REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4681 OF 2006
Ritesh Agarwal & Anr. ...Appellants
Versus
Securities & Exchange Board of India & Ors. ...Respondents
JUDGMENT
S.B. SINHA, J :
1. Ritesh Polysters Ltd. (Company) was a company incorporated and
registered under the provisions of the Companies Act, 1956.
One Surender Kumar Agarwal was shown to be a promoter in the
brochure issued by the Company. However, his wife Rookprekha
Agarwal and their two sons Ritesh Agarwal and Deepak Agarwal
(Appellants, who were said to be minors at the relevant time) also
purported to have made contributions. The Company came out with a
2
public issue of 30 lakh equity shares 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 12.06.1995. It closed on 22.06.1995. 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% 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.
3
As the Board has noticed the said irregularities in great details, it is
not necessary for us to repeat the same once over again. The Board, by
its order dated 9.02.2004, directed:
“40. Therefore, in the interest of the investors
and safety and security of the capital market, in
exercise of powers conferred on me under
Section 4(3) read with Section 11 and 11B of
SEBI Act and Regulation 11 of SEBI
(Prohibition of Fraudulent and Unfair Trade
Practices) Regulations, 1995, I, hereby, direct
M/s. Ritesh Polyster Limited and its promoters,
viz., Ritesh Exports Ltd., Sh. Surendra Kumar
Agarwal, Smt. Roop Rekha Agarwal, Sh.
Ritesh Agarwal and Sh. Deepak Agarwal to
disassociate themselves in every respect from
the capital market related activities and not to
access the capital market for a period of ten
years.
41. Further, in light of the facts and
circumstances of the case, it is already made
out that the public issue by the promoters was
hoax with an intention to perpetrate fraud on
investors. Therefore, I am of the view that it
would be appropriate to pass a direction under
section 11B of the SEBI Act as a remedial
measure. I hereby direct the above named
promoters of Ritesh Polyster Ltd. to buy back
the shares from the allottees/ shareholders
offering an amount at which the shares were
issued i.e. Rs. 15/- per share if the shares are
fully paid or @ Rs. 7.50 per share if the shares
are partly paid and delist Ritesh Polyster Ltd.
from the stock exchanges.”
4
3. An appeal was preferred thereagainst before the Tribunal.
However, none of the findings of fact were in question. The said
findings of fact, therefore, had attained finality.
The Tribunal, by reason of the impugned judgment, negatived the
plea of the appellants Ritesh Agarwal and Deepak Agarwal that they
were minors at the relevant time, stating:
“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.”
4. The Tribunal opined that the Company and its promoters played
fraud on the public and the Board was justified in debarring the
5
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 12.06.1995 and
closed on 22.06.1995, the Securities and Exchange Board of
India (Prohibition of Fraudulent and Unfair Trade Practices
Relating To Securities Markets) Regulations, 1995 (for short
“the FUTP Regulations) which came into force on and from
25.10.1995 cannot be said to have any application.
6
6. Ms. Suruchii Aggarwal, learned counsel appearing on behalf of the
respondents, on the other hand, would contend:
(i) Till the FUTP Regulations came into force, the matter used to
be governed by the Securities and Exchange Board of India
Act, 1992 (for short “the SEBI Act”) and application thereof
was not dependant upon the coming into force of the FUTP
Regulations.
(ii) In the proceedings before the Board, which is civil in nature,
the appellants Ritesh Agarwal and Deepak Agarwal never
claimed themselves to be the minors and, thus, such a plea
cannot be raised where they have been held guilty of
defrauding the public fund.
(iii) The nature of the fraud practised being that they purported to
have transferred their money to the Company on one day and
on the next day they took the same back and, thus, the promoter
having not admittedly contributed in the fund, the impugned
judgment should not be interfered with.
7. The SEBI Act was enacted to provide for the establishment of a
Board to protect the interests of investors in securities and to promote the
7
development of, and to regulate, the securities market and for matters
connected therewith or incidental thereto.
“Board” has been defined in Section 2(1)(a) of the SEBI Act to
mean “the Securities and Exchange Board of India established under
Section 3” thereof.
Chapter IV of the SEBI Act provides for powers and functions of
the Board. Sub-section (1) of Section 11 thereof enjoins a duty upon the
Board to protect the investors in securities and to promote the
development of and to regulate the securities market by such measures as
it thinks fit. The measures referred to in Sub-section (1) of Section 11
may provide for, without prejudice to the generality of the foregoing
provisions, inter alia the following:
“(a) regulating the business in stock exchanges
and any other securities markets;
(b) registering and regulating the working of
stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment
advisers and such other intermediaries who may
be associated with securities markets in any
manner;
8
(ba) ***
(c) ***
(d) ***
(e) prohibiting fraudulent and unfair trade
practices relating to securities markets;
(f) ***
(g) prohibiting insider trading in securities;
(h) ***
(i) ***
(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:
9
“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 provides for registration of stock
brokers, sub-brokers, share transfer agents, etc. Chapter VI A of the
10
SEBI Act provides for penalties and adjudication. Section 15H provides
for penalty for non-disclosure of acquisition of shares and take-overs.
Section 24 of the SEBI Act provides for the offences committed
under the SEBI Act.
Section 30 of the SEBI Act provides for regulation making power.
The Board in exercise of its power conferred upon it under Section 30 of
the SEBI Act made the FUTP Regulations. The said Regulations came
into force on and from 25.10.1995.
8. Indisputably, when the irregularities committed by the Company
and/ or its promoters came to the notice of the Board, it had issued a
notice only on 28.01.2003.
The FUTP Regulations are prospective in nature. Chapter II of the
FUTP Regulations provides for prohibition of fraudulent and unfair trade
practices relating to securities market. Regulation 4 prohibits against
market manipulation; Clause (a) whereof reads as under:
“4. No person shall –
(a) effect, take part in, or enter into, either
directly or indirectly, transactions in securities,
11with the intention of artificially raising or
depressing the prices of securities and thereby
inducing the sale or purchase of securities by
any person”
Regulation 5 of the FUTP Regulations provides for prohibiting
misleading statements to induce sale or purchase of securities.
Regulation 6 thereof prohibits unfair trade practices relating to securities.
Regulation 11 empowers the Board to issue directions in the following
terms:
“11. The Board may, after consideration of the
report referred to in regulation 10 and after
giving reasonable opportunity of hearing to the
person concerned, issue directions for ensuring
due compliance with the provisions of the Act,
rules and regulations made thereunder, for the
purposes specified in regulation 12.”
Regulation 12 of the FUTP Regulations specifies the purpose of
directions.
9. We may also notice that a Company has certain duties and
functions under the Companies Act, 1956. Section 63 thereof provides
12
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 Company for purchase of its own shares. Any
13
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 of Shares and
Takeovers) Regulations, 1997 in the following terms:
“2(h). `Promoter’ means –
(a) any person who is in control of the target
company;
(b) any person named as promoter in any offer
document of the target company or any
shareholding pattern filed by the target
company with the stock exchanges pursuant to
the Listing Agreement, whichever is later;
and includes any person belonging to the
promoter group as mentioned in Explanation I:
Provided that a director or officer of the target
company or any other person shall not be a
promoter, if he is acting as such merely in his
professional capacity.
Explanation I: For the purpose of this clause,
‘promoter group’ shall include:
(a) ***
(b) in case the promoter is an individual –
(i) the spouse of that person, or any
parent, brother, sister or child of that person or
of his spouse;
(ii) any company in which 10% or
more of the share capital is held by the
14promoter or an immediate relative of the
promoter or a firm or HUF in which the
promoter or any one or more of his immediate
relative is a member;
(iii) any company in which a company
specified in (i) above, holds 10% or more, of
the share capital; and
(iv) any HUF or firm in which the
aggregate share of the promoter and his
immediate relatives is equal to or more than
10% of the total.
Explanation II: Financial Institutions,
Scheduled Banks, Foreign Institutional
Investors (FIIs) and Mutual Funds shall not be
deemed to be a promoter or promoter group
merely by virtue of their shareholding.
Provided that the Financial Institutions,
Scheduled Banks and Foreign Institutional
Investors (FIIs) shall be treated as promoters or
promoter group for the subsidiaries or
companies promoted by them or mutual funds
sponsored by them.”
11. It may be true that only Surender Kumar Agarwal was shown as a
promoter in the Brochure along with Shiv Shanker Agarwal and
Mahender Kumar Agarwal, but, indisputably, Rooprekha Agarwal,
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.
15
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 penalty under the SEBI Act. The person who
committed the fraud in their names, viz., Surender Kumar Agarwal
16
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.
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 divergence of funds is also neither in doubt
nor in dispute. The promoter’s contribution has not come in,
furthermore, is not in question.
The Board did not find any justification in the cause shown by the
appellants herein.
The violations which have been found are:
“1) The entire amount collected as
subscription was not kept in a separate account
(public issue account) opened for this purpose
and was being deposited in other account of
other banks also.
2) Ritesh Polyster received only Rs. 35
lakhs as promoters contribution instead of Rs.
2.25 crores. However, they have fraudulently
allotted shares worth Rs. 2.25 crores to the
promoters and hence cheated the other genuine
investors/ underwriters.
17
3) Ritesh purchased the shares back from
the financiers who had bailed out the issue
(under the garb of subscription) using the
public issue proceeds. This is in violation of
Section 77 of the Companies Act, 1956. Thus,
the public issue proceeds have not been utilized
for the purpose it has been raised. Hence, there
has been misstatement in the prospectus to this
effect.
4) The issue did not receive the minimum
subscription of 90% even after the devolvement
period. Hence, the issue should have been
refunded which was not done. Thus, there has
been a misstatement in the prospectus to this
effect.”
The said findings are not in question. The Board, therefore, has
rightly proceeded to take action in terms of the SEBI Act.
The question as to whether the provisions of the FUTP
Regulations are attracted in this case may now be examined.
The FUTP Regulations came into force for the first time on
25.10.1995. Would it apply in a case where the cause of action arose
prior thereto? Ex facie, a penal statute will not have any retrospective
effect or retroactive operation. If commission of fraud was complete
prior to the said date, the question of invoking the penal provisions
contained in the said Regulations including Regulations 3 to 6 would not
arise. It is not that the Parliament did not provide for any penal provision
18
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.
In Sterlite Industries (India) Ltd. v. Securities and Exchange Board
of India [(2001) 31 SCL 485: (2001) 45 CLA 195 (SAT)] , 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.
19
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 from the order that the direction
debarring the appellant accessing the capital
market was issued invoking the powers vested
in the respondent under sections 11 and 11B.
…The Tribunal had occasion to examine the
scope and reach of these sections in Bank of
Baroda v. SEBI [2000] 26 SCL 532 (SAT)
(Mum.) and had expressed the following view:
“53. Section 11 and Section 11B are
interconnected and co-extensive as both these
sections are mainly focussed on investor
protection. On a careful perusal of the said
Section 13 referred to in the earlier paragraphs,
it could be seen that the respondent has been in
no uncertain terms mandated to protect the
interests of investors in securities by such
measures as it thinks fit. Of course those
measures are subject to the provisions of the
Act. The expression ‘measure’ has not been
defined in the Act. So we have to go by its
generally understood meaning. According to
Corpus Juris Secundum measure means
‘anything desired or done with a view to the
accomplishment of a purpose, a plan or course
of action intended to obtain some object, any
course of action proposed or adopted by a
Government’. However, I am not inclined to
agree with the respondent’s view that the power
under Section 11 is unlimited. I am of the view
that the legislature has circumscribed the
20
power, by putting the caveat that these
measures are subject to the provisions of the
Act. The ambit of power is contained within the
frame work of the Act. But within the statutory
frame work such power reigns.
54. While Section 11 deals with the functions
of the Board, Section 11B is on the powers of
the Board. Section 11B is more action oriented,
in a sense it is a functional tool in the hands of
the Board. In effect Section 11B is one of the
executive measures available to the respondent
to enforce its prime duty of investor protection.
As could be seen from the text of the section
reproduced above, 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. 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…”
21
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.”
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
VIA, provides for imposition of monetary
penalty for certain offences specified therein;
section 24 empowers Courts to award
punishment for violation of offences under the
Act etc. Since legislature has deliberately
chosen to create specific offences and penalties
thereto, it is not possible to view that under
Section 11B the respondent is competent to
issue a direction which tantamounts to
imposition of penalties, While widening the
scope of ‘such measures’ used in Section 11, to
include penalties, and thereby stretching the
scope of issuing directions under Section 11B
22
to cover imposition of penalties, the limitation
stated above need be kept in mind. However, it
is understood that the respondent has also been
taking the view that Section 11B is not a penal
provision, but preventive and remedial in its
application. If that is so, it has to be seen
whether the impugned direction prohibiting the
appellant from accessing the capital market for
a period of 2 years from the date of the order is
preventive or remedial. In the absence of any
explanation from the respondent as to what
exactly is meant by ‘accessing the capital
market’, it has to be understood as is understood
in the common parlance – i.e., entry to the
capital market for issuing/offering securities. In
this context, it is to be noted that the charge
against the Appellant is of market
manipulation. The shares of the appellant are
listed/traded in the stock exchanges even today.
That being the case preventing the appellant
raising further capital/offering shares to the
public in the next two years cannot serve as a
preventive measure to debilitate the appellant
indulging in market manipulation. Similarly, by
no stretch of imagination the said direction can
be considered even remedial as prospective
barring of a public issue cannot remedy an act
of market manipulation allegedly indulged for a
specific purpose, 3 years ago. A remedial action
is normally seen as one intended to correct,
remove or lessen a wrong, fault or defect.
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
23
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.”
[Emphasis supplied]
Similar observations were made in BPL Limited v. Securities &
Exchange Board of India, SEBI [2002] 38 SCL 310 (SAT) and Videocon
International Ltd. v. Securities & Exchange Board of India, Shri D.R.
Mehta, Chairman, SEBI and Dr. R.K. Kakkar, Division Chief, SEBI
[2002] 38 SCL 422.
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
24
only before the prospective purchasers of the shares but also before the
statutory authority. The same, however, would itself not mean that a
minor would not be penalized for entering into a contract which per se
was not enforceable. A contract must be entered into by a person who
can make a promise or make an offer. If he cannot make an offer or in
his favour an offer cannot be made, the contract would be void as an
agreement which is not enforceable in law would be void. Section 11 of
the Indian Contract Act provides that the person who is competent to
contract must be of the age of majority. If Ritesh Agarwal and Deepak
Agarwal were minors, as would appear from their birth certificates, they
could not have entered into the contract.
20. We, therefore, are of the opinion that subject to any other or
further order which the Board may pass as against Shri Surender Kumar
Agarwal and Smt. Rooprekha Agarwal, the impugned directions would
not be binding on Ritesh Agarwal and Deepak Agarwal.
21. We do not accept the contention of Ms. Aggarwal that the offence
is a continuing one.
25
22. We do not also accept the contention that Rooprekha Agarwal was
not a promoter and only promoters were Ritesh Polyesters Limited and
Surender Kumar Agarwal. We, however, accept the contention of Mr.
Sundaram that Ritesh Agarwal and Deepak Agarwal could not have
proceeded against for violation of the FUTP Regulations.
23. We, however, uphold other directions issued by the Board
including the action taken in respect of the offences purported to have
been committed. We also grant liberty to the authorities to proceed
against the offenders not only for other or further charges to which they
made themselves liable under the SEBI Act but also under the
Companies Act, 1956 and other penal statutes, if attracted.
24. For the reasons aforementioned, the appeal is allowed to the
aforementioned extent. No costs.
………………………….J.
[S.B. Sinha]
26
…………………………..J.
[Lokeshwar Singh Panta]
New Delhi;
May 13, 2008