Sunita Bhagat vs. Securities and Exchange Board of India.

2014] 182 Comp Cas  467 (Delhi)

[In the Delhi High Court]

Sunita Bhagat vs. Securities and Exchange Board of India.

Unless directors prove that an offence committed by the Company is without his knowledge or he has exercised all due diligence to prevent the commission of the offence, he is liable for punishment

Brief Facts

The Accord Plantation Ltd. (“Company”) had collected monies from various investors under Collective Investment Scheme (“CIS”). As per Section 12(1B) of the SEBI Act, 1992, which came into force on January 25, 1995, no person shall sponsor or caused to be sponsored or carry on any venture capital fund or CIS, unless it obtains a certificate of registration from the SEBI. Any person carrying out CIS prior to the above-stated period, must provide certain information to the SEBI as well as obtain registration. The Government of India asked the SEBI to form a CIS regulation and conveyed that instruments like agro bonds, plantation bonds, etc. shall be treated as CIS.

One of the objects of the Company is to carry business of agricultural, horticultural, floricultural and forestry related activities. The standard application form and brochure issued to
prospective investors contain names of four persons as directors.

Based on SEBI’s request, the Company provided the information on monies collected under the CIS. While communicating to SEBI, the Company conveyed that it had not floated any CIS and that they were not collecting any additional money under the current scheme. Subsequently, when the Company provided the information, it was observed that the Company had collected additional funds during these periods.

The SEBI notified the CIS regulation in October 1999 and the same was informed to the Company.  In its reply, the Company disclosed that they are not interested in CIS registration and will return the monies to the investors upon maturity. The reply shows that during the period 2001-2004, the Company intended to raise additional funds and pay part of it. As the Company has not registered under the CIS, SEBI had sent the show cause notice.  Upon several communications from the SEBI that the Company was not complying with the CIS regulation and after giving personal hearing to the Company, the SEBI Chairman passed an order directing the Company to pay amount to investors within one month from the date of the order.  During these periods, letters sent to the Company were returned undelivered. After due process of law, SEBI filed compliant before the ACMM, Delhi. ACMM passed an order against the Appellants. As per the said order, Appellants were sentenced for rigorous imprisonment for six months and pay a fine of Rs. 10 lakhs each. If the fine was not paid, then an additional imprisonment of
3 months for punishment as stated above would be applicable.

The appeal is filed by the Appellants against the order of ACMM, Delhi. The main contention of the application is that whether they are liable at the time the provisions of Section 12(1B) and / or CIS regulations were contravened by the Company and were they responsible for the Company’s business?  Further, the SEBI had to also prove that the offence by the Company was committed with the consent or connivance of any of the Appellants or attribute to their negligence.

Judgment and Reasoning:

The Court rejected the application of the Appellants. The Court perused the report of Dave Committee and the judgment in Paramount Bio-Tech Industries Ltd. vs. Union of India [2003] Law Suit (All) 1206; [2004] 120 Comp Case 18 (All) as to activities falling under CIS. The Court has also observed that the Company had not complied with various requirements of CIS regulations. The Court also noted that no receipt of refund of monies to the investors or books of accounts to that effect were produced. The Court also noted from the witness of one of the directors that some of the investors had filed winding up petition against the Company for not refunding their money. The Court also reviewed its judgment in Vishnu Prakash Bajpai vs. Securities and Exchange Board of India [2010] 154 Comp Cas 147 (Delhi) [2010] 2 Crimes 394 (Delhi), that offence is continuous offence under Section 24 of the SEBI Act till the time the Company complies with the CIS regulations.  The Court also looked into events date wise and the position of the directors at that point of time. The Court also observed that till the Company complied with the requirements as to refund of monies to the investors, the offence would continue and thus all the directors during such periods, even though resigned or appointed in between, are liable.