Securities and Exchange Board of India Vs. Gaurav Varshney [Supreme Court of India, 15-07-2016]

Securities and Exchange Board of India Act, 1992 – Section 12(1B) – Registration of stock-brokers, sub-brokers, share transfer agents, etc. –


IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

(Jagdish Singh Khehar) and (C. Nagappan) JJ.

July 15, 2016

CRIMINAL APPEAL NOS. 827-830 OF 2012

Securities and Exchange Board of India … Appellant Versus Gaurav Varshney & Anr. … Respondents

WITH CRIMINAL APPEAL NOS. 833-836 OF 2012

Securities and Exchange Board of India … Appellant Versus Parvesh Varshney … Respondent

WITH CRIMINAL APPEAL NO. 252 OF 2015

Major P.C. Thakur … Appellant Versus Securities and Exchange Board of India … Respondent

WITH CRIMINAL APPEAL NO. 251 OF 2015

Sunita Bhagat … Appellant Versus Securities and Exchange Board of India … Respondent

WITH CRIMINAL APPEAL NO. 832 OF 2012 Securities and Exchange Board of India … Appellant Versus Raj Chawla … Respondent

J U D G M E N T

Jagdish Singh Khehar, J.

Criminal Appeal nos. 827-830 of 2012

1. Sub-Section (1B) was inserted into Section 12 of the

Securities and Exchange Board of India Act, 1992

(hereinafter referred to as, the SEBI Act), on 25.1.1995. Section 12(1B) is extracted hereunder:-

12. Registration of stock-brokers, sub-brokers, share transfer agents, etc.

(1B) 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, for the 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.”

The question that arises for consideration in the present criminal appeals is, whether respondent nos. 1 and 2 – Gaurav Varshney and Vinod Kumar Varshney, had violated Section 12(1B), by incorporating M/s. Gaurav Agrigenetics Ltd., under the provisions of the Companies Act, 1956, on 3.7.1995, in the capacity of its first directors and promoters. This position emerges, because it is not a matter of dispute, that M/s. 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.”

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 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.

The provisions of section 12(1B) 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(1B) 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(1B) 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 SEBI Act is directed to send to SEBI information within 21 days from today 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

– Names, details and background of promoters/sponsors

All collective investment schemes which want to take benefit of the proviso of Section 12(1B) 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(1B). 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(1B) 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(1B) 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(1B) provides that till regulations are notified all collective investment schemes which are in existence can continue with their operations till 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(1B) of the SEBI Act and continue their operations are directed to send to SEBI, by 15th 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 maybe filed 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(1B) 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.”

3. In order to appreciate the stance adopted on behalf of respondent nos. 1 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 Vinod 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(1B), which had forbidden the sponsoring or carrying on of a collective investment initiative, without obtaining a certificate of registration from ‘the Board’. Respondent nos. 1 and 2 approached the High Court of Delhi (hereinafter referred to, as the High Court), by filing 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 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. 1 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 M/s. Gaurav Agrigenetics Ltd., on 10.5.1996. Since the aforesaid Form-32 had been submitted with the Registrar of Companies on 30.7.1998, it was contended on behalf of respondent no. 1, that he had no objection if it was assumed (for determination of the present controversy), that respondent no. 1 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 of respondent no. 2, that he had no objection to this Court assuming, that respondent no. 2 had severed his relationship with M/s. 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. 1 – Gaurav Varshney from the directorship of M/s. 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 M/s. Gaurav Agrigenetics Ltd., prior to the coming into existence of the Collective Investment Regulations (with effect from 15.10.1999). The High Court, by its impugned order dated 13.5.2010, had agreed with the proposition canvassed on behalf of respondent nos. 1 and 2, and had quashed Complaint Case no. 1241 of 2003 (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. 1 and 2 in the above noted complaint case.

7. Dissatisfied with the determination rendered by the High Court (vide the impugned order dated 13.5.2010), ‘the Board’ approached this Court, through Criminal Appeal nos. 827-830 of 2012, 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 12(1B), came into effect on the very date Section 12(1B) 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 of registration 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 of registration, on or after 25.1.1995, was absolutely forbidden. It was submitted on behalf of the appellant, that the proviso under Section 12(1B), 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(1B), learned counsel placed reliance on

Orissa State (Prevention & Control of Pollution) Board vs. Orient Paper Mills, (2003) 10 SCC 421

and invited our attention to the following observations recorded therein:-

5. We may at this stage peruse the relevant provisions of the law. Section 21 of the Act provides that subject to the provisions of the said section no person shall establish or operate any industrial plant in an air pollution control area without previous consent of the State Government. An industry which is functioning since before the declaration of the area as air pollution control area shall apply to the Board for consent within the period prescribed for the purpose. Section 22 provides as under:

“22. Persons carrying on industry etc. not to allow emission of air pollutants in excess of the standards laid down by State Board.—No person operating any industrial plant in any air pollution control area shall discharge or cause or permit to be discharged the emission of any air pollutant in excess of the standards laid down by the State Board under clause ( g) of sub-section (1) of Section 17.”

Section 19 empowers the State Government to declare an area as air pollution control area. The relevant part of Section 19 reads as follows:

19. Power to declare air pollution control areas

(1) The State Government may, after consultation with the State Board, by notification in the Official Gazette, declare in such manner as may be prescribed, any area or areas within the State as air pollution control area or areas for the purposes of this Act.

(2) The State Government may, after consultation with the State Board, by notification in the Official Gazette,—

(a) alter any air pollution control area whether by way of extension or reduction;

(b) declare a new air pollution control area in which may be merged one or more existing air pollution control areas or any part or parts thereof.

(3)-(5) ***”

*** *** ***

10. The question for consideration is, as to whether, as long the manner is not prescribed under the rules for declaration of an area as air pollution control area, a valid notification under Section 19(1) of the Act can be published in the Official Gazette or not.

11. So far as the statutory provision is concerned, the Act under Section 19 vests the State Government with power to notify any area, in an Official Gazette, as air pollution control area, but to say that exercise of such power is solely dependent upon framing of the rules prescribing the manner in which an area may be declared as air pollution control area, does not seem to be correct. Section 19 of the Act would read as follows by omitting the words “in such manner as may be prescribed” which part we put into bracket as follows:

“19. Power to declare air pollution control areas.—(1) The State Government may, after consultation with the State Board, by notification in the Official Gazette, declare (in such manner as may be prescribed), any area or areas within the State as air pollution control area or areas for the purposes of this Act. (2)-(4)***”

12. Section 19 says “… such manner as may be prescribed” and not “in the manner prescribed” or “… in the prescribed manner”. The expression used leaves some lever or play in the working of the provision. We would like to lay emphasis on the use of the word “as” which is significant. The manner is dependent upon “as” may be prescribed, if it is not prescribed, there is no manner available such as to be followed. The meaning of the word “as” has been indicated in Concise Oxford English Dictionary, 10th Edn., 2002 amongst others to mean as follows:

*** *** ***

In one of the cases decided by this Court, to be referred later in this judgment “as may be prescribed” has been held to mean “if any”. It is thus clear that such expression leaves the scope for some play for the workability of the provision under the law. The meaning of the word “as” takes colour in context with which it is used and the manner of its use as prefix or suffix etc. There is no rigidity about it and it may have the meaning of a situation of being in existence during a particular time or contingent, and so on and so forth. That is to say, something to happen in a manner, if such a manner is in being or exists, if it does not, it may not happen in that manner. Therefore, the reading of the provision under consideration makes it clear that manner of declaration is to be followed “as may be prescribed” i.e. “if any” prescribed.

13. Thus, in case manner is not prescribed under the rules, there is no obligation or requirement to follow any, except whatever the provision itself provides viz. Section 19 in the instant case which is also complete in itself even without any manner being prescribed as indicated shortly before to read the provision omitting this part “in such manner as may be prescribed”. Merely by absence of rules, the State would not be divested of its powers to notify in the Official Gazette any area declaring it to be an air pollution control area. In case, however, the rules have been framed prescribing the manner, undoubtedly, the declaration must be in accordance with such rules.

14. On the proposition indicated above, a decision reported in