Delhi District Court
(Refer State vs . Meena Kumari, 1986 Rlr 319). on 29 November, 2007
1
IN THE COURT OF SH. PADAM KANT SAXENA,
ADDITIONAL SESSIONS JUDGE: DELHI.
CC No.48/04 (Old)
CC No. 31/04 (New)
SECURITIES AND EXCHANGE
BOARD OF INDIA, (a statutory
body established under the provisions
of Securities and Exchange Board of
India Act, 1992). having its Regional
Office at Rajendra Place, New Delhi
represented by its Legal Officer,
Mr. Sharad Bansode .....Complainant.
Versus
1. Vatika Agro Industries (I) Ltd.
Andhiyari Bagh North,
Gorakhpur-273015.
2. Sh. Rishi Kumar Pandey,
S/o Late Rama Kan Pandey
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2
R/o. P.O. Gorakhnath,
P.S. Tiwaripur,
Distt. Gorakhpur.
3. Sh. Amar Nath Shukla,
S/o Sh. Ram Kripla Shukla,
R/o Moh. Humayunpur (North),
Distt. Gorakhpur.
4. Ms. Sheela Pandey,
W/o Sh. Rishi Kumar Pandey,
R/o. P.O. Gorakhnath,
P.S. Tiwaripur,
Distt. Gorakhpur. ....... Accused
Date of Institution : 14.01.2004
Date of Final Arguments : 23.11.2007
Judgment reserved on : 23.11.2007
Date of Judgment : 29.11.2007
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3
JUDGMENT
1. The complaint dated 14.01.2004, subject matter of the instant case, had been filed by Securities and Exchange Board of India, ( for short referred to as 'SEBI') on that date before Ld. ACMM, Delhi consequent upon which all accused were ordered to be summoned.
2. In pursuance of order no. F.3 (4)/ADJ/756570 dated 04.12.2004, passed by Ld. District and Sessions Judge, Delhi, the complaint case in question came to be transferred to this court by ld. A.C.M.M. Delhi vide order dated 14.12.2004 .
3. Briefly stated case of SEBI as disclosed in the complaint in question is that it was established under the Securities and Exchange Board of India Act, 1992 (for 3 Of 29 4 short referred to as 'the Act') for providing protection to the interests of investors in securities and to promote the development of and for regulating the securities markets and for matters connected therewith or incidental thereto, that Section 11(1) of the Act casts a duty upon SEBI to protect the development of and to regulate the securities market through appropriate measures, that SEBI in the year 1999 notified regulations for the regulation of the activities of collective investment schemes, titled as Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as 'CIS Regulations' of 'the said regulations;), that the accused no.1 had been operating collective investment schemes and raised an aggregate amount of nearly Rs.0.032 Crores from the general public, that the accused no.1 company filed information/details with SEBI regarding its collective investment schemes pursuant to SEBI Press release dated November 26, 4 Of 29 5 1997, and /or notice dated December 18, 1997, that in terms of Chapter IX of the said regulations, any person who had been operating a collective investment scheme at the time of commencement of the said regulations would be deemed to be an existing collective investment scheme and should comply with the provisions of the said chapter IX, that in terms of Regulation 73(1) of the said regulations, an existing collective investment scheme which failed to make an application for registration with SEBI, should wind up the existing collective investment schemes and repay the amount collected from the investors, that in terms of Regulation 74 of the said regulations, an existing collective investment scheme which was not desirous of obtaining provisional registration from SEBI should have formulated a scheme of repayment and also made such repayment to the existing investors in the manner specified in Regulation 73, that accused no.1 neither applied for registration under the said regulations nor 5 Of 29 6 took any steps for winding up of the schemes and repayment to the investors as provided under the regulations and as such had violated the provisions of Section 12(1B) of the Act and Regulations 5 (1) read with 68(1), 68(2), 73 and 74 of the said regulations, that on December 7, 2000 SEBI by exercising its powers conferred upon it under Section 11B of the Act directed accused no.1 to refund the money collected under the aforesaid collective investment schemes to the persons who invested therein within a period of one month from the date of the said directions, that the accused no.1 intentionally and with dishonest intention evaded the repayment of the amount collected by it from the investors, that accused nos. 2 to 4 were the directors of the accused no.1 and as such persons in charge of and responsible to the accused no.1 for the conduct of its business and hence the complaint in question came to be filed. .
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4. After appearance of accused nos. 1 to 4 notice dated 31.08.2006 was given to them i.e. accused nos. 1 to 4 to which each accused pleaded not guilty and claimed trial.
5. In support of its case, complainant examined only one witness whereafter ld. counsel for the complainant closed his evidence. Thereafter statements of accused were recorded separately.
6. The accused in support of their defence examined three witnesses in all. Thereafter ld. defence counsel closed his evidence.
7. I have heard ld. counsel for the parties and have gone through the records carefully.
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8. The question that arises for consideration is, whether any violation of the provisions of the Act and/or CIS Regulations had been committed by the accused or not.
9. Now the first point that needs to be looked into is, whether accused had been running collective investment scheme/schemes as contemplated by the Act and/or CIS Regulations or not.
10. In the complaint in question in paragraph 6 thereof it has been categorically stated that accused no.1 had been running the collective investment schemes and had raised an aggregate amount of Rs.0.032 crores from the general public. Then in paragraph 18 thereof it was further averred that accused nos. 2 to 4 being directors 8 Of 29 9 of accused no.1 were in charge of and responsible to it i.e. accused no.1 for conduct of its business.
11. Before analysing the evidence available on record, it would be useful to note that there is an important rule of evidence which must never be forgotten and that is, that the witness must be cross- examined on all parts of his testimony which it is intended to dispute, otherwise what the witness says in his examination-in-chief will be accepted as true. (Refer State Vs. Meena Kumari, 1986 RLR 319).
12. Now let us consider the evidence available on record.
13. Ms. Radhika Verma CW-1 in her deposition recorded before this court inter-alia testified that 9 Of 29 10 company sent a letter dated 13.01.1998 to SEBI. This has been proved on record as Ex. CW-1/3. Along with this letter Ex. CW-1/3, accused no.1 Company also sent certified copies of various documents including memorandum of Association. In para 16 of this memorandum of Association names of accused nos. 2 to 4 have been mentioned as its first directors. This witness further proved extract of fax dated 13.01.1998 as Ex. CW-1/2. In this document it was clearly mentioned that M/s Vartika Agro Industries (India) Ltd. had collected Rs.3,24,000/- upto 31.12.2007 under its various schemes. Further in Ex. CW-1/2, name of accused no.2 was mentioned as Managing Director while names of accused nos. 3 and 4 were mentioned as directors of the said company. CW-1 further proved on record letter dated 25.05.1998 Ex. CW-1/4 which was sent by accused no.1 company to SEBI. Genuineness and authenticity of these documents has not been challenged in the cross-examination of this witness. Therefore the 10 Of 29 11 said documents are deemed to have been admitted as correct. (Refer State Vs. Meena kumari (Supra) .
14. It was held in the case of Sita Ram Vs. Santanu Prasad, AIR 1966 SC 1697, that admission of a document is admission of its contents.
15. When the law laid down in the case of Sita Ram (Supra), is applied to the admitted documents referred to hereinbefore, then it stands proved on record that accused no.2 was Managing Director while accused nos. 3 and 4 were directors of the company viz. M/s. Vartika Agro Industries (I) Ltd. on whose behalf Ex. CW-1/2 to Ex. CW-1/4 were sent. It further stands proved on record that till 31.12.2007. M/s. Vartika Agro Industries (I) Ltd. had collected Rs.3,24,000/- under its various schemes.
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16. First and the foremost argument of ld. counsel for accused is that accused nos. 2 to 4 had no concern with accused no.1. During the course of arguments it was pointed out to me that the aforesaid letters related to M/s. Vartika Agro Industries (I) Ltd. while name of accused no.1 is M/s. Vatika Agro Industries (I) Ltd. (underlining is mine to supply emphasis).
17. The question is, should the case of SEBI fail merely on account of the said lapse. At this stage it would be useful to point out that accused no.2 during the course of his statement recorded under Section 313 of the Criminal Procedure Code, 1973 (for short referred to as 'the Code') in response to question no.3 admitted as correct that it was in response to press release referred to in the previous question, that accused company and the co-accused directors admitted vide letter dated 12 Of 29 13 13.01.1998 fax copy of which is Ex. CW-1/2 that a sum of Rs.3,24,000/- had been mobilized till 31.12.2007. Further in response to question no.7 accused no.2 in his statement replied as follows:-
"Q7. It is in evidence against you that the SEBI Collective Investment Scheme (CIS) regulations were notified on 15.10.99 and press release in this regard was issued by SEBI on 20.10.99 copy of which was annexed alongwith letter dated 21.10.99 which was sent to you accused company by registered post. But the letter returned with comments "left". The envelope and the letter are Ext.CW1/5 and CW1/6 respectively. What have you to say ?
Ans. It is correct. Since we had closed our business by 27.2.98, we also closed our office."
18. At this stage, I may also note the incriminating 13 Of 29 14 evidence on record which was put to accused no.1 in question no. 16 and his reply which are as follows:
"Q16. It is in evidence against you that you accused company had neither applied nor had been granted any registration or provisional registration with the SEBI under the SEBI (CIS) Regulations, 1999. What have you to say ?
Ans. It is correct."
19. As regards accused no.3, during his statement under Section 313 of the code incriminating evidence was put to him in the form of question no. 20 and he replied as follows:-
"Q20. What else do you have to say?
Ans. I do not know anything about this company. I do not when it commenced and when it ceased functioning. I am the brother in law of the co-accused but I do not know how I had become director in the
14 Of 29 15 company. I have not signed any paper or on behalf of the company or in relation to its existence."
20. Accused nos. 4 is the wife of accused no.2. Accused no.2 also entered the witness box and examined himself as DW-3 in support of the defence of the accused. In his examination-in-chief, had inter-alia deposed that accused nos. 3, 4 and he himself were directors of accused no.1 company. He further deposed that accused no.1 company had mobilized Rs.3,24,000/- in respect of its various schemes. In his cross- examination DW-3, accused no.2 also admitted that he was managing director of accused no.1.
21. Further on behalf of accused, Sh. Ramesh Pandey was examined as DW-1 and this witness inter- alia testified in his examination-in-chief that he had 15 Of 29 16 invested in M/s Vartika Agro Industries Ltd. In his cross-examination inter-alia he deposed that he could not say if accused company had no office anywhere in India or not.
22. So the evidence on record clearly reveals that despite there being a slight error in the name of accused no.1 viz, absence of alphabet 'r', after the alphabets 'Va' the accused were not misled by the same and no prejudice can be said to have been caused to them. I have no manner of doubt that accused were aware that accused no.1 and M/s Vartika Agro Industries Ltd. mentioned in Ex. CW-1/2 to Ex. CW-1/4 are one and the same. The objection appears to be highly technical. Admittedly address of M/s Vartika Agro Industries Ltd. and M/s Vatika Agro Industries Ltd. accused no.1 in the complaint is the same. Further no such discrepancy was pointed out in the cross-examination of CW-1 16 Of 29 17 Radhika Verma. It is no body's case that any company by the name of M/s Vartika Agro Industries Ltd. existed at "Andhiyari Bagh North, Gorakhpur-273015", which is also the address of M/s Vartika Agro Industries (India) Ltd. Mere omission of alphabet 'r' from the name of accused no.1, in my view is not significant since it has not caused any prejudice to the accused. Objection of the accused in this regard is therefore rejected.
23. The other limb of argument of learned defence counsel is that accused no.2 being managing director and accused nos. 3 and 4 being a directors of accused no.1 did not play any effective role in the day to day affairs thereof and therefore cannot be held liable. In this regard reliance has been placed on two judgments reported as SMS Pharmaceuticals Ltd. Vs. Neeta Bhalla and another 2005 (6) Comp. L.J. 144 and Mrs. 17 Of 29 18 Aruna Bansal Vs. State and Others, 2006 (2) DCR 1.
24. Now as per admitted documents Ex. CW-1/2 and Ex. CW-1/4, accused no.2 was managing director while accused nos. 3 and 4 were directors of accused no.1 at least as on 13.01.1998. So they are presumed to be incharge of affairs of accused no.1. Further on behalf of the accused, accused no.2 entered the witness box and examined himself as DW-3 and in his examination- in-chief inter-alia deposed that accused nos.2 to 4 were directors of accused no.1. Accused no. 3 in his statement under Section 313 of the Code, as mentioned above, also stated that he did not know as to how he became a director of accused no.1 company. Significantly the accused did not lead any evidence to show that accused nos. 2 to 4 were not responsible for running day to day affairs of accused no.1.
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25. A person in the commercial world having a transaction with a company, is entitled to presume that the directors of the company are in charge of the affairs of the company. It is well settled that if any restrictions on their powers are placed by the memorandum or articles of the company, it is for the directors to establish it at the trial. This was so held by the Apex Court in the case of N. Rangachari Vs. BSNL (2007) 5 SCC 108 .
26. Therefore in the face of the said law laid down by the Apex Court , I hold that accused nos. 2 to 4 who are directors of accused no.1, are presumed to be in charge of its affairs particularly when accused nos. 2 to 4 have failed to prove that they were not in charge of affairs of accused no.1 or any restrictions had been placed upon their powers by the memorandum or articles of association of accused no.1. Hence objection 19 Of 29 20 of learned defence counsel in this regard is also rejected.
27. Another argument advanced on behalf of accused is that the company stood closed in the year 1998 itself and it did not exist at the time of enforcement of CIS Regulations.
28. Accused no.2 in his statement recorded under Section 313 of the Code, in response to question no.7 stated that business stand closed by 27.02.1998. As against this, accused no.2 while appearing as DW-3 on behalf of accused no.1 company, stated that business stood closed in June, 1998. So these two stands are contradictory.
29. Now as per admitted letter Ex. CW-1/4 dated 25.05.1998 accused no.1 company was in existence. In 20 Of 29 21 such a fact situation, onus of proof was on the accused to prove that accused no.1 had been wound up thereafter. There is no documentary evidence on record to show this. I am not willing to rely upon mere word of mouth of accused no.2. Therefore I hold that accused have failed to prove that affairs of accused no.1 stood wound up in 1998 itself and on 15.10.1999 when CIS Regulations came into force, accused no.1 was still in existence.
30. Yet another argument raised by learned defence counsel is that the complaint has been filed in January, 2004, whereas cause of action has occurred on 14.01.2001, as per the statement of CW-1. As such the complaint is stated to be time barred as per the provisions of Sections 467 and 468 of the Code, wherein the limitation in respect to offence punishable for one year is of one year, and the present complaint 21 Of 29 22 has been filed after the lapse of three years.
31. At this stage I may also note that CW-1 in her deposition inter-alia deposed as follows:-
"The company failed to apply for registration as per the provisions of the SEBI CIS Regulations and was hence required to wind up its schemes in terms of the provisions of the regulations and submit a report to SEBI in this regard."
32. The said witness further deposed that in view of the company's failure to comply with the provisions of the Regulations, Chairman SEBI vide order dated 07.12.2000 directed the company to refund all the money collected under its various schemes along with returns due to the investors in terms of the offer within 22 Of 29 23 one month from the date of the said offer. Then at another place of her deposition CW1 deposed that the company did not submit any information regarding compliance with either the SEBI Chairman's order or the Regulations and it also did not submit the winding up and repayment report (for short referred to as 'the WRR') in the prescribed format. Further according to her the company neither applied nor was granted any registration or provisional registration with SEBI under SEBI CIS Regulations.
33. Now as per admitted documents Ex. CW-1/2 to Ex. CW-1/4, accused no.1 company had mobilized funds to the tune of Rs.3,24,000/-. This fact is also admitted by defence witness, DW-1 in his examination- in-chief. Deposition of CW1 that accused no.1 neither applied for registration nor was granted any such registration either as per Act or CIS Regulations nor 23 Of 29 24 accused no.1 filed WRR has remained un-controverted and is therefore deemed to have been admitted as correct. Therefore as per CIS Regulations 73 and 74, accused had to wind up its scheme and repay to all its investors. Further it was also incumbent upon accused to file WRR with SEBI. In such a fact situation onus of proof was on accused to prove about refund of money to investors and filing of WRR.
34. Therefore non filing of WRR is admitted. I am not willing to believe mere word of mouth of defence witnesses that entire money of the investors stood repaid particularly when details of names of persons, amount of their investments have not been disclosed and proved. In any case this would be a matter for SEBI to decide after audit of accounts of accused no.1. However,it stands proved on record that despite coming into force of CIS Regulations, accused failed to file WRR. Now this is a 24 Of 29 25 continuing offence and would continue till WRR was filed. Hence it cannot be said that the instant complaint is barred by limitation.
35. Now accused no.1 is a company. Admittedly accused nos. 2 and 4 were its directors on or about 13.01.1998 and continued to be so even at the time of filing the complaint.
36. Section 27 of the Act deals with the commission of offences by the company. According to sub section (1) thereof if an offence has been committed by a company, then every person who at the time of commission of the offence was in charge and was responsible to the company for conduct of the business , as also the company shall be deemed to be guilty of offence. In fact, in the face of the evidence available on record and discussed hereinbefore, it is clear that the 25 Of 29 26 accused nos. 2 to 4 being in charge of affairs of accused no.1 had been running collective investment schemes on or before 13.1.1998 when Ex.CW1/2 was issued by accused no.1 and sent to SEBI. The Regulations came into force w.e.f. 15.10.1999. Accused nos. 2 to 4 continued to be directors of accused no.1 at the time of notification of the said regulations w.e.f. 15.10.1999 and continue to be so even now.
37. Now, as already stated, as per Section 12 (1B) of the Act any person carrying on a collective investment scheme without a certificate of registration from SEBI, in accordance with Regulations is liable to be punished under Section 24 of the Act. As per Ex. CW-1/2 dated 13.01.1998 issued by accused no.1 and sent to SEBI, accused no.1 had been running collective investment schemes and had also mobilized funds from the investors. I have already held that accused no.1 26 Of 29 27 continued to run the said schemes and did not wind up. The regulations came into force w.e.f. 15.10.1999. Now as per regulations accused no.1 should have made an application for grant of a certificate within a period of two months w.e.f. 15.10.1999. Admittedly that was not done. As per Regulation Section 68, accused no.1 should have filed application for registration of the schemes. Now since as per admission of accused they were not desirous of obtaining provisional registration and therefore as per regulation 74, accused no.1 should have formulated a scheme of repayment and also made repayments to investors. Regulation 73 lays down that an existing collective investment scheme failed to make an application, then the same should have been wound up, the information sent to investors within two months i.e. up to 15.12.1999. As per SEBI regulation 73, the repayment had to be made within three months of information to investors. In terms of sub regulation 9 thereof, report had to be filed with SEBI.
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38. Now in the case in hand after Ex. CW-1/2 had been sent by accused no.1 to SEBI, after coming into force of Regulations w.e.f. 15.10.1999, since admittedly the collective investment schemes of accused no.1 were not got registered, burden of proof shifted on the accused to prove the special facts which were in its knowledge like winding up of schemes, intimations to investors about repayment and actual repayment within the prescribed period and also filing of WRR. However, I have no manner of doubt that accused have failed to prove the said facts.
39. Hence, I hold that complainant has been able to prove its case against the accused to the effect that accused no.1 of which accused no.2 to 4 were directors, had been running collective investment schemes and also mobilized funds without getting the same registered with SEBI and also failed to wind up, repay 28 Of 29 29 the investors and file WRR. Hence each accused is held guilty under Section 24 of the Act.
Dictated and announced in the open court today i.e. on 29.11.2007 (PADAM KANT SAXENA) ADDITIONAL SESSIONS JUDGE:
DELHI.
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