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TMI Blog2008 (5) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 per cent 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. As the Board has noticed the said irregularities in great details, it is not necessary for us to repeat the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 : (i)Ritesh Agarwal and Deepak Agarwal being minors, no order of penalty could have been imposed on them. (ii)Apart from Surender Kumar Agarwal, others having not been shown as promoters in the brochure, the impugned judgment cannot be sustained. (iii)The issue in question having been opened on 12-6-1995 and closed on 22-6-1995, the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995 which came into force on and from 25-10-1995 cannot be said to have any application. 6. Ms. Suruchii Aggarwal, learned counsel appearing on behalf of the respondents, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities 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 : "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 provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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. 12. 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 diverge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 15. In Sterlite Industries (India) Ltd. v. SEBI [2001] 31 SCL 485 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. 16. 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in Alka Synthetics Ltd.'s 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..." (p. 543) 17. 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. . . . ." (p. 545) 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 VI-A, provides for imposition of monetary penalty for certain offences specified therein; section 24 emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'a 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." (p. 545) 18. Similar observations were made in BPL Ltd. v. SEBI [2002] 38 SCL 310 (SAT - Mum.) and Videocon International Ltd. v. SEBI, Shri D.R. Mehta, Chairman, SEBI and Dr. R.K. Kakkar, Division Chief, SEBI [2002] 38 SCL 422 (SAT - Mum.). 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 only before the prospective purchasers of the shares but also before the statutory authority. The same, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 'the company') is a company incorporated under the provisions of the Companies Act, 1956. Its promoters are Ritesh Exports Ltd., Secunderabad, Shri Surender Kumar Agarwal, his wife Smt. Rooprekha Agarwal and their two sons Ritesh Agarwal and Deepak Agarwal. Ritesh Exports Ltd. one of the promoters is a group company and a sister concern of the appellant herein. The company came out with a public issue of 30 lakh equity shares of Rs. 10 each for cash at a premium of Rs. 5 per share aggregating Rs. 450 lakhs. A prospectus was issued inviting the general public to invest in the share capital of the company. The issue opened on 12-6-1995 and closed on 22-6-1995. The prospectus stipulated that out of the present issue, 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. The total amount to be invested by the promoters in the public issue was to the tune of Rs. 2.25 crores (Rs.225 lakhs). The prospectus further contained a stipulation that the promoters will bring in their share before the date of opening of the public issue and that the same shall be certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar short of the promoters' quota to the public issue. The shortfall as per the company's own admission is of Rs. 58,70,500. Not only this, we have on record the statement from the bank that cheques worth Rs. 77,29,500 issued by Surender Kumar Agarwal and Mrs. Rooprekha Agarwal - the two promoters - were returned unpaid. Ritesh Exports Ltd. is another promoter of the company. It had contributed towards the promoters' share to the extent of Rs. 58,50,000 by cheques. It has been found from the record of the two companies that a sum of Rs. 36.50 lakhs had been received by Ritesh Exports Ltd. from the company and the said amount was returned back to the company on the following day. In other words, the actual amount received from Ritesh Exports Ltd. is only to the tune of Rs. 22 lakhs. Deepak Agarwal and Ritesh Agarwal are also two promoters of the company and they contributed Rs. 10.5 lakhs each towards the promoters' share. It is clear from the record that they received this amount from Pratha Investments which is the sole proprietorship concern of one Ms. Sharmila Gang who is the wife of Mr. Mukesh Gang who is the auditor of the company. Pratha Investments in turn had received the mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d his family, 14,36,300 shares were allotted to them during the devolvement period. Pawan Kumar Agarwal and his family further sold these shares to Ritesh Capital Ltd. and Pratha Investments through off market transactions at the rate of Rs. 7.50 per share as they were partly paid. The shares were handed over to the Managing Director of the company along with signed blank transfer deeds. The details of the payments received by Pawan Kumar Agarwal and his family members are mentioned in the chart referred to in para 21 of the impugned order. It is clear from this chart that Ritesh Capital Ltd. had paid an amount of Rs. 41,14,500 for acquiring 5,48,600 shares and Pratha Investments had paid Rs. 66,57,750 for acquiring 8,87,700 shares from Pawan Kumar Agarwal and his family. It is relevant to mention here that Ritesh Capital Ltd. which had purchased the shares from Pawan Kumar Agarwal and his family is a group company and a sister concern of the appellant. There is then on record the bank statement of the accounts of Ritesh Capital Ltd. and Pratha Investments which they were maintaining with the State Bank of Patiala. The company, too, was maintaining an account with that bank. The st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Before concluding, we may refer to the request made on behalf of the appellants. Ms. Krishna Sharma, Advocate on behalf of the appellant appeared before us and made a request that the case be adjourned. The ground on which the adjournment was sought is that Mr. Anil Agarwal who was to be present in the court today is not available as he is busy with the admission of his son. We have declined the request for adjournment because it was not necessary for Mr. Anil Agarwal to be present in the court. Moreover we find from the record that on earlier occasions as well adjournments were sought by the appellants from time to ti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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