Rashima Verma vs Securities & Exchange Board Of ...
2009 Latest Caselaw 231 Del

                  "REPORTABLE"
*           HIGH COURT OF DELHI AT NEW DELHI

+                       Crl.M.C.3080/2007

                             Date of decision: 23.01.2009

#     RASHIMA VERMA                       ..... PETITIONER

!           Through :         Mr.   Sidharth Luthra,Sr.Adv.
                              Mr.   Pramod Kr. Dubey,Adv.
                              Mr.   Shri Singh,Adv.
                              Mr.   Vivek Jain,Adv.

                             Versus

$     SECURITIES & EXCHANGE
      BOARD OF INDIA                      ....RESPONDENTS

^           Through :         Mr. Ashish Agarwal,Adv.
                              Mr. R.K.Singh,Adv.

%
      CORAM:
      HON'BLE MS. JUSTICE ARUNA SURESH

     (1) Whether reporters of local paper may be
         allowed to see the judgment?

     (2) To be referred to the reporter or not? Yes

     (3) Whether the judgment should be reported
         in the Digest ?                     Yes

ARUNA SURESH, J.

1. Petitioner has been summoned vide order dated

15.12.2003 in complaint case No. 1231/2003 titled

„Securities and Exchange Board of India v. M/s.

Divyabhoomi Agro (I) Ltd. & Ors.‟, as director of

the company, in view of the violation under Section

27 of the Securities and Exchange Board of India

Act, 1992 (hereinafter referred to as „SEBI Act‟) by

the learned Additional Sessions Judge. M/s.

Divyabhoomi Agro (I) Ltd. (hereinafter referred to

as „the company‟) was operating Collective

Investment Schemes (hereinafter referred to as

„CIS‟) at the time of coming into force of SEBI

(Collective Investment Schemes) Regulations, 1999

and raised an aggregate amount of Rs. 8,26,800/-

from the general public. The company filed details

with Securities and Exchange Board of India

(hereinafter referred to as SEBI) regarding its CIS,

pursuant to SEBI press release dated 26.11.1997

and public notice dated 18.12.1997. As per the

regulations, any person, who had been operating

CIS at the time of commencement of the said

regulations was deemed to be an existing CIS and

after coming into force of these regulations, the

said person was required to move an application

before SEBI for grant of registration within a

period of two months from the date of notification

of the said regulations.

2. On 15.12.1999 and 29.12.1999, vide letters and

public notice dated 10.12.1999, the company was

given intimation to send its information,

memorandum of all the investors detailing the state

of affairs of the investment schemes and the

amount repayable to each investor and also the

manner in which the repayment of the amount was

to be determined. The company, however, failed to

make an application with SEBI and therefore as per

regulation 73(1), the company was to wound up,

and was required to repay the amount collected

from the investors and as per regulation 74,

company was required to formulate a scheme of

repayment to the existing investors. The company

neither applied for registration under the

regulations nor took steps for winding up of the

schemes and repayment to the investors and thus

violated provisions of SEBI Act and regulations

framed thereunder.

3. On 07.12.2000, SEBI directed the company to

refund the money collected under the CIS to the

persons who invested therein, within a period of

one month from the date of such directions, but the

company failed to comply with the same showing

dishonest intention. Since the company allegedly

caused huge pecuniary damage to the general

public who invested their hard-earned money in the

scheme operated by it, the company committed

violation of regulations of SEBI under Sections

11B, 12(1B) of the SEBI Act and Regulation 5(1)

read with Regulations 68(1), 68(2), 73 and 74 of

the SEBI (CIS) Regulations punishable under

Section 24(1), SEBI Act. The complaint was

accordingly filed against the company as well as

the directors/promoters of the company i.e.

accused Nos. 2-8.

4. Petitioner is arrayed as accused No. 6 in the

complaint and is shown as director/promoter of the

company. The learned Trial Court, on perusal of

the complaint, was of the view that complaint

disclosed commission of offence punishable under

Sections 24 and 27 of SEBI Act and summoned all

the accused persons including the petitioner vide

order dated 15.12.2003. Aggrieved by the said

order, the present petition has been filed.

5. Learned senior counsel for the petitioner, Mr.

Sidharth Luthra, submitted that the summoning

order dated 15.12.2003 deserves to be quashed as

the same was passed without perusing the material

available on the record and also that there are no

substantive allegations in the complaint that

petitioner was in charge of or responsible for the

conduct of business or the day to day affairs of the

company. It is further argued that petitioner was

never a director of the company and was neither in

charge of nor responsible for the conduct of the

business of the company because as per

Memorandum of Association of the company,

petitioner was merely one of the initial subscribers

of the shares of the company and was not the

director.

6. Learned senior counsel for the petitioner has

further argued that allegations against the

petitioner are contained in paragraph 20 of the

complaint only and correspondence as regards

SEBI regulations were addressed to and replied by

the company and no such correspondence was

made by the petitioner on behalf of the company.

It is emphasized that Form No. 32, put on record;

perusal of which would show that the petitioner

was not the director of the company and hence the

summoning order dated 15.12.2003 as against the

petitioner is contrary to the material available on

the record, bad and is liable to be quashed and set

aside.

7. Petitioner has relied upon the following judgments:

a. SMS Pharmaceuticals v. Neeta Bhalla (2005) 8 SCC 89 b. K. Srikanth Singh v. M/s. Northeast Securities Ltd. and Anr. 2007 (3) RCR (Crl.) 934 c. J.N. Bhatia v. State and Anr. 139 (2007) DLT 361 d. Anoop Jhalani v. State & Anr. 144 (2007) DLT 858 e. P.S. Srinivasan & Ors. v. M/s. VLS Finance Ltd. Crl.M.C. 7423-25/2006, 7430- 32/2006, 735-37/2006, 7458-60/2006 (Unreported dated 28.3.2008)

8. Learned counsel for the respondent, Mr. Ashish

Aggarwal, on the other hand, has submitted that

petition is not maintainable, as petitioner has

raised contentions on facts and not on law and the

facts can only be considered by the trial Court

during the course of trial on production of evidence

and not at this stage. It is also argued that accused

had failed to comply with the statutory provisions

and the petitioner being the person in charge of

and responsible for the affairs of the accused

company, was required to wind up the existing

collective scheme when the petitioner and the

accused company failed to register the existing CIS

even after being informed through public notices,

press releases, letters etc. in utter violation of the

regulations of SEBI.

9. Learned counsel for the respondent has further

argued that as per the Government Press Release,

accused company submitted information regarding

its scheme vide letter dated 13.1.1998 and the

name of the petitioner appeared in the list of

promoters/subscribers to the shares as per

Memorandum of Association and also in the letters

dated 1.6.1998 and 25.11.1998 as submitted by the

company; the petitioner was shown to be one of the

directors of the company. Learned counsel for the

respondent has disputed the veracity of Form No.

32 produced by the petitioner to show that

petitioner was not the director of the company.

Learned counsel for the respondent has referred to

the following judgments seeking dismissal of the

petition and to emphasize that this Court should

exercise its inherent powers under Section 482

Code of Criminal Procedure (hereinafter referred to

as Cr.P.C.) in extreme cases:

a. N.Rangachari v. Bharat Sanchar Nigam

Ltd. II(2007) CCR 258(SC)

b. Sushila Devi v. Securities & Exchange

Board of India 144(2007) DLT 47

10. In the petition, petitioner had also raised an issue

regarding the complaint being barred by period of

limitation. However, learned senior counsel for the

petitioner while arguing the case made it clear that

petitioner was not pressing the issue of limitation

and therefore I shall proceed to decide the petition

only on merits of the case.

11. For considering the petition on merits and to

appreciate the submissions of the counsel for the

rival parties, I feel the necessity of reproducing

relevant paragraphs in the complaint whereby the

directors of the company have been roped in by the

complainant:

"7. The accused no. 1 is a company registered under the provisions of the Companies Act and accused nos. 2 to 8 are the directors of the accused no. 1 company. The accused no. 2 to 8 are the person incharge and responsible for the day to day affairs of the company and all were actively connived with each other for the commission of offences.

...........

20. The Accused no. 2 to 8 are 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 are liable for the violations of the Accused No. 1, as provided under Section 27 of Securities and Exchange Board of India Act, 1992."

12. Perusal of the complaint shows accusations as to

the violation of SEBI Regulations and commission

of offence under SEBI Act are essentially against

the company, M/s. Divyabhoomi Agro (I) Ltd. The

complaint contains the details as to the manner in

which the accused company had potentially

violated the SEBI regulations and committed

offences under SEBI Act. However, assertion of

offences committed, putting the liability on the

directors as contained in paragraph 7 and 20 and

reproduced above, only state that, as the company

had committed offences, all directors would be

liable and are liable for the functioning and for

conducting the day to day business of the company.

Mere allegations contained in a line or two against

the directors in paragraphs 7 and 20 without

specifying the violative act committed by any of the

directors would not suffice to make the directors

offenders so as to summon them for the offences

under SEBI Act.

13. Complainant is required to be specific and explicit

as to the nature of allegations should be definite

and coherent to the role played by the director in

committing such offence in the complaint against

the directors of the company. Mere bald averments

in the complaint do not make the directors

offenders. Minimum averments to be made in a

complaint has to contain that the person sought to

be arraigned as an accused was in charge of the

affairs of the company or responsible for the

conduct of its business in such capacity at the time

when the offence was committed, before he is

deemed to be guilty of an offence committed by the

company. A director, manager or secretary or any

other officer of the company would also be deemed

to be guilty, if an offence is committed with his

consent or connivance or is attributable to any

neglect on his part. For that purpose, he need not

be in charge of and responsible to the company for

the conduct of its business.

14. The initial burden is on the complainant to show

that accused was in charge of the affairs of the

company and was responsible for the conduct of its

business or the offence had been committed with

his consent or connivance or is attributable to any

neglect on his part. Necessary averments in this

behalf have to be there in the complaint. In case

the complaint lacks such averments, and a person

is arrayed as accused only on the ground that he

was a director, such a complaint qua him has to be

quashed and no summoning orders in such like

circumstance are called for. There has to be a

specific accusation against the director or each of

the persons arrayed as accused in the complaint

and simple narration of the contents of the

provisions under the statute or the requirements of

law would not be enough to summon such person

as accused.

15. In the present case, the complainant has only

averred that petitioner was director and was in

charge of the affairs of the company and was

responsible for the conduct of its day to day

business. But there is no further elaboration as to

how petitioner was in charge of the affairs of the

company and was responsible for the conduct of its

business. There is not even a whisper nor a shred

of evidence or anything else to show, apart from

the presumption drawn by the complainant in the

complaint that there is an act committed by the

director from which a reasonable inference could

be drawn that petitioner could be vicariously liable.

It was necessary for the complainant to make

averments elaborating the role of such a director in

respect of her working in the company from which

the court could come to a prima facie conclusion

that she was responsible for the conduct of the

business of the company.

16. In SMS Pharmaceuticals v. Neeta Bhalla

(supra) a reference was made to three judge

bench, wherein one of the questions to be

considered was whether a director of the company

would be deemed to be in charge of and

responsible for the day to day affairs of the

company and for the conduct of its business and

therefore deemed to be guilty of the offence

committed by the company unless he proves to the

contrary. It was observed that the said question

was made in view of the fact that at the stage of

issuance of process, the Magistrate has before him,

only the complaint and the accompanying

documents and since Magistrate has power to

reject the complaint at the threshold, it necessarily

suggests that a complainant should make out a

case for issue of process, i.e. prima facie the

ingredients of the offence allegedly committed by

the director are to be satisfied. It was further

observed that simply because a person is director

in the company, he would not be presumed to be

discharging a particular function on behalf of the

company. A person may be a director in the

company but he may not know anything about the

day to day functioning of the company. As a

director, he may be attending meetings of the

Board of Directors of the company where usually

they decide policy matters and guide the course of

business of the company. It may be that Board of

Directors may appoint sub-committees consisting of

one or two directors out of the Board of Directors

of the company who may be made responsible for

the day to day functioning of the company. Thus, it

is clear that necessary averments are ought to be

contained in a complaint before a person can be

subjected to criminal process. A clear case should

be spelled out in the complaint against the person

sought to be made liable because a director is

fastened with vicarious liability for the offence

committed by the company. Mere description of an

accused as director in a company in the complaint

is not sufficient to make him liable for the act of the

company.

17. In the complaint, I do not find any narration or any

specific pleadings against the petitioner to make

her liable as person in charge and responsible for

the day to day affairs of the company and,

therefore, liable for violation of Section 27 of the

SEBI Act, committed by the accused company.

18. Vide letter dated 1.6.1998, the Chairman-cum-

Managing Director accused G.S. Verma, submitted

information as desired, to the Chairman, SEBI,

Bombay and along with this information he

enclosed list of directors and Memorandum and

Articles of Association of the Company. In the list

of directors dated 1.6.1998, petitioner is shown as

one of the directors and her occupation is shown as

service. The Chairman-cum-Managing Director,

accused G.S. Verma again submitted similar

information vide another letter dated 25.11.1998 to

the Chairman, SEBI, Bombay.

19. In the Memorandum of Association, name of the

petitioner appears at Serial No. 5 in the list of

persons as „Subscribers‟. In Form No. 32 dated

29.09.1997, name of the petitioner does not appear

in the list of Managing Director and Directors

appointed as per the Article of Association

indicating that petitioner was not the Director of

the Company at the relevant time. Since petitioner

is shown to be in service at that point of time, she

could not have been actively participating in the

day to day affairs of the company and therefore

could not be said to be responsible for the conduct

of its day to day business.

20. Learned counsel for the respondent has submitted

that respondent could not have known the nature

of work which was assigned to the petitioner as a

director of the company and it is for the petitioner

to prove in evidence during the trial of the case

that she was neither Director nor was responsible

for day to day affairs of the company and for the

conduct of its business. I do not find force in these

submissions. The complainant could have collected

information or derived knowledge, during its

dealings with the company to know the role of the

directors of the company in its day to day business

and from the said personal knowledge which it

could derive during its dealings with the company,

complainant could have made necessary averments

against the directors of the Company who dealt

with it. The complainant could therefore, have

specifically implicated each of the directors who

dealt with it in due course of the business of the

company, besides the Chairman-cum-Managing

Director who otherwise also becomes liable for the

violations committed by the company.

21. Perusal of paragraphs 7 and 20 of the complaint

would show that apart from general allegations

that accused Nos. 2 to 8 were collectively

responsible for day to day affairs of the company

and for the conduct of its business and the affairs

of accused No. 1 were conducted by accused Nos. 2

to 8, there are no specific allegations against the

petitioner. The nature or role played by the

petitioner, the type of transaction conducted by the

petitioner on behalf of accused No. 1 with the

complainant are conspicuously missing in the

complaint. Only a general statement is made in the

complaint that accused Nos. 2 to 8 actively

connived with each other for the commission of

offence being persons in charge and responsible for

the day to day affairs of the company. The

complainant, in this case, could have inspected the

records of the Registrar of Companies, Balance

Sheet of the company and such annual reports

which are public documents.

22. It is pertinent to mention here that complainant

had called upon the accused company to submit its

Certificate of Incorporation, copy of Memorandum

and Articles of Association, Audited Balance Sheet

and list of all the Directors of the company showing

their names, addresses and occupation as well as

compliance certificate, as was required to be

enclosed with the information. Necessary

information was accordingly submitted by accused

G.S. Verma, the Chairman-cum-Managing Director

of the company. Therefore, complainant had

necessary material for the purpose of attributing

role to the petitioner while arraying her as an

accused. The tendency of making all the directors

as accused for facing liability for an offence

committed by the company is on the increase and it

needs rationalization. In J.N. Bhatia & Ors. v.

State & Anr. (Supra), the Court held as follows:

"No doubt, the complainant is an outsider and may not know the internal arrangement of the company and his knowledge, viz.-a- viz. the company has to be limited to his personal knowledge which he derives from his dealings with the company. However, at the same time from his personal knowledge which he derives from his dealings with the company he can make necessary averments regarding the persons who dealt with him. Apart from Chairman and Managing Director, who become liable in any case, in view of the ratio laid down in SMS Pharmaceuticals v. Neeta Bhalla (supra), the complainant can specifically state as to which other director dealt with him in the course of the business and in what manner. There may be a director and/or other person who dealt with him on behalf of the company in negotiating the particular deal with the complainant and/or in issuing the cheque(s) in question or in signing the documents while dealing with the complainant, depending upon the nature of business dealings between the company and the complainant. He may also be a person who had promised the complainant that the cheques(s) would be

honoured on presentation. That apart, the complainant cannot be totally in dark about the affairs of the company. Every company incorporated under the Indian Companies Act is supposed to file its annual returns with the Registrar of Companies. Balance- sheet of the company and such annual returns are public documents. The complainant can always inspect those documents available with the Registrar of Companies, which may throw light by spelling out the role the Directors of a particular company are playing. Thus, the complainant is not in a helpless situation and can gather necessary material for the purpose of attributing role to a particular director/person while arraigning him as accused person. However, tendency is to make all Directors as accused whether they are active Directors or not. It is for this reason that observations of the supreme Court in SMS Pharmaceuticals v. Neeta Bhalla (supra), become relevant where it is stated that since Section 141(1) of the NI Act makes such persons vicariously liable by deeming provision, conditions contained in Section 141(1) have to be strictly complied with by demonstrating that he "had a role to play in relation to the incriminating act" and further that "such a person should know what is attributed to him to make him liable". It may, however, be added here that if the complainant is able to show and there are imputation that such a person, who is Director, Manager, Secretary or other officer of the company and the offence is committed with his consent or connivance or is attributable to any neglect on his part, he can be arraigned as accused as per the provisions of Section 141(2) of the NI Act."

23. It is the paramount responsibility of a Magistrate to

carefully examine the complaint and the pre-

summoning evidence before issuing summons.

Summoning of an accused in a criminal case is a

serious matter and not a mere formality. The Court

issuing process under Section 204 Cr.P.C. has to be

satisfied on the basis of the averments of the

complaint, documents, evidence and other material

available on record that there are sufficient

grounds for proceeding against the accused. In a

criminal complaint, it is the duty of the complainant

to allege and make out all the ingredients of the

offence before calling upon the court to proceed

against the accused. Only legally permissible

presumptions can be raised against the accused

whereas the factual aspect of the allegations in the

complaint are to be established by the complainant

before seeking summoning of the accused, before a

Magistrate sets into motion the criminal law as a

matter of course.

24. N.Rangachari v. Bharat Sanchar Nigam Ltd.

(supra) and Sushila Devi's case (supra) have no

relevance to the facts and circumstances of this

case. In the said two cases, the petitioners were

the Chairman and Managing Directors of the

accused company respectively and the Chairman

and Managing director of the company, in all

circumstances are in charge of the affairs of the

company and are responsible to the company for

the conduct of its business.

25. In the present case, only Mr. G.S. Verma was the

Chairman-cum-Managing Director of the Company

at the time of commission of the alleged offence

and therefore, was the person responsible for the

business of the company. However the summons

have been issued against all the accused persons

who are impleaded as Directors despite prime

accused being the company in the absence of a

specific averments against the petitioner. Even

without taking care of requirements of law whether

prima facie case was made out against the

petitioner, the Magistrate acted mechanically in

passing the impugned order against the petitioner.

26. In view of my detailed discussion as above, the

complaint as against the petitioner (accused No. 6

in the complaint) is not maintainable. Hence, the

complaint and the impugned summoning order qua

the petitioner is accordingly quashed.

Attested copy of the order be sent to the trial court.

ARUNA SURESH (JUDGE) January 23, 2009 rd