Omission In Framing Of Charge Not Fatal By Itself Unless Prejudice Caused To Accused: Madras High Court

The bench of Justice Bharatha Chakravarthy thus imposed two penalties on the company. Firstly, under the unamended Section 24(1) of the Act for allotting shares in violation of the act and secondly under the amended Section 24(2) of the Act for violating the directions of SEBI.

The court observed as under:

This is a case where, whether the charge is complaining of both Section 24(1) and 24(2) and the only error of the Trial Court was not to mention the Section 24(2) expressly. However, Section 24(2) being an offence of the same genus, no prejudice was caused to the appellants and I hold that the second act committed by the appellants after coming into force of the amendment, would amount to an offence under Section 24(2) of the SEBI Act as amended and therefore, under the amended provision, the Sessions Court was right in trying the offence.

Background

In the present case, the appellant company made an allotment of 1,73,995 equity shares of Rs.10/- each to 163 persons. Since this allotment was in violation of the provisions of SEBI (Disclosure and Investor Protection) Guidelines 2000, the matter was taken up by SEBI and by an order dated 10.04.2003, the appellant were directed to refund the money collected under the issue to the investors within a period of 30 days and file a compliance report within 15 days. On failure to comply with the above direction, the appellants would not be able to access the capital market for a period of 5 years and secondly will invite penalty under Section 15HB and prosecution under Section 24 of the SEBI Act.

Since the directions were not complied with, the Assistance Legal Advisor made a private complaint under Section 200 of CrPC for the offences under Section 24(1) r/w Section 27 of SEBI Act, 1992, before the XXIII Metropolitan Magistrate, Saidapet. Under Section 26 of the Act, since the offence was triable by Sessions Judge, the case was committed to the Principle Sessions Judge and was later made over to the XIX Additional Sessions Court, Chennai.

The trial court found the appellants guilty for the offence under Section 24(1) of SEBI Act and imposed a fine of Rs.50,00,000/- on each of the accused and in default of payment of fine, to undergo simple imprisonment for a period of one year. Hence, they approached the High Court.

The appellants submitted that the offence was said to have been committed on 28.03.2001 and at that time the unamended Section 24 and 26 would be applicable. As such, the offence was triable by a Magistrate and the maximum penalty that could have been issued for the said offence is only imprisonment for a period of one year or a fine of Rs.10,000/-, which is the maximum fine leviable by the Magistrate at that point of time. He therefore claimed that charging of the accused under new enhanced Section 24(1) of the SEBI Act itself was erroneous since it came into effect only on 29.10.2002, after the alleged offence was said to have been committed.

The prosecution on the other hand submitted that even though the initial issue of the shares was on 28.03.2001, the show cause notice was issued on 25.10.2002 followed by the order dated 10.04.2003. By the time the directions were issued by SEBI, the new Section 24 and 26 had already come into force and therefore the Trial Court had rightly convicted the appellants.

Court's Observations

After going through the submissions of the parties, the court opined that there were two violations in the present case. Firstly, the appellants had made allotments violating the provisions of the SEBI Act and thus committed an offence under Section 24(1) of the Act. Secondly, the appellants failed to comply with the directions of the SEBI and thus constituted an offence under Section 24(2) of the SEBI Act.

As far as the first violation was concerned, the issue was on 28.03.2001. hence, the punishment imposable was as per the provision of Section 24(1) as it stood prior to the amendment. As far as the second violation was concerned, the same was after the amendment and therefore, the appellants will be liable for the punishment as per the amended Act.

The court also observed that even though a specific charge was not framed for the second offence, the charge framed included the ingredients and facts of the said offence. It was merely an omission to mention the provision of law and no prejudice was caused to the accused in any manner arisen by not framing a specific charge . Thus, second act committed by the appellants after coming into force of the amendment, would amount to an offence under Section 24(2) of the SEBI Act and the Trial Court was right in trying the offence under the amended provisions.

At the same time, the court also observed that even though the court had the power to impose a fine of up to twenty five crore rupees, the same had to be exercised on a rational bases. In the present case, the Sessions Court did not provide any discussion or reason for imposing twenty five crore. Thus, the court deemed it fit to interfere with the order.

The court therefore imposed a fine of Rs. 17,39,950 which was the amount initially ordered to be refunded. The amount was to be paid jointly and separately payable by all the accused and in default they were liable to undergo a simple imprisonment for a period of one year.

Thus, the appellant were convicted for an offence punishable under Section 24(1) of the SEBI Act as it stood prior to the SEBI (amendment act, 2002) and imposed a fine of Rs.10,000/- each. The appellants were also convicted for the offence punishable under Section 24(2) of the SEBI Act as it stands after the SEBI (amendment act, 2002) and were jointly and separately imposed with a fine of Rs.17,39,950/-.

Case Title: Kunnamkulam Paper Mills Ltd. and ors v. Securities and Exchange Board of India

Case No: Crl.A.No.626 of 2019

Citation: 2022 LiveLaw (Mad) 303

Counsel for the Appellants: Mr R.Yashod Vardhan, Senior Counsel for M/s.R.Sunilkumar

Counsel for the Respondent: Mr N.P.Kumar Special Public Prosecutor