The Supreme Court has held that minors cannot be prosecuted or barred from operating in the securities market for unfair market trade practices even if irregularities have been committed in their names.
Sebi had barred Ritesh Polyester and its promoters -- Ritesh Exports, Surendra Kumar Agarwal and his wife Roop Rekha Agarwal and their minor sons Ritesh and Deepak -- from operating in the capital market for a period of 10 years for violating the Sebi Act and Sebi (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995.
A bench headed by Justice S B Sinha while allowing Ritesh and Deepak's appeal said that the minors, as was apparent from their birth certificates, could not have committed fraud and thus the impugned directions would not be binding on them as minors cannot enter into a contract.
"If they were minors, they being not party to the fraud, could not have been subjected to penalty under the Sebi Act.
The person who committed the fraud in their names, viz., Surender himself, should have been proceeded against not only for commission of act of fraud on his own behalf but also on behalf of the minors."
However, it allowed the market regulator to go ahead with the prosecution against other promoters including Surender and Rooprekha.
"We, however, uphold other directions issued by the Board, including the action taken in respect of the offences purported to have been committed. We also grant liberty to the authorities to proceed against the offenders not only for other or further charges to which they made themselves liable under the Sebi Act but also under the Companies Act, 1956 and other penal statutes, if attracted." the court said.
While stating that the FUTP Regulations are prospective in nature, the court said that Sebi cannot proceed against the promoters under the FUTP Regulations as they had committed the irregularities prior to coming into force of these regulations on October 25, 1995.
"Ex facie, a penal statute will not have any retrospective effect or retroactive operation. If commission of fraud was complete prior to the said date, the question of invoking the penal provisions contained in the said Regulations including Regulations 3 to 6 would not arise," the judgement stated while setting aside the Securities Appellate Tribunal's ruling.
Justice Sinha further said that "a right to carry on trade is a constitutional right. By reason of the penalty imposed, the Board inter alia has taken away the said constitutional right for a period of 10 years which, in our opinion, is impermissible in law as the Regulations were not attracted."
Ritesh Polyesters Ltd had come out with a public issue of 30 lakh equity shares of Rs 10 each at a premium of Rs 5 per share aggregating to Rs 4.50 crore (Rs 45 million). After closing of issue on June 22,1995, 15 lakh shares of Rs 10 each for cash at a premium of Rs 5 per share were reserved for allotment to the promoters and directors of the company and their friends and relatives.
Sebi on investigations had found that only 7.96 per cent of the public issue had been subscribed by the public till the closing date and the promoters who were required to subscribe Rs 2.25 crore (Rs 22.5 million) had invested only Rs 35 lakhs (Rs 3.5 million).
Besides, a large number of other irregularities were also found.
Sebi had also found that Pratha Investments, Ritesh Capital and Ritesh Agarwal had sought issuance of duplicate shares contending that the shares allotted in their favour had been misplaced. The stock exchange, however, on an inquiry had found that the alleged lost shares had in fact been sold in the market.
The trading in the scrip of the company was suspended.
