Facts of The Case
- On May 20th, 1993, the respondent, namely Indrajeet, was appointed as the Joint Director of “Trident Steel Limited.” The company had made the public issue of Rs. 7 crores 2 lakhs.
- B.S.E, on receiving the complaint, that company has not disclosed in the prospectus about the pledge of Rs. 7,50,000 shares for raising the working capital from Baroda Bank, held by directors during the public issue, and some of the investors didn’t have received the dividend for the year.
- On the preliminary investigations by the BSE, it was found the shares certificates has not been transferred by the company to some of the investors and on asking the company about dividend they said dividend had not been declared for that year.
- On March 31st, 2004, the chairperson of the investigating board said that the Joint director Mr. Ajay is not allowed to be associated or trade on any stock exchange in India for five years under Section 4 & 11 of The SEBI Act. After the order of the board, the joint director appealed before the appellate tribunal.
- The appellate tribunal said that since the public issue was related to 1993 and section 11-B of the SEBI Act was enforced in 2005. So, the above-mentioned section can’t be invoked in the matter. Being unsatisfied, the petitioner had appealed before the Supreme Court of India, where the decision of the BSE board was upheld.
Issues In the Case
- The primary and foremost question before the Apex court was that can a person be restrained from being associated or making a trade on the various stock exchange under section 4 & 11 of the SEBI Act?
- Another issue in the case was that the company had misguided the investors by not disclosing the actual information of capital structure in the prospectus.
- The last issue was; can the company be held liable for not dispatching the share certificates and not declaring the dividend?
- Section 4 (3), The SEBI Act, 1992: The chairman can give directions to manage all the affairs of the board and can use the powers given to him under the act.
- Section 11 (B), The SEBI Act,1992: It empowers the SEBI to issue directions for investor protection, for the proper regulation of securities market, no other market associated with securities market is effected and to allow other markets to function correctly with secure management.
- Section 11 (4) (B), The SEBI Act, 1992: Any person indulged in the unfair trade practice can be restrained from accessing the stock exchange market and can be prohibited to sell or purchase or deal in securities.
- Article 20 (1), The Indian Constitution: It talks about the laws which impose penalties on the acts which are already done, or we can say that it has a retrospective effect on the imposition of penalty.
- Section 26, The Companies Act, 2013: What should be included in the prospectus is given under this section, and if any misstatement is made in contravention to this section, then it is a punishable offence.
In the United Kingdom, if there has been any misleading statement in the prospectus, then the governing laws are the Financial Services and Markets Act, 2000, whose Section 90 lays down the punishment, i.e. anyone related to the listing of securities from the company is liable to pay the compensation to the security holders. There are several laws in the U.S.A, that provide the investor’s protection from any unfair practice by the companies, such as The securities Act, 1933, and they have separately set up the Securities and Exchange Commission to look into matters of investor protection.
A person can be restrained from being associated or conducting any practice on the stock exchange due to the powers provided to the SEBI in Section 11(b) of The SEBI Act, 1992. Also, as per Section 36 of the Monopolies and Restrictive Trade Practices Act, 1969, if any false representation is made to the consumer, then the supplier of goods and services have committed the punishable offence. In the present case, it was argued that Section 11(b) of The SEBI act was brought in 1995, but the matter relates to 1994, so the current law is not applicable as per Article 20 (1) of the constitution. But, Article 20(1) of The Indian Constitution is invalid as the company has not committed any criminal offence.
As per Section 26 of the Companies Act, 2013, if any misleading statement or any fact have been omitted by the company in its prospectus, then it leads to a punishable offence. Also, as per Rule, 4 of Companies (Prospectus And Allotment Of Securities) Rules 2014 it is compulsory to attach the trade report related to proceeds of securities which was not given by the company in the present case. Depending on the situation, it would lead to the validation of Section 34 and 35 of The Companies Act, 2013, i.e. criminal and civil liability which, includes both fine and imprisonment for misleading statements or any omission of facts in the prospectus. which misguides the investors of the company. This is also considered to be fraud under Section 447 of the Companies Act 2013. It also attracts Section 17 of The Indian Contract Act,1872, i.e. fraud, since one of the components of fraud is active concealment of a fact by having one knowledge or belief of that and further, as per Section 19 of the Indian Contract Act, investors can rescind their contracts with the company.
The share certificates should be transferred within two months or sixty days from the date of allotment as per Section 56(4) of the Companies Act, 2013. But in the present case, a public issue was completed in 2014, and the complaint has been in 2015, which shows that one year has been completed and share certificates are not issued. According to Section 127 of The Companies Act, 2013 if the dividend is not given by the company with in the thirty days of the declaration, then the directors should be imprisoned for two years or a fine of thousand per day or both, and 18% interest is to be paid by the company.
So, as per the laws, it can be said that the apex court in upholding the judgement or the order of the board is correct. But, for misleading information in the prospectus, the company can be charged with fraud under The Indian Contract Act. Also, the company is duty-bound to prove that they have dispatched the share certificates and they are being received by the shareholders.
Various judicial pronouncements support the judgement of the Hon’ble Court in this matter. In the case of ITO v. Mohammed Kunhi , it was held that authority could use all the reasonable ground wherever necessary to express the grant of the statutory power, which shows that SEBI has abilities to apply section 11 (b) of the act whenever necessary. The Securities appellate tribunal has successfully used section 11(b) of the SEBI Act, where there was total misleading information given by the company in the matter of R.K. Aggarwal v. Securities and Exchange Board of India. The Delhi High court in the matter of MZ Khan v. SEBI said that Section 11 is within the limits as it only gives SEBI the power to protect the interest of the investors in terms of securities and the securities market.
Further, the companies can be charged for the offence of fraud was held In the case of “Hafez Rustom Dalal v. Registrar of Companies.” it was held that it is an apparent offence committed if there is any false or misstatement in the company’s prospectus. Another matter of Ramrakh R. Bohra v. SEBI, it was held that misleading statement in the prospectus is the severe offence for which the company and faces behind it must be punished.
Since in the present case, the company have failed to prove that they have transferred the share certificates as it was held in the case of Cardiff Chemicals v. Fortune Bio-tech Ltd. that it’s the company with whom the burden is to prove that share certificates have been transferred.
Conclusion & Suggestions
In the current case, the prima facie case was of misstatement in the prospectus and harming the interest of investors in the securities market. The main issue was related to section 11(b) of the SEBI Act, which put restrain on the director to trade on the stock exchange due to some unfair trade practice, that the law was not in existence when the primary subject matter was disputed. The apex court held that there was no retrospective effect of the provision, and such an order to restrain the joint director of the firm cannot be challenged, and it doesn’t violate any of the condition of the Indian Constitution.
It was also observed in this case that the board cannot be prevented from acting as per the law which has its existence when the order was passed, even if it applies prospectively. In the case, the court very well said that the offence defined under the General Clauses Act could not be equated with such an offence, that is going to affect the public at large. The company was also held liable for not sending the share certificates and declaring the dividends for the year under the provisions of The Companies Act, 2013. The proceedings done by the board were in a fair manner and, its decision was upheld by the apex court.
It can also be concluded that directors for the personal benefits of the company do provide misleading statements in the prospectus. Still, this only help in the short run and they face heavy loss in the long run. So, it’s not wrong to suggest that they should not try to mislead the investors. Further, it can be recommended that there is a need for laws for SEBI which help in accurate investigations and controlling the unfair trade in the securities exchange market.
 The SEBI Act, 1993, Sec. 4(3), No. 15, Acts of Parliament, 1992 (India).
 The SEBI Act, 1992, Sec. 11(b), No. 15, Acts of Parliament, 1992 (India).
 The SEBI Act, 1992, Sec. 11 (4) (b), No. 15, Acts of Parliament, 1992 (India).
 INDIAN CONST., art. 20 (1)
 The Companies Act, 2013, Sec. 26, No. 18, Acts of Parliament, 2013 (India).
 The Financial Services and Markets Act, 2000, Sec. 90, No.8, Acts of Parliament, 2000 (UK)
 Mahendra Singh, Liability for Misstatement in Prospectus, LEGAL INDIA, (08:33 PM, 04/12/2020), https://www.legalindia.com/liability-for-misstatement-in-prospectus-where-to-stop/
 Supra Note 1
 The Monopolies and Restrictive Trade Practices Act,1969, Sec. 36, , No.54, Acts of Parliament, 1969 (India)
 INDIAN CONSTITUTION, art. 20 (1)
 The General Clauses Act, 1897, No. 10, Acts of Parliament,1897 (India).
 The Companies Act,2013, Sec. 26, No. 18, Acts of Parliament, 2013 (India).
 The Companies (Prospectus and Allotment of Securities) Rules 2014, Rule 4
 The Companies Act 2013, Sec. 34 & 35, No. 18, Acts of Parliament, 2013 (India).
 The Companies Act, 2013, Sec. 447, No. 18, Acts of Parliament, 2013 (India).
 The Indian Contract Act 1872, Sec. 17, No. 9, Acts of Parliament, 1872 (India).
 The Indian Contract Act 1872, Sec. 19, No. 9, Acts of Parliament, 1872 (India).
 The Companies Act 2013, Sec.56(4), No. 18, Acts of Parliament, 2013 (India).
 The Companies Act, 2013, Sec. 127, No. 18, Acts of Parliament, 2013 (India).
 ITO v. Mohammed Kunhi, (1969) AIR SC 430
 R.K. Aggarwal v. Securities and Exchange Board of India, Appeal No. 1 of 2001
 MZ Khan v. SEBI, (1999) AIR Del. 164
 Hafez Rustom Dalal v. Registrar of Companies, (2005) 128 CompCas Guj. 883
 Ramrakh R. Bohra v. SEBI, (1999) 33 CLA 243
 Cardiff Chemicals v. Fortune Bio-tech Ltd., (2004) 55 SCL 645