In a unique sequence, the Revisional Court declined to intervene in the dismissal of a discharge application filed by Karvy Stock Broking Limited's Chief Executive Officer (Accused No.5). The petition was requisitioned under Section 227 of the Code of Criminal Procedure, 1973, after the Special Judge declined to acquit him of criminal proceedings on the grounds of provisions under the Securities and Exchange Board of India Act, 1992 (SEBI Act), read with the SEBI Regulations.
Background of the Case:
The prosecution case arises out of gargantuan irregularities committed by KSBL, a registered stockbroker and depository participant with SEBI, NSE, BSE, NSDL, and CDSL. The firm, its directors, and top functionaries allegedly pledged clients' securities without law, in the face value of about ? 2,700 crore, and diverted money deposited with it in absence of knowledge or consent of the clients.
These acts were further claimed to be direct contraventions of SEBI circulars, the SEBI (Stock Brokers) Regulations, 1992, and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations).
The applicant, then the CEO, was queued as Accused No.5 and held responsible under Section 27 of the SEBI Act, which makes people in charge of, and responsible for, the affairs of a company's liable when offences are committed.
Applicant's Defence: The applicant argued that he was wrongly implicated since an adjudication order dated 20 April 2023 passed by SEBI’s Whole-Time Member did not impose any penalty on him. In the view of the applicant, this was exoneration on merits and therefore attracted the principle determined by the Supreme Court in Radheshyam Kejriwal v. State of West Bengal (2011) 2 SCC 943 — that criminal prosecution on the basis of the same facts cannot go on if an individual is held innocent in adjudication proceedings. J. Sekar v. Directorate of Enforcement (2022) 7 SCC 370 was also depended on.
The defence was also of the view that the applicant was not de facto in charge of KSBL as well as not directly responsible for the act of pledging client securities. Therefore, Section 27(2) of the SEBI Act could not be used against him.
Response of SEBI: On behalf of SEBI, it was claimed that the applicant was not fully acquitted in the adjudication proceedings. The position that no penalty order has been passed is not tantamount to an order of acquittal.
In fact, the concerned adjudicating authority itself observed that the applicant had participated actively in KSBL's asset gathering campaign, failed to exercise due care expected of a senior officer, and failed to alert anybody to the large-scale borrowing of securities on an off-shelf platform.
SEBI also invoked that under Section 27(1) of the SEBI Act, the vicarious liability is imposed upon all those who were in charge and command of the business of the company at the aforesaid time. Being the CEO, the applicant could not be exempted from liability just because the malfeasance had started prior to his takeover of office or due to the absence of direct proof of personal gain.
Court's Consideration:
The Revisional Court considered whether the proceedings of adjudication provided a bar to prosecution in absolute terms. It observed that law differentiates between instances where adjudication acquits an officer on technical grounds and instances where a finding of innocence in unqualified terms is made. Exoneration provides a bar only in the latter instance. The Court cited precedents of Collector of Customs v. L.R. Melwani (AIR 1970 SC 962), K.G. Premshanker v. Inspector of Police (2002) 8 SCC 87, and State of Bihar v. Ramesh Singh (1977) 4 SCC 39 reaffirmed the position that criminal trials cannot be short-circuited at the stage of discharge solely because adjudication proceedings ended without punishment.
A strong suspicion on the basis of credible material is enough to frame charges and proceed to trial.
The Court noticed that the decision of adjudication did not comprise a clear statement of innocence. On the contrary, it recorded adverse findings on the applicant's shortcomings, like his inactivity as a seasoned expert. These findings negated the argument that the applicant had been entirely cleared.
Decision:
Believing that there were prima facie grounds to prosecute the applicant under Section 27(1) of the SEBI Act, the Court upheld the order of the Special Judge rejecting the plea for discharge. It emphasized that liability of a person in charge of a company is statutory in nature, and discharge at this juncture would amount to premature testing of evidence. Therefore, the Revision Application was withdrawn, and the applicant was directed to be tried according to law.
Section 27, Securities and Exchange Board of India Act - 1992
Securities and Exchange Board of India Act, 1992
Section 227., Code of Criminal Procedure - 1973
Code of Criminal Procedure, 1973
