TaxTMI 
TaxTMI 
2011 (2) TMI 1258
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....statutory body established under the provisions of the Act filed a complaint dated 21-12-2002 against the Appellants and Sh. Hemant Sharma one more Director of the Appellant No. 1 who was declared a proclaimed offender during the trial. According to the complaint, the Appellant floated a Collective Investment Scheme (C.I.S.) and collected a sum of Rs. 0.35 crores from the general public. SEBI had notified the Securities and Exchange Board of India (Collective Investment Scheme) Regulations, 1999 ('the Regulations') which were not complied with by the Appellants. The SEBI filed a complaint against the Appellants for violation of sections 11B, 12(1B) of the Act and Regulations 5(1), 68(1), 68(2), 73 & 74 punishable under section 24(1) read with section 27 of the Act, as the Appellant Nos. 2 to 5 and Hemant Sharma being the Directors of the Appellant No. 1 were responsible for the conduct of its business. 3. In the complaint before the learned Metropolitan Magistrate SEBI examined CW1 Ms. Versha Aggarwal, Assistant General Manager and CW2 Ms. Jyoti Jindgar, General Manager. CW1 inter alia deposed and exhibited the authorization to pursue the complaint vide delegation of power, the pu....
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....e Company was directed to be wound up on 5-7-2001. The learned Trial Court erroneously came to the conclusion that the offence continued, however, the said offence could not have continued once the Company was wound up. Notices sent by the SEBI were duly replied vide Ex. CW1/1 wherein it was specifically stated that the Company was desirous of taking the benefit of the provisions of section 12(1B) of the SEBI Act. It is stated that a document cannot be read in piecemeal and it should be read as a whole. The Respondent SEBI relies on the undertaking to ensure compliance as stated in the reply dated 28-7-1998 but does not take into account the first two sub-paragraphs where it is stated that they have not floated any C.I.S. subsequent to the public notice issued on 18-12-1997 and they are not mobilizing any further funds under the existing schemes. It is contended that the provision was applicable to the existing collective investment schemes only. The scheme of the Appellant being an old one and no current funds being mobilized, the public notice did not relate to the Appellant. It is thus prayed that the learned Trial Court erroneously convicted the Appellants hence the appeal be a....
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....with fine, which may extend to twenty five crore rupees or with both. Prior to the amendment brought about on 29-10-2002 the imprisonment was for one year or with fine, or with both and the amount of fine to be imposed was not spelt out. However, with effect from 29-10-2002 the imprisonment has been provided for a term which may extend to ten years or with fine which may extend to Rs. 25 crores or with both. Since in the present case, the offence was committed prior to the amendment, the sentence provided would be one year imprisonment or with fine or with both. 7. Under section 27 of the Act, in cases of offences by companies, every person who at the time when the offence was committed was in-charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence. As per section 12(1B) of the Act, no person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme including mutual funds, unless he obtains a certificate of registration from the SEBI in accordance with the Regulations. The proviso to this sub-section....
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.... registration fails to comply with the provisions of regulation 71; shall wind up the existing scheme. (2) The existing Collective Investment Scheme to be wound up under sub-regulation (1) shall send an information memorandum to the investors who have subscribed to the schemes, within two months from the date of receipt of intimation from the Board, detailing the state of affairs of the scheme, the amount repayable to each investor and the manner in which such amount is determined. (3) The information memorandum referred to in sub-regulation (2) shall be dated and signed by all the directors of the scheme. (4) The Board may specify such other disclosures to be made in the information memorandum, as it deems fit. (5) The information memorandum shall be sent to the investors within one week from the date of the information memorandum. (6) The information memorandum shall explicitly state that investors desirous of continuing with the scheme shall have to give a positive consent within one month from the date of the information memorandum to continue with the scheme. (7) The investors who give positive consent under sub-regulation (6) shall continue with the scheme at their ris....
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....ations were notified on 15-10-1999. The Company was duly informed of this notification vide press release dated 20-10-1999 and by a specific letter dated 21-10-1999. However, the same was returned undelivered with the report "left without address". Letter and the envelope has been exhibited as Ex.CW1/3 and Ex. CW1/4. The Company was further intimated about the regulatory re- quirements in terms of provisions of Regulations 5(1), 73 and 74 for registration, winding up of the schemes and re-payments of the investors etc, vide letters dated 10-2-1999 and 29-12-1999. The letters came back with the report that "left without address" Ex. CW1/5 and Ex. CW1/6 are envelope and letter dated 10-12-1999 and Ex. CW1/7 and Ex. CW1/8 are envelope and letter dated 29-12-1999. A public notice dated 10-12-1999 was also issued in this regard. The Appellant neither applied for registration nor informed the SEBI of the winding up of its scheme. The show-cause notice dated 12-5-2000 issued to the Company for taking action against it was also returned back undelivered with the report "left without address" vide Ex.CW1/9 and CW1/10. No reply to the show-cause notice was received from the Appellant. A remi....
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....testimony of witnesses and the documents exhibited on record, it is proved that, that the Company was incorporated on 20-9-1995. Section 12(1B) of the Act was inserted with effect from 21-1-1995 wherein it was specifically provided that no person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or Collective Investment Schemes including mutual funds, unless he obtains a certificate of registration from the SEBI in accordance with the Regulations. Proviso to this sub-section deals with the companies which were already carrying such business and they were also directed that they could continue the operation till such time Regulations are made under clause (d) of sub-section (2) of section 30. Thus, as on the date of incorporation, there was a clear embargo on the Appellant to sponsor or cause to be sponsored or carry or cause to be carried on any collective investment scheme without obtaining certificate of registration from the SEBI in accordance with the regulations. Only companies which were already carrying on prior to the incorporation of section 12(1B) were permitted to continue the same till the Regulations were framed. Eve....
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....of the complaint, the company was in existence and had not lost its entity as a juristic person and in terms of sections 24 and 27 of the Act, the Appellant and its directors i.e., the persons responsible for day-to-day affairs of the company were liable for the offence committed by them for violation of the Act and Regulations. Similar view was taken in Official Liquidator, Gannon Dunkerley & Co. (Madras) Ltd. v. Assistant Commissioner, Urban Land Tax [1992] 73 Comp. Cas. 168 (Mad.) which reads as under :- "In my view, the Company under liquidation does not lose its existence. The effect of an order of winding up is to place the affairs of the company into the hands of the Official Liquidator for completing the process of winding up, the Official Liquidator being put in possession as 'custodia legis' and managing the affairs for the limited purpose. In the course of administration by the Liquidator, after meeting out the liabilities of the company, he moves the Court for appropriate orders to adjust the rights of contributories among themselves and distribute any assets among the persons entitled thereto. Till such an order of the Court for such distribution is obtained and actua....
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....e of repayment and make such repayment to the existing investors in the manner specified in Regulation 73. Thus, the winding up contemplated under the SEBI (C.I.S.) Regulations, 1999 is a different mechanism of winding up the scheme than what is provided under the provisions of the Companies Act, 1956 which is winding up of the Company itself, and non-compliance thereof is punishable under section 24 read with section 27 of the Act. 14. I find no merit in the contention of the learned defence counsel that no role has been attributed to the Appellant Nos. 2 to 5. The Appellants were the promoters and Directors thus, the responsibility of day-to-day functioning of the Company as has been proved by the complainant witnesses from the memorandum and articles of association is also on them. The Hon'ble Supreme Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla [2005] 8 SCC 891 held that a clear, unambiguous and specific allegation against a person impleaded as an accused that he was in charge of and responsible to the company in the conduct of its business at the material time when the offence was committed is sufficient. This issue was also considered by the Supreme Court in N. Ranga....
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....any and of their being in charge of the company. In Gower and Davies Principles of Modern Company Law (Seventh Edition), the theory behind the idea of identification is traced as follows : "It is possible to find in the cases varying formulations of the underlying principle, and the most recent definitions suggest that the courts are prepared today to give the rule of attribution based on identification a somewhat broader scope. In the original formulation in Lennard's Carrying Company case Lord Haldane based identification on a person 'who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation'. Recently, however, such an approach has been castigated by the Privy Council through Lord Hoffmann in Maridian Global case as a misleading "general metaphysic of companies". The true question in each case was who as a matter of construction of the statute in question, or presumably other rule of law, is to be regarded as the controller of the company for the purpose of the identification rule. But as has already been noticed, the decision in S.M.S. Pharmaceuticals Ltd. (supra) binding on us, has postulated that a director i....
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....levant to reproduce the relevant portion of the complaint filed by the respondent which is duly exhibited and proved by the statement of CW1 Versha Aggarwal : "In view of the above, it is charged that the Accused No. 1 has committed the violation of sections 11B, 12(1B) of Securities and Exchange Board of India Act, 1992 read with Reg. 5(1) read with Regs. 68(1), 68(2), 73 and 74 of the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 which is punishable under section 24(1) of Securities and Exchange Board of India Act, 1992. The Accused Nos. 2 to 6 are the directors and/or persons in charge of the responsible to the Accused No. 1 for the conduct of its business and are liable for the violations of the Accused No. 1, in terms of section 27 of Securities and Exchange Board of India Act, 1992." Besides CW2 in her testimony has stated: "The non-compliance of the SEBI directions and the violations of section 12(1B) of the Act and the Regulations is attributable to accused Nos. 2 to 6, who are the directors of accused No. 1 company. Accused No. 1 company did not get the schemes registered with SEBI prior to mobilization of funds thereunder. Till....
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....esses along with the relevant documents duly exhibited, together with the testimony of defence witness Sh. Tarsem Saini and the contradictory statements given by the Appellants under section 313, Cr.P.C. it can be safely adduced that the case of the contention of the learned counsel for the Appellant is liable to be dismissed, as there is sufficient evidence on record i.e., the complaint, the memorandum of article of associations and the statement of DW1 Tarsem Saini which is cogent and sufficient to show that at the time when the violation of SEBI (C.I.S.) Regulation was carried on by the Accused No. 1 company, the Appellant Nos. 2 to 5 herein were the persons in-charge and responsible for the affairs of the company. As regards compliance of the Regulations and notices, they have stated that since their company was wound up, they were not aware of any such notices and compliance to be made. It would be relevant to note here that the order directing the winding up of the Company were passed on 5-7-2001 whereas the SEBI (C.I.S.) Regulations came into force on 15-10-1999 whereafter all the public notices and notices were sent to the company, which were all prior to the directions for....