K.M. Venkateswaran and Another vs Assistant Registrar of Companies

A. Arumughaswamy, J.—The petitioners are accused Nos. 7 and 8 and they have come forward to file this petition to quash the proceedings in E.O. C.C. No. 147 of 2003 oh the file of the Additional Chief Metropolitan Magistrate, Economic Offences-I, Egmore, Chennai. The respondent/complainant filed a complaint u/s 68 of the Companies Act, 1956. The allegations in the complaint runs as follows: Accused No. 1 is the managing director of the company and the other accused are the directors of the company. The officers authorised by the Central Government inspected the records of the company u/s 209A of the Act. During the course of inspection they noticed that the company had mobilised Rs. 275 crores on December 30, 1999 and Rs. 29.40 crores on May 20, 2000, through private placement of shares on preferential basis to FIIs/OCHBs/Private Funds/Foreign Companies. However, the shares allotted on May 20, 2000, was fortified by the company for nonpayment of call money. As per the letter of offer issued by the company for the shares allotted on December 30, 1999, the proceeds of the said preferential issue was to be utilised to make the company debt free and also to meet cost of acquisition of additional assets besides funding working capital needs of the company. However, the inspection report revealed that more than Rs. 200 crores of the proceeds of the aforesaid preferential issue was initially utilised by the company to make loans to several companies. On receiving back the loans, the said funds were utilised by the company to invest in the shares of M/s. DSQ Beverages Ltd., M/s. DSQ Holdings Ltd., and M/s. Antarix Applications Ltd., to the extent of Rs. 57.75 crores, 56 crores and 117.60 crores respectively. It is evident from the above that the company had not utilised the funds raised through private placement on December 30, 1999, for the purpose for which it was actually raised and as such the company had fraudulently induced persons to invest in the shares of the company through the aforesaid letter of offer attracting the provisions of section 68 of the Act. Whereas the company did not take any steps to implement the business plan referred to in the letter of offer and has thus failed to fulfill the promise made by it to the FII and others while offering the shares through the letter of offer issued by the company. The statements made by the company in the letter of offer referred to above were, therefore, not true and the same were made with the intent to defraud the persons to whom the shares were offered.

The company had fraudulently induced persons to invest in the shares of the company through the aforesaid letter of offer and the said offer were made with the intent to defraud the persons to whom the shares were offered. The accused as the directors of the company in the said letter of offer, failed to take reasonable steps to comply with the promises made in the letter of offer as stated above. The accused as the directors of the company are responsible for the functioning of the company and also responsible for the implementation of the promises made in the letter of offer and hence the complainant has reasonable cause to believe that various statements made in the letter of offer were made recklessly with a view to defraud the persons as stated above and hence the accused as the directors of the company are liable for the offence u/s 68 of the Act. The said complaint was taken cognisance by the learned Additional Chief Metropolitan Magistrate, Economic Offence, Egmore, Chennai in E.O. C.C. No. 147 of 2003.

The contention of learned counsel appearing for the petitioners is that the first accused is the managing director of the company and he is the final authority and responsible for the investment. A2 to A8 are the directors of the company. The records revealed that they have mobilised funds only from the friends and relatives and they have not received any amount from the public. Therefore, there cannot, be any prosecution against the petitioners. Further, the petitioners are ceased up from the directorship of the company at the relevant point of time. Hence, he prays that the complaint against the petitioners has to be quashed.

Learned counsel appearing for the respondent/complainant contended that the petitioners are the directors of the company and they have mobilised funds for more than 200 crores and since the company had fraudulently induced the persons to invest in the shares of the company through the aforesaid letter of offer and the said offer was made with the intention to defraud the persons to whom the shares were offered, the petitioners are liable for the offence u/s 68 of the Act. Hence, he prays that the petition has to be dismissed.

I have heard the rival submissions and perused the materials available on record.

It is not in dispute that accused No. 1 is the managing director of the company and accused Nos. 2 to 8 are the directors of the company. The complaint has been taken cognisance by the learned Additional Chief Metropolitan Magistrate, Economic Offence, Egmore, Chennai in E.O. C.C. No. 147 of 2003 also not in dispute. From the records it is seen that at the very belated stage the present petitioners have come forward with this quash petition. Learned counsel for the petitioners relying on the handbill and the Master Circular No. 1 of 2011, dated July 29, 2011 See [2011] 165 Comp Cas (St.) 428, issued by the Ministry of Corporate Affairs. Even though the said circular deals with the different aspect now as per this case admittedly a sum of Rs. 200 crores has been mobilised and the said aspect has not been very much denied. Since the mobilisation of amount by the petitioners has been proved incidentally one has to look into the aspect as to whether the said amount has been mobilised from the public or from the relatives of the petitioners as contended by learned counsel for the petitioners. No such documents have been produced by the complainant to show that they have mobilised the funds from the third parties.

Of course learned counsel for the petitioners relied on the judgment of the Supreme Court in the case of Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India reported in Civil Appeal No. 9813 of 2011 (since reported in- Sahara India Real Estate Corporation Ltd. and Others Vs. Securities and Exchange Board of India and Another, wherein it has been held that (page 229):

(a) The SEBI has the powers to administer the provisions referred to in the opening part of section 55A which relates to issue and transfer of securities and non-payment of dividend by public companies like Saharas, which have issued securities to fifty persons or more, though not listed on a recognised stock exchange, whether they intended to list their securities or not.

(b) Saharas were legally obliged to file the final prospectus u/s 60B(9) with the SEBI, failure to do so attracts criminal liability.

(c) First proviso to section 67(3) casts a legal obligation to list the securities on a recognised stock exchange, if the offer is made to fifty or more persons, which Saharas have violated which may attract the penal provisions contained in section 68 of the Act.

(d) Section 73 of the Act casts an obligation on a public company to apply for listing of its securities on a recognised stock exchange, once it invites subscription from fifty or more persons, which Saharas have violated and they have to refund the money collected to the investors with interest.

(e) Saharas have violated the DIP Guidelines and ICDR, 2009 and by not complying with the disclosure requirements and investor protection measures for public, and also violated section 56 of the Companies Act which may attract penal provisions.

(f) 2003 Rules or the 2011 Rules cannot override the provisions of section 67(3) and section 73, being subordinate legislations, 2003 Rules are also not applicable to any offer of shares or debentures to more than forty nine persons and are to be read subject to the proviso to section 67(3) and section 73(1) of the Companies Act.

(g) OFCDs issued by Saharas have the characteristics of shares and debentures and fall within the definition of section 2(h) of the SCR Act. The definition of ''securities'' u/s 2(45AA) of the Companies Act includes ''hybrids'' and the SEBI has jurisdiction over hybrids like OFCDs issued by Saharas, since the expression ''securities'' has been specifically dealt with u/s 55A of the Companies Act.

(h) Section 28(1)(b) of the SCR Act indicates that it is only convertible bonds and share/warrant of the type referred to therein, which are excluded from the applicability of the SCR Act and not debentures, which are separate category of securities in the definition contained in section 2(h) of the SCR Act. The contention of Saharas that OFCDs issued by them are convertible bonds issued on the basis of the price agreed upon at the time of issue and, therefore, the provisions of the SCR Act, would not apply, in view of thus, section 28(1)(b) cannot be sustained.

(i) The SEBI can exercise its jurisdiction under sections 11(1), 11(4), 11A(1)(b) and 11B of the SEBI Act and regulation 107 of ICDR, 2009 over public companies who have issued shares or debentures to fifty or more, but not complied with the provisions of section 73(1) by not listing its securities on a recognised stock exchange.

(j) Saharas are legally bound to refund the money collected to the investors, as provided u/s 73(2) of the Companies Act read with rule 4D of the Companies (Central Government''s) General Rules and Forms, 1956 and the SEBI has the power to enforce those provisions.

(k) Saharas'' conduct invites civil and criminal liability under various provisions like sections 56(3), 62, 68, 68A, 73(3), 628, 629 and so on.

In the said decision even though it has been discussed about the prospectus of the company and the deposit, the facts of the case is not applicable to the present set of facts of this petition. The petitioners are directors is not in dispute. The amount mobilised also is not in dispute. The burden lies upon the petitioners to prove that they have not received any amount from the third parties. For which no document has been forthcoming. Since it is the case of the year 2003, at this stage, I do not find any reason to quash the proceedings against the petitioners. This petition is dismissed. The learned Additional Chief Metropolitan Magistrate, Egmore, Chennai is directed to dispose of the case as expeditiously, as possibly by posting the matter on weekly once basis. Consequently, M.P. Nos. 1 and 2 are closed.