provides that an existing CIS which is not desirous of obtaining provisional registration from the Board shall formulate a scheme of repayment to the existing investors in the manner specified in Regulation 73. Moreover, Regulation 69 provides that if prior to the date of coming into force the Regulations, any person was running an existing collective investment scheme he should apply for grant of certificate within two months from such date. Regulation 69 contains a prohibition agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant. As noted earlier, in terms of Regulation 73, the payment to the investors was to be made within three (3) months from the date of the information memorandum. This is not even the case of the appellants that the Company had actually sent information memorandum in terms of the Regulations to all its investors within two (2) months of receipt of intimation from SEBI and the said memorandum envisaged payment to the investors within three (3) months from its date. 16. It has come in the statement of Mr. P.S. Chaudhary and Mr. S.S. Thakur that the Company had made payment to 90-95 per cent of investors, but, there is no documentary proof of such payment. No investor has been produced in the witness box and no receipt or any other document evidencing such a payment was produced during trial. In any case, even as per the admission of the aforesaid two Directors there are some investors who are yet to be repaid the amount which the Company had collected from them under its CIS. By not making full payment in terms of the Regulations and the directions issued by the Chairman of SEBI, the Company contravened the provisions of the Regulations and also failed to comply with the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were contravened by the Company, they were in-charge of and responsible to the Company for conduct of its business or not. Of Course, even if they were in-charge of and responsible to the Company for conduct of its business they would not to be guilty of commission of offence if they are able to prove that the offence by the Company was committed without their knowledge or that they had exercised all due diligence to prevent the commission of such offence. If SEBI is able to prove that the offence by the Company was committed with the consent or connivance of any of the appellants or is attributable to any neglect on their part, they shall be guilty in terms of sub-section (2) of Section 27 even if they were not persons in-charge of and responsible to the Company for conduct of its business. 21. As far as the appellant Mr. P.S. Chaudhary, he being the Managing Director of the Company, was the person primarily concerned with managing the business of the Company. Being the Managing Director, he would be involved in day-to-day business of the Company and raising funds from the investors under the Collective Investment Scheme floated by the Company. Therefore, he would certainly be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um substantive sentence to ten (10) years, and to prescribe a fine up to Rs. 25.00 crore. The amendment clearly indicates the seriousness, which the Legislature attaches to such contraventions. The purpose obviously is to deter persons such as the appellants from trapping the gullible investors, by promising them returns which are unrealistic and can never be given. Any unwarranted leniency towards such persons will be highly misplaced, besides being detrimental to the larger interest of the society. Therefore, no ground made out for reducing the amount of fine imposed upon the appellant Mr. P.S. Chaudhary. The appeal filed by Mr. P.S. Chaudhary is, therefore, dismissed. He is directed to surrender forthwith before the trial court. If he does not surrender forthwith, the trial court shall take necessary steps to procure his presence and commit him to prison to undergo the sentence awarded to him. The fine imposed upon Mr. P.S. Chaudhary, unless already deposited, shall be deposited within a week. If the fine is not deposited within one (1) week, it shall be open to SEBI to take such steps as are open to it in law to recover the amount of fine. Crl. A. Nos.1029/2009, 1030/2009 & 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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