The Bombay High Court has held that absence of penalty in a departmental inquiry is not exoneration and therefore cannot bar criminal prosecution when allegations are not declared as wholly unreliable.

The Court was considering a Revision Application against an order by which Application for discharge from complaint registered for offences under Section 24(1) read with Section 27, Section 12A and Sections 26 and 26B of the Securities and Exchange Board of India Act, 1992 was rejected.

The single judge bench of Justice Amit Borkar observed, "It is thus clear that exoneration in departmental or regulatory proceedings will bind criminal prosecution only in very limited situations. Three conditions must be satisfied. First, the adjudicating authority must have examined all the facts and evidence in detail and given a clear finding. An order passed only on technicalities like limitation or jurisdiction cannot 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. A mere absence of penalty or grant of benefit of doubt does not amount to exoneration on merits."

The Applicant was represented by Advocate Ashok Singh while the Respondent was represented by Advocate Anubha Rastogi.

Facts of the Case

The Complaint was also based on the SEBI (Stock Brokers) Regulations, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, particularly Regulation 4(1) and 4(2)(m), read with various circulars issued under Section 11 of the SEBI Act, 1992, and further read with Sections 193 and 200 of the Code of Criminal Procedure, 1973.

The Accused No.1 is the firm Karvy Stock Broking, Accused No.2 was the Managing Director and promoter of the company and the Applicant, Accused No.5, was its Chief Executive Officer. All these persons were in charge of and responsible for the conduct of the business of Accused No.1 at the relevant time when the alleged offence took place. It was alleged that Accused No.1 unauthorizedly pledged and misused its clients’ securities and funds. Such acts were in clear violation of the circulars issued by SEBI from time to time. The company failed to exercise due skill, care, and fairness towards its clients, indulged in malpractices, and thereby violated statutory requirements under Clauses A(1) to A(5) of the Code of Conduct nder Schedule II read with Regulation 9 of the SEBI (Stock Brokers) Regulations, 1992. The further allegation was that Accused No.1, 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 were in breach of the fiduciary capacity in which those securities were held.

The scale of the alleged offences was assessed at about Rs. 2,700 crore, being the value of client securities unauthorizedly pledged by the company in violation of law. It is alleged that the funds raised were utilized by the company and its connected entities. On this basis, a complaint was filed before the Trial Court seeking initiation of prosecution against Accused No.1 company and the persons in charge of its affairs, including the applicant who was then serving as its Chief Executive Officer.

Advocate for the Applicant submitted that the allegations in the complaint have already been adjudicated by the Whole Time Member of SEBI and in that order, no penalty was imposed and no adverse direction was issued against the Applicant. He argued that this amounts to exoneration of the Applicant on merits and the Special Judge failed to appreciate that the Applicant was neither in de facto control nor a key managerial person in charge of the business of KSBL. Hence, he cannot be held liable for prosecution under Section 27(2) of the SEBI Act. Reliance was placed on decision of the Supreme Court in Radheshyam Kejriwal vs. State of West Bengal & Ors., (2011).

Advocate for the Respondent submitted that Applicant was working as Chief Executive Officer and was therefore responsible for the affairs of the company. It was argued that under Section 27(1) of the SEBI Act, every person who, at the time the offence was committed, was in charge of and responsible for the conduct of the business of the company is deemed guilty and liable for prosecution.

Reliance was placed on Supreme Court's decision in Air Customs Officer, IGI New Delhi vs. Pramod Kumar Dhamija, (2016), and Videocon Industries Limited vs. State of Maharashtra, (2016) wherein it was held that exoneration does not bar prosecution if it is not on merits or if relevant material was not considered.

Reasoning By Court

The Court held that the settled legal position is that exoneration in departmental or regulatory proceedings will bind criminal prosecution only in very limited situations.

It thus held, ".....it is seen that the adjudication order dated 20 April 2023 does not contain any detailed finding of innocence. On the contrary, paragraphs 126 and 127 of the order note that the applicant actively participated in the asset collection drive and, as Chief Executive Officer, failed to exercise the diligence expected of him. These are adverse findings against the applicant and rule out any claim of complete exoneration. The Adjudicating Officer has not held that the allegations against the applicant were baseless or unsustainable. The order only refrains from imposing penalty but does not absolve him of responsibility under the SEBI framework. The order also records that irregular pledging of client securities had taken place and that the applicant, being a senior professional, should have raised concerns. Therefore, the allegations remain prima facie sustainable. Lastly, the order does not contain any clean declaration of innocence. It does not state that the applicant had no role in the misconduct. Instead, it reflects negligence and lack of diligence on his part in discharging his duties as a person in charge of the company’s affairs."

The Court concluded that the adjudication order cannot operate as a bar to the present prosecution under Section 27(1) of the SEBI Act.

"On the contrary, the complaint discloses prima facie material to proceed against the applicant, and the findings in the adjudication order reinforce his responsibility as Chief Executive Officer and as a person in charge of the company’s business at the relevant time.......Therefore, under Section 27(1) of the SEBI Act, it is not necessary to show that the officer himself committed the wrongful act. The liability arises simply because the person was in charge of and responsible for the conduct of business of the company when the offence took place. The role of the applicant as Chief Executive Officer, and his participation in the affairs of the company, is evident even from the adjudication order itself. 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. These observations do not amount to exoneration; rather, they indicate responsibility", the Court observed.

The Application was accordingly dismissed.

Cause Title: Rajiv Ranjan Singh vs. Securities & Exchange Board of India (2025:BHC-AS:37804)

Appearances:

Applicant- Advocate Ashok Singh

Respondent- Advocate Anubha Rastogi, Advocate Aditya Joshi, Additional Public Prosecutor Sagar R. Agarkar

Click here to read/ download Order





Bombay High CourtJustice Amit Borkar

Sheetal Joon