& Exchange Board of India Vs. Ajay Agarwal  INSC 148 (25 February
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.1697 OF
2005 Securities & Exchange Board of India ..Appellant(s) Versus Ajay
The question which arises for consideration in this appeal is
whether Section 11-B of the Securities and Exchange Board of India Act, 1992 (for short, `the Act') could be invoked by the Chairman of
the Securities and Exchange Board of India (for short, `SEBI') in conjunction
with Sections 4(3) and 11 for restraining the respondent from associating with
any corporate body in accessing the securities market and 1 prohibiting him
from buying, selling or dealing in securities.
The factual background in which the present appeal arises is noted
The respondent was appointed the Joint Managing Director of
Trident Steel Limited (hereafter referred to as "the said Company) on or
about 20th May 1993. The Board initiated certain preliminary investigations
about the affairs relating to public issues by the said Company on the basis of
a complaint received from a member of Bombay Stock Exchange (for short B.S.E.).
The public issue of the said Company was of 52 lacs shares of Rs.10 each at a
premium of Rs.3.50 per share aggregating to Rs.7 crore 2 lacs. The Lead
Managers to the issue were Bank of Baroda and Apple Industries Limited. Such
issues opened on 26th November, 1993 and closed on December 1993 and one of the
Directors of the Company appeared to be the chief promoter of the same.
The complaint was to the effect that there was misstatement in the
prospectus filed by the company at the time of the public issue with 2 regard
to alleged non-disclosure of pledge of 7 lac 50 thousand shares held in the
company by directors of the company to avail of working capital from Bank of
Baroda. The second aspect of the complaint was that the Directors of the
company had also given a non-disposal undertaking to Bank of Baroda in respect
of the same shares and that the prospectus does not mention the same. The
further complaint is that the 2000 investors complained regarding non- receipt
of dividend and the such complaint was filed before the Investor Service Cell,
B.S.E. The company while replying to the investors stated that it had not
declared any dividend during the preceding year in respect of which complaint
has been made. Therefore, prima facie, a case of misstating the facts in the
prospectus and misguiding the investors was made out. It appears that the
company had deliberately not dispatched share certificates to investors based
in Jalgaon and failed to produce the share transfer records and proof of
records of the applicants in Jalgaon.
In the course of investigation it appeared that the Directors of
the company had pledged their personal holding of 7 lac 50 thousand shares with
the Bank of Baroda and its Director, namely, Mr. A.A. Kazi and Dowell Leasing
and Financing Limited had given non-disposal undertaking to Bank of Baroda.
This was not disclosed in the prospectus of the company.
appears to be, prima facie, a case of violation of SEBI guidelines for
disclosure for investor protection. Thus an important aspect of the capital
structure of the company had not been disclosed in the prospectus as a result
of which the investors were misguided. In view of such complaint having been received
investigation was undertaken. Ultimately, a show cause notice dated 22.12.99
was issued to the respondent asking it to show cause why directions under
Section 11-B of the Act restraining the company and its Directors from
accessing the capital market for a suitable period will not be issued. A reply
was demanded within 15 days from the receipt of the show cause notice.
Pursuant to such show cause notice the respondent gave his reply
on 1.3.2000 and 10.7.2002. Thereafter, an opportunity of personal hearing was
granted to the respondent on 14.5.2002 and the same was adjourned to 5.7.2002
and on that date the Board made its submissions. Ultimately, on 31st March,
2004 Chairman of the Board passed an order, the concluding portion whereof is
in exercise of the powers conferred upon me by virtue of Section 4(3) read with
Section 11 and Section 11B of SEBI Act, I hereby direct that Shri Ajay Agarwal
be restrained from associating with any corporate body in accessing the securities
market and also be prohibited from buying, selling or dealing in securities for
a period of five years.
direction shall come into force with immediate effect".
Against the said order an appeal being Appeal No.85 of 2004 was
filed before the Tribunal.
Before the Appellate Forum the only point argued is that Section
11-B of the Act came by way of amendment to the said Act with effect from 25th
January, 1995 whereas the public issue in respect of which the impugned order
was passed 5 was of November 1993 and the prospectus was of October 1993. Both
public issue and prospectus were prior to 1995. The shares were listed with
effect from 15.2.1994. Therefore, it was urged on behalf of the appellant that
the alleged misconduct if any was for a period of time when Section 11-B was
not on the statute book. Thus, the question arose whether any direction can be
issued under Section 11-B for the alleged misconduct said to have been
committed prior to introduction of Section 11-B. The Appellate Tribunal was of
the view that the provision of Section 11-B cannot be invoked in respect of the
alleged misconduct which took place at a point of time when Section 11-B was
not on the statute book. While passing the said order the Appellate Forum
recorded that the respondent before the said Forum, the appellant herein, wants
to withdraw the impugned order.
In fact, against the said recording a review was filed for
reviewing the contents of paragraphs 13 and 14 of the order passed by the
Paragraphs 13 and 14 of the order passed by the Appellate Tribunal
are set out below:
We have heard the learned counsel for the respondent. The learned counsel
fairly conceded that such wide powers as in section 11-B cannot be
learned counsel for the respondent seeks leave of this court to withdraw the
After reviewing the said order the Appellate Tribunal ultimately
deleted paragraph 14 by the order dated 9.12.04.
Again in the order dated 9.12.04 it was unfortunately mentioned
that the order was passed with the consent of the parties.
the said recital in the order, as noted above, was deleted.
Assailing order of the Appellate Tribunal, the learned counsel for
the appellant-Board mainly urged that the finding given by the Tribunal that
the powers under Section 11-B can only be used prospectively and not
retrospectively had been given on an erroneous appreciation of the legal
provision under the said Act. It appears 7 that the Appellate Tribunal passed
its order by relying on the decision of this Court in the case of Govinddas and
others v. Income Tax Officer and another - 1976 (103) ITR 123 (S.C.).
The decision of this Court in Govinddas (supra) was on totally
different facts and legal questions.
It is well known that the substantive laws to be applied for
determination of tax liability must be the law which is in force in the relevant
It is well settled that law to be applied for assessment is the
one which is extant in the assessment year unless there is an amendment which
is made retrospective either expressly or by necessary implication. See M/s
Reliance Jute and Industries Ltd. v C.I.T West Bengal, Calcutta [1980 (1) SCC
139 at p.141 para 6].
principles have been followed in the case of Controller of Estate Duty,
Gujarat-I, Ahemadabad v. M.A. Merchant and etc., [AIR 1989 SC 1710 at p.1713
In Govinddas (supra), this Court held that Subsections (1) to (5)
of Section 171 of the 1961 Act provide for the machinery of assessment of Hindu
Undivided Family after partition.
(6) of Section 171 of 1961 Act is the substantive provision imposing tax
liability on the members which is payable by the joint family. But these
provisions are, rightly held to be, not applicable for recovery of tax assessed
on the Hindu Undivided Family for a period prior to the enactment of those
provisions. Therefore, this Court held that the income tax officer was not
correct in taking recourse to sub-sections (6) to (7) of Section 171 of the
Income Tax Act, 1961 for the purpose of recovery of tax assessed on the Hindu
Undivided Family for assessment in respect of the years 1950-1951 and 1956-1957
since the relevant provisions of 1961 Act were not given any retrospective
operation. It is not in dispute that the assessment of tax in respect of the
assessment year for the Hindu Undivided Family was completed under the
corresponding provisions of the 1922 Act. Therefore, the Supreme Court held
that such a case would be 9 governed by Section 25-A of the old Act which does
not impose any liability on members of the Hindu Undivided Family in case of
partial partition since no such liability existed under Section 25-A of the old
It is clear from the aforesaid discussion that the ratio in
Govinddas's case does not apply to this case in as much as no tax liability has
been created under the order of the Board.
The appellate Tribunal without at all discussing the facts and law
involved in Govinddas erroneously applied its ratio in the impugned order.
It may be noted in this connection that the impugned order was
passed by the Board in exercise of its power under Section 4(3) read with
Section 11 and Section 11-B of the said Act. Under Section 11 of the said Act
the Board has the power of restraining a person from accessing the securities
market or prohibiting any person associated with securities market to 10 buy,
sell or deal in securities. Such power is given to the Board under Section
11(4)(b) of the said Act. Section 11(4)(b) of the said Act is as follows:
restrain persons from accessing the securities market and prohibit any person
associated with securities market to buy, sell or deal in securities"
Therefore, restrain order passed on the respondent strictly
speaking was not under Section 11-B of the said Act. However, the provisions of
Section 11(4)(B) of the said Act also came by way of amendment in 2002. It
should, however, be noted that by the time the Board passed the order on 31st
March 2004 all the amendments were on the statute.
Therefore, the question here is not of retrospective operation of
the amendments. Even if the amendments to the said Act are allowed to operate
prospectively by the time the order was passed by the Board, it was empowered
by the aforesaid amendments to do so.
Therefore, without giving any retrospective operation to those
provisions, the impugned order can be passed by the Board in as much as the
amendments in questions empowered the Board to pass such an order when it
passed the order.
question that survives is whether the Board could pass the order in respect of
allegations which surfaced prior to the coming into effect of those amendments
in 1995 and 2002.
It is here that question of protection against ex-post facto laws
fall for consideration.
In this connection it may be noticed that Section 11-B of the Act
was invoked even at the show cause stage. Therefore, it cannot be said that any
provision has been invoked in the midst of any pending proceeding initiated by
the Board. The respondent was, thus, put on notice that the Board is invoking
its power under Section 11-B which was available to it under the law on the
date of issuance of show cause notice.
In the premises, it cannot be said that any new provision has been
invoked in connection with any pending proceeding. Nor can it be contended by
the respondent that there was any unfairness in the proceeding. Respondent was
given adequate notice of the charges in the show cause notice.
given an opportunity to reply to the show cause notice and, thereafter, a fair
opportunity of hearing was given before the order was passed by the Board. The
entire gamut of a fair procedure was thus observed.
This Court also finds that there is no challenge to the amended
provision of the law. Even if the law applies prospectively, the Board cannot
be prevented from acting in terms of the law which exists on the day the Board
passed its order.
It was urged on behalf of the respondent that on the date when the
violations were alleged against him, the Board did not have the power either
under Section 11-B or under Section 11 (4)(b) as those provisions came
subsequently by way of amendment. This contention weighed with the appellate
forum and the respondent was given 13 the protection against ex post facto law
even though it was not clearly mentioned in the order of the Appellate Forum.
The right of a person of not being convicted of any offence except
for violation of a law in force at the time of the commission of the act
charged as an offence and not to be subjected to a penalty greater than that
which might have been inflicted under the law in force at the time of the
commission of the offence, is a Fundamental Right guaranteed under our
Constitution only in a case where a person is charged of having committed an
"offence" and is subjected to a "penalty".
In the instant case, the respondent has not been held guilty of
committing any offence nor has he been subjected to any penalty. He has merely
been restrained by an order for a period of five years from associating with
any corporate body in accessing the securities market and also has been
prohibited from buying, selling or dealing in securities for a period of five
The word `offence' under Article 20 sub-clause (1) of the
Constitution has not been defined under the Constitution. But Article 367 of
the Constitution states that unless the context otherwise requires, the General
Clauses Act, 1897 shall apply for the interpretation of the Constitution as it
does for the interpretation of an Act.
we look at the definition of `offence' under General Clauses Act, 1897 it shall
mean any act or an omission made punishable by any law for the time being in
force. Therefore, the order of restrain for a specified period cannot be
equated with punishment for an offence as has been defined under the General
Under Criminal procedure code, `offence' has been defined under
Section 2(n) as follows:
"offence" means any act or omission made punishable by any law for
the time being in force and includes any act in respect of which a complaint
may be made under Section 20 of the Cattle- trespass Act, 1871 (1 of
On a comparison of the aforesaid two definitions we find that
there are common links between the two. An offence would always mean an act of
omission or commission which would be punishable by any law for the time being
Article 20(1) was interpreted by the Court in Rao Shiv Bahadur
Singh and another v. State of Vindhya Pradesh (AIR 1953 SC 394). Justice
Jagannadhads speaking for Constitution Bench, on a comparison of similar
provisions in English Law and American Constitution, opined that the language
used in Article 20 is in much wider terms. This Court held that:
is prohibited is the conviction of a person or his subjection to a penalty
under `ex post facto' laws. The prohibition under the Article is not confined
to the passing or the validity of the law, but extends to the conviction or the
sentence and is based on its character as an `ex post facto' law"
The ratio of this judgment has again been affirmed in State of
West Bengal v. S.K. Ghosh, (AIR 1963 SC 255), wherein another Constitution
Bench of this Court speaking through Justice Wanchoo, as His Lordship then was,
held that a 16 forfeiture by a District Judge under Section 13(3) of Criminal
Laws Amendment Ordinance of 1944 cannot be equated to a forfeiture under
Section 53 of IPC inasmuch as forfeiture under Section 13(3) of the Ordinance
involved embezzlement of government money or property and the same is not punishment
or penalty within the meaning of Article 20(1) of Constitution (See paras 14
and 15 of the judgment).
Even if penalty is imposed after an adjudicatory proceeding,
persons on whom such penalty is imposed cannot be called an accused. It has
been held that proceedings under Section 23(1A) of Foreign Exchange Regulation
Act, 1947 are adjudicatory in character and not criminal proceedings (See
Director of Enforcement v. M.C.T.M. Corporation Pvt. Ltd. and others, (1996) 2
SCC 471). Persons who are subjected to such penalties are also not entitled to
the protection under Article 20(1) of the Constitution.
Following the aforesaid ratio, this Court cannot hold that
protection under Article 20(1) of the 17 Constitution in respect of ex-post
facto laws is available to the respondent in this case.
If we look at the legislative intent for enacting the said Act, it
transpires that the same was enacted to achieve the twin purposes of promoting
orderly and healthy growth of securities market and for protecting the interest
of the investors. The requirement of such an enactment was felt in view of
substantial growth in the capital market by increasing participation of the
investors. In fact such enactment was necessary in order to ensure the
confidence of the investors in the capital market by giving them some
The said Act is pre-eminently a social welfare legislation seeking
to protect the interests of common men who are small investors.
It is a well known canon of construction that when Court is called
upon to interpret provisions of a social welfare legislation the paramount duty
of the Court is to adopt such an interpretation as to further the purposes of
law 18 and if possible eschew the one which frustrates it.
Keeping this principle in mind if we analyse some of the
provisions of the Act it appears that the Board has been established under
Section 3 as a body corporate and the powers and functions of the Board have
been clearly stated in Chapter IV and under Section 11 of the said Act.
A perusal of Section 11, Sub-Section 2(a) of the said Act makes it
clear that the primary function of the Board is to regulate the business in
stock exchanges and any other securities markets and in order to do so it has
been entrusted with various powers.
Section 11 had to be amended on several occasions to keep pace
with the `felt necessities of time'. One such amendment was made in Sub Section
(4) of Section 11 of the said Act, which gives the Board the power to restrain
persons from accessing the securities market and to prohibit such persons from
being 19 associated with securities market to buy and sell or deal in
securities. Such an amendment came in 2002.
From the statement of objects and reasons of the Amendment Act of
2002, it appears that the Parliament thought that in view of growing importance
of stock market in national economy, SEBI will have to deal with new demands in
terms of improving organisational structure and strengthening institutional
Therefore, certain shortcomings which were in the existing
structure of law were sought to be amended by strengthening the mechanisms
available to SEBI for investigation and enforcement, so that it is better
equipped to investigate and enforce against market malpractices. (See Paragraph
3 of the Statement of objects and reasons).
Section 11-B which empowers the Board to issue certain directions
also came up by way of amendment in 1995 by Act 9 of 1995. The Statements of
Objects and Reasons of such 20 amendments show one of the objects is to empower
the Board to issue regulations without the approval of the Central Government.
(See para 3(e) of the Statements of Objects and Reasons).
11-B of the Act thus empowers the Board to give directions in the interest of
the investors and for orderly development of securities market, which, as noted
above, is one of the twin purposes to be achieved by the said Act. Therefore,
by the 1995 amendment by way of Section 11-B Board has been empowered to carry
out the purposes of the said Act.
As noted above, there is no challenge to those provisions which
came by way of amendment. In the absence of any challenge to those provisions,
it cannot be said that even though Board is statutorily empowered to exercise
functions in accordance with the amended law, its power to act under the law,
as amended, will stand frozen in respect of any violation which might have
taken place prior to the enactment of those provisions. It is nobody's case
that Board has exercised those powers in respect of a proceeding which was
initiated prior to the 21 enactment of those provisions. In fact Board has
issued the show cause notice in terms of Section 11-B and considered the reply
of the respondent. In such a situation, there has no infraction in the
Therefore, the entire basis of the order of the Appellate Tribunal
that provision of Section 11- B cannot be applied retrospectively has been
passed on an erroneous basis, as discussed herein above.
Provisions of Section 11-B being procedural in nature can be
The appellate Tribunal made a manifest error by not appreciating
that Section 11-B is procedural in nature. It is a time honoured principle if
the law affects matters of procedure, then prima facie it applies to all
actions, pending as well as future. See K.Eapan Chako v. The Provident
Investment Company (P.) Ltd.,[AIR 1976 SC 2610] wherein Chief Justice A.N. Ray
laid down those principles.
Maxwell in his "Interpretation of Statutes" also
indicated that no one has a vested right in any course of procedure. A person's
right of either prosecution or defence is conditioned by the manner prescribed
for the time being by the law and if by the Act of Parliament, the mode of
proceeding is altered, and then no one has any other right than to proceed
under the alternate mode. [Maxwell Interpretation of Statutes, 11th Edition,
These principles, enunciated by Maxwell, have been quoted with
approval by the Supreme Court in its Constitution Bench judgment in Union of
India v. Sukumar Pyne [AIR 1966 SC 1206 at p.1209]
For the reasons discussed above, this Court is constrained to
quash the order of the Appellate Tribunal and upholds the order of the Chairman
of the Board.
The appeal is allowed. There will be, however, no orders as to
.......................J. (G.S SINGHVI)