SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAV VARSHNEY & Anr.

Vasu Dev Singh vs. Union of India 2006 (8) Suppl. SCR 535 : (2006) 12 SCC 753; P.B. Desai vs. State of Maharashtra 2013 (11) SCR 863 : (2013) 15 SCC 481; Harshendra Kumar D. vs. Rebatilata Kaley 2011 (2) SCR 670 : (2011) 3 SCC 351; S.MS. Pharmaceuticals Ltd. vs. Neeta Bhalla (2005) 8 SCC 89; National Small Industries Corporation Ltd. vs. Harmeet Singh Paintal 2010 (2) SCR 805 : (2010) 3 SCC 330; Gunma/a Sales Private Limited vs. Anu Mehta, 2014 (10) SCR 1117 : (2015) 1 sec 103 - referred to. Case Law Reference 2003 (~) SCR 741 1985 (~) SCR 815. 2099 (14) SCR 528 2006 (8) Suppl. SCR 535 2013 (11 ) SCR 863 2001 (2 ) Suppl. SCR 128 (2005) s sec 89 2010 (~) SCR 805 2014 (10) SCR 1117 2911 (2) SCR 670 held inapplicable Para9 held inapplicable Para9 held inapplicable Para 10 Para 13 referred to Para 28 referred to Para 40 relied on Para 52 referred to Para 52 referred to Para 52 referred to Para 60 referred to c D E F G CRIMINAL APPELLATE JURISDICTION : Criminal Appeal H Nos. 827-830 of20 I 2. SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAVVARSHNEY & ANR. 11 From the Judgment and Order dated 13.05.2010 of the High Court A of Delhi at New Delhi in Cr. M. C. No. 7468-71 of 2006. WITH Crl. A. Nos. 832, 833-836of2012 Crl. A. Nos. 251, 252 of2015. Ms. Indu Malhotra, Sr. Adv., San jay Mann, Vinay K. Dagar, (For Ms. Rekha Pandey, Ritesh Agrawal, Jatin Zaveri, Neel Kamal Mishra, Yakesh Anand, Nimit Mathur (For Sanjeev Anand), Advs. for the appearing parties. The Judgment of the Court was delivered by JAGDISH SINGH KHEHAR, J. Criminal Appeal nos. 827-830 of 2012

#1. Sub-Section (I B) was inserted into Section 12 of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as, the SEBI Act), on 25.1.1995. Section 12( I B) is extracted hereunder:- "12. Registration of stock-brokers, sub-brokers, share transfer agents, etc. - (1 B) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations: Provided that any person sponsoring or cause to be sponsored, carrying or causing to be carried on any venture capital funds or collective investment scheme operating in the securities market immediately before the commencement of the Securities Laws (Amendment) Act, 1995 for which no certificate of registration was required prior to such commencement, may continue to operate till such time regulations are made under clause ( d) of sub-section (2) of section 30. Explanation.- For the removal of doubts, it is hereby declared that, forthe purposes of this section, a collective investment scheme or mutual fund shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a component of investment besides the component of insurance issued by an insurer." B c D E F G H SUPREME COURT REPORTS (201 :;] 7 S.C.R. The question that arises for consideration in the present criminal appeals is, whether respondent nos. I and 2-Gaurav Varshney and Vinod Kumar Varshney, had violated Section 12(1 B), by incorporating M/s. Gaurav Agrigenetics Ltd., under the provisions of the Companies Act, 1956, on 3. 7.1995, in the capacity ofits first directors and promoters. This position emerges, because it is not a matter of dispute, that Mis. Gaurav Agrigenetics Ltd. commenced a collective investment scheme, immediately on its incorporation.

#2. In order to highlight the implications of the amendment, made on 25.1.1995, the Government of India issued a press release dated 18.11.1997. The text of the same is extracted hereunder:- "The matter relating to regulating entities which issue instruments such as agro bonds, plantation bonds etc. has been receiving Government's attention. While the instruments may be funding agro based investment activity, it is observed that they often offer very high rates of return not consistent with normal returns in such activities. There is, therefore, a high element of risk associated with such schemes. In order to ensure that investors make investment decisions with the full knowledge of the risks involved in such schemes, Government has felt it necessary to put in place an appropriate regulatory framework for such schemes. Government after detailed consultation with the regulatory authorities concerned has decided to treat such schemes as "Collective Investment Schemes" coming under the provisions of the Section 11(2)( c) of the SEBI Act. In order to regulate such Collective Investment Schemes, both from the aspect of investor protection as well as allowing legitimate investment activity to take place, SEBI would first formulate draft regulations for this purpose. These draft regulations would be made available for public discussion. The investors who have invested in such schemes as well as entities running such schemes will be requested to give their comments on pertinent matters to SEBI for enabling SEBI to formulate appropriate regulations for such Collective Investment Schemes. Once these regulations come into force, it is expected that they will promote legitimate investment activity on plantation and other agriculture based business, while at the same time give investors an adequate degree of protection for their investments." 12 A B c D E F G I-I SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.] For the same purpose, as stated above, the Securities and Exchange Board of India (hereinafter referred to as, 'the Board') also issued a separate press release, dated 26.11.1997. The text of the above press release, is reproduced below:- "The Central Government has by a press release dated 18.11.1997 decided that an appropriate regulatory framework for regulating entities which issued instruments such as agro bonds, plantation bontls, etc. has to be put in place. The Government has decided that schemes through which such instruments are issued would be treated as collective investment schemes coming under the provisions of the SEBI Act. In terms of the press release, SEBI has initiated action for drafting regulations for such collective investment schemes. The provisions of section 12(1 B) of the SEBI Act prohibit collective investment schemes including mutual funds from sponsoring any new scheme till the regulations are notified. While the regulations for mutual fund schemes have been notified by SEBI, regulations for collective investment schemes including plantations schemes require to be notified in view of the press release issued by the Central Government. These regulations are under preparation and will be issued in due course. first in draft form for the public discussion and later in the final form. Till these regulations are notified, as a result of the provisions of section 12(1 B) of the SEBI Act, no person can sponsor or cause to be sponsored any new collective investment scheme and raise further funds. The provisions of section 12(1 B) provides that till regulations are notified all collective investment schemes which are operating can continue with their activities till the regulations are notified. Any collective investment scheme which is desirous of taking benefit of the proviso to section 12( 1B) of the SEB I Act is directed to send to SEBI information within 21 days from today containing details such as:- - Ternis and conditions of the schemes launched - Funds raised through all the schemes - Promises or assurances or assured returns made in the scheme - Copies of offer document of the scheme - Names, details and background of promoters/sponsors 13 A B c D E F G H 14 A B c D E F G H SUPREME COURT REPORTS [2016] 7 S.C.R. All collective investment schemes which want to take benefit of the proviso of Section 12(18) are also directed to make an advertisement only in accordance with the advertisement code already prescribed by SEBI under the Disclosure and investors protection guidelines." In addition to the above, 'the Board' also issued a public notice, on 18.12.1997. The instant public notice also related to, the implications of Section 12(1 B). The contents of the public notice, are reproduced below:- "The Central Government has by a press release dated 18.11.1997 decided that an appropriate regulatory framework for regulating entities which issued instruments such as agro bonds, plantation bonds, etc. has to be put in place. The Government has decided that schemes through which such instruments are issued would be treated as collective investment schemes coming under the provisions of the SEBI Act. In terms of the press release, SEBI has initiated action for drafting regulations for such collective investment schemes. A committee under the chairmanship of Dr. S.A. Dave has already been constituted. The provisions of section 12(1 B) of the SEBI Act prohibit collective investment schemes including mutual funds from sponsoring any new scheme till the regulations are notified. While the regulations for mutual fund schemes have been notified by SEBI. regulations for collective investment schemes including plantations schemes require to be notified in view of the press release issued by the Central Government. These regulations are under preparation and will be issued in due course, first in draft form for the public discussion and later in the final form. Till these regulations are notified, it is hereby brought to the notice of the public that as a result of the provisions of section 12(18) of the SEBI Act. no· person can sponsor or cause to be sponsored any new collective investment scheme and raise further funds. Further, the provisions of section 12( I B) provides that till regulations are notified all collective investment schemes which are in existence can continue with their operations ti II the regulations are notified. It is hereby brought to the notice of the public that existing collective investment schemes which are desirous of taking benefit of the proviso to section 12( 18) of the SEBI Act and continue their operations are directed to send to SEBI. by 15!!! SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.] January 1998 information containing details such as: Terms and conditions of the schemes launched, Funds raised through all the schemes, Promises or assurances or assured returns made in the scheme, Copies of offer document of the scheme and Names, details and background of promoters/sponsors. 15 A Note: The above information regarding existing collective investment schemes in northern, southern and eastern region mayb<' ti led with the respective regional office of SEBI. 8 In further exercise of the powers under section 11 read with section 11 (B) all collective investment schemes which want to take benefit of the proviso of section 12(1 B) are also directed to make an advertisement only in accordance with the advertisement code already pre.scribed by SEBI under the Disclosure and investors protection guidelines."

#3. In order to appreciate the stance adopted on behalf of respondent nos. I and 2, it is essential to point out, that in consonance with Section 12(1B) of the SEBI Act, and in furtherance of the power vested with 'the Board', under Section 30 of the SEBI Act, 'the Board' framed regulations - the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (hereinafter referred to as, the Collective Investment Regulations). The Collective Investment Regulations, were to come into force, on the date of their publication in the official gazette. It is not a matter of dispute, that the same were brought into force, on 15.10.1999.

#4. Respondent nos. 1 and 2 - Gaurav Varshney and Vi nod Kumar Varshney, were aggrieved by the criminal proceedings initiated against them, on the basis of a complaint filed by 'the Board', under Section 200 of the Code of Criminal Procedure, 1973 (hereinafter referred to as, the Cr.P.C.), read with Sections 24(1) and 27 of the SEBI Act, alleging, that they had breached the bar created by Section 12( 1 B), which had forbidden the sponsoring or carrying on of a collective investment initiative, without obtaining a certificate ofregistration from 'the Board'. Respondent nos. I and 2 approached the High Court of Delhi (hereinafter referred to, as the High Court), by tiling Criminal Miscellaneous Case nos. 7468-7471 of 2006 and Criminal Miscellaneous no. 951 of 2007, for quashing Complaint Case no. 1241 of 2003, pending in the Court of the Chief Metropolitan Magistrate, Tis Hazari Courts, Delhi, titled as "SEBI vs. Gaurav Agrigenetics Ltd. and others", as well as, the order dated c D E F G H SUPREME COURT REPORTS [2016] 7 S.C.R.

15.12.2003, by which the Chief Metropolitan Magistrate had summoned them (in the aforementioned complaint case).

#5. The simple contention advanced at the hands of respondent nos. l and 2 was, that the bar against sponsoring or carrying on a collective investment scheme, without obtaining a certificate of registration from 'the Board' under the Collective Investment Regulations, could arise only after the Collective Investment Regulations were brought into existence. In this behalf it was pointed out, that the Collective Investment Regulations were admittedly brought into force from 15.10.1999. To exculpate their involvement in the proceedings initiated against them, the main assertion advanced on behalf of respondent nos. 1 and 2 was, that respondent no. 1 - Gaurav Varshney had submitted Form-32 with the Registrar of Companies, communicating the factum of his resignation from the directorship of Mis. Gaurav Agrigenetics Ltd., on I 0.5.1996. Since the aforesaid Form-32 had been submitted with the Registrar of Companies on 30.7.1998, it was contended on behalfofrespondent no. I, that he had no objection ifit was assumed (for determination of the present controversy), that respondent no. I had resigned from the directorship of the concerned company on 30. 7.1998. Likewise, it was pointed out, that respondent no. 2 - Vinod Kumar Varshney, had submitted Form-32 with the Registrar of Companies, communicating the factum of his resignation from the It was however directorship of the company, on 15.9.1998. acknowledged, that Form-32 with respect to his resignation, was submitted with the Registrar of Companies, on 23.12.1998. It was contended on behalf ofrespondent no. 2, that he had no objection to this Court assuming, that respondent no, 2 had severed his relationship with Mis. Gaurav Agrigenetics Ltd. on 23 .12.1998, i.e. the date when Form-32 was submitted with the Registrar of Companies.

#6. In the background of the fact situation noticed hereinabove, it was urged, that if the date of resignation of respondent no. I - Gaurav Varshney from the directorship of Mis. Gaurav Agrigenetics Ltd. is taken as 30.7.1998, and that of respondent no. 2- Vinod Kumar Varshney, is taken as 23.12.1998, both of them had admittedly resigned from the directorship of Mis. Gaurav Agrigenetics Ltd., prior to the coming into existence of the Collective Investment Regulations (with effect from 15. l 0.1999). The High Court, by its impugned order dated 13.5.2010, had agreed with the proposition canvassed on behalf of respondent nos. 16 A B c D E F G H SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.] 1 and 2, and had quashed Complaint Case no. 1241 of2003 (pending in the Court of Chief Metropolitan Magistrate, Tis Hazari Courts, Delhi), as well as, the order dated 15.12.2003 issued by the said Chief Metropolitan Magistrate, summoning respondent nos. I and 2 in the above noted complaint case.

#7. Dissatisfied with the determination rendered by the High Court (vi de the impugned order dated 13.5.20 I 0), 'the Board' approached this Court, through Criminal Appeal nos. 827-830of2012, to raise a challenge to the order passed by the High Court.

#8. The primary contention advanced on behalf of 'the Board' was, that the High Court misunderstood and misconstrued the bar created by Section 12(1B) of the SEBI Act. It was submitted on behalf of the appellant, that the bar contemplated under Section I 2( I B), came into effect on the very date Section 12( 18) was inserted into the SEBI Act (i.e. from 25.1.1995). It was asserted, that the said bar restrained everyone, from sponsoring or carrying on any collective investment activity, without obtaining a certificate ofregistration from 'the Board', under the Collective Investment Regulations. And as_ such, any act of sponsoring or commencement of a collective investment venture, without obtaining a certificate ofregistration, on or after 25.1.1995, was absolutely forbidden. It was submitted on behalf of the appellant, that the proviso under Section 12( 1 B), made the position absolutely clear and unambiguous. It was pointed out, that the proviso authorized all persons who had sponsored or were carrying on a collective investment scheme " ... immediately before the commencement of the Securities Law (Amendment) Act, 1995, for which no certificate of registration was required prior to such commencement...", to continue to operate, till regulations were framed under clause ( d) of sub-Section (2) of Section 30. Therefore, relying on the proviso under Section 12(1B), it was submitted, that actions of sponsoring or carrying on an enterprise of collective investment, were permitted to only such persons, who had commenced such activities prior to the commencement of the Securities Law (Amendment) Act, 1995 (i.e., prior to 25.1.1995).

#9. In order to substantiate the afore-noted contention, and also, in order to demonstrate, that the action of 'the Board' in not framing the Collective Investment Regulations, would have no bearing, to the bar created under Section 12( I B), learned counsel pla.:ed reliance on Orissa State (Prevention & Control of Pollution) Board vs. Orient Paper Mills, 17 A B c D E F G H 18 A B c D E F G SUPREME COURT REPORTS [2016] 7 S.C.R. (2003) 10 SCC 421, and invited our attention to the following observations recorded therein:-

#5. We may at this stage peruse the relevant provisions of the law. Section 21 of the Act provides that subject to the provisions of the said section no person shall establish or operate any industrial plant in an air pollution control area without previous consent of the State Government. An industry which is functioning since before the declaration of the area as air pollution control area shall apply to the Board for consent within the period prescribed for the purpose. Section 22 provides as under: "22. Persons carrying on industry etc. not to allow emission of air pollutants in excess of the standards laid down by State Board.-No person operating any industrial plant in any air pollution control area shall discharge or cause or permit to be discharged the emission of any air pollutant in excess of the standards laid down by the State Board under clause (g) of sub-section(!) of Section 17." Section 19 empowers the State Government to declare an area as air pollution control area. The relevant part of Section 19 reads as follows: "19. Power to declare air pollution control areas.-{ 1) The State Government may, after consultation with the State Board. by notification in the Official Gazette, declare in such manner as may be prescribed, any area or areas within the State as air pollution control area or areas for the purposes of this Act. (2) The State Government may. after consultation with the State Board, by notification in the Official Gazette,- ( a) alter any air pollution control area whether by way of extension or reduction; (b) declare a new air pollution control area in which may be merged one or more existing air pollution control areas or any part or parts thereof. (3)-(5)***" *** *** *** H

#10. The question for consideration is, as to whether, as long the SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.] manner is not prescribed under the rules for declaration of an area as air pollution control area, a valid notification under Section 19( I) of the Act can be published in the Official Gazette or not.

#11. So far as the statutory provision is concerned, the Act under Section 19 vests the State Government with power to notify any area, in an Official Gazette, as air pollution control area, but to say that exercise of such power is solely dependent upon framing of the ;·des prescribing the manner in which an area may be declared as air pollution control area, does not seem to be correct. Section 19 of the Act would read as follows by omitting the words "in such manner as may be prescribed" which part we put into bracket as follows: "19. Power to declare air pollution control areas.-{ I) The State Government may, after consultation with the State Board, hv notification in the Official Gazette, declare (in such manner as may be prescribed), any area or areas within the State as air pollution control area or areas for the purposes of this Act. (2)-(4)***" 19 A B c D

#12. Section 19 says " ... such manner as may be prescribed'' and not "in the manner prescribed" or " ... in the prescribed manner". The expression used leaves some lever or play in the E working of the provision. We would like to lay emphasis on the use of the word "as" which is significant. The manner is dependent upon "as" may be prescribed, if it is not prescribed, there is no manner available such as to be followed. The meaning of the word "as" has been indicated in Concise Oxford English Dictionary, I 0th Edn., 2002 amongst others to mean as follows: F *** *** *** In one of the cases decided by this Court, to be referred later in this judgment "as may be prescribed" has been held to mean "if any". It is thus clear that such expression leaves the scope for some play for the workability of the provision under the law. The meaning of the word "as" takes colour in context with which it is used and the manner of its use as prefix or suffix etc. There is no rigidity about it and it may have the meaning of a situation of being in existence during a particular time or contingent, and so on and so forth. That is to say, something to happen in a manner, G H SUPREME COURT REPORTS [2016] 7 S.C.R. if such a manner is in being or exists, if it does not, it may not happen in that manner. Therefore, the reading of the provision under consideration makes it clear that manner of declaration is to be followed "as may be prescribed" i.e. "if any" prescribed.

#13. Thus, in case manner is not prescribed under the rules. there is no obligation or requirement to follow any. except whatever the provision itself provides viz. Section 19 in the instant case which is also complete in itself even without any manner being prescribed as indicated shortly before to read the provision omitting this part "in such manner as may be prescribed". Merely by absence of rules, the State would not be divested of its powers to notify in the Official Gazette any area declaring it to be an air pollution control area. In case. however, the ru Jes have been framed prescribing the manner, undoubtedly, the declaration must be in accordance with such rules.

#14. On the proposition indicated above, a decision reported in T. Cajee v. U. Jormanik Siem, AIR 1961 SC 276, would be relevant. The matter pertained to removal of Seim from the office, namely, the Chief Headman of the area in the District Council governed by Schedule VI of the Constitution. The High Court took the view that the District Council could act only by making a law with the assent of the Governor. So far as the appointment and removal from the office of a Seim is concerned, provision contained in para 3( 1 )(g) of the Schedule was referred to, which empowered the District Council to make laws in respect of the appointment and succession of office of Chiefs Headmen. The High Court took the view that in absence of framing of such a law, there would be no power of appointment of a Chief or Sei111 nor for his removal either. This Court negated the view taken by the High Court observing that: (AIR p. 281, para 10) "[l]t seems to us that the High Court has read far more into para 3( l)(g) than is justified by its language. Para 3( I) is in fact something like a legislative list and enumerates the subjects on which the District Council is competent to make laws .... But it does not follow from this that the appointment or removal of a Chief is a legislative act or that no appointment or removal_ can be made without there being first a law to that effect." 20 A B c D E F G H SECURITIES AND EXCHANGE BOARD OF INDIA v. GAURAVVARSHNEY & ANR. [JAGDISH SINGH KHEHAR, J.] 21 This Court found that para 2(4) relating to administration of an A autonomous district, vested in the District Council such powers and further observed as under: (AIR p. 281, para I 0) "The Constitution could not have intended that all administration in the autonomous districts should come to a stop till the Governor made regulations under para 19( 1 )(b) or ti 11 District B Council passed laws under para 3( 1 )(g) .... Doubtless when regulations are made ... the administrative authorities would be bound to follow the regulations so made or the laws so passed."

#15. It is thus clear from the decision referred to in the preceding paragraph that the power which vests in an authority would not cease to exist simply for the reason that the rules have not been framed or the manner_ of exercise of the power has not been prescribed. So far as Section 54 of the Act is concerned, it only enumerates the subjects on which the State Government is entitled to frame rules. c D *** *** *** E

#20. We feel that so far as the point relating to the meaning of the word "may" used under Section I 9 of the Act is concerned, it is not relevant for resolving the controversy we are concerned with. Once the manner is prescribed under the rules undoubtedly, the declaration of the area has to be only in accordance with the manner prescribed but absence of rules will not render the Act inoperative. The power vested under Section 19 of the Act, would still be exercisable as provided under the provision i.e. by declaring an area as air pollution control area by publication of notification in the Official Gazette. Non-framing of rules does not curtail the power of the State Government to declare any area as air pollution control area by means of a notification published in the Official Gazette. The part of the provision "in such manner as may be prescribed" would spring into operation only after such manner is G prescribed by framing the rules under Section 54(2)(k) of the Act. This view as indicated earlier, is amply supported by the decision of this Court referred to above in the case ofT. Cajee, AIR 1961 SC 276, which is a decision by a Constitution Bench of this Court. It has been followed in a subsequent decision of this Court reported F H 22 A B c D E F G H SUPREME COURT REPORTS [2016] 7 S.C.R. in Surinder Singh v.Central Govt., (1986) 4 SCC 667. The Central Government had not framed rules in respect of disposal of property forming part of the compensation pool as contemplated under the provisions of the relevant Act. It was claimed by one of the parties that the authority constituted under the Act had no jurisdiction to dispose ofurban agricultural property by auction-sale in absence of rules. The contention was repelled with the following observations: (SCC p. 673, para 6) "Where a statute confers powers on an authority to do certain acts or exercise power in respect of certain matters, subject to rules, the exercise of power conferred by the statute does not depend on the existence of rules unless the statute expressly provides for the same. In other words framing of the rules is not condition precedent to the exercise of the power expressly and unconditionally conferred by the statute. The expression 'subject to the rules' only means, in accordance with the rules, ifany. lfrules are framed, the powers so conferred on authority could be exercised in accordance with these rules. But if no rules are framed there is no void and the authority is not precluded from exercising the power conferred by the statute."