While declining to interfere with an ongoing investigation, the Telangana High Court (HC) dismissed a criminal petition filed by the National Stock Exchange (NSE), its managing director (MD) and chief executive officer (CEO) Vikram Limaye and chief regulatory officer (CRO) Priya Subbaraman (the petitioners) to quash a first information report (FIR) FIR No 27 of 2022 dated 9 February 2022 registered at the central crime station at Hyderabad under Sections 409 and 420 of the Indian Penal Code (IPC).
In an order issued on 12 April 2022, justice K Lakshman says, "...proceedings against directors can be quashed if the evidence does not indicate any role played by such directors. Availability of evidence is sine qua non to determine whether any specific allegations are made against the directors. In other words, the proceedings against directors cannot be quashed if the role played by them in the commission of the offence is unclear and the investigation is not completed."
"...given the extent of the alleged fraud and the parties involved, the Court is not inclined to interfere with the investigation at this stage. Therefore, the present criminal petition is liable to be dismissed," the bench says.
In February this year, T Ravi Prakash, an investor from Hyderabad, had filed a FIR against Anugrah Stock & Broking Pvt Ltd (ASBPL), Paresh Kariya, Anil Gandhi, proprietor of Teji Mandi Analytics Pvt Ltd (TMAPL), NSE, Mr Limaye, Ms Subbaraman, Edelweiss Custodian Services Ltd (Edelweiss) and Central Depository Services Ltd (CDSL).
Advocate Ravichandra Hegde of Parinam Law Associates, who appeared for the investor who had filed the case, argued that there was “dereliction of duty, willful omission and failure to take preventive measures in furtherance of the conspiracy to cause loss to the investors.”
He also argued that ASBPL along with others was involved in the misuse of client funds and securities, failure to settle the clients’ accounts, failure to correctly report the shortfall in margin collection in the derivative section, illegally and unauthorisedly lending the money of the investors, providing incorrect details in the enhanced supervision data and wrongly calculating the net worth. NSE was aware of all these violations for a long time and this was concealed from the investors who innocently invested in ASBPL, he says.
The Telangana HC observed that pleadings of the parties, the material papers filed by them and the contentions of the counsels, prima facie, reveal the commission of a large-scale fraud involving entities like the NSE, ASBPL, TMAPL, Edelweiss and other individuals including directors and key managerial personnel of these entities.
"According to this Court, prima facie, it appears that serious lapses were committed by the NSE in regulating the trading activities of ASBPL. At the stage of the investigation, it cannot be said whether the failure to act effectively was due to any dishonest intention. A case involving several factual issues which are supported by one side and disputed by the other side can be only decided during the trial. The Court cannot at the stage of the investigation determine the existence of mens rea," the HC stated.
In their submission, Mr Limaye and Ms Subbaraman contended that they are not involved in the micromanagement of the trading members of NSE. However, the bench pointed out that "…transcript of the meeting dated 10 June 2020 reveals that the petitioners had the knowledge of the violations committed by ASBPL. The petitioners were aware of the misuse of funds in light of the various inspections conducted by them and also the various alerts generated by the CDSL. As stated above, whether the inaction or failure to take appropriate action is deliberate or not can only be decided after the investigation is completed. Therefore, the contention that the ingredients of sections 409 and 420 of the IPC are not satisfied cannot be accepted as the investigation is still underway."
During the hearing, NSE, Mr Limaye and Ms Subbaraman also contended that MDs and CROs cannot be held liable unless any specific overt acts have been alleged against them. Senior counsel S Niranjan Reddy appeared for NSE.
Justice Lakshman, however, cited a judgement given by the Supreme Court in Sunil Bharti Mittal vs Central Bureau of Investigation (CBI) ((2014) 4 SCC 609). In that case, the apex court had ruled, "No doubt, a corporate entity is an artificial person which acts through its officers, directors, MDs and chairman. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so."
"Thus, an individual who has perpetrated the commission of an offence on behalf of a company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent," the SC had said.
The Telangana HC then dismissed the petition filed by NSE, Mr Limaye and Ms Subbaraman.