IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.T.SANKARAN MONDAY, THE 31ST OCTOBER 2011 / 9TH KARTHIKA 1933 Bail Appl..No. 8135 of 2011 CRIME NO.1391 OF 2011 OF THRISSUR TOWN WEST POLICE STATION PETITIONER : ACCUSED NO.2: ------------------------------ DR.HARISH BABU MADDINENI, FLAT NO.108,CREATIVE SNEHA APARTMENTS, BOTANICAL GARDENS,KONDAPUR,HYDERABAD, ANDHRA PRADESH. BY ADV. SRI.RAJIT RESPONDENT: STATE: --------------- STATE OF KERALA, REPRESENTED BY PUBLIC PROSECUTOR, HIGH COURT OF KERALA AT ERNAKULAM. ADDL.ADVOCATE GENERAL SRI.K.A.JALEEL THIS BAIL APPLICATION HAVING BEEN FINALLY HEARD ON 20/10/2011, ALONG WITH BA NO.8136 & 8137 OF 2011, THE COURT ON 31/10/2011 PASSED THE FOLLOWING: K.T.SANKARAN, J. ------------------------------------------------------------- Bail Appl.NOs.8135, 8136 & 8137 OF 2011 ------------------------------------------------------------- Dated this the 31st day of October, 2011 O R D E R These Bail Applications are filed by Dr. Harish Babu Maddineni, accused No.2 in Crime Nos.1391 of 2011, 1392 of 2011 and 1390 of 2011 of Thrissur Town West Police Station, Thrissur, under Section 439 of the Code of Criminal Procedure. 2. The offences alleged against the accused are under Sections 406, 418, 420 read with Section 34 of the Indian Penal Code and Section 6 of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 (hereinafter referred to as the ‘Prize Chits Act’) 3. One Shirly Jose, Varantharappilly filed a complaint before the Court of the Chief Judicial Magistrate, Thrissur, alleging that a sum of `1,79,500/- was collected by the accused giving false promises and that the accused committed the aforesaid offence. The complaint was forwarded to the police under Section 156 (3) of the Code of Criminal Procedure and accordingly Crime No.1391 of 2011 was registered. Crime No.1392 of 2011 was registered on the basis of a complaint filed BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 2 :: by Lijo Varkey alleging that he was cheated by the accused after collecting a sum of `1,80,000/-. Chandrika of Thiruvilwamala alleged that the accused cheated her by collecting a sum of `10,80,000/-. On the basis of a complaint filed by her before Court, Crime No.1390 of 2011 was registered, on forwarding the complaint to the police for investigation. 4. Accused No.1 in the aforesaid three Crimes is Nano Excel Corporation Limited represented by its Managing Director and Chief Executive Dr.Harish Babu Maddineni. The second accused is Dr.Harish Babu Maddineni, the petitioner herein. The other accused persons are the Director and Vice President as well as the Directors of the company. 5. The Petitioner was arrested at Hyderabad in connection with Crime No.252 of 2011 of Wadakkanchery Police Station. Formal arrest of the petitioner was recorded in the aforesaid three crimes on 14.10.2011. 6. The prosecution case is the following: The petitioner started a Company, namely, Nano Excel Enterprises Private Limited and it was registered at Hyderabad on 12-7-2007. In January 2010, the petitioner started another company under the name and style Nano Excel Power Corporation Limited. On 26-2-2010, the name of the company was changed as Nano Excel Corporation Limited. The accused collected BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 3 :: crores of rupees from the general public under the guise of marketing products and also under the guise of providing shares in an alleged 100 MV Power plant at Arunachal Pradesh. Wide publicity was given through media and otherwise by the petitioner that the Nano Excel Power Corporation had entered into an agreement with the Government of Arunachal Pradesh for establishing a 100 MV Power Plant at Arunachal Pradesh. Believing the promises given by the accused, hundreds of persons took shares in the Power Project. It is also alleged that under the guise of marketing nano products, the accused collected crores of rupees from the general public after supplying poor quality and low cost products at high rates. Even according to the statement given by the petitioner to the Crime Branch, he had collected Rupees 347 crores from the general public. The customers deposited crores of rupees at the Thrissur office of the company. Products alleged to be nano products are not available in open market. At the inception, the Company started a package of `4,000/- for their products. Later, the face value of the package was increased to Rupees five thousand, then to six thousand and lastly to Rupees twelve thousand. The modus operandi was that if a person deposited money, the company would give him an ID number and he would be a distributor. Only a distributor who holds ID number could purchase products from the company. The distributor would get commission if he enrolls new members. Huge amounts were being paid BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 4 :: to the so called distributors. The accused offered a return of `1,30,000/- in a week to a person who deposited `12,000/-, apart from the royalty income of `1,80,000/-. The activities in which the accused indulged themselves was a money circulation scheme under the guise of selling poor quality and low cost products, with an intent to make quick and easy money. False representations were made to the public in order to collect huge amounts and thus the accused cheated the public. 7. Sri.Rajit, the learned counsel for the petitioner submitted that the company was doing multi level marketing. All the activities of the company were transparent and legal. The counsel further submitted that all the relevant details regarding the transaction have been set out in the Bail Application. He referred to paragraphs 12 to 19 of the Bail Application, which read as follows: “12. The 1st accused company deals with products which are based on Nano technology. The said products are sold by way of Multi Level marketing and the profits by sale of products are directly granted to the persons who help in promoting the product. The products marketed by the company includes Nano cards, Nano Bracelets, Nano watches, Anti Oxidant Water filter, Nano washing ball, nano bio cool etc. All these products are imported from China and Korea. In this context, it is respectfully submitted that these products are directly imported from the manufacturer and BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 5 :: the relevant customs duty and other taxes are already paid on the MRP of the product and not on the purchase price. The products, which are imported are tested and sent and there is absolutely no basis in the allegation that the products imported by the Company do not have nano technology. 13. It is respectfully pointed out that the products have been sold, after demonstration and the customers being fully satisfied by the utility of the product. There is not a single customer who has purchased the product without being satisfied by the use of the product. With regard to the allegation that the products are exorbitantly priced, it is submitted with respect that the product gives full value for the money invested and that there is no compulsion on the customer to purchase the product. 14. The company in order to promote the product has decided to share the major share of profit of the products with the distributors, who sell the product through the MLM Network. The company had sales of Rs.358,59,241/- and the company has paid commission worth Rs.302,17,32,40/-. All these figures are backed by documents which are already in the custody of the Investigating officer. There is no law in the country preventing such a sharing of profit. 15. The company has paid the sales tax (VAT) on all the products and there is no complaint with regard to the default or omission to pay tax. The company has been BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 6 :: conducting legitimate business and the attempt is by the company's detractors to tarnish the image of the company. 16. The company has also entered into a valid M.O.U with the Government of Arunachalpradesh to start a Solar & Hydro Power Plant in Arunachalparadesh based on the use of Nano technology and the agreement has been signed by the authorised signatory of the State. The share certificates are issued to the customers to mop up funds for the said project on the profits of the project being shared by the Share holders. There is again nothing illegal in the said course of action adopted by the company. 17. To understand the manner in which the company promoted its marketing venture, it is necessary to understand the strategy adopted by the Company. A customer is entitled to purchase a product offered by the company by way of a package. While purchasing a product by way of selection of a package, the purchaser was entitled to get an entry into a business venture with the company. Take for example a person purchases a health product package like a wrist watch package from the company. The price of the said wrist watch package is Rs.12,000/-. Once a person pays an amount of Rs.12,000/- he is taken into the package and he is issued an ID number. The said person is given the wrist watch marketed by the company. Apart from this watch this person gets an entry point into a plan called the Club Binary Compensation Plan and an entry into the Royalty club. BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 7 :: 18. There are 2 methods of playing out this Club Binary Compensation Plan. One is by being an active member and one is by being a passive member. An active member is a person who canvases the products of the company and acts as an independent distributor of the company. Say an active member, whom we shall call 'A', canvases 2 persons or persons in multiples of 2, the person gets a referral commission of 5% straight away at the time when he introduces the person. The 2 persons introduced by 'A' will canvas for 2 persons a piece. In case the said 2 persons canvas 2 persons a piece, A will stand to gain the business volume that is fixed by the company on behalf of 4 units. This chain follows the said pattern. In case only 1 person under A canvas for person, then the situation will be were only 1 part of the chain work and therefore A does not get any commission in this particular plan. 19. Coming to the scheme under the Royalty club, the company brings in the scheme of a passive player called the 'Royalty Club'. In this case presume A introduces 2 members say B & C. If only B is active, the chain will carry downwards in the plan of B. Whereas the chain under C will remain dormant. Hence both A & C will be eligible to take part in the passive plan called Royalty Club. In Royalty Club the system is with reference to a board. The members of this passive club, gain an entry into this board which has a membership of 15 persons. These persons are added into this board automatically online by the company as and when BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 8 :: the chain becomes passive. The company declares a bonus for each board. The senior most member of the board gets this bonus and goes out of the board, leaving turn for the 2nd senior most member to get this bonus since the earlier board splits into 2. This pattern is continued. There is nothing illegal in the company promoting its product through various schemes, which work to the benefit of the customers, who also promote the product.” 8. The learned counsel for the petitioner referred to the decisions in State of West Bengal V. Swapan Kumar Guha and others: AIR 1982 SC 949= (1982) 1 SCC 561; Kuriachan Chacko V. State of Kerala: 2007 (3) KLT 843; Kuriachan Chacko and others V. State of Kerala: (2008) 8 SCC 708. He also submitted that the Supreme Court granted Special Leave to Appeal against the judgment of the Andhra Pradesh High Court in Amway India Enterprises V. Union of India: 2007 ALT (4) 808 and stay was also granted. 9. Sri.Rajit submitted that when the project involves sale of products and if it is stipulated that a person becomes a member only on purchasing the product, that would amount to a transaction other than a “money circulation scheme” as defined under the Prize Chits Act. It would only amount to multi level marketing. The counsel also submitted that when different interpretations are possible, the interpretation favourable to the accused should be preferred. BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 9 :: 10. Sri.K.A.Jaleel, the learned Additional Advocate General submitted the following: Thrissur West Police registered 116 cases against the petitioner and other directors of the company, out of which 31 cases were handed over to the Crime Branch. The Crime Branch is conducting investigation of 124 cases registered against the petitioner and others at different police stations. A special investigation team headed by the Additional Director General of Police (Crime) was constituted for the purpose of investigation. Only accused Nos.2 and 10 were arrested. The business was conducted by the accused through website. The software for the same was created by a Ludhiana based company. The Director of the said software company has been directed to appear before the Crime Branch. The products of the accused company have not been tested in any laboratories in India. There is no proof to indicate that the products based on Nano technology were imported from China and Korea. Import details have to be collected from the Customs Department, Hyderabad. The accused is having 40 accounts in various banks. The website of the company has to be analysed with the assistance of a computer expert. The details of the bank accounts are also to be verified. The Income Tax returns have to be collected and examined. It is submitted that the petitioner and the company were not rendering any useful service to the society; on the BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 10 :: other hand, the acts of the accused constituted an offence affecting the general public. 11. It is pointed out by the learned Additional Advocate General that the petitioner gave wide publicity that the company was going to start a 100 MV Power Plant at Arunachal Pradesh. Believing the representations, large number of persons took shares in the Power project. The petitioner had only signed an agreement for a project with the Government of Arunachal Pradesh for 14 MV Power Plant, but the brochures issued by the company and the representations made in the meetings indicate that the project is of 100 MV. No Power Plant has been established by the company. The accused fraudulently and dishonestly induced people to deposit money making false representations and thus they committed the offence of cheating. 12. The learned Additional Advocate General submitted that the activities undertaken by the accused clearly amount to a “money circulation scheme” as defined under the Prize Chits Act. He relied on the decision of the Supreme Court in Kuriachan Chacko and others V. State of Kerala: (2008) 8 SCC 708 and the decision of the Kerala High Court in Abdul Arshad V. State of Kerala: 2011 (3) KLT 796= ILR 2011 (3) Kerala 856. BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 11 :: 13. Section 2 (c) of the Prize Chits Act defines “money circulation scheme” thus: ““money circulation scheme” means any scheme by whatever name called, for the making of quick or easy money; or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.” 14. Sections 3 and 4 of the Prize Chits Act read as follows: “3. Banning of prize chits and money circulation scheme or enrolment as members or participation therein.- No person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme.” “4. Penalty for contravening the provisions of Section 3.- Whoever contravenes the provisions of Section 3 shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees or with both. BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 12 :: Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgment of the Court, the imprisonment shall not be less than one year and the fine shall not be less than one thousand rupees.” 15. Section 6 of the Prize Chits Act provides that when an offence under the Act is committed by a Company, every person who, at the time 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 and shall be liable to be proceeded against and punished accordingly. 16. In State of West Bengal V. Swapan Kumar Guha and others: AIR 1982 SC 949 = (1982) 1 SCC 561 it was held that the High Court under Article 226 of the Constitution will not normally interfere with an investigation into the case and will permit investigation into the offence to be completed; if, however, the materials do not disclose an offence no investigation should normally be permitted. Referring to the Prize Chits Act, and particularly money circulation scheme, it was held thus: “ Commas or no commas, and howsoever thoughtfully one may place them if they are to there, I find it impossible to take cl.(c) to mean that any and every activity “for the making BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 13 :: of quick or easy money” is comprehended within its scope. For the matter of that, I cannot believe any law to ban every kind of activity for making quick or easy money, without more, on pain of penal consequences. It is far too vague and arbitrary to prescribe that “whosoever makes quick or easy money shall be liable to be punished with fine or imprisonment”. For then, in the absence of any demarcation of legitimate money-making activities from those which fall within the ban, the question whether the penal provision is attracted in a given case will depend upon the will and temper, sweet or sour, of the magistracy. Besides, speaking of law and morals, it does not seem morally just or proper to say that no person shall make quick or easy money, specially quick. A person who makes quick money may do so legitimately by the use of his wits and wisdom and no moral turpitude may attach to it. One need not ravel afar to find speaking examples of this. Indeed, there are honourable men (and now women) in all professions recognized traditionally as noble, who make quite quick money by the use of their talents, acumen and experience acquired over the years by dint of hard work and industry.” 17. In Swapan Kumar Guha’s case, a partnership firm, consisting of three partners, was found to be offering interest at 48% per annum to its members and later reduced to 36% per annum. The loan certificates showed rate of interest only at 12% per annum. Alleging that payment of the amount in excess of 12% showed that a ‘money circulation scheme’ BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 14 :: was promoted, a case was registered against the partners of the firm. Writ Petition was filed by the partners for quashing the FIR and the proceedings. The Calcutta High Court allowed the Writ Petition. State of West Bengal challenged the judgment in appeal before the Supreme Court. The appeal was dismissed. It was held that no ‘money circulation scheme’ was involved in the case. 18. In Kuriachan Chacko V. State of Kerala: 2007 (3) KLT 843, the facts of the case are stated in paragraph 4 of the judgment thus: “The basic facts are simple. The petitioners are persons- partners of a firm and employees, who conduct a Scheme by name “LIS Deepasthambham Scheme”. The scheme is apparently simple in its conception. A person has to pay Rs.625/- and purchase one unit from the promoter. The promoter will make use of Rs.350/- to purchase 35 lottery tickets of the Kerala State Government lotteries each for Rs.10/- for the unit holder for the next 35 weeks. If the unit holder wins any prize upto Rs.5,000/- in the 35 draws in respect of the tickets, the promoter shall collect the same and pay the same to the unit holder. If he wins any prize above Rs.5,000/-, the ticket shall be handed over to the unit holder for collection. The balance of Rs.275/- will be used to make the unit holder a subscriber of a magazine by name “Thrikalam” for one year. The said magazine will reproduce relevant and important materials from other magazines. It will BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 15 :: also furnish information about the lottery tickets which have won prizes. “ 19. In Kuriachan Chacko’s case, the Kerala High Court held that the transaction in question constituted a ‘money circulation scheme’. 20. The Supreme Court dismissed the appeal from the judgment of the Kerala High Court, in Kuriachan Chacko and others V. State of Kerala: (2008) 8 SCC 708. The Supreme Court referred to State of West Bengal V. Swapan Kumar Guha and others: AIR 1982 SC 949 = (1982) 1 SCC 561 and held thus: “34. In the instant case, both the essentials of Section 2 (c) are present. The Scheme provides for (i) making of quick or easy money, and (ii) it is dependent upon an event or contingency relative or applicable to the enrolment of members into the Scheme. As observed by us, a member would be entitled to double amount only when after his enrolment, additional 14 members are enrolled in the Scheme. The second ingredient, namely, such payment of money is dependent on the “event or contingency relative or applicable to the enrolment of members into the scheme” is thus very much present. Swapan Kumar Guha, therefore, in our considered opinion, does not apply and carry the case of the accused further. BAIL APPL. NOS.8135, 8136 & 8137 OF 2011 :: 16 :: 35. It was next contended that there is no obligation on the part of the unit holder to enlist/enroll more members into the Scheme and, therefore, the Scheme does not attract Section 2 (c). The contention has no force. Section 2 (c) nowhere provides that a member of the scheme must himself enroll other members and only in that eventuality, the provision of the Act would apply. The Section does not provide for positive or dominant role to be played by a member of the scheme. 36. In our opinion, the requirement of law is “an event or contingency relative or applicable to the enrolment of members into the scheme” and nothing more. The plain language of the section does not insist that such enrolment of members must be by the members already enrolled. It is impossible to read into the statutory provision such requirement which is not stipulated by Parliament. Upholding of the argument of the learned counsel would result in rewriting of the section, which is certainly not permissible in our constitutional system. 37. The event or contingency on the happening of which the amount would become payable must be relative or applicable to the enrolment of the members into the Scheme. It is immaterial by whom