A single bench of Justice Anish Kumar Gupta of the Allahabad High Court recently quashed criminal proceedings against a licensed share broker in response to an FIR filed concerning a dispute over an equity shares transaction. The application had been filed seeking quashing of the chargesheet, dated September 6, 2018, and cognizance order, dated April 12, 2019, as well as the entire criminal proceedings in the case under Sections 420 and 409 of the India Penal Code (IPC). The case was pending in the court of chief judicial magistrate, Agra.
An FIR was lodged by the opposite party under Sections 420 and 406 of the IPC, alleging that the applicant is the director/ proprietor of M/s LDK Share and Securities Pvt Ltd, the licensed share broker. It was alleged that the opposite party and his younger brother were having demat accounts with the Stock Holding Corporation of the applicant, where the equity shares of different IT companies were deposited by the opposite party and his brother. The opposite party and his brother used to trade in equity shares through the applicant, who was the licensed share broker.
It was also alleged that the applicant had contacted the opposite party and his brother and asked them to invest and trade in shares through the applicant and promised various facilities. The opposite party and his brother then invested in equity shares and also subsequently sold them. When the opposite party asked the applicant about the money from the shares sold, the latter assured that the payment shall be made after sometime. However, despite repeated demands made by the opposite party, the applicant failed to make the payment of shares amounting Rs 9,69,450.
When the payment was not made by the applicant, a legal notice, dated November 30, 2017, was sent to the applicant. However, despite the notice, the applicant did not pay the amount. It was therefore alleged that the applicant had committed a breach of trust and misappropriation of the amount of the opposite party.
The counsel for the applicant relying upon the judgment of the Supreme Court in Lalit Chaturvedi & Others vs State of UP and Another, submitted that from the allegations made in the FIR, no offence under Sections 420 and 409 of the IPC can be made out against the applicant. The counsel further submitted that the applicant is a broker appointed under the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act) and the alleged offence is only covered under Section 15-F of the SEBI Act. The counsel also submitted that no criminal prosecution can be initiated on the basis of the FIR lodged by any person for the offence under the SEBI Act, and criminal prosecution can only be initiated on the complaint filed by the court under the SEBI Act. Therefore, he said the FIR lodged by the opposite party is not sustainable in law.
The High Court observed that from the plain reading of provisions of Section 420 of the IPC, it is apparent that if any person cheats and dishonestly induces another person to deliver any property or make alter or destroy the whole or any part of the valuable security or anything which is signed or sealed, and which is capable of being converted into a valuable security, he shall be punishable under the Section. The High Court further observed that there is no element of cheating or dishonest inducement on the part of the applicant. The applicant was a share broker and the opposite party, being fully aware of the consequences and risks involved in investing in shares, had consciously made the investment through the applicant. The Court held that there is some accounting dispute between the parties for which the FIR has been lodged, praying for the recovery of the amount, which is not permissible by criminal action as has been held by the apex court in Lalit Chaturvedi (supra).
The Court further held that a person cannot be held responsible for any offence under Section 409 of the IPC as well as Section 420 of the IPC on the basis of the allegations levelled as both the offences are contradictory and operate in different fields altogether. In the case of cheating, dishonest intention must be present from the inception of the transaction, which is categorically missing in this case. Thus, no offence under Section 420 IPC is made out. For the offence of criminal breach of trust, the pre-condition is valid entrustment and subsequently its misappropriation, the Court further held.
The Court noted that in this case, the opposite party was dealing in shares through the applicant and subsequently there is some accounting dispute between the parties in such dealing and no determined sum is entrusted. The share market has its own risks. Therefore, it cannot be said that there was any entrustment of the property by the opposite party with the applicant. Thus, no offence under Section 409 of the IPC can made out against the applicant.
The Court further held that from the judgment in Mohammed Ibrahim and Others vs State of Bihar and Another, a person cannot claim to have entrusted any property to someone and at the same time also not say that he has been cheated by dishonest inducement to deliver the property. It can either be the entrustment or the cheating, however, it cannot be both.
The Court said the tenor of the FIR is to get the recovery of money, and therefore, the FIR lodged by the opposite party to initiate criminal proceedings for recovery of money is not sustainable and is self-contradictory. At the most, from the allegations made in the FIR, there can be an offence under Section 15-F of the SEBI Act.
Section 26 of the SEBI Act prohibits registration of the FIR for which only the complaint can be filed under Section 26 of the Act, by the Board. The Act reads as under:
Cognizance of offences by courts—
“(1) No court shall take cognizance of any offence punishable under the Act or any rules or regulations made thereunder, save on a complaint made by the Board.
(2) No court inferior to that of [a Court of Session] shall try any offence punishable under this Act.”
The Court also observed that the SEBI Act is a special act, which shall prevail over the general act. It is a settled position of law that once a special act holds the field, the provisions of general law would not apply and the prosecution can only be lodged in accordance with the provisions of such a special law and provisions of Section 26 of the SEBI Act, specifically. The reliance placed on Section 26B of the SEBI Act by the counsel for the opposite party is misconceived. It is applicable only for the purpose of filing the complaint before the special courts and not for criminal prosecution under the provisions of IPC.
The Securities and Exchange Board of India is a regulatory body for securities and commodity markets in India under the administrative domain of the Union ministry of finance. It was established on April 12, 1988, as an executive body and given statutory powers on January 30, 1992, through the SEBI Act, 1992. The Act provides for the establishment of a board to protect the interests of investors in securities and promote the development of, and to regulate the securities market. The SEBI regulates the activities of stock exchanges, market intermediaries and issuers. It sets guidelines for market operations, listing requirements and investor protection measures. It also holds the platform to protect the stock market.
—By Adarsh Kumar and India Legal Bureau