Crl.A. 220/2010 Page 1 of 27 * IN THE HIGH COURT OF DELHI AT NEW DELHI + Crl. Appeal No. 220/2010 % Reserved on: 27th January, 2011 Decided on: 8th February, 2011 ANKUR FOREST & PROJECT DEVELOPMENT INDIA LTD. & ORS ..... Petitioner Through: Mr. Amit Kumar & Ms. Nisha Neel, Advocates versus SECURITY EXCHANGE BOARD OF INDIA ..... Respondent Through: Mr. Sanjay Mann and Mr. Rakesh Singh, Advocates Coram: HON'BLE MS. JUSTICE MUKTA GUPTA 1. Whether the Reporters of local papers may be allowed to see the judgment? Not necessary 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? MUKTA GUPTA, J. 1. By the present appeal the Appellants i.e. Appellant No.1 the company and Appellant Nos. 2 to 5 its Directors, challenge the impugned judgment dated 29th January, 2010 convicting them for offences punishable under Section 24(1) read with Section 27 of the Securities and Exchange Board of India Act, 1992 (in short referred to as the „Act‟) and the order on sentence dated 4th February, 2010 whereby Appellant Nos. 2 to 5 have been directed to Crl.A. 220/2010 Page 2 of 27 undergo Rigorous Imprisonment for a period of one year and a fine of Rupees Five lakhs each to all the Appellants and in default of payment of fine to further undergo simple imprisonment for a period of six months to Appellant Nos. 2 to 5. 2. Briefly, the facts of the case are that the Securities and Exchange Board of India (in short „SEBI‟), a statutory body established under the provisions of the Act filed a complaint dated 21st December, 2002 against the Appellants and Sh. Hemant Sharma one more Director of the Appellant No.1 who was declared a proclaimed offender during the trial. According to the complaint, the Appellant floated a Collective Investment Scheme (in short C.I.S.) and collected a sum of `0.35/- crores from the general public. SEBI had notified the Securities and Exchange Board of India (Collective Investment Scheme) Regulations, 1999 (in short „the Regulations‟) which were not complied with by the Appellants. The SEBI filed a complaint against the Appellants for violation of Sections 11B, 12(1B) of the Act and Regulations 5(1), 68(1), 68(2), 73 & 74 punishable under Sections 24(1) read with Sec. 27 of the Act, as the Appellant Nos. 2 to 5 and Hemant Sharma being the Directors of the Appellant No. 1 were responsible for the conduct of its business. 3. In the complaint before the learned Metropolitan Magistrate SEBI examined CW 1 Ms. Versha Aggarwal, Assistant General Manager and CW2 Crl.A. 220/2010 Page 3 of 27 Ms. Jyoti Jindgar, General Manager. CW1 inter alia deposed and exhibited the authorization to pursue the complaint vide delegation of power, the public notice dated 18th December, 1997, the issuance of bonds that is the agro bonds, plantation bonds floated by the Appellant No.1 which all came within the ambit of C.I.S. and thus the provisions of Act. As the Appellant no.1 had floated these C.I.S. schemes, it was statutorily bound to comply with the provisions of the Regulations which it failed to do and thus was liable to be punished under Section 24 of the Act and Appellant Nos. 2 to 5, under Sec. 24 read with Section 27 of the Act. CW2 Ms. Jyoti deposed and exhibited various public notices and stated that the Appellant No.1 did not get the scheme registered with the SEBI prior to mobilization of the fund and that till date i.e. till the date of her evidence, the Appellant No.1 had neither applied for registration nor any provisional registration was granted to it. The Appellant No.1 and its Directors did not even file the winding up and re- payment reports despite being intimated regarding the statutory obligations. After recording of the statements of the accused, they led their defence evidence by examining Sh. Tarsem Saini, Appellant No.2 as defence witness, who in his cross-examination admitted having not complied with the statutory provisions. Crl.A. 220/2010 Page 4 of 27 4. Learned counsel for the Appellant contends that the Appellant i.e. the Company and its Directors could not be prosecuted as the Company itself was wound up on 5th July, 2001 pursuant to the order passed by the Hon‟ble Punjab and Haryana High Court and the complaint was filed on 21st December, 2002 when the Company which was a juristic person was no more in existence and its Directors also had lost their identity. Despite Section 11C of the Act, SEBI conducted no investigation before filing of the complaint and prosecuted the Appellant only on the basis of documents supplied by them. Though the complaint is dated 21st December, 2002 however, the Appellants were summoned on 2nd December 2002 i.e., prior to the filing of the complaint, as observed by the learned trial court in para 2 of the judgment. The documents alleged to be sent by the company do not bear the signature of any of the Appellants. The complainant has produced no direct evidence nor any direct witness to the offence. Moreover, no role of commission of any offence has been attributed to any of the Appellants. In the cross- examination, PW1 has admitted that she did not know who was actually running the Company nor that the Company was directed to be wound up on 5th July, 2001. The learned Trial Court erroneously came to the conclusion that the offence continued, however, the said offence could not have continued once the Company was wound up. Notices sent by the SEBI were Crl.A. 220/2010 Page 5 of 27 duly replied vide Ex. CW1/1 wherein it was specifically stated that the Company was desirous of taking the benefit of the provisions of Section 12(1B) of the SEBI Act. It is stated that a document cannot be read in piecemeal and it should be read as a whole. The Respondent SEBI relies on the undertaking to ensure compliance as stated in the reply dated 28th July, 1998 but does not take into account the first two sub-paragraphs where it is stated that they have not floated any C.I.S. subsequent to the public notice issued on 18th December, 1997 and they are not mobilizing any further funds under the existing schemes. It is contended that the provision was applicable to the existing collective investment schemes only. The scheme of the Appellant being an old one and no current funds being mobilized, the public notice did not relate to the Appellant. It is thus prayed that the learned Trial Court erroneously convicted the Appellants hence the appeal be allowed and the impugned order be set aside. In the alternative, the quantum of sentence is excessive as in the event of non-deposition of fine i.e. `5,00,000/- per Appellant, Appellant Nos. 2 to 5 have been directed to undergo imprisonment for a period of six months. 5. Learned counsel for the Respondent contends that the Regulation 68, 73 & 74 came into force on the 15th October, 1999 and under the Regulations it was clearly provided that a person can be prosecuted if he is running an Crl.A. 220/2010 Page 6 of 27 existing collective investment scheme. To comply with Regulation 71, the grounds for winding up of the same existed before the learned Trial Court. The winding up of the Company under the Companies Act is different from the winding up of the C.I.S. as contemplated under Regulation 73. The provision of Section 11C of the Act conferring powers of investigation on SEBI came into effect on 29th October, 2002 whereas the Company was directed to be wound up on the 15th July, 2001, thus no investigation could have been carried out by the SEBI in terms of Section 11C of the Act. The directions in terms of Section 11B of the Act were also passed on 7th November, 2000. The violation of Regulation 73 is continuing in nature till the amount is not paid back to the investors and the scheme is not wound up in terms of Regulation 73. Reliance is placed on Vishnu Prakash Vajpayee vs. SEBI, MANU/DE/0235/2010 to contend that the contravention of the provision of the Act by not refunding money collected by it from the persons who had invested the money in its collective investment schemes is a continuing offence till the time company complies with the Regulations and the directions issued by SEBI by refunding the money to the investors. Reliance is also placed on Sheoratan Aggarwal and another vs. State of Madhya Pradesh 1984 (4) SCC 352 to contend that along with company its Crl.A. 220/2010 Page 7 of 27 Directors can also be convicted. It is thus prayed that the appeal be dismissed being devoid of any merit. 6. I have heard learned counsel for the parties and perused the record. Before proceeding with the evidence adduced on record, it would be relevant to note the provisions of the Act. Section 24 of the Act provides that, if any, person contravenes or attempt to contravenes or abets the contravention of the provisions of this Act or of any rules and regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty five crore rupees or with both. Prior to the amendment brought about on 29th October, 2002 the imprisonment was for one year or with fine, or with both and the amount of fine to be imposed was not spelt out. However, with effect from 29th October, 2002 the imprisonment has been provided for a term which may extend to ten years or with fine which may extend to `25 crores or with both. Since in the present case, the offence was committed prior to the amendment, the sentence provided would be one year imprisonment or with fine or with both. 7. Under Section 27 of the Act, in cases of offences by companies, every person who at the time when the offence was committed 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. Crl.A. 220/2010 Page 8 of 27 As per Section 12(1B) of the Act, 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 including mutual funds, unless he obtains a certificate of registration from the SEBI in accordance with the Regulations. The proviso to this sub-Section provides that any person sponsoring or cause to be sponsored, carrying or causing to be carried on any venture capital fund or Collective Investment Scheme operating in the securities market immediately before commencement of the Securities Law (Amendment) Act, 1995 for which no certificate of registration was required prior to such commencement, may continue to operate till such time regulations are made under Clause (b) sub-Section (2) of Section 30. Regulations 68(1) provides that any person who has been operating a C.I.S. at the time of commencement of these regulations, shall be deemed to be an existing CIS and shall also comply with the provisions of this chapter. Sub-clause (2) directs the applicant to give a written undertaking to the SEBI to comply with the conditions specified in Regulation (5). In terms of sub-Regulation (3) of Regulation 71 the applicant who has been considered eligible for the grant of provisional registration by the SEBI shall pay provisional registration fee as per second schedule. Sub-Regulation (4) of Regulation 71 states that an applicant who after grant of provisional registration fails to comply with the Crl.A. 220/2010 Page 9 of 27 conditions as specified in sub-Regulation (1) and Regulation (9) shall not be considered eligible for the grant of certificate for registration under Regulation 10 and shall wind up the scheme in the manner specified in Regulation 73. Regulation 72 provides for grant of registration certificate to an existing C.I.S. which satisfies the SEBI that the requirements specified in Regulation 9 and the conditions specified under Regulation 71 have been fulfilled, upon the payment of registration fees as specified in para 2 of 2nd schedule and on such terms and conditions as may be specified by the SEBI. Sub-Regulation (2) of Regulation 72 permits the SEBI to grant the certificate to an existing CIS to float new schemes on such terms and conditions as may be specified by the Board. 8. Regulation 73 provides for a complete mechanism for the manner of re- payment and winding up of the existing collective investment scheme. Regulation 73 & 74 states as under: “Manner of repayment and winding up 73. (1) An existing collective investment scheme which: (a) has failed to make an application for registration to the Board; or (b) has not been granted provisional registration by the Board; or (c) having obtained provisional registration fails to comply with the provisions of regulation 71; shall wind up the existing scheme. Crl.A. 220/2010 Page 10 of 27 (2) The existing Collective Investment Scheme to be wound up under sub-regulation (1) shall send an information memorandum to the investors who have subscribed to the schemes, within two months from the date of receipt of intimation from the Board, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined. (3) The information memorandum referred to in sub- regulation (2) shall be dated and signed by all the directors of the scheme. (4) The Board may specify such other disclosures to be made in the information memorandum, as it deems fit. (5) The information memorandum shall be sent to the investors within one week from the date of the information memorandum. (6) The information memorandum shall explicitly state that investors desirous of continuing with the scheme shall have to give a positive consent within one month from the date of the information memorandum to continue with the scheme. (7) The investors who give positive consent under sub- regulation (6) shall continue with the scheme at their risk and responsibility: Provided that if the positive consent to continue with the scheme, is received from only twenty-five per cent or less of the total number of existing investors, the scheme shall be wound up. (8) The payment to the investors shall be made within three months of the date of the information memorandum. Crl.A. 220/2010 Page 11 of 27 (9) On completion of the winding up, the existing collective investment scheme shall file with the Board such reports, as may be specified by the Board. Existing scheme not desirous of obtaining registration to repay 74. An existing collective investment scheme which is not desirous of obtaining provisional registration from the Board shall formulate a scheme of repayment and make such repayment to the existing investors in the manner specified in regulation 73.” 9. Ms. Versha Aggarwal, Manager, SEBI who appeared as CW1 has deposed that she was working as Manager, SEBI and was authorized to continue this complaint by the delegation of power signed by the Chairman, SEBI. Mr. Sarad who had filed the complaint was authorized to file the same on behalf of the SEBI, identified his signature as she had seen him working during his duties. A public notice dated 18th December, 1997 was issued that the companies which had issued instruments such as agro bonds, plantation bonds would be treated as CIS coming under the provisions of SEBI Act. By the said notice companies were required to file their information i.e. details of Directors, fund mobilized, copy of memorandum and articles with SEBI. The Appellant No.1 vide its letter received on 18th December, 1997 submitted the aforesaid details vide Ex.CW1/1 consisting of 33 pages. As per said letter, Appellant Nos. 2-5 that is Sh. Tarsem Saini, Sh. Rajbir Singh, Sh. Jagjit Crl.A. 220/2010 Page 12 of 27 Singh, Sh. Mohan Lal Saini and Sh. Hemant Sharma were the Directors of the Company which mobilized funds of `34,76,151/- under this C.I.S. As per Memorandum of Association the above named persons along with Mr. S. Singh and Mr. Jai Bhagwan were the promoters of the Company. Vide its letter dated 28th July, 1998 Ex. CW1/2, the company intimated that audit for financial year 1997-1998 had not been completed and they would submit the audited balance-sheets immediately after completion of the audit compliance certificate was enclosed. This compliance certificate which will be dealt later, is the bone of contention in the present appeal. SEBI C.I.S. Regulations were notified on the 15th October, 1999. The Company was duly informed of this notification vide press release dated 20th October, 1999 and by a specific letter dated 21st October, 1999. However, the same was returned undelivered with the report “left without address”. Letter and the envelop has been exhibited as Ex.CW1/3 and Ex. CW1/4. The Company was further intimated about the regulatory requirements in terms of provisions of Regulations 5 (1), 73 and 74 for registration, winding up of the schemes and re-payments of the investors etc, vide letters dated 10th February, 1999 and 29th December, 1999. The letters came back with the report that “left without address” Ex. CW1/5 and Ex. CW1/6 are envelope and letter dated 10th December, 1999 and Ex. CW1/7 and Ex. CW1/8 are envelope and letter dated 29th December, 1999. A public Crl.A. 220/2010 Page 13 of 27 notice dated 10th December, 1999 was also issued in this regard. The Appellant neither applied for registration nor informed the SEBI of the winding up of its scheme. The show-cause notice dated 12th May, 2000 issued to the Company for taking action against it was also returned back undelivered with the report “left without address” vide Ex.CW1/9 and CW1/10. No reply to the show-cause notice was received from the Appellant. A reminder that on completion of winding up, the company was required to file a detailed report, was sent vide letter dated 31st July, 2000 along with the format of winding up and the said letter was also returned back undelivered with the same endorsement. The Company still failed to file the winding up and repayment report with the SEBI. Vide letter dated 7th December, 2000, Chairman, SEBI issued direction under Section 11B of the Act and directed the Company to refund the money collected under the scheme within a period of one month from the date of order failing which further action will be initiated. The contents of the said order was specifically brought to the notice of the Company vide letter dated 18th December, 2000 and by way of public notice date 14th January, 2001 wherein a list of 523 entities along with the text of directions issued under Section 11B of the Act was duly published. The name of the Company in the said list of 523 entities appeared at serial No. 37. According to CW1 till the date of her evidence i.e. 22nd March, 2007, the Crl.A. 220/2010 Page 14 of 27 Company did not file the winding up and repayment report, thereby not complying with the Chairman‟s order and thus violated the provisions of the Act and the Regulations. 10. CW2 Ms. Jyoti Jindgar, Deputy General Manager, SEBI has deposed that she was competent to continue the said complaint in view of the delegation of powers dated 21st April, 2003 exhibited as Ex. CW2/1. She further stated that non-compliance of SEBI directions and the violations of Section 12 (1B) of the Act and the Regulations made thereunder is attributable to accused No. 2 to 6 who are the directors of the accused No.1, Company. Accused No. 1, company did not get the schemes registered with SEBI prior to realization of funds thereunder and that till date, that is, 29th August, 2008 the Appellant No. 1 or the Appellants 2 to 5 had not applied for registration nor any provisional registration was granted to them. The appellant have also not filed any winding up and repayment report till now. Though the Appellant Nos. 2 to 6 were statutorily bound to comply with the same being the directors of the company and were intimated regarding obligations under SEBI Regulations and Directions passed by Chairman, SEBI through public notices and thus this witness has exhibited the public notices dated 10th December, 1999 and 7th December, 2000 published on 14th January, 2001 vide Ex. CW2/2 and Ex. CW2/3 respectively. Crl.A. 220/2010 Page 15 of 27 11. Thus from the testimony of witnesses and the documents exhibited on record, it is proved that, that the Company was incorporated on 20th September, 1995. Section 12(1B) of the Act was inserted with effect from 21st January, 1995 wherein it was specifically provided 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 Schemes including mutual funds, unless he obtains a certificate of registration from the SEBI in accordance with the Regulations. Proviso to this sub-Section deals with the companies which were already carrying such business and they were also directed that they could continue the operation till such time Regulations are made under Clause (d) of sub-Section 2 of Section 30. Thus, as on the date of incorporation, there was a clear embargo on the Appellant to sponsor or cause to be sponsored or carry or cause to be carried on any collective investment scheme without obtaining certificate of registration from the SEBI in accordance with the regulations. Only companies which were already carrying on prior to the incorporation of Section 12 (1B) were permitted to continue the same till the Regulations were framed. Even those companies on the Regulations coming into operation were statutorily bound to comply them. Since the Appellant was not a Company which were carrying on the collective investment scheme as on 21st January, 1995 it could not have started the same Crl.A. 220/2010 Page 16 of 27 without the certificate of registration from the SEBI. Despite the embargo, the Appellant started the C.I.S and thus at this stage it does not lie in the mouth of the Appellant to contend that the Regulations related to existing CIS and did not apply to it because when the Regulations came into force i.e. on 15th October, 1999 the Appellant was running a collective investment scheme and thus was running an existing collective investment scheme and could do so without any registration or without applying for the same. Moreover, Regulation 5(1) provides that prior to the date of coming into force of the Regulations, any person who was running an existing collective investment scheme should apply for grant of certificate within two months from such date. This Regulation was also not complied with by the Appellant. Thus, there is no merit in the contention of the learned counsel that there is no violation of Regulation 68(1), 68(2), 73 and 74. 12. I also do not find any force in the contention of learned counsel for the Appellant that since the Company was wound up vide order dated 5th July, 2001 no complaint could have been filed by the SEBI in December, 2002 as the Company which was a juristic person was non-existent and its Directors had lost their identity. This contention of the Appellant is wholly fallacious. DW1 vide Ex. DW1/1 has proved that on 5th July, 2001 the High Court for the States of Punjab and Haryana in Company Petition No. 187/1999 directed the Crl.A. 220/2010 Page 17 of 27 winding up of the Appellant Company as it was admitted by the Company that it was in debt and could not make the payment of the petitioner therein due to financial crunch and further no secured assurance was given by the company. Under the provisions of company law till the time the company is dissolved i.e. the process of liquidation continues, it does not lose its entity and hence, the directors, or person in