# SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAV VARSHNEY & ANR

- **Citation:** [2016] 7 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 2016
- **Case number:** Criminal Appeal Nos. 827-830 of2012
- **Bench:** Jagdigh Singh Khehar, C. Nagappan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/securities-and-exchange-board-of-india-v-gaurav-varshney-anr-31597
- **Pages:** 85

## Headnote

Securities and Exchange Board Act, 1992:
s.12(1 B) - Interpretation of - Held: Persons governed by
substantive provision of s.12(JB) (Non-proviso category), that is,
those who had not commenced the activity of sponsoring or carrying
on a collective investment scheme prior to 25.01.1995 are permitted
to commence activities only after obtaining a certificate of
registration - While, persons covered under the proviso category,
B
c
that is, those who were already carrying on such activities were
D
permitted to continue their activities and after the framing of
concerned regulations, they could continue the said activities only
after obtaining a certificate of registration - In other words, a new
· entrepreneur desirous of sponsoring or carrying on any activity in
the nature of collective investment for the first time after 25.1.1995,
could do so only after he/it had obtained a certificate of registration
from 'the Board', in accordance with the Collective Investment
Regulations - Therefore, till such time the Regulations were framed
by 'the Board' uls.12(1 B), and a certificate of registration was
obtained, no fresh entry could be made in the field of collective
investment, by a per.>onlentity not already carrying on such activity -
Securities and Exchange .Board of India (Collective Investment
Schemes) Regulations, 1999.
s. 12(1 B) - Bar under - Held: Any person/entity not falling in
the proviso category (an "existing" operator, of a collective
investment scheme) was barred from coi11111e11cing to sponsor or carry
on any collective investment activity, after the insertion of s.12(1 B)
into the SEBI Act, till such time as he/it had obtained a certificate of
registration from 'the Board', in accordance with the Collective
Investment Regulations - The said bar would, therefore, undoubtedly
extend till the framing of the regulations - The bar, would further
extend, even beyond the framing of the above regulations, till the
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[2016] 7.S.C.R.
concerned new entrepreneur was successful in obtaining a certificate
of registration - Therefore, the period during which the concerned
activities were barred (for the non-proviso category) u/s.12(1 B)
co111111enced fro111 the date of insertion of s.12(1 B) into the SEBI Act
(25.1.1995), and subsisted upto, the actual date when the new
entrepreneur obtained a certificate of registration.
s.12(1B) - Mandatory or directory provision - Held: Use of
negative words in conjunction with the word "shall" makes the
legislative intent absolutely clear, and also mandatory with reference
to those not already engaged in collective investment operations -
Further, contravention of s.12(1 B) entails penal consequences, and
therefore, cannot be construed as directory - The bar created for
new operators, of a collective investment initiative, was, therefore,
absolute and manda_tory.
Securities and Exchange Board of India (Collective Investment
Sche111es) Regulations, 1999: Regn. 5 - "existing collective
invest111ent scheme" - Connotation of - Held: An existing collective
investment scheme, at the time of notification of the regulations,
could only be one which had com111enced its activities prior to
25.1.1995 - A collective investment scheme, which commenced after
25.1.1995, could not be described as an "existing" collective
investment scheme, because the same was statutorily barred, and
wholly impermissible in law.
Criminal jurisprudence: Held: There can be no doubt
whatsoever, that the particulars of the offeni;e, of which an accused
is charged, have to be clearly stated to him - No amount of evidence
can be looked into, for an accusation not levelled or m,vfe out, in a
complaint - This is one of the basic tenets of the criminal
;urisprudence.
Code of Criminal Procedure, 1973:
s.251 - Scope of- Where implications of various proviso to a
section are different, mere mention of section in complaint would
not amount to disclosing to the accused, the particulars of the o

## Text

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[2016] 7 S.C.R. I
SECURITIES AND EXCHANGE BOARD OF INDIA
A
v.
GAURAV VARSHNEY & ANR.
(Criminal Appeal Nos. 827-830 of2012)
JULY 15,2016
(JAGDIGH SINGH KHEHAR AND C. NAGAPPAN, JJ.]
Securities and Exchange Board Act, 1992:
s.12(1 B) - Interpretation of - Held: Persons governed by
substantive provision of s.12(JB) (Non-proviso category), that is,
those who had not commenced the activity of sponsoring or carrying
on a collective investment scheme prior to 25.01.1995 are permitted
to commence activities only after obtaining a certificate of
registration - While, persons covered under the proviso category,
B
c
that is, those who were already carrying on such activities were
D
permitted to continue their activities and after the framing of
concerned regulations, they could continue the said activities only
after obtaining a certificate of registration - In other words, a new
· entrepreneur desirous of sponsoring or carrying on any activity in
the nature of collective investment for the first time after 25.1.1995,
could do so only after he/it had obtained a certificate of registration
from 'the Board', in accordance with the Collective Investment
Regulations - Therefore, till such time the Regulations were framed
by 'the Board' uls.12(1 B), and a certificate of registration was
obtained, no fresh entry could be made in the field of collective
investment, by a per.>onlentity not already carrying on such activity -
Securities and Exchange .Board of India (Collective Investment
Schemes) Regulations, 1999.
s. 12(1 B) - Bar under - Held: Any person/entity not falling in
the proviso category (an "existing" operator, of a collective
investment scheme) was barred from coi11111e11cing to sponsor or carry
on any collective investment activity, after the insertion of s.12(1 B)
into the SEBI Act, till such time as he/it had obtained a certificate of
registration from 'the Board', in accordance with the Collective
Investment Regulations - The said bar would, therefore, undoubtedly
extend till the framing of the regulations - The bar, would further
extend, even beyond the framing of the above regulations, till the
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concerned new entrepreneur was successful in obtaining a certificate
of registration - Therefore, the period during which the concerned
activities were barred (for the non-proviso category) u/s.12(1 B)
co111111enced fro111 the date of insertion of s.12(1 B) into the SEBI Act
(25.1.1995), and subsisted upto, the actual date when the new
entrepreneur obtained a certificate of registration.
s.12(1B) - Mandatory or directory provision - Held: Use of
negative words in conjunction with the word "shall" makes the
legislative intent absolutely clear, and also mandatory with reference
to those not already engaged in collective investment operations -
Further, contravention of s.12(1 B) entails penal consequences, and
therefore, cannot be construed as directory - The bar created for
new operators, of a collective investment initiative, was, therefore,
absolute and manda_tory.
Securities and Exchange Board of India (Collective Investment
Sche111es) Regulations, 1999: Regn. 5 - "existing collective
invest111ent scheme" - Connotation of - Held: An existing collective
investment scheme, at the time of notification of the regulations,
could only be one which had com111enced its activities prior to
25.1.1995 - A collective investment scheme, which commenced after
25.1.1995, could not be described as an "existing" collective
investment scheme, because the same was statutorily barred, and
wholly impermissible in law.
Criminal jurisprudence: Held: There can be no doubt
whatsoever, that the particulars of the offeni;e, of which an accused
is charged, have to be clearly stated to him - No amount of evidence
can be looked into, for an accusation not levelled or m,vfe out, in a
complaint - This is one of the basic tenets of the criminal
;urisprudence.
Code of Criminal Procedure, 1973:
s.251 - Scope of- Where implications of various proviso to a
section are different, mere mention of section in complaint would
not amount to disclosing to the accused, the particulars of the offence
of which they were accused - In the instant case, in the complaint,
director of the company was accused of violating s.12(1 B) of SEBI
Act - s.12(1 BJ has two categories for two class of persons -
Implications for proviso category and the non-proviso category are
SECURITIES AND EXCHANGE BOARD OF INDIA v.
GAURAVVARSHNEY & ANR.
different -A perusal of the charge-sheet reveals, that the respondents
were being treated as belonging to the proviso category - But 'the
Board' treated them as belonging to the non-proviso category -
This is clearly impermissible - s.251 will not remedy the above defect
and deficiency in the complaint - Securities and Exchange Board
Act, 1992.
s.465 - Omissions or irregularities in matters of procedure -
Held: There can be no doubt that omissions and/or irregularities in
matters of procedure can be overlooked, subject to the condition,
that such an omission or irregularity does not occasion "failure of
iustice" - Lack of material facts, which are vital to establish the
ingredients of an offence, cannot be viewed as a procedural
omission -
The above requirement is not procedural, but
substantive - irregularity and omission in the present case, in not
disclosinR to the accused, the particulars of the offence for which
they were being proceeded against, would occasion "failure of
;ustice" - Practice and Procedure - Procedural irregularities.
Disposing of the appeals, the Court
HELD: Criminal Appeal Nos. 827-830 of 2012
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1. On the insertion of Section 12(1B) in the SEBI Act on
25.1.1995, two classes of persons were created. The first class
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comprised of such person(s) who had commenced the activity of
sponsoring or carrying on a collective investment scheme prior
to 25.1.1995 (this category is referred as the proviso category).
This category would be governed by the proviso under Section
12(1B). The second category created by Section 12(1B) was
constituted of persons who had not commenced the activity of
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sponsoring or carrying on a collective investment scheme prior
to 25.1.1995 (this category is referred as the non-proviso
category). The persons covered by the proviso category were
permitted to continue their existing collective investment
activities, till the framing of the Collective Investment
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Regulations. On the framing of the Collective Investment
Regulations, the said persons covered by the proviso category,
were required to obtain a certificate of registration, which would
enable them to continue to operate their existing collective
investment scheme(s). Insofar as the non"proviso category is
concerned, the same was barred from sponsoring or carrying on
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a collective investment initiative, without first obtaining a
certificate of registration from 'the Board', in accordance with
the Collective Investment Regulations. [Paras 15, 16, 17) [31G-H; 32-A-D]
2. The Collective Investment Regulations came into force
on 15.10.1999. A person falling in the proviso category, namely,
an individual who had commenced the activity of sponsoring or
carrying on a collective investment initiative prior to 25.1.1995,
was liable to move an application for registration under Regulation
5 of the Regulations. An application under Regulation 5 could
not have been made by an individual falling under the non-proviso
category, for the simple reason, that an activity of sponsoring or
carrying on a collective investment scheme by the said individual
could not be termed as an "existing" collective investment
scheme. An "existing" collective investment scheme (- as the
heading of Regulation 5, suggests) within the meaning of Section
12(1B) read with the Regulations, could only be one which had
commenced prior to 25.1.1995, i.e. prior to the insertion of Section
12(1B) in the SEBI Act. A collective investment scheme, which
commenced after 25.1.1995, could not be described as an
"existing" collective investment scheme, because the same was
statutorily barred, and therefore, wholly impermissible in law. What
a statute bars, cannot be authorized through regulations. (Para
19) [33-B-C, E-H]
3. ln.sofar as persons falling in the non-proviso category
(namely, those desirous of commencing activities concerning
collective investment, after 25.1.1995) are concerned, such
persons could commence an activity in the nature of collective
investment, after seeking a certificate of registration under the
Regulations. For which purpose, they were required to apply
under Regulation 4 of the Regulations. A perusal of Regulation
4 leaves no room for any doubt, that the same is applicable to a
person" ... proposing to carry any activity ... " in the nature of a
collective investment. All persons who had not commenced to
sponsor or carry on a collective investment scheme before
25.1.1995, would fall in this category. In the above view of the
matter, persons who were desirous to sponsor or carry on the
activity in the nature of collective investment after 25.1.1995,
SECURITIES AND EXCHANGE BOARD OF INDIA v.
GAURAVVARSHNEY & ANR.
were clearly an!l unambiguously barred from doing so, unless
they were possessed of a certificate of registration, issued by
'the Board' under the Regulations. [Para 20) (34-C-H]
4. There can be no doubt, that the date when the Investment
Regulations came into force (-15.10.1999), has no relevance,
insofar as the breach of Section 12(1B) of the SEBI Act, with
reference to such new entrepreneurs, is concerned. The bar to
sponsor or cause to be sponsored, or carry on or cause to be
carried on any collective investment activity by a new
entrepreneur (-who had not commenced the concerned activities,
before 25.1.1995) under Section 12(1B) of the SEBI Act, was not
dependent on the framing of the regulations. The above bar was
absolute and unconditional, till the new entrepreneur (described
above) obtained a certificate of registration, in accordance with
the regulations. [Para 22) (35-E-F]
5. The salient features of Section 12(1B) are: (i) The
Statement of Objects and Reasons of the Securities Laws
(Amendment) Act, 1995, which resulted in the insertion of subSection (IB) in Section 12 of the SEBI Act, reveals that the same
was brought in, on account of past experience of 'the Board', and
the dire need to protect the interests of investors. (ii) The
language of sub-section (lB) of Section 12 of the SEBI Act is
clear and unambiguous - it allowed existing collective investment
scheme(s) entrepreneurs, to continue with the same by creating
an exception in their favour, through the proviso under Section
12(1B). And it barred new operators from commencing collective
investment scheme(s), till after they had obtained a certificate of
registration. (iii) The use of negative words in sub-Section (IB) -
"No person shall ... ", denotes mandatory intent, with reference
to those not already engaged in collective investment operations.
(iv) The use of negative words in conjunction with the word
"shall", further makes the legislative intent absolutely clear, and
also, mandatory, with reference to those not already engaged in
collective investment operations. (v) The contravention of Section
12(1B) entails penal consequences, and therefore, cannot be
construed as directory. The bar created for new operators, of a
collective investment initiative, was, therefore, absolute and
mandatory. [Para 23) [36-B-F]
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Orissa State (Prevention & Control of Pollution) Board
vs. Orient Paper Mills 2003 (2) SCR 741 : (2003) 10
SCC 421; U.P. State Electricity Board, Lucknow vs. City
Board, Mussoorie 1985 (2) SCR 815 : (1985) 2 SCC
16; Union of India vs. A.K. Pandey 2009 (14) SCR
528 : (2009) 10 sec 552 - held inapplicable.
6.1.1. In the complaint dated 15.12.2003, the private
respondents were being treated as operating, an "existing"
collective investment scheme. They were accused i11ter alia, for
having not complied with Regulation 5 of the Regulations. The
first assertion of the Board is that the directors of the company
concerned were pointedly accused of having violated Section
12(1B) of the SEBI Act. A perusal of the complaint, reveal two
accusations against the accused. Firstly, that the accused did not
apply for registration under the Regulations. And secondly, the
accused did not take any steps for winding up of the collective
investment scheme(s) being operated by them, refunding deposits
made by the investors, as per the provisions of the Regulations.
The basis of the accusations levelled against the accused was
not, that they had no right to commence a collective investment
venture, during the period between 25.1.1995 when Section
12(1B) of the SEBI Act came to be inserted, till the requisite
certificate of registration was sought. The complaint did not
include any direct or indirect insinuation, that the accused had
unauthorisedly commenced operations of a collective investment
scheme, after 25.1.1995. Even the date of commencement of
· the collective investment operations, by the accused, was not
expressed in the complaint. [Paras 26, 31, 32] [40-B-C; 43-C-D,
G-H; 44-A-C]
6.1.2. There can be no doubt whatsoever, that the
particulars of the offence, of which an accused is charged, have
to be clearly stated to him. In cas.e the accused in the present
_case were to be charged for having violated Section 12(1B) as
new operators under the non-proviso category, it was imperative
to inform them of all the relevant particulars, namely, that they
had unauthorisedly commenced a collective investment scheme,
during the period when there was a complete bar, against
commencing to sponsor or carry on a collective investment
SECURITIES AND EXCHANGE BOARD OF INDIA v.
GAURAVVARSHNEY & ANR.
scheme. In the absence of the above particulars of the offence,
they could not have been tried or punished for the same. No
amount of evidence can be looked into, for an accusation not
levelled or made out, in a complaint. This is one of the basic
tenets of the criminal jurisprudence. [Para 34) [44-F-H]
6.2. The Board relied on Section 251 Cr.P.C. in support of
second submission.
A perusal of Section 251 Cr.P.C. leaves no
room for any doubt, that" ... the particulars of the offence of which
he is accused shall be stated to him ... ". The particulars for an
offence postulated for the non-proviso category (-where the
activity of a collective investment scheme, is commenced after
25.1.1995), under Section 12(1B) would be the date on which the
accused commenced sponsoring or carrying on a collective
investment scheme. If such date fell within the period when the
initiation of a new collecthe investment endeavour stood barred
under Section 12(1B), the accused had to be accosted of the same.
And only thereupon, the accused would have understood, what
charge was being levelled against him. Merely mention of the
statutory provision, namely, Section 12(1B) would not amount to
disclosing to the accused, the particulars of the offence of which
they were accused. One cannot lose sight of the fact, that
implications for the proviso category (-those who commenced
operations before 25.1.1995) and the non-proviso category
(-those who commenced operations after 25.1.1995) are different.
A perusal of the chargesheet reveals, that the respondents were
being treated as belonging to the proviso category. But 'the
Board' treated them as belonging to the non-proviso category,
and to proceed against them for having engaged themselves in
activities concerning collective investment, on the basis of the
material available on the record of the case. This is clearly
impermissible. Section 251 of the Cr.P.C. will not remedy the
above defect and deficiency in the complaint. [Para 35] (45-A, CG]
6.3. The third submission advanced on behalf of 'the Board',
was based on violation of Section 12(1B) of the SEBI Act. Neither
the complaint nor the charge-sheet filed against the accused
demonstrates that the company in question commenced its
collective investment activities on its own for the first time after
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25.1.1995. It could well be, that an existing collective investment
scheme covered by the proviso category under Section 12(1B),
came to be purchased or taken over by the concerned company,
after its incorporation. There is no bar against a newly incorporated
company, restraining it from taking over an existing business.
Merely the fact that the company under consideration was
incorporated after 25.1.1995, would not be sufficient to
demonstrate the culpability of the accused, insofar as, the restraint
against fresh commencement of collective investment activities
under Section 12(1B) of the SEBI Act is concerned. [Paras 36,
37) [46-A, E-H)
State of MP. vs. Bhooraji, 2001 (2) Suppl. SCR 128 :
(2001) 7 sec 679 - relied on.
6.4. The last submission advanced on behalf of 'the Board',
was based on Section 465 Cr.P.C. Section 465 Cr.P.C. pertains
to omissions or irregularities in matters of procedure. Chapter
XXXV of the Cr.P.C. include Sections 460 to 466. The heading of
the instant Chapter is "Irregular Proceedings". The material
facts constituting the offence, for which an accused is being
charged, must mandatorily be put to the accused.
Irregularity
and omission in the present case, in not disclosing to the accused,
the particulars of the offence for which they were being proceeded
against, would occasion "failure of justice". Accordingly, the lapse
which the appellant desires this Court to overlook and exempt,
cannot be overlooked under Section 465. [Paras 41, 42) (51-C,
E, G)
7. The quashing of the proceedings initiated by 'the Board',
against respondent nos. 1 and 2, calls for no interference, for the
simple reason, that they relate to an alleged breach by M/s.
Gaurav Agrigenetics Ltd., of the Regulations, by treating them
as existing collective investment undertaking. Those belonging
to the proviso category, could only be proceeded against for having.
continued their activities relating to collective investment, without
obtaining registration, after the notification of the Regulations.
By the time the Regulations were notified, respondent nos. 1
and 2 had already. severed their relationship with M/s. Gaurav
Agrigenetics Ltd.
[Para 44) [52-G-H; 53-A-B]
SECURITIES AND EXCHANGE BOARD OF INDIA v.
9
GAURAVVARSHNEY & ANR .
. Criminal Appeal Nos. 833-836 of 2012
A
8. Accused no. 6, had tendered her resignation from the
position of director of M/s. Gaurav Agrigenetics Ltd. with effect
from 6.4.1998. The resignation of the respondent had taken
effect before the Regulations were notified - on 15.10.1999. The
said regulations, therefore, could not have been breached, by
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the respondent. [Para 48) [54-C-D]
Criminal Appeal No. 252 of 2015
9.1. The appellant was in charge, and was responsible to
the company, for the conduct of its business. It is not possible to
accept, that the appellant's activities concerning M/s. Accord
Plantation Ltd., were confined to tendering advice with reference
to its agricultural activities alone. In the above view of the matter,
the appellant was liable to shoulder the responsibilities of the
company relatablc to its business activities, and therefore, was
justifiably proceeded against, under Section 27 of the SEBI Act.
Since it has been effectively established, that the appellant ceased
to be a director on 20.2.2000, and culpability, if at all, would arise
only on 31.3.2000, the proceedings initiated against the appellant
were not sustainable, and would be liable to be quashed. [Paras
53, 56) [64-B-C; 68-A-BJ
9.2. The appellant was not accused of having violated the
substantive provision of Section 12(1B) of the SEBI Act, by
commencing a collective investment undertaking as a new
operator belonging to the non-proviso category (-who had not
commenced the above activity before 25.1.1995). The appellant
was only accused of having breached Regulation 5 of the
Regulations, read with Chapter IX of the said regulations, and
more particularly Regulations 68, 73 and 74). The last date for
moving an appropriate application unde1· Regulation 5, having
been extended from 15.12.1999 to 31.3.2000, the said regulations
could be deemed to have been breached by Mis. Accord Plantation
Ltd., as also, by the appellant, in case such an application had not
been filed under Regulation 5 on or before 31.3.2000. The instant
conclusion is sufficient to exculpate the appellant, who had
severed his relationship, with M/s. Accord Plantation Ltd. with
effect from 20.2.2000. [Para 64) 172-G; 73-A-C)
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[2G i 6) 7 S.C.R.
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Criminal Appeal No. 251 of 2015
10. The proceedings initiated against the appellant were
wholly misconceived, as there was no occasion whatsoever for
the appellant to have violated Regulation 5, read with Regulations
68 to 72, or in the alternative, Regulations 73 and 74 of the
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Collective Investment Regulations. [Para 76) (80-G-H]
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Criminal Appeal No. 832 of 2012
11. The respondent had resigned from the position of
director of M/s. Fair Deal Forests Ltd., on 30.3.1997. The
complaint in the present case was filed against the respondent
on 15.12.2003 i.e., well after the period of one year, calculated
from the date of the respondent's resignation. [Para 87) [85-E-F]
Vasu Dev Singh vs. Union of India 2006 (8) Suppl. SCR
535 : (2006) 12 SCC 753; P.B. Desai vs. State of
Maharashtra 2013 (11) SCR 863 : (2013) 15 SCC 481;
Harshendra Kumar D. vs. Rebatilata Kaley 2011 (2)
SCR 670 : (2011) 3 SCC 351; S.MS. Pharmaceuticals
Ltd. vs. Neeta Bhalla (2005) 8 SCC 89; National Small
Industries Corporation Ltd. vs. Harmeet Singh Paintal
2010 (2) SCR 805 : (2010) 3 SCC 330; Gunma/a Sales
Private Limited vs. Anu Mehta, 2014 (10) SCR 1117 :
(2015) 1 sec 103 - referred to.
Case Law Reference
2003 (~) SCR 741
held inapplicable
Para9
1985 (~) SCR 815.
held inapplicable
Para9
2099 (14) SCR 528
held inapplicable
Para 10
2006 (8) Suppl. SCR 535
referred to
Para 13
2013 (11 ) SCR 863
referred to
Para 28
2001 (2 ) Suppl. SCR 128
relied on
Para 40
(2005) s sec 89
referred to
Para 52
2010 (~) SCR 805
referred to
Para 52
2014 (10) SCR 1117
referred to
Para 52
2911 (2) SCR 670
referred to
Para 60
CRIMINAL APPELLATE JURISDICTION : Criminal Appeal
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Nos. 827-830 of20 I 2.
SECURITIES AND EXCHANGE BOARD OF INDIA v.
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GAURAVVARSHNEY & ANR.
From the Judgment and Order dated 13.05.2010 of the High Court
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of Delhi at New Delhi in Cr. M. C. No. 7468-71 of 2006.
WITH
Crl. A. Nos. 832, 833-836of2012
Crl. A. Nos. 251, 252 of2015.
Ms. Indu Malhotra, Sr. Adv., San jay Mann, Vinay K. Dagar, (For
Ms. Rekha Pandey, Ritesh Agrawal, Jatin Zaveri, Neel Kamal Mishra,
Yakesh Anand, Nimit Mathur (For Sanjeev Anand), Advs. for the
appearing parties.
The Judgment of the Court was delivered by
JAGDISH SINGH KHEHAR, J.
Criminal Appeal nos. 827-830 of 2012
1. Sub-Section (I B) was inserted into Section 12 of the Securities
and Exchange Board of India Act, 1992 (hereinafter referred to as, the
B
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SEBI Act), on 25.1.1995. Section 12( I B) is extracted hereunder:-
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"12. Registration of stock-brokers, sub-brokers, share transfer
agents, etc. -
(1 B) 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 Board in accordance with the
regulations:
Provided that any person sponsoring or cause to be sponsored,
carrying or causing to be carried on any venture capital funds or
collective investment scheme operating in the securities market
immediately before the commencement of the Securities Laws
(Amendment) Act, 1995 for which no certificate of registration
was required prior to such commencement, may continue to operate
till such time regulations are made under clause ( d) of sub-section
(2) of section 30.
Explanation.- For the removal of doubts, it is hereby declared
that, forthe purposes of this section, a collective investment scheme
or mutual fund shall not include any unit linked insurance policy or
scrips or any such instrument or unit, by whatever name called,
which provides a component of investment besides the component
of insurance issued by an insurer."
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The question that arises for consideration in the present criminal appeals
is, whether respondent nos. I and 2-Gaurav Varshney and Vinod Kumar
Varshney, had violated Section 12(1 B), by incorporating M/s. Gaurav
Agrigenetics Ltd., under the provisions of the Companies Act, 1956, on
3. 7.1995, in the capacity ofits first directors and promoters. This position
emerges, because it is not a matter of dispute, that Mis. Gaurav
Agrigenetics Ltd. commenced a collective investment scheme,
immediately on its incorporation.
2. In order to highlight the implications of the amendment, made
on 25.1.1995, the Government of India issued a press release dated
18.11.1997. The text of the same is extracted hereunder:-
"The matter relating to regulating entities which issue instruments
such as agro bonds, plantation bonds etc. has been receiving
Government's attention. While the instruments may be funding
agro based investment activity, it is observed that they often offer
very high rates of return not consistent with normal returns in
such activities. There is, therefore, a high element of risk
associated with such schemes. In order to ensure that investors
make investment decisions with the full knowledge of the risks
involved in such schemes, Government has felt it necessary to
put in place an appropriate regulatory framework for such
schemes. Government after detailed consultation with the
regulatory authorities concerned has decided to treat such schemes
as "Collective Investment Schemes" coming under the provisions
of the Section 11(2)( c) of the SEBI Act. In order to regulate such
Collective Investment Schemes, both from the aspect of investor
protection as well as allowing legitimate investment activity to
take place, SEBI would first formulate draft regulations for this
purpose. These draft regulations would be made available for
public discussion. The investors who have invested in such
schemes as well as entities running such schemes will be requested
to give their comments on pertinent matters to SEBI for enabling
SEBI to formulate appropriate regulations for such Collective
Investment Schemes.
Once these regulations come into force, it is expected that they
will promote legitimate investment activity on plantation and other
agriculture based business, while at the same time give investors
an adequate degree of protection for their investments."
SECURITIES AND EXCHANGE BOARD OF INDIA v.
GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.]
For the same purpose, as stated above, the Securities and Exchange
Board of India (hereinafter referred to as, 'the Board') also issued a
separate press release, dated 26.11.1997. The text of the above press
release, is reproduced below:-
"The Central Government has by a press release dated 18.11.1997
decided that an appropriate regulatory framework for regulating
entities which issued instruments such as agro bonds, plantation
bontls, etc. has to be put in place. The Government has decided
that schemes through which such instruments are issued would
be treated as collective investment schemes coming under the
provisions of the SEBI Act. In terms of the press release, SEBI
has initiated action for drafting regulations for such collective
investment schemes.
The provisions of section 12(1 B) of the SEBI Act prohibit collective
investment schemes including mutual funds from sponsoring any
new scheme till the regulations are notified. While the regulations
for mutual fund schemes have been notified by SEBI, regulations
for collective investment schemes including plantations schemes
require to be notified in view of the press release issued by the
Central Government. These regulations are under preparation and
will be issued in due course. first in draft form for the public
discussion and later in the final form. Till these regulations are
notified, as a result of the provisions of section 12(1 B) of the
SEBI Act, no person can sponsor or cause to be sponsored any
new collective investment scheme and raise further funds.
The provisions of section 12(1 B) provides that till regulations are
notified all collective investment schemes which are operating
can continue with their activities till the regulations are notified.
Any collective investment scheme which is desirous of taking
benefit of the proviso to section 12( 1B) of the SEB I Act is directed
to send to SEBI information within 21 days from today containing
details such as:-
-
Ternis and conditions of the schemes launched
-
Funds raised through all the schemes
-
Promises or assurances or assured returns made in the
scheme
-
Copies of offer document of the scheme
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Names, details and background of promoters/sponsors
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All collective investment schemes which want to take benefit of
the proviso of Section 12(18) are also directed to make an
advertisement only in accordance with the advertisement code
already prescribed by SEBI under the Disclosure and investors
protection guidelines."
In addition to the above, 'the Board' also issued a public notice, on
18.12.1997. The instant public notice also related to, the implications of
Section 12(1 B). The contents of the public notice, are reproduced below:-
"The Central Government has by a press release dated 18.11.1997
decided that an appropriate regulatory framework for regulating
entities which issued instruments such as agro bonds, plantation
bonds, etc. has to be put in place. The Government has decided
that schemes through which such instruments are issued would
be treated as collective investment schemes coming under the
provisions of the SEBI Act. In terms of the press release, SEBI
has initiated action for drafting regulations for such collective
investment schemes. A committee under the chairmanship of Dr.
S.A. Dave has already been constituted.
The provisions of section 12(1 B) of the SEBI Act prohibit collective
investment schemes including mutual funds from sponsoring any
new scheme till the regulations are notified. While the regulations
for mutual fund schemes have been notified by SEBI. regulations
for collective investment schemes including plantations schemes
require to be notified in view of the press release issued by the
Central Government. These regulations are under preparation and
will be issued in due course, first in draft form for the public
discussion and later in the final form. Till these regulations are
notified, it is hereby brought to the notice of the public that as a
result of the provisions of section 12(18) of the SEBI Act. no·
person can sponsor or cause to be sponsored any new collective
investment scheme and raise further funds.
Further, the provisions of section 12( I B) provides that till
regulations are notified all collective investment schemes which
are in existence can continue with their operations ti II the regulations
are notified. It is hereby brought to the notice of the public that
existing collective investment schemes which are desirous of taking
benefit of the proviso to section 12( 18) of the SEBI Act and
continue their operations are directed to send to SEBI. by 15!!!
SECURITIES AND EXCHANGE BOARD OF INDIA v.
GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.]
January 1998 information containing details such as: Terms and
conditions of the schemes launched, Funds raised through all the
schemes, Promises or assurances or assured returns made in the
scheme, Copies of offer document of the scheme and Names,
details and background of promoters/sponsors.
Note: The above information regarding existing collective
investment schemes in northern, southern and eastern region
mayb<' ti led with the respective regional office of SEBI.
In further exercise of the powers under section 11 read with section
11 (B) all collective investment schemes which want to take benefit
of the proviso of section 12(1 B) are also directed to make an
advertisement only in accordance with the advertisement code
already pre.scribed by SEBI under the Disclosure and investors
protection guidelines."
3. In order to appreciate the stance adopted on behalf of
respondent nos. I and 2, it is essential to point out, that in consonance
with Section 12(1B) of the SEBI Act, and in furtherance of the power
vested with 'the Board', under Section 30 of the SEBI Act, 'the Board'
framed regulations - the Securities and Exchange Board of India
(Collective Investment Schemes) Regulations, 1999 (hereinafter referred
to as, the Collective Investment Regulations). The Collective Investment
Regulations, were to come into force, on the date of their publication in
the official gazette. It is not a matter of dispute, that the same were
brought into force, on 15.10.1999.
4. Respondent nos. 1 and 2 - Gaurav Varshney and Vi nod Kumar
Varshney, were aggrieved by the criminal proceedings initiated against
them, on the basis of a complaint filed by 'the Board', under Section 200
of the Code of Criminal Procedure, 1973 (hereinafter referred to as, the
Cr.P.C.), read with Sections 24(1) and 27 of the SEBI Act, alleging, that
they had breached the bar created by Section 12( 1 B), which had forbidden
the sponsoring or carrying on of a collective investment initiative, without
obtaining a certificate ofregistration from 'the Board'. Respondent nos.
I and 2 approached the High Court of Delhi (hereinafter referred to, as
the High Court), by tiling Criminal Miscellaneous Case nos. 7468-7471
of 2006 and Criminal Miscellaneous no. 951 of 2007, for quashing
Complaint Case no. 1241 of 2003, pending in the Court of the Chief
Metropolitan Magistrate, Tis Hazari Courts, Delhi, titled as "SEBI vs.
Gaurav Agrigenetics Ltd. and others", as well as, the order dated
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15.12.2003, by which the Chief Metropolitan Magistrate had summoned
them (in the aforementioned complaint case).
5. The simple contention advanced at the hands of respondent
nos. l and 2 was, that the bar against sponsoring or carrying on a
collective investment scheme, without obtaining a certificate of
registration from 'the Board' under the Collective Investment
Regulations, could arise only after the Collective Investment Regulations
were brought into existence. In this behalf it was pointed out, that the
Collective Investment Regulations were admittedly brought into force
from 15.10.1999. To exculpate their involvement in the proceedings
initiated against them, the main assertion advanced on behalf of
respondent nos. 1 and 2 was, that respondent no. 1 - Gaurav Varshney
had submitted Form-32 with the Registrar of Companies, communicating
the factum of his resignation from the directorship of Mis. Gaurav
Agrigenetics Ltd., on I 0.5.1996. Since the aforesaid Form-32 had been
submitted with the Registrar of Companies on 30.7.1998, it was contended
on behalfofrespondent no. I, that he had no objection ifit was assumed
(for determination of the present controversy), that respondent no. I
had resigned from the directorship of the concerned company on
30. 7.1998. Likewise, it was pointed out, that respondent no. 2 - Vinod
Kumar Varshney, had submitted Form-32 with the Registrar of
Companies, communicating the factum of his resignation from the
directorship of the company, on 15.9.1998. It was however
acknowledged, that Form-32 with respect to his resignation, was submitted
with the Registrar of Companies, on 23.12.1998. It was contended on
behalf ofrespondent no. 2, that he had no objection to this Court assuming,
that respondent no, 2 had severed his relationship with Mis. Gaurav
Agrigenetics Ltd. on 23 .12.1998, i.e. the date when Form-32 was
submitted with the Registrar of Companies.
6. In the background of the fact situation noticed hereinabove, it
was urged, that if the date of resignation of respondent no. I - Gaurav
Varshney from the directorship of Mis. Gaurav Agrigenetics Ltd. is taken
as 30.7.1998, and that of respondent no. 2- Vinod Kumar Varshney, is
taken as 23.12.1998, both of them had admittedly resigned from the
directorship of Mis. Gaurav Agrigenetics Ltd., prior to the coming into
existence of the Collective Investment Regulations (with effect from
15. l 0.1999). The High Court, by its impugned order dated 13.5.2010,
had agreed with the proposition canvassed on behalf of respondent nos.
SECURITIES AND EXCHANGE BOARD OF INDIA v.
GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.]
1 and 2, and had quashed Complaint Case no. 1241 of2003 (pending in
the Court of Chief Metropolitan Magistrate, Tis Hazari Courts, Delhi),
as well as, the order dated 15.12.2003 issued by the said Chief
Metropolitan Magistrate, summoning respondent nos. I and 2 in the above
noted complaint case.
7. Dissatisfied with the determination rendered by the High Court
(vi de the impugned order dated 13.5.20 I 0), 'the Board' approached this
Court, through Criminal Appeal nos. 827-830of2012, to raise a challenge
to the order passed by the High Court.
8. The primary contention advanced on behalf of 'the Board' was,
that the High Court misunderstood and misconstrued the bar created by
Section 12(1B) of the SEBI Act. It was submitted on behalf of the
appellant, that the bar contemplated under Section I 2( I B), came into
effect on the very date Section 12( 18) was inserted into the SEBI Act
(i.e. from 25.1.1995). It was asserted, that the said bar restrained
everyone, from sponsoring or carrying on any collective investment
activity, without obtaining a certificate ofregistration from 'the Board',
under the Collective Investment Regulations. And as_ such, any act of
sponsoring or commencement of a collective investment venture, without
obtaining a certificate ofregistration, on or after 25.1.1995, was absolutely
forbidden. It was submitted on behalf of the appellant, that the proviso
under Section 12( 1 B), made the position absolutely clear and
unambiguous. It was pointed out, that the proviso authorized all persons
who had sponsored or were carrying on a collective investment scheme
" ... immediately before the commencement of the Securities Law
(Amendment) Act, 1995, for which no certificate of registration was
required prior to such commencement...", to continue to operate, till
regulations were framed under clause ( d) of sub-Section (2) of Section
30. Therefore, relying on the proviso under Section 12(1B), it was
submitted, that actions of sponsoring or carrying on an enterprise of
collective investment, were permitted to only such persons, who had
commenced such activities prior to the commencement of the Securities
Law (Amendment) Act, 1995 (i.e., prior to 25.1.1995).
9. In order to substantiate the afore-noted contention, and also, in
order to demonstrate, that the action of 'the Board' in not framing the
Collective Investment Regulations, would have no bearing, to the bar
created under Section 12( I B), learned counsel pla.:ed reliance on Orissa
State (Prevention & Control of Pollution) Board vs. Orient Paper Mills,
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(2003) 10 SCC 421, and invited our attention to the following observations
recorded therein:-
5.