Ritesh Agarwal & Anr vs Securities & Exchange Board Of ...

on 13 May, 2008

Supreme Court of India

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 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.

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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.

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 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.

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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.

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 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

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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..."

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 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

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