Section 68
PENALTY
FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY
[1998] 17 SCL 455 (GUJ.)
HIGH COURT OF
v.
H.L. GOKHALE, J.
JULY 30, 1998
Section
68 of the Companies Act, 1956, read with sections 15-1 and 15K of the
Securities and Exchange Board of India Act, 1992 and rule 15 of the SEBI
(Appeal to Central Government) Rules, 1993 - Public issue – Fraudulently inducing
persons to invest money - On day of opening issue was over-subscribed nearly 12
times - Before allotment of shares a substantial portion of applications were
withdrawn - On complaint SEBI enquired into matter and found that MD of company
had illegal agreement with another person for gray market operation to boost
prices of shares - SEBI ordered company to refund subscription received from
public issue - Securities Appellate Tribunal after giving two adjournments
dismissed appeal on merit ex parte - Appeal there against on ground that
principles of natural justice was violated - Court granted interim stay of
operation of order - Company diverted fund to sister concern which purchased
land out of that fund - Whether petitioner would be given an opportunity of
being heard once again but that would be on a stringent terms that it would
restore status quo ante and deposit amount with SEBI which was received from
public issue - Held, yes
FACTS
The
petitioner-company floated public issue of 36 lakhs equity shares of Rs. 10
each. When the issue was opened for subscription, it was oversubscribed by
nearly 12 times. However, large number of applications totalling huge number of
shares were withdrawn before the allotment was made. The SEBI receiving
complaint regarding this public issue held an inquiry. It was reported that
'A', the managing director of the company entered into an illegal agreement
with one S, guaranting the payment of Rs. 21 lakhs to S for gray market
operations to illegally boost the prices of the shares. Subsequently, a notice
was given to the company and A was directed to refund the subscription received
from public issue. The petitioner filed appeal before the Securities Appellate
Tribunal against the order but got the case adjourned on plea of
non-availability of their advocate. Ultimately, the appeal was dismissed. The
petitioner filed an application for review which was also rejected. While so
the Bombay Stock Exchange declined listing of shares of the company. Against
all these orders instant petition was filed in which the petitioner contended
that the first order passed by the appellate authority confirming the order of
refund was an order violating principle of natural justice inasmuch as the
petitioner was not heard. It was further contended that the signature of A in
the alleged agreement of A with S was forged signature and, therefore, that
would not have been relied upon. It also stated that a complaint had been filed
with the Criminal Court against S. It was also contended that the concerned
cheque book was issued two days subsequent to the alleged agreement. However,
it was not explained why Rs. 21 lakhs were given to S.
HELD
As far as the
summary hearing of the appeal against refund was concerned, rule 15
of the SEBI (Appeal to Central Government) Rules, 1993 provides that 'on the
day fixed or on any other day to which the hearing may be adjourned, the
appellant shall be heard in support of the appeal'. Rule 15(2) provides that
'in case the appellant does not appear in person or through an authorised
representative when the appeal is called for hearing, the Central Government
may dispose of the appeal on merits'. The requirements of an appropriate
hearing through an advocate is normally expected to be followed, but, it cannot
be permitted to be misused by a litigant, who wants the opportunity of hearing
to be used to the detriment of the parties, which are not before that authority.
In the instant
case after a preliminary inquiry and a full-fledged original proceeding wherein
the petitioner had participated, the petitioner was in terms directed to refund
the subscription received from the public issue. The petitioner had every right
to file the appeal, but at the same time the least that was expected of the
petitioner was to keep the fund intact and not to divert it. After the matter
came up before the Court, initially an ad interim relief in terms of prayer
clause 6(b) was granted which prevented the execution of the impugned orders.
After the matter came before the Court, the petitioner was asked as to what he
had done with the amounts which had been realized from the subscription. A
statement was filed for that purpose in the Court accepting that properties had
been purchased An amount of Rs. 67,60,000 was diverted to the Club for the
utility service of health club and entry road. This Club was supposed to be a
sister concern of the petitioner as stated in the affidavit of A and the directors
of the club and the petitioner were the same persons.
As stated
above, the petitioner had every right of appeal but it was also expected to
keep the corpus intact. That had not been done. The other aspect of the matter
was that out of the two stock exchanges, Bombay Stock Exchange had declined
listing of the shares of this company. When the prospectus of the company
states that permission was applied from more than one stock exchanges and where
the company failed to obtain permission from anyone of such Stock Exchange, the
entire allotment was held to be void vide the Supreme Court decision in
Rishyashringa Jewellery Ltd. v. Stock Exchange [9967] 85 Comp. Cos. 479/[1995]
6 SCL 227. The petitioner submitted that the order of non-listing by the Bombay
Stock Exchange was not final inasmuch as appeal was preferred therefrom. As
narrated above, that appeal had been dismissed by the SEBI for the reason that
the other appeal against the order of refund had come to be dismissed and the
appeal against the order of Stock Exchange had become infructuous.
In the
circumstances narrated above, it was clear that the petitioner had diverted the
funds with respect to which there was an order of the SEBI which directed it to
refund the amounts. The documents of the purchase of land effected thereafter
had been made available and they showed that all these lands were purchased
subsequent to the original order passed by the SEBI. A party which wants to be
heard is not expected to utilise the time for such diversion of funds. In these
circumstances, the petitioner would be given an opportunity to be heard once
again in both the appeals but that would be on stringent terms. In fact the
petitioner ought to refund the entire amount, and restore the status quo ante.
In the circumstances, the appeals were stood revived. The petitioner would
deposit Rs. 50 lakhs with SEBI and A would give a personal undertaking to the
Court that he would pay the remaining amount if the decision in appeals go
against him. The petitioner would create a charge on the properties purchased
out of these funds mentioned in his affidavit. The petitioner had given the
time of four weeks to take the necessary steps within which period the
execution of the impugned order would remain stayed. During this period,
however, the petitioner and A would not deal with, part with, alienate or
encumber any of these properties mentioned in the affidavit. A was also to
instruct the club to stop its activities forthwith inasmuch as they were
obviously ran out of the diverted fund of Rs. 67.60 lakhs that would enable him
to raise the deposit of Rs. 50 lakhs as well
The respondent
SEBI was at liberty to take appropriate action with respect to the recovery of
amounts either from these properties or from the clubor from the bankers to the
issue in the meanwhile short of execution of the impugned orders. In the event,
the petitioner complied with the above terms, within a period of four weeks
these appeals would stand revived. In the event he did not comply, within the
period of four weeks, the orders passed by the original authority would stand
confirmed The above conditions imposing restriction on the petitioner would,
however, stand withdrawn after a period of four weeks. The SEBI was also
expected to take action against the bankers to the issue. The bankers to the
issue hold the application moneys in the nature of trust fund The SEBI would,
therefore, find out whether the bankers were responsible in this and take
appropriate action. In case the petitioner did not want to accept these
conditions, he may inform the SEBI accordingly in which case SEBI would be at
liberty to execute the orders.
CASES
REFERRED TO
Rishyashringa
Jewellery Ltd v. Stock Exchange [1996] 85 Comp. Cas. 479/ [1995] 6 SCL 227 (SC)
and Rich Paints Ltd v. Vadodara Stock Exchange [1998] 92 Comp. Cas. 282/15 SCL
128 (Guj.).
K.S.
Jhaveri for the Petitioner. N.V.
Anjaria and Amar N. Bhatt for the Respondent.
ORDER
1. Heard Mr. Jhaveri for the petitioner;
Mr. S.N. Shelat, Addl. Advocate General for respondent No. 2; Mr. Puj,
intervener for the applicant in Civil Application No. 5229 of 1998; Ms. Advani
for the applicant in Civil Application No. 6889 of 1998. The petitioner-company
floated a public issue of 36 lakhs equity shares of Rs. 10 each. The issue was
opened for subscription on 21-12-1995 and was oversubscribed by nearly 12
times. However, large number of applications totalling to 21126300 (sic) shares
were withdrawn before the allotment was made. Respondent No. 2, Securities
& Exchange Board of India (SEBI) received a complaint in regard to this
public issue. It issued a notice to the petitioner-company and an inquiry was
held. After the inquiry, (wherein amongst other Mr. Atul Shah, Managing
Director of the petitioner was heard), a report was submitted, which
established the involvement of Mr. Atul Shah with one Mr. Shantilal Gandhi,
which led to this oversubscription and subsequent withdrawal of the
applications. An agreement entered into between Atul Shah and Shantilal Gandhi,
which guaranteed the payment of Rs. 21 lakhs by Mr. Atul Shah to Mr. Shantilal
Gandhi for these gray market operations to illegally boost the prices of the
said shares was also brought on record. In view of the report, a notice was
given to the petitioner on 17-5-1996 and thereafter, on hearing the petitioner
and Atul Shah, an order was passed on 19-12-1996 directing Atul Shah to refund
the subscription received from public issue of Jaltarang Motels Ltd. The
petitioner preferred an appeal against that order. During the course of that appeal,
an application was given by the petitioner that their advocate was not
available on the date on which hearing was fixed. In view of that application,
the matter was adjourned to the next day and thereafter by one day more. The
appellate authority, thereafter proceeded to decide the appeal on merits and
dismissed the same.
2. After this
order an application for review was filed and on that being rejected, the
appellate order as well as the order in review has come to be challenged by
this petition. There was another development side by side, namely, that the
listing of shares of the petitioner-company was declined by the Bombay Stock
Exchange. Against that order also an appeal was filed and that came to be
rejected by the SEBI by its order dated 24-12-1996. That order is also
challenged in this petition.
3. Mr.
Jhaveri appearing for the petitioner submitted that the first order passed by
appellate authority confirming the order of refund is an order violating
principle of natural justice inasmuch as petitioner's advocate was not
available and the matter ought not to have been proceeded in that manner. The
second submission of Mr. Jhaveri is that the complaint was proceeded against
the petitioner, in view of the alleged agreement with above referred Mr. Shantilal
Gandhi, Mr. Jhaveri submits that the signature of Mr. Atul Shah of the
petitioner-company on that agreement is a forged signature and since the action
is based on a forged document, it is naturally uncalled for. He also states
that a complaint has been filed with the Ahmedabad Metropolitan Magistrate's
Court against Mr. Gandhi. (The directors of Jaltarang Club are same as
directors of the petitioner-company as stated by Mr. Jhaveri). Mr. Jhaveri
states that the concerned cheque book was issued two days subsequent to the
alleged agreement. It is, however, not explained as to why Rs. 21 lakhs were
given to this Mr. Gandhi.
4. The
third submission of Mr. Jhaveri with respect to the order of Bombay Stock
Exchange and the appellate order is that the appellate order is a mechanical
order, which dismissed the appeal because the other appeal was already
dismissed.
5. As far as
the summary hearing of the appeal against refund is concerned, rule 15 of the
SEBI (Appeal to Central Government, Rules, 1993 provides that "on the day
fixed or on any other day to which the hearing may be adjourned, the appellant
shall be heard in support of the appeal". Sub-rule (2) of rule 15 provides
that "in case the appellant does not appear in person or through an
authorised representative when the appeal is called for hearing, the Central
Government may dispose of the appeal on merits". The requirement of an
appropriate hearing through an advocate is normally expected to be followed,
but, it cannot be permitted to be misused by a litigant, who wants the
opportunity of hearing to be used to the detriment of the parties, which are
not before that authority. In the instant case after a preliminary inquiry and
a full-fledged original proceeding wherein the petitioner had participated, the
petitioner was in terms directed to refund the subscription received from the
public issue of Jaltarang Motels Ltd. The petitioner had every right to file
the appeal, but at the same time the least that was expected of the petitioner
was to keep the fund intact and not to divert it. After the matter came up
before this Court, initially an ad interim relief in terms of prayer clause
6(b) was granted which prevented the execution of the impugned orders. After
the matter came before me, the petitioner was asked as to what he had done with
the amounts which had been realized from the subscription. A statement was
filed for that purpose in this Court accepting that properties have been
purchased at village Vekaria Kishol, Taluka Viramgam at village Vasna near
Ahmedabad and in Jamalpur, Ward-II in Ahmedabad. An amount of Rs. 67,60,000 was
diverted to the Jaltarang Motels Club for the utility service of health club
and entry road. This Jaltarang Club is supposed to be a sister concern of the
petitioner as stated in the affidavit of Mr. Atul Shah in paragraph 4 affirmed
on 29-7-1998 and it is accepted by Mr. Jhaveri that the directors of the club
and the petitioner are the same persons.
As stated
above, the petitioner had every right of appeal but it was also expected to
keep the corpus intact. That has not been done. The other aspect of the matter
is that out of the two stock exchanges, Bombay Stock Exchange had declined
listing of the shares of this company. When the prospectus of the company
states that permission is applied from more than one stock exchanges and where
the company fails to obtain permission from anyone of such stock exchange, the
entire allotment is held to be void vide the Supreme Court decision in
Rishyashringa Jewellery Ltd, v. Stock Exchange [1996] 85 Comp. Cas. 479/[1995]
6 SCL 227. Mr. Jhaveri submits that the order of non-listing by the Bombay
Stock Exchange is not final inasmuch as appeal was preferred therefrom. As
narrated above, that appeal has been dismissed by SEBI for the reason that the
other appeal against the order of refund had come to be dismissed and the
appeal against the order of the stock exchange had become infructuous.
7. In
the circumstances narrated above, it is clear that the petitioner has diverted
the funds with respect to which there was an order of SEBI which directed it to
refund the amounts. The documents of the purchase of land effected thereafter
have been made available and they show that all these lands are purchased
subsequent to the original order passed by the SEBI. A party which wants to be
heard is not expected to utilise the time for such diversion of funds.
8. In
the circumstances stated above, the proper course will be that the petitioner
can be given an opportunity to be heard once again in both the appeals, but
that will be on stringent terms. In fact, the petitioner ought to refund the
entire amount, and restore the status quo ante. Mr. Shelat states that they
should at least deposit Rs. 50 lakhs since admittedly they have diverted Rs.
67,60,000 to their sister concern and Mr. Atul Shah should give personal
undertaking to refund the remaining amount, if required. In the meanwhile the
petitioner should create a charge in favour of SEBI on the properties
purchased. The suggestion of Mr. Shelat deserves acceptance in the interest of
justice. In the circumstances, the two appeals shall stand revived, if:
(a) The petitioner deposits an amount of
Rs. 50 lakhs with SEBI and Mr. Atul Shah gives a personal undertaking to this
Court that he will pay the remaining amount if the decisions in appeals go
against him. Mr. Jhaveri states that the petitioner has only Rs. 6 lakhs
available in the bank and only that much deposit be directed. It is not
possible to accept this suggestion though if he deposits these Rs. 6 lakhs with
the SEBI, same will be adjusted towards the deposit of Rs. 50 lakhs. In the
meanwhile he shall not withdraw any amount from these Rs. 6 lakhs.
(b) The petitioner will create a charge
on the properties purchased out of these funds mentioned in his affidavit,
filed in this Court affirmed on 29-7-1998.
9. The
petitioner is given the time of four weeks to take the necessary steps within
which period the execution of the impugned order will remain stayed. During
this period, however, the petitioner and Mr. Atul Shah will not deal with, part
with, alienate or encumber any of these properties mentioned in the affidavit.
Mr. Atul Shah will also instruct the Jaltarang Club to stop its activities
forthwith inasmuch as they are obviously run out of the diverted fund of Rs.
67,60,000, that will enable him to raise the deposit of Rs. 50 lakhs as well.
Mr. Jhaveri states that it is a separate entity but no further particulars
about it are being given. He accepted that the directors are the same persons.
No prejudice will be caused if the activities of the club are not run for a
period of four weeks.
10. The
respondent SEBI is at liberty to take appropriate action with respect to the
recovery of amounts either from these properties or from the club or from the bankers
to the issue in the meanwhile short of execution of the impugned orders. In the
event, the petitioner complies with the above terms, within a period of four
weeks these appeals will stand revived. In the event he does not comply, within
the period of four weeks, the orders passed by the original authority will
stand confirmed. The above conditions imposing restriction on the petitioner
will, however, stand withdrawn after a period of four weeks.
11. Mr.
Jhaveri states that it is Mr. Gandhi, who was investigate into the complaint
against him and take appropriate action. The SEBI is also expected to take
action against the bankers to the issue. As held by my brother M.S. Shah, J. in
Rich Paints Ltd v. Vadodara Stock Exchange [1998] 92 Comp. Cas. 282 (Guj.), the
'bankers to the issue hold the application moneys in the nature of trust fund'.
The SEBI will, therefore, find out whether the bankers are responsible in this
and take appropriate action. Mr. Jhaveri applies for stay of the order
vis-a-vis the conditions on the club. The request is rejected. This is because
the opportunity of being heard is being given on the conditions stated above
and with stay of execution of the impugned orders in the meanwhile. The
conditions are necessary in the facts of the present case. In case the
petitioner does not want to accept these conditions, he may inform SEBI
accordingly in which case SEBI will be at liberty to execute the order.
12. This petition is accordingly
disposed of in terms of the above order.
[2003] 42 scl 89 (mad.)
High
Court of
Sundaram
Finance Services Ltd.
v.
Grandtrust Finance Ltd.
A. Packiaraj, J.
Section 68, read with section 628, of the
Companies Act, 1956 - Prospectus - Penalty for fraudulently inducing person to
invest money - On basis of representation of accused that shares of company
would be offered for sale to public by certain date, complainant purchased
shares of company - An agreement had also been entered into between complainant
and accused with regard to same - However, three days before that date, without
knowledge of complainant, accused entered into supplementary agreement whereby
‘date as agreed’ stood altered as ‘date to be decided by sponsor in his sole
discretion’ - Whether when matter related to chain of events, subsequent
documents could be taken into consideration for coming to conclusion that there
was an element of cheating at time of representation - Held, yes - Whether, in
instant case, there was sufficient ground for magistrate to take cognizance of
offence as against accused - Held, yes
The complainant filed complaint alleging that
A-1 was the sponsor for the A-3 company. In order to expand their business
operations, A-3 company required finance and for that purpose it had, along
with the A-1, approached and induced the complainant to subscribe for shares.
Relying on the representation that there was a possibility of the shares being
sold at higher price and that the sponsor would arrange to offer the equity
shares for sale to the public not later than 30-4-1996, the complainant
subscribed for the shares of A-3 company. An agreement was entered into between
the complainant and the accused with regard to the same. On 27-4-1996, a
supplementary agreement had been entered into between the complainant and A-3
in which certain amendment had been made. In all other respects, the earlier
divestment agreement stood unaltered along with the A-1 that the shares would
be brought for sale on or before 30-4-1996. However, on the very same day,
without the knowledge of the complainant, A-1 and A-3 had clandestinely entered
into a supplementary agreement wherein they had made an amendment with regard
to the date and by that amendment the date 30-4-1996 stood altered as date to
be decided by the sponsor in his sole discretion.
Therefore, the complainant was said to have
been misled, or a false promise had been given to the complainant by the
sponsor even at the time of representing that the shares would be offered for
sale on 30-4-1996, but the sponsor did not do so and, consequently, the offence
under section 68 read with section 628 had been committed by the accused. The
petitioner urged that the supplementary agreement could not be taken into
consideration, since what has to be seen in a case of cheating is the document
that pertains to the earliest representation, on the basis of which the accused
had parted with the money and the Court had to see whether there was any false
representation or deception on that date on which such a representation was
made and, consequently, any offence was said to have been made out.
In a case of a private complaint, there are
two stages, one is taking cognizance and the other is framing charges. In the
instant case, the magistrate had taken cognizance. So, in such circumstances,
one had to consider whether it was necessary for the magistrate to go deep into
the complaint and the documents to see whether there were enough materials to
frame charges and quashing the prosecution at that stage would amount to
nipping it in the bud. It may not be so, since if there is a grave suspicion
that the accused would have committed an offence, it is enough for the Court to
frame charges.
True, the Court must be satisfied to hold that
there was deception at the time of representation. But that cannot be gauged
only on the basis of the earliest representation alone. No one would ever at
the first instance itself come forward with any mis-statements, enabling the
person to fall into the trap. On the other hand, a sharp-witted cheat would try
to make it appear as if he is making a genuine offer at the first instance and
lure people into the transaction and it is only later on, he would bring out
his true colours and ultimately cheat them. Therefore, when the matter relates
to a chain of events, one cannot take into consideration the earliest document
alone and come to a conclusion that there was an element of cheating at the
time of representation. The subsequent documents which had been entered into,
especially the two documents in the form of agreements, one relating to the
complainant and the accused and the other between the first and the third accused
inter se, had been prepared only on 27-4-1996, and the agreement in which the
complainant was a party did not contain any amendment, nor did it show that the
shares should be brought for sale by the sponsor on the date and time as might
be decided by the sponsor in its absolute discretion. However, in the agreement
between A-1 and A-3, the amendment had been carried out. That obviously, was to
drag on the process of bringing the shares for sale and admittedly, it
transpired that the shares had not yet been brought for sale.
The facts of the case revealed that there was
a chain of events taking place from the year 1995 to April 1996, and,
consequently, there was sufficient ground for the magistrate to take cognizance
of the offence as against the accused.
R. Ramakrishnan v. V.S. Dhanasekar [1981] LW
(Crl.) 178 (Mad.), S.W. Palanitkar v. State of Bihar [2002] SCC (Crl.) 129,
Punjab National Bank v. Surendra Prasad Sinha [1992] 75 Comp. Cas. 699 (SC),
Maratt Rubber Ltd. v. J.K. Marattukalam [2001] 104 Comp. Cas. 1/32 SCL 171
(SC), Medchl Chemicals & Pharma (P.) Ltd. v. Biological E Ltd. [2000] 2 JT
426,
K. Seshadri for the Petitioner. K. Srinivasan for the Respondent.
This petition is filed under section 482 of
the Criminal Procedure Code, 1973, to quash the private complaint in E.O.C.C.
No. 128 of 1999, pending on the file of the learned Additional Chief
Metropolitan Magistrate (Economic Offences No. 1), Egmore, Chennai, filed by
M/s. Grandtrust Finance Limited represented by its authorised agent and credit
officer Mr. M. Prabhakar against the petitioners, along with two other accused,
who are not before this court, for offences under sections 68 and 628 of the
Companies Act, 1956, and under sections 409, 420 read with section 120-B of the
Indian Penal Code.
At the outset, I may state that neither of the
parties has brought to the notice of the court under what section the
magistrate has taken cognizance of the complaint. However, the fact remains
that the complaint is only at the initial stage and moreover, this being a
private complaint, evidence has to be recorded and only then charges have to be
framed by the magistrate. Therefore, admittedly witnesses have not been
examined and charges have not been framed yet. At this stage, the petitioners
who are A-1 and A-2 have come forward with the present petition.
The gist of the complaint is as follows :
(a) The first accused namely the first petitioner M/s.
Sundaram Finance Services Limited is the sponsor for the third accused namely
M/s. Vishnu Forge Industries. In order to expand their business operations, the
third accused company required finance and accordingly for the said purpose,
had along with the first accused approached and induced the complainant to
subscribe for shares. Accordingly, the complainant believing their
representation to be true subscribed for 50,000 equity shares of face value Rs.
10 each with a premium of Rs. 6 for each share and in that process, enclosed
therewith a cheque, addressed to the first petitioner along with the cheque for
Rs. 8,00,000. The said cheque no doubt was drawn in favour of the third
accused. Accordingly the first accused received the cheque amount and placed it
to the third accused for having received the said amount.
(b) Apart from the above, it was represented to the
complainant by the first accused that there is a possibility of the shares
being sold for a price not less than Rs. 25 per share, as the third accused
company was going public. It is on the basis of this representation that the
complainant purchased the shares.
(c) It is also understood that the first and the third
accused entered into a sponsorship agreement on September 1, 1995, and the very
first clause in the sponsorship agreement dated September 1, 1995, provides that
the first accused shall be the sponsor and shall arrange to offer the equity
shares for sale to the public not later than April 30, 1996, and to get them
listed at the Over the Counter Exchange of India (OTCEI), on such terms and
conditions as may be decided by the sponsor in its absolute discretion. It is
seen that the copy of the sponsorship agreement was also served on the
complainant on the same day.
(d) In continuance of the above-stated agreement, the first
accused and the third accused as one party and the complainant along with the
other co-investors as another party, entered into a divestment agreement on
September 1, 1995. Clause 15 of the divestment agreement dated September 1,
1995, runs as follows :
“The sponsor shall arrange to offer the equity
shares for sale to the public not later than April 30, 1996, to get them listed
at the OTCEI, on such terms and conditions as may be decided by the sponsor in
its absolute discretion.”
(e) About three days prior to the last day for the company to
go public i.e., on April 27, 1996, the first and the third accused wanted a few
clauses to be amended in the divestment agreement already entered into and
therefore amended the same and entered into a supplementary agreement to the
divestment agreement with the same parties, in which the second and the fourth
accused being the representatives of the first and the third accused, signed
the agreement. Pursuant to the substituted clauses in the divestment agreement,
the following amendments were carried out.
(i) The words “over the Counter Exchange of India” (OTCEI) shall
stand altered and be read as “OTCEI or any other stock exchange”.
(ii) The meaning of the words “the shares” stands altered to mean the
shares subscribed by the subscribers and bonus shares, if any, issued to the
investors before the date of offer for sale.
In
all other respects, the other clauses and terms and conditions of divestment
agreement stood unaltered.
(f) Here, it is important to note that clause (15) of the
divestment agreement dated September 1, 1995, namely, the sponsor shall arrange
to offer the equity shares for sale to the public not later than April 30,
1996, stood unaltered. The complainant only on such representation made by the
accused and further it is only on the basis of these terms and conditions in
the sponsorship agreement and divestment agreement, believed the same to be
true and had purchased the shares to the tune of Rs. 8,00,000.
(g) However, contrary to such representations, promises made
and the agreements entered into, the first accused failed to arrange to offer
the equity shares for sale to the public by April 30, 1996, and moreover, no
efforts had been taken by the accused either to list the shares nor was
anything done in the direction of going public.
(h) In the meantime, surprisingly, pursuant to the criminal
conspiracy between them, the first and the third accused had entered into a
supplementary agreement to the sponsorship agreement among themselves without
the knowledge of the investors, including the complainant on April 27, 1996, to
the effect that,
“The sponsor shall arrange to offer the shares
for sale to the public and to get them listed at the OTCEI, or any other stock
exchange on such terms, conditions and at such time as may be decided by the
sponsor in its discretion.”
(i) Therefore, the complainant is said to have been mislead,
or a false promise has been given to the complainant by the sponsor even at the
time of representing that the shares would be offered for sale on April 30, 1996,
but did not do so and consequently, the offence mentioned above has been
committed by the accused.
“Learned counsel for the petitioner would
first argue that the entire transaction would be a civil consequence, in other
words, learned counsel would say that it is only a breach of agreement, for
which the remedy is only in the civil court and the parties cannot seek their
vengeance through the criminal courts. In support of his contention, learned
counsel would cite before me a decision of this court, in R. Ramakrishnan v.
V.S. Dhanasekar [1981] LW (Crl.) 178, wherein his Lordship has held that “the
parties should not be encouraged to resort to criminal courts in a case, in
which the point at issue between them is one, which can more appropriately be
decided by a civil court by unfolding the panoramic facts and the parties
should not be allowed to appease their anger by resorting to criminal
proceedings”.
Yet another case has been cited by learned
counsel for the petitioner in S.W. Palanitkar v. State of Bihar [2002] SCC
(Crl.) 129, wherein their Lordships have followed an earlier decision of the
Supreme Court, in Punjab National Bank v. Surendra Prasad Sinha [1992] 75 Comp.
Cas. 699; wherein it has been stated that judicial process should not be used
as an instrument in the hands of the private complainant as vendetta to harass
the person needlessly.
Learned counsel would further rely upon
paragraph 9 of the judgment cited supra in S.W. Palanitkar’s case (supra),
wherein, it is held as follows :
“The ingredients
in order to constitute a criminal breach of trust are : (i) entrusting a person
with property or with any dominion over property; (ii) that person entrusted
(a) dishonestly misappropriating or converting that property to his own use; or
(b) dishonestly using or disposing of that property or wilfully suffering
any other person so to do in violation (i) of any direction of law
prescribing the mode in which such trust is to be discharged, (ii) of any legal
contract made, touching the discharge of such trust.”
Learned counsel for the petitioners would
further persuade this court that what has to be seen is that whether there is
any intention of cheating at the time of making the representation and he would
stress that the agreement dated September 1, 1995, has alone to be considered
and on going through the agreement, it is seen that there is absolutely no
element of cheating and according to the agreement the date mentioned for the
company to go public was on April 30, 1996. But due to certain unforeseen circumstances,
the said company could not go public and at best, it may only amount to a
breach of an agreement, for which the complainant would be entitled to seek
remedies before the civil court.
The second limb of the argument advanced by
learned counsel is that even assuming that the company did not go public
wilfully, the third accused is the company who has committed an offence and the
first accused is also similarly placed as that of the complainant, who has also
invested about Rs. 21,00,000 for having purchased shares and he has also been
victimised. In such circumstances, if at all anybody is said to have committed
an offence, it is only the third and the fourth accused, who may at best be
called upon to answer charges and not the petitioners herein.
Learned counsel for the complainant would
place a decision of the Supreme Court in Maratt Rubber Ltd. v. J.K.
Marattukalam [2001] 104 Comp. Cas. 1, wherein their Lordships have stated that
section 482 of the Criminal Procedure Code should be sparingly and cautiously
exercised and only when the court on consideration comes to a conclusion that
otherwise it would be a case of abuse of the process of the court or that there
will be gross miscarriage of justice. Furthermore, the learned Judge has also
held that mere pendency of civil proceedings before any civil court, will not
be a ground for quashing criminal proceedings, or to frame a charge against the
accused.
In Medchl Chemicals & Pharma (P.) Ltd. v.
Biological E. Ltd. [2000] 2 JT 426, their Lordships have followed a decision of
the Supreme Court in Nagpur Steel & Alloys (P.) Ltd. v. P. Radhakrishna
[1997] SCC (Crl.) 1073 wherein it has been stated that merely because the
offence was committed during the course of a commercial transaction, that would
not be sufficient to hold that the complaint did not warrant a trial. Whether
or not the allegations in the complaint were true was to be decided on the
basis of evidence to be led at the trial in the complaint case. It certainly
was not a case in which the criminal trial should have been cut short. Their
Lordships would further go on to state that the High Court while exercising its
inherent power, the only requirement is to see whether the continuance of the
proceeding would be a total abuse of the process of the court. The Criminal
Procedure Code contains a detailed procedure for investigation, charge and
trial and in the event, the High Court is desirous of putting a stop to the
known procedure of law, the High Court must use proper circumspection and as noticed
above, every care and caution to quash the complaint in exercise of its
inherent jurisdiction.
At this stage it will not be out of place for
me to state how a petition under section 482 of the Criminal Procedure Code has
to be viewed, in the case of one, which has been instituted on a police report
as opposed to a private complaint.
A case instituted on a police report is a culmination of an entire investi-gation and the entire evidence that is sought to be relied on by the prosecution forms part of the section173 of the Criminal Procedure Code records and as such the framing of the charge is based purely on such statements and records and consequently, the accused is at liberty to put forth his contention on the basis of the materials that are available under section 173 of the Criminal Procedure Code and persuade the court that the evidence is insufficient to warrant framing of charges. But whereas, in the case of a complaint filed by a private person, there are two stages, one is the stage of taking cognizance and the other is the stage of framing charges.
At the stage of taking cognizance by the
magistrate the only material before him is the complaint and the documents in
support of the same. He may on certain occasions conduct an enquiry under
section 202 of the Criminal Procedure Code and then take cognizance or in the
absence of the same, if he is satisfied with the complaint and the sworn
statement, he is at liberty to take cognizance. But once cognizance has been
taken, he has to follow the next process by issuing summons or warrant as the
case may be to the accused and after the accused appears before the court,
witnesses are examined on behalf of the prosecution, for the purpose of framing
charges. It is only thereafter, the accused is at liberty to cross-examine the
witnesses and before framing charges both the sides are entitled to put forth
their contentions and it is on this basis, the magistrate can either frame
charges or not.
Therefore, at the risk of repetition I may
state that in a case of a private complaint there are two stages, one is taking
cognizance and the other is framing charges. In the present case, we are at the
stage of the magistrate having taken cognizance. So in such circumstances, we
have to consider whether it is necessary for the magistrate to go deep into the
complaint and the documents to see whether there are enough materials to frame
charges and quashing the prosecution at this stage would amount to nipping it
in the bud.
I am afraid that it may not be so, since the
Apex Court has stated that if there is a grave suspicion that the accused would
have committed an offence, it is enough for the court to frame charges. In the
judgments in Dilwar Balu Kurane v. State of Maharashtra [2002] SCC (Crl.) 210
and in Rajesh Bajaj v. State of NCT of Delhi [1999] 3 SCC 259, 262, the Supreme
Court has held as follows :
“It is not
necessary that a complainant should verbatim reproduce in the body of his
complaint all the ingredients of the offence he is alleging. Nor is it
necessary that the complainant should state in so many words that the intention
of the accused was dishonest or fraudulent. Splitting up of the definition into
different components of the offence to make a meticulous scrutiny, whether all
the ingredients have been precisely spelled out in the complaint, is not the
need at this stage. If factual foundation for the offence has been laid in the
complaint the court should not hasten to quash criminal proceedings....”
Bearing the above propositions of law in mind,
I have to now consider the materials before the court. The respondent has
clearly averred in his complaint that the first accused is the sponsor for the
third accused company who tried to float the shares and bring in for sale on or
before April 30, 1996. An agreement had been entered into between the
complainant and the accused with regard to the same. But however three days
prior to the expiry of the date, i.e., on April 27, 1996, a supplementary
agreement has been entered into between the complainant and the third accused
in which only certain amendments had been made and those two amendments are to
the effect that the words found in the earlier agreement, namely, “Over the
Counter Exchange of India (OTCEI)” would stand altered and be read as “OTCEI or
any other stock exchange” and the second amendment was to the effect that the
words “the shares” stand altered to mean the shares subscribed by the
subscribers and bonus shares, if any, issued to the investors before the date
of offer for sale. In all other respects, the earlier divestment agreement
stood unaltered, that is to say that the earlier commitment made by the third
accused along with the first accused that the shares shall be brought for sale
on or before April 30, 1996, shall stand valid.
However, the case of the complainant is that
on the very same day, namely, on April 27, 1996, without his knowledge, A-1 and
A-3 have clandestinely entered into a supplementary agreement to the
sponsorship agreement, wherein they have made an amendment in relation to clause
(15) of the sponsorship agreement, which reads as follows :
“The sponsor
shall arrange to offer the equity shares for sale to the public not later than
April 30, 1996, to get them listed at the OTCEI on such terms and conditions as
may be decided by the sponsor in its absolute discretion be altered and read
as,
‘The sponsor
shall arrange to offer the shares for sale to the public and to get them listed
at the OTCEI or any other stock exchange on such terms, conditions and at such
time as may be decided by the sponsor in its absolute discretion’.”
Apart from the above stated amendment, there
has also been an amendment with regard to the date, which runs as follows :
“The date
‘April 30, 1996’, stands altered and be read as ‘date to be decided by the
sponsor in his sole discretion’.”
This clause has been found in the document
executed by the first and the third accused which has been signed by the second
and the fourth accused dated April 27, 1996. Further, in the said document,
neither the complainant was a party nor was he informed about this amendment.
Learned counsel for the petitioner would argue
that this document cannot be taken into consideration, since what has to be
seen in a case of cheating is the document that pertains to the earliest
representation, on the basis of which the accused had parted with the money and
this court has to see whether there was any false representation or deception
on that date on which such a representation was made and consequently, any
offence is said to have been made out.
True, the court must be satisfied to hold that
there was deception at the time of representation. But that cannot be gauged
only on the basis of the earliest representation alone. No one would even at
the first instance itself come forward with any misstatements, enabling the
person to fall into the trap. On the other hand, a sharp-witted cheat would try
to make it appear as if he is making a genuine offer at the first instance and
lure people into the transaction and it is only later on, he will bring out his
true colours and ultimately cheat him. Therefore, when the matter relates to a
chain of events, we cannot take into consideration the earliest document alone
and come to a conclusion that there was an element of cheating at the time of
representation. The subsequent documents which have been entered into
especially the two documents in the form of agreements of one relating to the
complainant and the accused herein and the other between the first and the
third accused inter se, have been prepared only on April 27, 1996, and the
agreement in which the complainant is a party does not contain any amendment,
or it does not show that the shares should be brought for sale by the sponsor
on the date and time as may be decided by the sponsor in its absolute
discretion. However, in the agreement between A-1 and A-3 this amendment has
been carried out. This obviously, is to drag on the process of bringing the
shares for sale and admittedly, it transpires that the shares have not yet been
brought for sale.
The complainant has filed these two agreements
along with the complaint. The details of the entire thing have not been
brought to this court and it may not be necessary for me to go into those
documents at this stage. In these circumstances, I am again reminded of the
decision of the Apex Court in Hridaya Ranjan Prasad Verma v. State of Bihar
[2000] 4 SCC 168, wherein their Lordships have held that the intention of the
accused depends upon the inducement, which may be judged by his subsequent
conduct also. The facts of this case reveal that there is a chain of events
taking place from the year, 1995 to April 1996, and consequently, I find there
is sufficient ground for the magistrate to take cognizance of the offence as
against the accused.
Yet another argument has been advanced by
learned counsel for the petitioners that for the offence under the Companies
Act, the complaint has to be given only by the Registrar. Here again, at the
risk of repetition, I may state that none of the parties has stated under what
section the magistrate had taken cognizance and at any rate, this is a matter
which could be raised at the time of framing charges by the magistrate.
In the above circumstances, I do not find and
reason to quash the complaint. Accordingly, this petition is dismissed.
Consequently, connected criminal miscellaneous petitions are closed.