Ritesh Agarwal & ANR. Vs. Securities & Exchange Board of India&Ors
[2008] INSC 911 (13
May 2008)
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE
JURISDICTION CIVIL APPEAL NO. 4681 OF 2006 Ritesh Agarwal & Anr.
...Appellants Versus Securities & Exchange Board of India & Ors.
...Respondents
S.B. SINHA, J :
1. Ritesh Polysters Ltd. (Company)
was a company incorporated and registered under the provisions of the Companies Act, 1956.
One Surender Kumar Agarwal was
shown to be a promoter in the brochure issued by the Company. However, his wife
Rookprekha Agarwal and their two sons Ritesh Agarwal and Deepak Agarwal
(Appellants, who were said to be minors at the relevant time) also purported to
have made contributions. The Company came out with a 2 public issue of 30 lakh
equity shares of Rs. 10/- each at a premium of Rs.
5/- per share aggregating to Rs.
450 lakhs. A prospectus therefor was issued. The issue opened on 12.06.1995. It
closed on 22.06.1995. 15 lakh shares of Rs. 10/- each for cash at a premium of
Rs. 5/- per share were reserved for firm allotment to the promoters and
directors of the company and their friends and relatives. A sum of Rs. 2.25
crores (Rs.
225/- lakhs) was to be invested by
the promoters. The issue went through. It later transpired that Pratha
Investments, Ritesh Capital and Ritesh Agarwal asked for issuance of duplicate
shares contending that the shares allotted in their favour had been misplaced.
An advertisement was issued. A notice was also sent to the Stock Exchange. The
Stock Exchange, however, on an enquiry made in that behalf, came to learn that
the alleged lost shares had in fact been sold in the market. The trading in the
scrip of the Company was suspended.
2. The matter was referred to the
Securities and Exchange Board of India (for short "the Board"). In an
enquiry conducted by the Board, it was discovered that only 7.96% of the public
issue had been subscribed by the public till the closing date and the promoters
who were required to subscribe Rs. 225/- lakhs had invested a sum of Rs. 35/-
lakhs only. A large number of other irregularities were also found.
3 As the Board has noticed the
said irregularities in great details, it is not necessary for us to repeat the
same once over again. The Board, by its order dated 9.02.2004, directed:
"40. Therefore, in the
interest of the investors and safety and security of the capital market, in
exercise of powers conferred on me under Section 4(3) read with Section 11 and
11B of SEBI Act and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair
Trade Practices) Regulations, 1995, I, hereby, direct M/s. Ritesh Polyster
Limited and its promoters, viz., Ritesh Exports Ltd., Sh. Surendra Kumar
Agarwal, Smt. Roop Rekha Agarwal, Sh.
Ritesh Agarwal and Sh. Deepak
Agarwal to disassociate themselves in every respect from the capital market
related activities and not to access the capital market for a period of ten
years.
41. Further, in light of the facts
and circumstances of the case, it is already made out that the public issue by
the promoters was hoax with an intention to perpetrate fraud on investors.
Therefore, I am of the view that it would be appropriate to pass a direction
under section 11B of the SEBI Act as a remedial measure. I hereby direct the
above named promoters of Ritesh Polyster Ltd. to buy back the shares from the
allottees/ shareholders offering an amount at which the shares were issued i.e.
Rs. 15/- per share if the shares are fully paid or @ Rs. 7.50 per share if the
shares are partly paid and delist Ritesh Polyster Ltd.
from the stock exchanges."
4 3. An appeal was preferred
thereagainst before the Tribunal.
However, none of the findings of
fact were in question. The said findings of fact, therefore, had attained
finality.
The Tribunal, by reason of the
impugned judgment, negatived the plea of the appellants Ritesh Agarwal and
Deepak Agarwal that they were minors at the relevant time, stating:
"The appellants in appeal no.
43/2004 have taken a plea that they were minors at the time when the company
went in for the public issue and, therefore, the Board was not justified in
issuing any direction to them. We are unable to accept this plea. We are
informed that the Board has launched prosecution against the company and its
promoters. In those proceedings it may be relevant for these appellants to
contend that they were minors, but in the present proceedings which are of
civil nature, the plea can have no relevance. At any rate, they had attained
majority on the date when the impugned order was passed and, therefore, the
direction restraining them from accessing the capital market could be issued by
the Board."
4. The Tribunal opined that the
Company and its promoters played fraud on the public and the Board was
justified in debarring the 5 promoters and the Company from having access to
the capital market for a period of 10 years. It also agreed with the other
directions of the Board.
5. In the aforementioned backdrop,
the questions which have been raised before us by Mr. C.A. Sundaram, learned
senior counsel appearing on behalf of the appellants, have to be noticed, which
are as under:
-
Ritesh Agarwal and Deepak
Agarwal being minors, no order of penalty could have been imposed on them.
-
Apart from Surender Kumar
Agarwal, others having not been shown as promoters in the brochure, the
impugned judgment cannot be sustained.
-
The issue in question having
been opened on 12.06.1995 and closed on 22.06.1995, the Securities and Exchange
Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating
To Securities Markets) Regulations, 1995 (for short "the FUTP Regulations)
which came into force on and from 25.10.1995 cannot be said to have any
application.
6
6. Ms. Suruchii Aggarwal, learned
counsel appearing on behalf of the respondents, on the other hand, would
contend:
-
Till the FUTP Regulations came
into force, the matter used to be governed by the Securities and Exchange Board
of India Act, 1992 (for short "the SEBI Act") and application thereof
was not dependant upon the coming into force of the FUTP Regulations.
-
In the proceedings before the
Board, which is civil in nature, the appellants Ritesh Agarwal and Deepak
Agarwal never claimed themselves to be the minors and, thus, such a plea cannot
be raised where they have been held guilty of defrauding the public fund.
-
The nature of the fraud practised being that they purported to have transferred their money to the
Company on one day and on the next day they took the same back and, thus, the
promoter having not admittedly contributed in the fund, the impugned judgment
should not be interfered with.
7. The SEBI Act was enacted to
provide for the establishment of a Board to protect the interests of investors
in securities and to promote the 7 development of, and to regulate, the
securities market and for matters connected therewith or incidental thereto.
"Board" has been defined
in Section 2(1)(a) of the SEBI Act to mean "the Securities and Exchange
Board of India established under Section 3" thereof.
Chapter IV of the SEBI Act
provides for powers and functions of the Board. Sub-section (1) of Section 11
thereof enjoins a duty upon the Board to protect the investors in securities
and to promote the development of and to regulate the securities market by such
measures as it thinks fit. The measures referred to in Sub-section (1) of
Section 11 may provide for, without prejudice to the generality of the
foregoing provisions, inter alia the following:
"(a) regulating the business
in stock exchanges and any other securities markets;
(b) registering and regulating the
working of stock brokers, sub-brokers, share transfer agents, bankers to an
issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with securities markets in any manner;
8 (ba) *** (c) *** (d) *** (e)
prohibiting fraudulent and unfair trade practices relating to securities
markets;
(f) *** (g) prohibiting insider
trading in securities;
(h) *** (i) *** (ia) *** (j)
performing such functions and exercising such powers under the provisions of
the Securities Contracts (Regulation) Act, 1956 (42 of 1956), as may be
delegated to it by the Central Government;"
Section 11A of the SEBI Act
specifies the matters which are required to be disclosed by the companies.
Section 11AA thereof provides for collective investment scheme. Section 11B
provides for certain remedial measures which read as under:
9 "11B. Power to issue
directions Save as otherwise provided in section 11, if after making or causing
to be made an enquiry, the Board is satisfied that it is necessary- (i) in the
interest of investors, or orderly development of securities market; or (ii) to
prevent the affairs of any intermediary or other persons referred to in section
12 being conducted in a manner detrimental to the interests of investors or
securities market; or (iii) to secure the proper management of any such
intermediary or person, it may issue such directions,- (a) to any person or
class of persons referred to in section 12, or associated with the securities
market; or (b) to any company in respect of matters specified in section 11A,
as may be appropriate in the interests of investors in securities and the
securities market."
Section 12 of the SEBI Act
provides for registration of stock brokers, sub-brokers, share transfer agents,
etc. Chapter VI A of the 10 SEBI Act provides for penalties and adjudication.
Section 15H provides for penalty for non-disclosure of acquisition of shares
and take-overs.
Section 24 of the SEBI Act
provides for the offences committed under the SEBI Act.
Section 30 of the SEBI Act
provides for regulation making power.
The Board in exercise of its power
conferred upon it under Section 30 of the SEBI Act made the FUTP Regulations.
The said Regulations came into force on and from 25.10.1995.
8. Indisputably, when the
irregularities committed by the Company and/ or its promoters came to the
notice of the Board, it had issued a notice only on 28.01.2003.
The FUTP Regulations are
prospective in nature. Chapter II of the FUTP Regulations provides for
prohibition of fraudulent and unfair trade practices relating to securities
market. Regulation 4 prohibits against market manipulation; Clause (a) whereof
reads as under:
"4. No person shall - (a)
effect, take part in, or enter into, either directly or indirectly,
transactions in securities, 11 with the intention of artificially raising or
depressing the prices of securities and thereby inducing the sale or purchase
of securities by any person"
Regulation 5 of the FUTP
Regulations provides for prohibiting misleading statements to induce sale or
purchase of securities.
Regulation 6 thereof prohibits
unfair trade practices relating to securities.
Regulation 11 empowers the Board
to issue directions in the following terms:
"11. The Board may, after
consideration of the report referred to in regulation 10 and after giving
reasonable opportunity of hearing to the person concerned, issue directions for
ensuring due compliance with the provisions of the Act, rules and regulations
made thereunder, for the purposes specified in regulation 12."
Regulation 12 of the FUTP
Regulations specifies the purpose of directions.
9. We may also notice that a
Company has certain duties and functions under the Companies Act, 1956.
Section 63 thereof provides 12 for criminal liability for mis-statements in the
prospectus, which reads as under:
"63 - Criminal liability for
mis-statements in prospectus (1) Where a prospectus issued after the
commencement of this Act includes any untrue statement, every person who
authorised the issue of the prospectus shall be punishable with imprisonment
for a term which may extend to two years, or with fine which may extend to
fifty thousand rupees, or with both, unless he proves either that the statement
was immaterial or that he had reasonable ground to believe, and did up to the time
of the issue of the prospectus believe, that the statement was true.
(2) A person shall not be deemed
for the purposes of this section to have authorised the issue of a prospectus
by reason only of his having given- (a) the consent required by section 58 to
the inclusion therein of a statement purporting to be made by him as an expert,
or (b) the consent required by sub-section (3) of section 60."
Section 77 of the Companies Act
provides for restrictions on purchase or loans by Company for purchase of its
own shares. Any 13 person violating the provisions of the Companies Act
may be proceeded thereunder.
10. The word "promoter",
however, has not been defined either under the Companies Act
or under the SEBI Act. The definition of promoter has, however, been provided
in Section 2(h) of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 in the following terms:
"2(h). `Promoter' means - (a)
any person who is in control of the target company;
(b) any person named as promoter
in any offer document of the target company or any shareholding pattern filed
by the target company with the stock exchanges pursuant to the Listing
Agreement, whichever is later;
and includes any person belonging
to the promoter group as mentioned in Explanation I:
Provided that a director or
officer of the target company or any other person shall not be a promoter, if
he is acting as such merely in his professional capacity.
Explanation I: For the purpose of
this clause, 'promoter group' shall include:
(a) *** (b) in case the promoter
is an individual - (i) the spouse of that person, or any parent, brother,
sister or child of that person or of his spouse;
(ii) any company in which 10% or
more of the share capital is held by the 14 promoter or an immediate relative
of the promoter or a firm or HUF in which the promoter or any one or more of
his immediate relative is a member;
(iii) any company in which a
company specified in (i) above, holds 10% or more, of the share capital; and
(iv) any HUF or firm in which the aggregate share of the promoter and his
immediate relatives is equal to or more than 10% of the total.
Explanation II: Financial
Institutions, Scheduled Banks, Foreign Institutional Investors (FIIs) and
Mutual Funds shall not be deemed to be a promoter or promoter group merely by
virtue of their shareholding.
Provided that the Financial
Institutions, Scheduled Banks and Foreign Institutional Investors (FIIs) shall
be treated as promoters or promoter group for the subsidiaries or companies
promoted by them or mutual funds sponsored by them."
11. It may be true that only
Surender Kumar Agarwal was shown as a promoter in the Brochure along with Shiv
Shanker Agarwal and Mahender Kumar Agarwal, but, indisputably, Rooprekha
Agarwal, Ritesh Agarwal and Deepak Agarwal who are wife and sons of Surender
Kumar Agarwal made contributions. They, therefore, come within the purview of
the said term.
15 Surender Kumar Agarwal ex facie
suppressed the fact that Ritesh Agarwal and Deepak Agarwal were minors. Such a
contention appeared to have been raised for the first time before the Tribunal.
It is one thing to say that as
minors they could not have entered into a contract having regard to the
provisions of the Indian Contract Act, 1872 and, thus, any act committed by
them should be ignored, but, this, itself, goes to show how Surender Kumar
Agarwal played an important role in resorting to wholly unfair practices and
fraudulent acts. It is, therefore, not possible for us to hold that Surender
Kumar Agarwal alone was the promoter.
However, a minor cannot enter into
a contract. The Tribunal unfortunately did not go into this question in
details. Finding of the Tribunal which has been noticed by us hereinbefore,
with respect, is wholly unsustainable. It is not based on any legal principle.
No reason has been assigned therefor.
If they were minors, they being
not party to the fraud, could not have been subjected to penalty under the SEBI
Act. The person who committed the fraud in their names, viz., Surender Kumar
Agarwal 16 himself, should have been proceeded against not only for commission
of act of fraud on his own behalf but also on behalf of the minors.
The fact that the issue was
under-subscribed is not in dispute. The question that the under-writers have
not subscribed is also not in issue.
The fact that there had been
divergence of funds is also neither in doubt nor in dispute. The promoter's
contribution has not come in, furthermore, is not in question.
The Board did not find any
justification in the cause shown by the appellants herein.
The violations which have been
found are:
"1) The entire amount
collected as subscription was not kept in a separate account (public issue
account) opened for this purpose and was being deposited in other account of
other banks also.
2) Ritesh Polyster received only
Rs. 35 lakhs as promoters contribution instead of Rs.
2.25 crores. However, they have
fraudulently allotted shares worth Rs. 2.25 crores to the promoters and hence
cheated the other genuine investors/ underwriters.
17 3) Ritesh purchased the shares
back from the financiers who had bailed out the issue (under the garb of
subscription) using the public issue proceeds. This is in violation of Section
77 of the Companies
Act, 1956. Thus, the public issue proceeds have not been utilized for the
purpose it has been raised. Hence, there has been misstatement in the
prospectus to this effect.
4) The issue did not receive the
minimum subscription of 90% even after the devolvement period. Hence, the issue
should have been refunded which was not done. Thus, there has been a
misstatement in the prospectus to this effect."
The said findings are not in
question. The Board, therefore, has rightly proceeded to take action in terms
of the SEBI Act.
The question as to whether the
provisions of the FUTP Regulations are attracted in this case may now be
examined.
The FUTP Regulations came into
force for the first time on 25.10.1995. Would it apply in a case where the
cause of action arose prior thereto? Ex facie, a penal statute will not have
any retrospective effect or retroactive operation. If commission of fraud was
complete prior to the said date, the question of invoking the penal provisions
contained in the said Regulations including Regulations 3 to 6 would not arise.
It is not that the Parliament did not provide for any penal provision 18 in
this behalf. If the appellants have violated the provisions of the Companies Act,
they can be prosecuted thereunder. If they have violated the provisions of the
SEBI Act, all actions taken thereunder may be taken to their logical
conclusion. A citizen of India has a right to carry on a profession or business as
envisaged by Article 19(1)(g) of the Constitution of India. Any restriction
imposed thereupon must be made by reason of a law contemplated under Clause (6)
thereof. In absence of any valid law operating in the field, there would not be
any source for imposing penalty. A right to carry on trade is a constitutional
right. By reason of the penalty imposed, the Board inter alia has taken away
the said constitutional right for a period of ten years which, in our opinion,
is impermissible in law as the Regulations were not attracted.
In Sterlite Industries (India)
Ltd. v. Securities and Exchange Board of India [(2001) 31 SCL 485: (2001) 45
CLA 195 (SAT)] , the Chairman of the Board vide its order had prohibited the
appellant, a public limited company through its directors from accessing the
capital market for a period of two years and also ordered to initiate
prosecution proceedings under Section 24 read with Section 27 of the Act for
violation of Regulation 4(a) and 4(d) of the FUTP regulations against the
appellant.
19 Setting aside the impugned
order, the Tribunal on the applicability of Sections 11 and 11B of the Act on
barring the appellant from accessing the capital market while referring to its
decision in Bank of Baroda opined:
"104. It is seen from the
order that the direction debarring the appellant accessing the capital market
was issued invoking the powers vested in the respondent under sections 11 and
11B.
...The Tribunal had occasion to
examine the scope and reach of these sections in Bank of Baroda v. SEBI [2000]
26 SCL 532 (SAT) (Mum.) and had expressed the following view:
"53. Section 11 and Section
11B are interconnected and co-extensive as both these sections are mainly
focussed on investor protection. On a careful perusal of the said Section 13
referred to in the earlier paragraphs, it could be seen that the respondent has
been in no uncertain terms mandated to protect the interests of investors in
securities by such measures as it thinks fit. Of course those measures are
subject to the provisions of the Act. The expression 'measure' has not been
defined in the Act. So we have to go by its generally understood meaning.
According to Corpus Juris Secundum measure means 'anything desired or done with
a view to the accomplishment of a purpose, a plan or course of action intended
to obtain some object, any course of action proposed or adopted by a
Government'. However, I am not inclined to agree with the respondent's view
that the power under Section 11 is unlimited. I am of the view that the
legislature has circumscribed the 20 power, by putting the caveat that these
measures are subject to the provisions of the Act. The ambit of power is
contained within the frame work of the Act. But within the statutory frame work
such power reigns.
54. While Section 11 deals with
the functions of the Board, Section 11B is on the powers of the Board. Section
11B is more action oriented, in a sense it is a functional tool in the hands of
the Board. In effect Section 11B is one of the executive measures available to
the respondent to enforce its prime duty of investor protection.
As could be seen from the text of
the section reproduced above, the respondent is empowered to issue directions
in the interests of investors of any person or class of persons referred to in
Section 12 of the Act or associated with the securities market. In other words
the section identifies the persons to whom and the purposes for which,
directions can be issued.
55. The Gujarat High Court had
examined the scope of Section 11 and Section 11B vis-a-vis the respondent's
position, while deciding an appeal against the Single Judge's order in Alka
Synthetics Ltd. case [1999] 19 SCL 460. The basic issue for consideration
before the Division Bench in the said appeal was as to whether the respondent
had the authority to issue an order under Section 11B of the Act for impounding
or forfeiting the money received by stock exchanges, as per the concluded
transactions under its procedure, until final decision is made..."
21 While negating the views of the
Single Judge, and upholding the respondent's power to issue such a direction
under Section 11B it was held that the Act provides for remedial measures and,
thus, it was entitled to issue any direction.
It was, however, held :
"106. It has to be noted that
Section 11B does not even remotely empower the respondent to impose
penalties."
It was furthermore held :
"108. The legislature has
clearly spelt out the penal provisions in the Act at 3 places - Section 12(3)
provides for suspension or cancellation of the certificate of registration
granted to the market intermediaries in the event of their proven misconduct,
provision under Chapter VIA, provides for imposition of monetary penalty for
certain offences specified therein;
section 24 empowers Courts to
award punishment for violation of offences under the Act etc. Since legislature
has deliberately chosen to create specific offences and penalties thereto, it
is not possible to view that under Section 11B the respondent is competent to
issue a direction which tantamounts to imposition of penalties, While widening
the scope of 'such measures' used in Section 11, to include penalties, and
thereby stretching the scope of issuing directions under Section 11B 22 to
cover imposition of penalties, the limitation stated above need be kept in
mind. However, it is understood that the respondent has also been taking the
view that Section 11B is not a penal provision, but preventive and remedial in
its application. If that is so, it has to be seen whether the impugned direction
prohibiting the appellant from accessing the capital market for a period of 2
years from the date of the order is preventive or remedial. In the absence of
any explanation from the respondent as to what exactly is meant by 'accessing
the capital market', it has to be understood as is understood in the common
parlance - i.e., entry to the capital market for issuing/offering securities.
In this context, it is to be noted that the charge against the Appellant is of
market manipulation. The shares of the appellant are listed/traded in the stock
exchanges even today.
That being the case preventing the
appellant raising further capital/offering shares to the public in the next two
years cannot serve as a preventive measure to debilitate the appellant
indulging in market manipulation. Similarly, by no stretch of imagination the
said direction can be considered even remedial as prospective barring of a
public issue cannot remedy an act of market manipulation allegedly indulged for
a specific purpose, 3 years ago. A remedial action is normally seen as one
intended to correct, remove or lessen a wrong, fault or defect.
Purport of preventive or remedial
directions which can be issued in a proven case of fraudulent and unfair trade
practice is discernible from the provisions of regulation 12 of the
Regulations, already cited in this order.
In my view the impugned order is
neither remedial nor preventive but punitive in effect as it takes away the
appellant's right to mobilise funds from the public to carry on its business.
According to Webster's
Encyclopaedic Unabridged Dictionary 'penalty means a 23 punishment imposed or
incurred for a violation of law or rule'. In the instant case it is seen that
the order is made in the light of the finding - by the authority, that the
appellant has violated the regulations. This nexus also strengthens the view
that the order debarring the appellant from accessing the capital market is a
penalty. In this view of the matter the order has no legal backing and
therefore cannot sustain."
[Emphasis supplied] Similar
observations were made in BPL Limited v. Securities &
Exchange Board of India, SEBI
[2002] 38 SCL 310 (SAT) and Videocon International Ltd. v. Securities &
Exchange Board of India, Shri D.R. Mehta, Chairman, SEBI and Dr. R.K.
Kakkar, Division Chief, SEBI [2002] 38 SCL 422.
19. Ritesh Agarwal and Deepak
Agarwal are said to be minors. As they were minors having regard to the
provisions of the Indian Contract Act, they could not have been proceeded
against strictly in terms of the provisions of the said Act. Apart from the
actions taken by the Board, the persons who undertook those fraudulent actions
may also be held to be guilty of making a mis-representation and commission of
fraud not 24 only before the prospective purchasers of the shares but also
before the statutory authority. The same, however, would itself not mean that a
minor would not be penalized for entering into a contract which per se was not
enforceable. A contract must be entered into by a person who can make a promise
or make an offer. If he cannot make an offer or in his favour an offer cannot
be made, the contract would be void as an agreement which is not enforceable in
law would be void. Section 11 of the Indian Contract Act provides that the
person who is competent to contract must be of the age of majority. If Ritesh
Agarwal and Deepak Agarwal were minors, as would appear from their birth
certificates, they could not have entered into the contract.
20. We, therefore, are of the
opinion that subject to any other or further order which the Board may pass as
against Shri Surender Kumar Agarwal and Smt. Rooprekha Agarwal, the impugned
directions would not be binding on Ritesh Agarwal and Deepak Agarwal.
21. We do not accept the
contention of Ms. Aggarwal that the offence is a continuing one.
25
22. We do not also accept the
contention that Rooprekha Agarwal was not a promoter and only promoters were
Ritesh Polyesters Limited and Surender Kumar Agarwal. We, however, accept the
contention of Mr.
Sundaram that Ritesh Agarwal and
Deepak Agarwal could not have proceeded against for violation of the FUTP
Regulations.
23. We, however, uphold other
directions issued by the Board including the action taken in respect of the
offences purported to have been committed. We also grant liberty to the
authorities to proceed against the offenders not only for other or further
charges to which they made themselves liable under the SEBI Act but also under
the Companies
Act, 1956 and other penal statutes, if attracted.
24. For the reasons
aforementioned, the appeal is allowed to the aforementioned extent. No costs.
...............................J.
[S.B. Sinha] 26
................................J.
[Lokeshwar Singh Panta] New Delhi;
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