Bombay High Court: The instant revision application was filed against the order passed by the Special Judge, wherein, the discharge application filed by the applicant-CEO of Karvy Stock Broking (company) was rejected. A Single Judge Bench of Amit Borkar, J., held that the order passed by the Adjudicating Authority in the complaint registered against the company and its members, even though did not impose any penalty on the applicant, it did not amount to exoneration on merits. The Court specified that the complaint relied on cogent material which disclosed sufficient grounds to proceed against the company and the applicant being the CEO was liable under Section 27(1) of Securities Exchange Board of India Act, 1992 (SEBI Act). Therefore, the Court held that the order passed by the Special Judge rejecting the discharge application was based on settled principles of law and did not warrant interference of the Court.
Background
The company was registered as stockbroker and Depository Participant with SEBI, NSE, BSE NSDL and CDSL. It was accused of pledging and misusing securities and funds of its clients in an unauthorised manner which was in violation of various circulars issued by SEBI. It was also alleged that the company failed in exercising due skill, care, and fairness towards its clients, had indulged in malpractices, and thereby violated statutory requirements under Clauses A(1) to A(5) of the Code of Conduct under Schedule II, Regulation 9 of the SEBI (Stock Brokers) Regulations, 1992.
Furthermore, it was alleged that the company being an intermediary entered into transactions including pledging of securities belonging to its clients without their knowledge or instructions and misused and diverted the funds so received. Such acts of the company were in breach of the fiduciary capacity which it held towards its clients. The scale of the alleged offences was assessed at about Rs. 2700 crore.
Thus, a complaint was filed before the Trial Court to initiate prosecution against the company and the persons in charge of its affairs at the relevant time i.e. the CEO, Managing Director of the company. The said complaint mentioned the violation of Clauses A(1) to A(5) of the Code of Conduct under Schedule II read with Regulation 9 of the SEBI (Stock Brokers) Regulations, 1992, along with circulars issued under Section 11(1) of the SEBI Act.
The allegations in the complaint were adjudicated by the Whole Time Member of SEBI (Adjudicating Authority) wherein, neither any penalty was imposed, nor any adverse order was passed against the applicant. It was contended by the applicant that the said order amounted to exoneration on merits, therefore, an application of discharge was filed before the Special Judge under Section 227 of Criminal Procedure Code, 1973. The discharge application was rejected by the Special Judge. Aggrieved by the same, the applicant approached the present Court.
Analysis, Law and Decision
The Court explained that exoneration in departmental or regulatory proceedings bind criminal prosecution only in very limited situations. To fall in the ambit of those limited situations, three conditions must be satisfied according to the precedents set by the Supreme Court in various cases. First, the adjudicating authority must have examined all the facts and evidence in detail and have given a clear finding. Therefore, an order passed on mere technicalities like limitation or jurisdiction could not bar prosecution. Second, there must be a clear conclusion that the allegations were wholly baseless or not proved at all. Third, the order must contain a clean declaration of innocence, holding the person not guilty of the misconduct. Thus, mere absence of penalty or grant of benefit of doubt would not amount to exoneration on merits.
The Court observed that the order passed by the Adjudicating Authority did not contain any detailed finding of innocence. On the contrary, the order mentioned that the applicant had actively participated in the asset collection drive and as the CEO, he failed to exercise the due diligence expected from him. The Court pointed out that the order, did not state that the allegations against the applicant were baseless or unsustainable. In fact, the order recorded that irregular pledging of client securities had taken place and stated that the applicant, being a senior professional, should have raised concerns as per the provisions of Section 27(1) of SEBI Act.
Therefore, the order had only refrained from imposing any penalty but had neither absolved the applicant from his responsibilities nor had declared him innocent of the misconduct. The order reflected negligence and lack of diligence by the applicant, in discharging his duties as the CEO.
The Court opined that though no penalty was imposed, the order records that the applicant was a senior officer of the company, had taken part in the asset collection drive, and failed to act with the diligence expected from a person holding his position. Therefore, prima facie liability under Section 27(1) of SEBI Act was attracted against the applicant. To be held liable under the said provision, it is not necessary to show that the officer himself committed the wrongful act. The liability arises because the person was in charge of and responsible for the conduct of business of the company when the offence took place. Hence, the order passed by the Adjudicating Authority did not amount to exoneration, rather, they indicate responsibility of the applicant.
The Court pointed out that the complaint relied on cogent material such as the SEBI inspection report, reports of NSE, the forensic audit, and relevant bank and company’s account statements which disclose sufficient grounds to proceed against the company.
Accordingly, the Court held that mere non-imposition of any penalty on the applicant, does not amount to exoneration on merits. It was also held that the complaint for prosecution of the company was based on cogent material which provided sufficient ground to proceed and the applicant being the CEO of the company at the relevant time was liable as per the provisions of Section 27(1) of the SEBI Act. Therefore, the Court opined that the rejection of discharge application by the Special Judge was based on the settled principles of law and did not require any interference of the Court.
[Rajiv Ranjan Singh v. SEBI, 2025 SCC OnLine Bom 3165, decided on: 11-9-2025]
Advocates who appeared in this case:
Advocate for the Applicant- Ashok Singh, Sameer Bothre i/by Mr. Arun Nile, Advocates
Advocate for the Respondents- Anubha Rastogi, Aditya Joshi
Buy Code of Criminal Procedure, 1973 HERE
