TMI Blog2008 (5) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 12-6-1995. It closed on 22-6-1995. 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 per cent of the public issue had been subscribed by the public till the closing date and the promoters who we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... markets in any manner; ( ba )to ( d ) ****** ( e )prohibiting fraudulent and unfair trade practices relating to securities markets; ( f )****** ( g )prohibiting insider trading in securities; ( h )to ( 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 : "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. We may also notice that a Company has certain duties and functions under the Companies Act, 1956. Section 63 thereof provides 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Regulations 3 to 6 would not arise. It is not that the Parliament did not provide for any penal provision 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. 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efect. 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 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 Agarwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lyesters Ltd. Versus Securties and Exchange Board of India JUSTICE N.K. SODHI, PRESIDING OFFICER C. BHATTACHARYA AND R.N. BHARDWAJ, MEMBER APPEAL NO. 44 OF 2004 JULY 31, 2006 ORDER Justice N.K. Sodhi, Presiding Officer. - This order will dispose of a bunch of four Appeal Nos. 41 to 44/2004 in which common questions of law and fact arise and which are directed against a common order. Since arguments were addressed in Appeal No. 44 of 2004, the facts are being taken from this case. Ritesh Polyesters Ltd. (hereinafter called 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor of the company along with stock invests which had been issued long after the closure of the issue and these amounts too, do not appear to have gone into the separate account of the company. Be that as it may, there are other serious irregularities found by the Board during the course of the investigations. As admitted by the company in its reply to the show-cause notice, the promoters had brought in a sum of Rs. 1,66,29,500 by cheques which were deposited with the company. This amount by itself, even if all cheques had been honoured, was far 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of the investigations, which fact is not disputed, that one Pawan Kumar Agarwal and his family members came forward to subscribe to the public issue though belatedly and invested Rs. 1,07,72,250 which is about 49 per cent of the total issue. The 60 days report submitted by the lead manager then indicates that the issue remained unsubscribed only to the extent of 3.49 per cent obviously because Pawan Kumar Agarwal and his family and the underwriters had invested the balance amount. On investment being made by Pawan Kumar Agarwal and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the amount of Rs. 225 crores by way of subscription from the public issue had advanced loans to its sister concerns and Pratha Investments for purchasing its own shares back from Pawan Kumar Agarwal and his family members. This, too, is a serious irregularity because a company after receiving money through a public issue is not expected to divert those funds for purchasing its own shares. 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. Before concluding, we may refer to the request made on behalf of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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