DIRECTORS LIABILITY FOR FRAUD

In Re: Kamalakshi Finance Corporation Limited

being a possible case of tax evasion, which could be seen by the concerned law enforcement
agencies separately, is prima facie also a fraud on the securities market in as much as it involves
manipulative transactions in securities and misuse of the securities market. The manipulation in
the traded volume and price of the scrip by a group of connected entities has the potential to induce
gullible and genuine investors to trade in the scrip and harm them. As such the acts and omissions
of KFCL, Kamalakshi group and suspected entities and allottees are 'fraudulent' as defined under
regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 ('PFUTP Regulations') and are in contravention of the
provisions of Regulations 3(a), (b), (c) and (d) and 4(1), 4(2)(a), (b), (e) and (g) thereof and section
12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992. The said provisions
are reproduced hereunder:-
SEBI ACT
Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of
securities or control.
"12A. No person shall directly or indirectly-
..
(c) engage in any act, practice, course of business which operates or would operate as fraud or
deceit upon any person, in connection with the issue, dealing in securities which are listed or
proposed to be listed on a recognised stock exchange, in contravention of the provisions of this
Act or the rules or the regulations made thereunder;"
PFUTP Regulations
"3. Prohibition of certain dealings in securities
No person shall directly or indirectly-
(d) engage in any act, practice, course of business which operates or would operate as fraud or
deceit upon any person in connection with any dealing in or issue of securities which are listed or
proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act
or the rules and the regulations made there under.
4. Prohibition of manipulative, fraudulent and unfair trade practices
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it
involves fraud and may include all or any of the following, namely:-
(e) any act or omission amounting to manipulation of the price of a security;
30. I note that the directors of KFCL during the relevant time (i.e. Dheeraj Shah, Sheetal Dheeraj
Shah, Heetal Kumar J Shah, Naresh Suresh Gurav, Chandresh Upadhyay, Arvindkumar Upadyay,
Suneel Upadhyay Kumar, Praful Arvindbhai Solanki and Sonal Virani Neeraj), being in control of
the day to day affairs of KFCL, had the knowledge of its acts and omissions. They were also under
an obligation to ensure that the acts and transactions of KFCL were not in violation of any of the
applicable provisions of SEBI Regulations or other applicable laws. I, therefore, prima facie find
that the directors of KFCL (i.e. Dheeraj Shah, Sheetal Dheeraj Shah, Heetal Kumar J Shah, Naresh
Suresh Gurav, Chandresh Upadhyay, Arvindkumar Upadyay, Suneel Upadhyay Kumar, Praful
Arvindbhai Solanki and Sonal Virani Neeraj) were responsible for KFCL's acts and omissions in
this case.

N. NARAYANAN VS. SEBI

40. The Appellant has taken the stand, as already stated, that even though he was a whole time
Director he was not conversant with the accounts and finance and was only dealing with the human
resource management of the company, hence, he had no fraudulent intention to deceive the
investors. We find it difficult to accept the contention. The Appellant, admittedly, was a whole
time Director of the company, as regards the preparation of the annual accounts, the balancesheet
and financial statement and laying of the same before the company at the Annual General Meeting
and filing the same before the Registrar of the Companies as well as before SEBI, the Directors of
the company have greater responsibility, especially when the company is a registered company.
Directors of the companies, especially of the listed companies, have access to inside knowledge,
such as, financial position of the company, dividend rates, annual accounts etc. Directors are
expected to exercise the powers for the purposes for which they are conferred. Sometimes they
may misuse their powers for their personal gain and makes false representations to the public for
unlawful gain.
OFFICIAL LIQUIDATOR, SUPREME BANK LTD. Vs. P. A. TENDOLKAR (DEAD) BY
L. RS. AND ORS. 1973 AIR 1104, 1973 SCR (3) 364

It is certainly a question of fact, to be determined upon the evidence in each case, whether a
Director, alleged to be liable for misfeasance, had acted reasonably as well as honestly and with
due diligence, so that he could not be held liable for conniving at fraud and misappropriation which
takes place. A Director may be shown to be so placed and to have been so closely and so long
associated personally with the management of the Company that he will be deemed to be not
merely cognizant of but liable for fraud in the conduct of the business of a Company even though
no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what
must be obvious to everyone whoexamines the affairs of the Company even superficially. If he
does so he could be held liable for dereliction of duties undertaken by him and compelled to make
good the losses incurred by the Company due to his neglect even if he is not shown to be guilty of
participating in the commission of fraud. It is enough if his negligence is of such a character as to
enable frauds to be committed and losses thereby incurred by the Company.

For appellant

Sesa Goa Limited and Ors. vs. State of Maharashtra and Anr. (11.12.2008 - BOMHC) :
MANU/MH/1194/2008

40. The principle of vicarious liability is well recognised in civil law. However, in criminal law, it
is well settled that unless a provision for vicarious liability exists in a statute, the managing director
or directors of the company cannot be accused for any offences committed by the company. In
Maksud Saiyed v. State of Gujarat (supra), the Supreme Court has held that the Indian Penal Code
does not contain any provision for attaching vicarious liability on the part of the managing director
or directors of the company when the accused is the company. It has been further held that since
the bank is a body corporate, vicarious liability of the managing director and the director would
arise provided there exists a provision in that behalf in the statute. A similar view has been
expressed by the Supreme Court in the case of S.K. Alagh v. State of U.P. (supra) while
considering the provisions of Section 406, Indian Penal Code. In the complaint as it stands, there
are no specific allegations made out against the Directors of the company inasmuch as no specific
role has been attributed to each of the Directors. There must be an overt act described in the
complaint which can be attributed to the Directors that constitutes an offence under Sections 403
and 406. In case of some of the petitioners, they were not Directors at the time when the offence
was allegedly committed in 1993 when the offer document was issued. Therefore, the question of
entrustment of any property to them or inducement by them would not arise. Mens rea must be
present from inception and the contention of the Respondent that all the Directors of the Company
were equally liable cannot be accepted. Furthermore, it cannot be presumed that the present
Directors had knowledge of any offence having been committed by the Company. Assuming they
had such knowledge, it would not be sufficient to make them liable for the alleged offences. As
noted above, R.K. Dalmiya's case (supra) dealt with Section 409 under which Dalmiya was
convicted. The Supreme Court on the basis of the evidence on record did not accept the contentions
put forth on behalf of Dalmiya that he could not be convicted under the aforesaid section merely
because he was the Chairman of the company. The Supreme Court in its detailed judgment has
observed that Dalmiya actually looked after the share business and had knowledge of the losses of
the company union agencies.

AJAY SURENDRA PATEL VS. DEPUTY COMMISSIONER OF INCOME TAX (23.02.2017 - GUJHC) :
MANU/GJ/0256/2017
12.1 Now, referring to the strenuous contention raised by learned counsel for the petitioner that
except bringing share capital, the petitioner was not concerned with the affairs of the company and
everything has been done by other directors. Now, to deal with this contention if we peruse the
statutory provisions contained under Section 166 of the Companies Act, certain duties are spelt
out with respect to the obligation of directors of the company. Perusal of this statutory provision
would indicate that director of a company shall exercise his duties with due and reasonable care,
skill and diligence, and shall exercise independent judgment and further, a director of a company
shall not assign his office or any assignment so made, shall be void. Now, this statutory provision
dealing with duty of the director has indicated that other director is supposed to take his office with
due diligence on account of fiduciary obligation with the company. There are series of cases in
which it has been held that the position of a director of a company is fiduciary relationship with
the company and director is supposed to or under a legal obligation to observe the utmost good
faith towards the company in any transaction with it or in its behalf and therefore, looking to this
obligation of the petitioner towards the company, he cannot plead ignorance completely about the
affairs of the company which has practically led virtually a company to a closure. This fiduciary
obligation does not cease with the resignation. As said earlier, sub-section (3) of Section 166 of
the Companies Act which spelled out that director shall exercise his duties with due and reasonable
care and based upon which the Supreme Court in case of N. Narayanan v. Adjudicating Officer,
SEBI, reported in MANU/SC/0426/2013 : AIR 2013 SC 3191 has held that, 'failure of a corporate
governance on the part of directors if they failed to exercised due care and diligence and thereby,
allowing fabrication of figures and false disclosure, they would be liable for such omissions and
commissions.' Relevant observations of the said decision are reproduced hereinafter :

"32. Responsibility is cast on the Directors to prepare the annual records and reports and those
accounts should reflect 'a true and fair view'. The over-riding obligation of the Directors is to
approve the accounts only if they are satisfied that they give true and fair view of the profits or
loss for the relevant period and the correct financial position of the company.
33. Company though a legal entity cannot act by itself, it can act only through its Directors. They
are expected to exercise their power on behalf of the company with utmost care, skill and diligence.
This Court while describing what is the duty of a Director of a company held in Official Liquidator
v. P.A. Tendolkar MANU/SC/0005/1973 : (1973) 1 SCC 602 that a Director may be shown to be
placed and to have been so closely and so long associated personally with the management of the
company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct
of business of the company even though no specific act of dishonesty is provide against him
personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs
of the company even superficially.
40. The appellant has taken the stand, as already stated, that even though he was a whole time
Director he was not conversant with the accounts and finance and was only dealing with the human
resource management of the company, hence, he had no fraudulent intention to deceive the
investors. We find it difficult to accept the contention. The appellant, admittedly, was a whole time
Director of the company, as regards the preparation of the annual accounts, the balance-sheet and
financial statement and laying of the same before the company at the Annual General Meeting and
filing the same before the Registrar of the Companies as well as before SEBI, the Directors of the
company have greater responsibility, especially when the company is a registered company.
Directors of the companies, especially of the listed companies, have access to inside knowledge,
such as, financial position of the company, dividend rates, annual accounts etc. Directors are
expected to exercise the powers for the purposes for which they are conferred. Sometimes they
may misuse their powers for their personal gain and makes false representations to the public for
unlawful gain."
12.2 So, even in cases where director is leaving the matter to the discretion of other directors
without supervision and also for making loans without inquiry for what purpose the loans were
made and consequently, when the company suffered a loss in transaction the directors were held
to be responsible as held in case of Dorchester Finance Co. Ltd. v. Stebbings, reported in 1 Co
Lawyers 38 (USA) and therefore, looking to this proposition of law, the stand which has been
taken that petitioner was completely unaware about the fact and everything was done by Mr. Pratik
R. Shah is not an excuse available to the petitioner from absolving from the crystallized liability.
The statute does not permit a director of a company to assign his office to be left to others and
therefore, consequences he must suffer on account of such negligence. Such assignment shall be
void as impermissible in the statute and therefore, defence which has been tried to be projected
that everything is done by the others is not available to the petitioner. The fiduciary position of a
director in a company does not permit the directors to throw always up their hands and say that we
knew nothing as did not take part and therefore, considering this position of petitioner in the
company we do not propose to allow such defence to be accepted. On the contrary, we feel that a
director with a sizable amount of holding structure of the company can never be allowed to take
such plea to keep himself away from the responsibilities under the guise of resignation.
R.K. DALMIA VS. DELHI ADMINISTRATION (05.04.1962 - SC) : MANU/SC/0110/1962
345. We agree with respect with the following observation in Emperor v. Ragho Ram
MANU/UP/0302/1933 : I.L.R. [1933] All. 783 :

"If the intention with which as false document is made is to conceal a fraudulent or dishonest act
which had been previously committed, we fail to appreciate how that intention could be other than
an intention to commit fraud. The concealment of an already committed fraud is a fraud."
And, again, at pages 789 :

"Where, therefore, there is an intention to obtain an advantage by deceit there is fraud and if a
document is fabricated with such intent, it is forgery. A man who deliberately makes a false
document in order to conceal fraud already committed by him is undoubtedly acting with intent to
commit fraud, as by making the false document he intends the party concerned to believe that no
fraud had been committed. It requires no argument to demonstrate that steps taken and devices
adopted with a view to prevent persons already defrauded from ascertaining that fraud had been
perpetrated on them, and thus to enable the person who practised the fraud to retain the illicit gain
which he secured by the fraud, amount to the commission of a fraud. An act that is calculated to
conceal fraud already committed and to make the party defrauded believe that no fraud had been
committed is a fraudulent act and the person responsible for the acts fraudulently within the
meaning of section 25 of the Code."

FOR APPELLANT
141. In re City Equitable Fire Insurance Co. Ltd., (1925)1 Ch 407, dividend had been paid out of
capital and losses had been occasioned by unjustified investments and loans. The liquidator sought
to make the directors responsible for the loss on the ground that they had been guilty of breach of
duty and their act on that account amounted to misfeasance. The five principles which Romer, J.
laid down in connection with the duty of directors were:

(1) A director is only liable for gross or culpable negligence, this means that he does not owe a
duty to his company, to take all possible care. It is some degree of care less than that. The care that
he is bound to take has been described by Neville, J. in the case referred to above as "reasonable
care" to be measured by the care an ordinary man might be expected to take in the circumstances
on his own behalf.

(2) A director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience.
(3) A director is not bound to give continuous attention to the affairs of his company. His duties
are of an intermittent nature to be performed at periodical board meetings, and at meetings of any
committee of the board upon which he happens to be placed. He is not, however, bound to attend
all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able
to do so.

(4) In respect of all duties that, having regard to the exigencies of business, and the articles of
association, may properly be left to some other official, a director is, in the absence of grounds for
suspicion, justified in trusting that official to perform such duties honestly.

(5) Directors are not bound to examine entries in the company's books.

142. The principles laid down in the above mentioned cases have been followed by Indian Courts
also. Reference may be made by way of example to three cases, which will be found reported in
S.C. Mitra v. Nawab Ali Khan, MANU/OU/0383/1925 : AIR 1926 Oudh 153, National Bank of
Upper India, Lucknow v. Dina Nath Sapru, MANU/OU/0093/1926 : AIR 1926 Oudh 243 and
Thinnappa Chettiar v. Rajagopalan, MANU/TN/0203/1944 : AIR 1944 Mad 536.

IONIC METALLIKS VS. UNION OF INDIA (09.09.2014 - GUJHC) : MANU/GJ/0683/2014

LIFTING OF CORPORATE VEIL

AJAY SURENDRA PATEL VS. DEPUTY COMMISSIONER OF INCOME TAX (23.02.2017 - GUJHC) :
MANU/GJ/0256/2017
12.3 Now, in the context of this situation if we examine the principle of lifting of corporate veil, it
seems that the authority has rightly applied this principle. The principle of separate legal entity has
been dealt with by a well recognized case of Saloman v. Saloman & Co. Ltd. wherein, it is accepted
that when a company is incorporated, all dealings are with the company and all persons behind the
company are disregarded, however important they may be. This means that there is veil drawn
between the company and its members. It has been held that normally, this principle of corporate
personality of a company is to be respected to. Howsoever, when the people start misusing this
veil of corporate personality then it becomes necessary for the courts to pierced the corporate veil
and look to the persons who are in fact the real beneficiaries and this well recognized principle of
lifting of corporate veil or piercing the corporate veil is held to be well accepted in extraordinary
circumstances which are reflecting from the background of case on hand. Though a defence is set
up by the petitioner that everything has been done after his resignation but, upon examination it
appears that in a relevant year when substantial transactions and the huge cash deposits have come,
can be said to be during the tenure of the directorship of the petitioner.

13. This well recognized principle of corporate veil can be lifted if the company is used as a means
to evade tax or to circumvent the tax obligation and in that case, an individual shareholder may
also be liable to pay the income-tax. The Supreme Court in case of Juggilal Kamlapat v.
Commissioner of Income Tax, U.P., reported in MANU/UP/0251/1962 : 1964 (52) ITR 811 has
held that the Court is entitled to lift the mask of corporate entity if it is used for tax evasion or to
circumvent the tax obligations and therefore, in such a situation, the person concerned can be held
to be liable for income-tax. In case of Commissioner of Income-tax v. Sri Meenakshi Mills,
Madurai, reported in MANU/SC/0138/1966 : AIR 1967 SC 819, has also spelt out the proposition
that the Court is empowered to lift the corporate veil if the company is used as a means to
circumvent the obligation.
13.1 There are series of cases in which for the purpose of protection of revenue, the authority as
well as the Court is entitled to lift the corporate veil and see behind it and fix the liability of person
concerned, howsoever he may be.
..
16. A further proposition of law is also not possible to be ignored by the Court is that even in case
of Tata Engineering & Locomotive Co. Ltd. as also in Life Insurance Corporation v. Hari Das
Mundhra, reported in MANU/UP/0001/1962 : 1962 LawSuit (All) 30 as well as in PNB Finance
Ltd. v. Shital Prasad Jain, reported in MANU/DE/0235/1981 : 1983 54 Company Cases 66 (Delhi),
it has been held by all the Courts consistently that in a given case the Court may lift the corporate
veil of a company where it appears that the company was formed only for some fraudulent purpose
and to defraud the creditors or to avoid legal obligations. Now in the context of this proposition, if
we look at and correlate the clauses contained in Memorandum of Association as well as Articles
of Association and correspondingly, to the stand taken by the department, it appears that the
company is engaged in altogether other business than the main object for which the company was
set up and therefore, in view of settled position of law, if the company has travelled beyond the
scope of the object of Memorandum of Association then such transaction has no legal sanctity and
can be said to be void and therefore, this improper conduction of business de-hors the main object
tantamount to be improper conduct of the company and for that very purpose, it is always open for
the Court as well as for the authority to lift the corporate veil.

17. Similarly, the corporate veil can be lifted if it is found that the company is acting as an agent
of shareholders though it has got legal entity. In a well known case of Re F.G. Films Ltd., a British
company which was formed with 90% of shares held by American director. The said British
company and an American company arranged to produce a films in the name of the British
company. The Board of Trade of Great Britain refused to register the firm as British firm by
upholding that English company acted as the nominee or agent of the American company and this
has taken place upon lifting of corporate veil. Therefore, this is also relevant case law for the
subject on hand as the petitioner upon induction has brought share capital to the extent of 98.33%
and the certificate of commencement of business was obtained after induction of the petitioner.
Therefore, practically the company was to be used as lever to transact a business which is de-hors
the Memorandum of Association. Therefore, these are the relevant circumstances in which it can
safely be stated that authority has rightly exercised statutory powers to lift the corporate veil to
examine behind it and fix the liability for protection of revenue of the department.

SEBI, (1) IN RE : NISHWET MANAGEMENT SERVICES PRIVATE LIMITED; (2) IN

RE : PYRAMID SAIMIRA THEATRE LIMITED
17. In view of the above, I find it necessary to look behind the corporate veil, and, what we
find is that Mr. Nirmal Kotecha is solely the real person behind Nishwet. It is to be noted
that the courts have been inclined to lift the corporate veil when it is felt 'fraud' or 'mischief'
could have been perpetrated using the cover of the separate legal person that goes with a
corporate entity. In this context, it is pertinent to quote the following observation of the Hon'ble
Supreme Court of India in Delhi Development Authority v. Skipper Construction Company Private
Limited [AIR 1996 SC 2005]:
"28. The concept of corporate entity was evolved to encourage and promote trade and commerce
but not to commit illegalities or to defraud people. Where, therefore, the corporate character is
employed for the purpose of committing illegality or for defrauding others, the court would ignore
the corporate character and will look at the reality behind the corporate veil so as to enable it to
pass appropriate orders to do justice between the parties concerned".
18. Further, the Hon'ble Securities Appellate Tribunal in a number of cases including the matter
of Rajendra Mehta vs. Whole Time Member, SEBI (Appeal No. 79 of 2008, decided on June 24,
2009) has observed thus"........It is true that the companies are different legal entities but when
allegations of market irregularities of the kind alleged against the appellant are made, it is open
to lift the corporate veil and find out who is behind the transactions".
19. In view of the above, I find it appropriate to confirm the directions issued against Nishwet vide
ex-parte interim order dated April 23, 2009 in the matter of investigation in the scrip of PSTL till
further orders, taking into consideration the fact that the ultimate aim of the enabling legislation,
the SEBI Act, is to do justice in public interest to protect investors in the securities market.

FOR APPELLANT
OFFICER IN DEFAULT/ VICARIOUS LIABILITY
SESA GOA LIMITED AND ORS. VS. STATE OF MAHARASHTRA AND ANR.
OFFICER IN DEFAULT' AND LIFTING OF THE CORPORATE VEIL:
34. The learned Counsel for the Petitioners has submitted that unless a Director is an officer in
default he would not be liable for committing of the offence Under Section 73 of the Companies
Act. An 'officer in default' has been defined in that Act as follows:
5. - Meaning of officer who is in default. - For the purpose of any provision in this Act which
enacts that an officer of the company who is in default shall be liable to any punishment or penalty,
whether by way of imprisonment, fine or otherwise, the expression officer who is in default means
all the following officers of the company, namely:
a) the managing director or managing directors: in relation to any provision referred to in Section
5, has the meaning specified in that section;
b) the whole time director or whole time directors;
c) the whole time director or whole time directors;
d) the Manager;
e) any Secretary;
f) any person in accordance with whose directions or instructions the Board of Directors of the
Company is accustomed to act;
35. Criminal liability cannot be attached to a person unless there is both mens rea and actus reus
attributable to the person. Some of the directors like Petitioner Nos. 5, 9, 10 and 11 in Writ Petition
No. 2739 of 2006 are Directors of both the Companies SGL as well as SIL whereas the others are
Directors of SGL. The criminal liability of a Director would arise only when he is an officer in
default as defined in Section 5 of the Companies Act. None of the petitioners are officers in default
within the meaning of Section 5 of the Companies Act. Therefore, they cannot be accused of
having committed a breach of Section 73 of the Companies Act. Moreover unless the criminal
liability is stipulated in a particular statute, a person cannot be made liable vicariously.
The submission of the learned Counsel for the Respondent that by lifting of the corporation veil,
this Court should go beyond the Company and reach out to bring within its ambit the true persons
behind the Company is not a principle which would apply in a case such as the present one. There
is no dispute that the shares of SIL have been sold to the shareholders of SGL. Nor is there any
dispute that the pig iron plant and the iron ore have been sold by SGL to SIL. Therefore, in my
opinion, there is no need to pierce the corporate veil to ascertain which entity is behind the
transactions. In fact, if the submission of the learned Counsel for the Respondent No. 2 is to be
accepted and the corporate veil should be pierced in order to fix criminal liability on account of
the sale of pig iron plant of SGL to SIL it would defeat the very submission made by the learned
Counsel that SGL has siphoned off money from SIL by selling the pig iron plant to SIL for an
exorbitant amount. Admittedly the Respondent is also a shareholder of SGL and has thus benefited
by the transaction.
36. Apart from this, the submission of the learned Counsel for the Respondent that the Directors
are vicariously liable for the offences committed by the Companies Act cannot be accepted. As
observed by the Supreme Court in Maksud Saiyed v. State of Gujarat MANU/SC/7923/2007 :
(2008)5SCC668 , the Indian Penal Code does not contain any provisions for attaching vicarious
liability on the part of the Managing Director or Directors of a Company when the accused is the
Company. It is only when a statute provides for fixing vicarious liability on a Director for an
offence committed by the Company that a Director can be said to be vicariously liable. A similar
view has been taken by the Supreme Court in S.K. Alagh v. State of U.P. (2008) 42 C C 228 .
Besides this, a perusal of the complaint shows that no specific role is attributed to any of the
Directors. They have been roped in only because they happen to be Directors of the Company. The
complaint does not describe the actus reus besides the mens rea to make out an offence against the
Directors under the Indian Penal Code. In case of Shi Yang @ Sang v. A. Kannagi 2008 Cr.L.J.
617, the Madras High Court has held that if a person is alleged to be guilty of an offence there
must be necessary averments incorporated in the complaint. The particular acts which are
attributable to the accused person must spelt out in any complaint accurately and unequivocally
pointing to the criminality of the accused person. There must be a specific pleading to the effect
that a particular Director, personally, has committed an offence. It is now well settled that in the
absence of a particularization as to the role of an accused it would not be appropriate to accept an
omnibus allegation for implication of a person in the offence. Besides this, the offences alleged
are in respect of events which have taken place prior to 2003. In Ajay Mitra v. State of M.P.
MANU/SC/0052/2003 : 2003CriLJ1249 , the Supreme Court has observed that no liability can be
fastened on persons who have become Directors after the alleged offences have been committed.
It is now well settled that for a person to be liable of criminal breach of trust and inducement,
mens rea is required to be established from the inception. The Directors who have been arraigned
as accused were not on the Board of Directors when the alleged misrepresentations were made in
the preferential offer document of 1993. They were neither Directors of SIL nor SGL at that time
and, therefore, could not have been involved in either the inducement or entrustment. The
knowledge relevant for attributing criminal liability must be contemporaneous knowledge. A
Director cannot be implicated by the mere fact that he obtained knowledge much later of the
alleged offence having been committed.
37. Therefore, in my opinion, the submission of the learned Counsel for the Respondent that the
Directors are vicariously liable for the offences committed by the Company cannot be accepted.
Reliance has been placed by the learned Counsel for the Respondent on the case of R.K. Dalmiya
v. Delhi Administration (supra) in support of his submission that the petitioner - Directors were
officers in default. He also relied on the judgment of the Supreme Court in the case of Laxmi N.
Joshi v. State of Maharashtra AIR 1986 SC 439.
MANIPULATION OF BOOKS OF ACCOUNT/ FRAUD UNFER REGULATIONS
N. NARAYANAN VS. SEBI

25. In Sahara India Real Estate Corporation Limited and Ors. v. Securities and Exchange Board
of India and Anr. MANU/SC/0702/2012 : (2013) 1 SCC 1, this Court has noticed that though the
Indian Companies Act, 1956 was modeled on English Companies Act, 1948, no efforts have been
made to incorporate universally accepted principles and concepts into our company law. of late,
however, some efforts have been made by carrying out few amendments to the Companies Act,
1956, so also in the SEBI Act, 1992 and Rules and Regulations framed therein to keep pace with
the English Companies Act and related legislations. When we interpret the provisions of the SEBI
Act and the Regulations relating to a company registered under the Companies Act, the provisions
of the Companies Act have also to be borne in mind. For instance, in SEBI Act, there is no
provision for keeping proper books of accounts by a registered company.

26. Section 209 of the Companies Act says that every company shall keep at the registered office
proper books of accounts. Books of accounts should be so kept as to give true and fair view of the
state of the company's affairs and explain transactions. of course, the auditors of the company must
examine whether the company has maintained proper cost accounting records as required bythe
rules. Companies whose securities are traded on a public market, it is trite law that the disclosure
of information about the company is crucial for the correct and accurate pricing of the company's
securities and for the official operation of the market. Section 210 of the Companies Act states that
at every annual general meeting of the company, the Board of Directors is required to lay before
it a balance-sheet as at the end of and a profit and loss account for the financial year.

27. Clause 41 of Listing Agreement between the SEBI and the concerned companies requires the
companies to furnish to stock exchange and to publish unaudited financial result on a quarterly
basis in the prescribed format. Section 55A of the Companies Act deals with the powers of SEBI
which says some of the provisions referred to therein, so far as they relate to issue and transfer of
securities and non-payment of dividends in the case of listed companies be administered by SEBI.
Further, it is also indicated that how the books of accounts have to be kept by the company, so also
with regard to audit of account etc. finds a place in the Companies Act, so also the qualification
and disqualification of the Managing Directors.
33. Company though a legal entity cannot act by itself, it can act only through its Directors. They
are expected to exercise their power on behalf of the company with utmost care, skill and diligence.
This Court while describing what is the duty of a Director of a company held in Official Liquidator
v. P.A. Tendolkar MANU/SC/0005/1973 : (1973) 1 SCC 602 that a Director may be shown to be
placed and to have been so closely and so long associated personally with the management of the
company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct
of business of the company even though no specific act of dishonesty is provide against him
personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs
of the company even superficially.

34. The facts in this case clearly reveal that the Directors of the company in question had failed in
their duty to exercise due care and diligence and allowed the company to fabricate the figures and
making false disclosures. Facts indicate that they have overlooked the numerous red flags in the
revenues, profits, receivables, deposits etc. which should not have escaped the attention of a
prudent person. For instance, profit as on quarter ending June 2007 was three times more than the
preceding quarter, it doubled in the quarter ending December 2007 over the preceding quarter.

In Re : Pyramid Saimira Theatre Limited

7. Mr. Natarajan has submitted that he cannot be charged under Section 12A which basically deals
with intermediaries and he is not covered under the said section. He has further submitted that he
cannot be charged under PFUTP Regulations, as he has not dealt in shares of PSTL. I, however,
find that Section 12A prohibits any person from employing manipulative and deceptive devices.
This Section is not limited to intermediaries, as claimed by Mr. Natarajan, and includes any person.
Further, PFUTP Regulations prohibit a person from employing any manipulative or deceptive
device in connection with purchase or sale of securities or engaging in any act which operates as
fraud or deceit upon any person in connection with dealing in securities. The SCN alleges various
accounting irregularities and false disclosures which operate as fraud on investors dealing in shares
of PSTL. It is not necessary that the fraudster itself has to deal in securities to attract PFUTP
Regulations. It is enough if it has committed the fraud which has the potential to induce others to
deal in securities. I, therefore, find that Section 12A covers Mr. Natarajan within its ambit and
PFUTP Regulations cover his allegedly illegal activities. This is besides the fact that Mr. V.
Natarajan has sold his entire stake in PSTL to Mr. P. S. Saminathan by selling 1,11,335 shares and
8,90,665 shares respectively on April 03, 2008 and April 14, 2008 in off market transactions.
9. The only issue remains to be decided is: can the whole time directors be held responsible for the
violations committed by the company. A company does not have a mind of its own. It acts through
its board of directors. The directors, particularly whole time directors, are responsible for all the
acts of omission and commission by the company. It is the duty and responsibility of the directors
to ensure that proper systems and controls are in place for financial reporting and to monitor the
efficacy of such systems and controls. They have the duty of care, which calls for exercise of
independent judgment with reasonable care, diligence and skill which should be reasonably
exercised by a prudent person with the knowledge, skill and experience which may reasonably be
expected of a director in his position and any additional knowledge, skill and experience which he
has. I find that the directors failed to exercise the duty of care by either actively allowing the
management to fabricate accounts and make false disclosures or not setting up systems to generate
accurate accounts and make correct disclosures. The former is more likely as the noticees
overlooked numerous red flags in the trend in revenues, profits, receivables, advances, etc. which
could not escape the attention of a prudent person. For example, profits tripled in the quarter ending
June 2007 over the preceding quarter. It doubled in the quarter ending December 2007 over the
preceding quarter. The quarter ending March 2008 reported a loss of Rs.3.11 crore compared to a
profit of Rs.29.87 crore in the preceding quarter. Similarly, though the number of screens in
theatres increased from 487 as on September 30, 2007 to 655 as on December 31, 2007, security
deposits with theatres during the same period increased disproportionately from Rs.36.05 crore to
Rs.170.38 crore. Such aberrations in financial figures would alert any person of ordinary prudence.
The appropriate questions at the right time from the noticees would have unraveled the fraud being
played by the company on the innocent investors. By failing to ask the right questions at the right
point of time, I find that the noticees have failed in their duty of care as a director. I find that the
noticees were either too negligent to notice the aberrations in performance of the company and the
fraud behind such aberrations or acted as shadow directors of the board. In either case, they
facilitated the company to make false and misleading disclosures and thereby created artificial
prices and volumes in the securities of PSTL in the market, to the detriment of innocent investors.
I, therefore, conclude that the charge of disclosure of false and misleading statements, as alleged
in the SCN against the noticees, is established.

In Re: RKKR Agencies Limited (31.03.2004 - SEBI / SAT) : MANU/SB/0060/2004

7.1.11 I note that the total fictitious reserves created by the company accounted for Rs.509 crores
in 1999, Rs.904 crores in 2000 and Rs.426 crores in 2001 accounting for about 84% in 1999, 87%
in 2000 and 76% in 2001 of the total reserves of the company. Because of these fictitious results,
the book value of the share had been manipulated upwards by Rs.74 in 1999, Rs.66 in 2000 and
Rs.32 in 2001 out of the total book value of Rs.92 in 1999, Rs.80 in 2000 and Rs.45 in 2001.

7.1.12 Thus the management of the company resorted to accounting the brand value and human
resources thereby artificially boosting the net worth per share by about Rs.130 per share during
the year 1999 and 2000. This is a fictitious entry made in the books of the company in order to
boost the net worth of the shares. Further it reveals that the operational performance of the
company was window dressed substantially to project a rosy picture about the performance of the
company and with a manipulative intent to misguide the shareholders and public investors.
IN RE.: MARKET MANIPULATION USING GDR ISSUES (19.09.2014 - SEBI / SAT) :
MANU/SB/0062/2014

14. I note that the provisions of section 12A(a)-(c) of the SEBI Act read with regulations 3(a)-(d)
of the PFUTP Regulations, inter alia prohibit buying, selling or dealing in securities in a fraudulent
manner; employment of any manipulative/deceptive device, scheme or artifice to defraud in
connection with dealing in securities; engaging in any act, practice, course of business which
operates or would operate as fraud or deceit upon any person in connection with dealing in
securities. Further, regulations 4(1) and 4(2)(a) of the PFUTP Regulations, inter alia prohibit
indulgence in fraudulent and unfair trade practices in securities through an act which creates false
or misleading appearance of trading in securities. In my view, any fraudulent or deceptive device,
scheme, act, omission, etc. which has the potential to inter alia induce sale/purchase of securities
of any company; influence investment decisions of investors in such company; or result in
wrongful gain, etc. would be covered within the prohibition under the aforementioned provisions
of law. In the context of the present case, the CP group actively traded in the shares of the Issuer
Companies and thereby facilitated the Sub Accounts in selling the shares in the Indian securities
market.

N. NARAYANAN VS. ADJUDICATING OFFICER, SEBI

25. In Sahara India Real Estate Corporation Limited and Ors. v. Securities and Exchange Board of India
and Anr. MANU/SC/0702/2012 : (2013) 1 SCC 1, this Court has noticed that though the Indian Companies
Act, 1956 was modeled on English Companies Act, 1948, no efforts have been made to incorporate
universally accepted principles and concepts into our company law. of late, however, some efforts have
been made by carrying out few amendments to the Companies Act, 1956, so also in the SEBI Act, 1992
and Rules and Regulations framed therein to keep pace with the English Companies Act and related
legislations. When we interpret the provisions of the SEBI Act and the Regulations relating to a company
registered under the Companies Act, the provisions of the Companies Act have also to be borne in mind.
For instance, in SEBI Act, there is no provision for keeping proper books of accounts by a registered
company.

26. Section 209 of the Companies Act says that every company shall keep at the registered office proper
books of accounts. Books of accounts should be so kept as to give true and fair view of the state of the
company's affairs and explain transactions. of course, the auditors of the company must examine whether
the company has maintained proper cost accounting records as required bythe rules. Companies whose
securities are traded on a public market, it is trite law that the disclosure of information about the company
is crucial for the correct and accurate pricing of the company's securities and for the official operation of
the market. Section 210 of the Companies Act states that at every annual general meeting of the company,
the Board of Directors is required to lay before it a balance-sheet as at the end of and a profit and loss
account for the financial year.

27. Clause 41 of Listing Agreement between the SEBI and the concerned companies requires the companies
to furnish to stock exchange and to publish unaudited financial result on a quarterly basis in the prescribed
format. Section 55A of the Companies Act deals with the powers of SEBI which says some of the provisions
referred to therein, so far as they relate to issue and transfer of securities and non-payment of dividends in
the case of listed companies be administered by SEBI. Further, it is also indicated that how the books of
accounts have to be kept by the company, so also with regard to audit of account etc. finds a place in the
Companies Act, so also the qualification and disqualification of the Managing Directors.

V. Natarajan Versus Securities and Exchange Board of India

Investigations carried out by the Board revealed that the company had committed serious
irregularities in its books of accounts and by showing inflated profits and revenues it lured the
general public to invest in the shares of the company. It has been found that the financial results
as disclosed to the public through the stock exchanges were false and inaccurate and the finding
in this regard is not being challenged before us. It is also not in issue that the appellant being the
chairman and whole time director was a part of the board of directors which approved the financial
results. This being so, we are satisfied that the provisions of Regulations 3 and 4 of the Securities
and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 were violated. These regulations, among others, prohibit any
person from employing any device, scheme or artifice to defraud in connection with dealing in or
issue of securities which are listed or proposed to be listed on an exchange. They also prohibit
persons from engaging in any act, practice, course of business which operates or would operate as
fraud or deceit upon any person in connection with any dealing in or issue of securities that are
listed on stock exchanges. These regulations also prohibit persons from indulging in a fraudulent
or unfair trade practice in securities which includes publishing any information which is not true
or which he does not believe to be true. Any advertisement that is misleading or contains
information in a distorted manner which may influence the decision of the investors is also an
unfair trade practice in securities which is prohibited. The regulations also make it clear that
planting false or misleading news which may induce the public for selling or purchasing securities
would also come within the ambit of unfair trade practice in securities. It is by now well understood
that unaudited financial results that are required to be published by every listed company on a
quarterly basis do form the basis for the investing public to take informed decisions. Any false
information or false accounts depicting inflated revenues and profits by fictitious entries in
accounts is, indeed, a very serious wrong doing which directly impacts the securities market and
the investors. Since the appellant was a part of the board of directors which approved the financial
results of the company which were actually false and untrue, we are satisfied that the appellant is
guilty of the charges levelled against him. Having regard to the nature of the serious market
violation committed by the appellant, the Board was justified in keeping him out of the market for
a period of three years and not allowing him to be a director on any listed company for that period.

CASH FLOW STATEMENT

SENIOR EXECUTIVE DIRECTOR

SMD-I(N)/JJ/2331/95
June 26, 1995

The Cash Flow Statement in the annual report will ensure the disclosure of actual cash flow in the
operations of the company. Incorporation of a new provision in the Listing Agreement requiring
the companies to give a Cash Flow Statements in their annual reports will help the investors to get
better quality information about the performance of the company. Internationally, the requirement
of a cash flow statement is imposed and this is considered to be an essential source of information
for investors.

The group has suggested the requirements for Cash Flow statements and also a model of the same.
SEBI has decided that the suggested modifications in the Listing Agreement should provide for
the companies giving of Cash Flow Statement in the Annual Report.
It is therefore considered necessary to amend Clause 32 of the Listing Agreement as indicated
hereunder:-

"The company will supply a copy of the complete and full Balance Sheet, Profit and Loss Account
and the Directors Report to each shareholder and upon application to any member of the exchange.
The company will also give a Cash Flow Statement along with the Balance Sheet and Profit and
Loss Account. The Cash Flow Statement will be prepared in accordance with the Annexure
attached hereto."

ANNEXURE- A

OBJECTIVES

1. The objective of the cash flow statement (CFS) is to require reporting entities falling within its
scope to report on a standard basis their cash generation and cash absorption for a period between
two balance sheet dates. Standard headings have been devised for assisting the users to assess the
liquidity, viability and financial adaptability of the reporting entity. This will ensure that cash flows
highlight the significant components of the cash flow and facilitates comparison of the cash flow
performance of different and varying natures of business.

APPLICABILITY

2. This requirements shall be mandatory for all the listed companies and other listed entities on the
recognised stock exchanges.

SCOPE

3. A company should prepare a cash flow statement in accordance with this requirements and
should present it as an integral part of its financial statements for each period for which financial
statements are presented.

BENEFITS OF CASH FLOW INFORMATION

4. A cash flow statement, when used in the conjunction with the rest of the financial statements,
provides information that enables users to analyse the pattern of resource deployment in/out of
assets, evaluate the changes in net assets of a company, its financial structure (including its
liquidity and solvency) and its ability to affect the amounts and timing of cash flow in order to
adapt to changing circumstances and assessing the ability of the company to generate cash and
cash equivalent and enables users to develop models to assess and compare the present value of
the future cash flows of different companies. It also enhances comparability of the reporting of
operating performance by different companies because it eliminates the effects of using different
accounting treatments for the same transactions and events.

5. Historical cash flow information is often used as an indicator of the amount, timing and certainty
of future cash flows. It is also useful in checking the accuracy of past assessments of future cash
flows and in examining the relationship between profitability and net cash flow and the impact of
changing prices.

IMPORTANCE OF DISCLOSURE

N. NARAYANAN VS. SEBI

38. The Companies Act casts an obligation on the company registered under the Companies Act
to keep the Books of accounts to achieve transparency. Previously, it was thought that the
production of the annual accounts and it preparation is that of the Accounting Professional engaged
by the company where two groups who were vitally interested were the shareholders and the
creditors. But the scenario has drastically changed, especially with regard to the company whose
securities are traded in public market. Disclosure of information about the company is, therefore,
crucial for the accurate pricing of the company's securities and for market integrity. Records
maintained by the company should show and explain the company's transactions, it should disclose
with reasonable accuracy the financial position, at any time, and to enable the Directors to ensure
that the balance-sheet and profit and loss accounts will comply with the statutory expectations that
accounts give a true and fair view.

V. Natarajan Versus Securities and Exchange Board of India

Investigations carried out by the Board revealed that the company had committed serious
irregularities in its books of accounts and by showing inflated profits and revenues it lured the
general public to invest in the shares of the company. It has been found that the financial results
as disclosed to the public through the stock exchanges were false and inaccurate and the finding
in this regard is not being challenged before us. It is also not in issue that the appellant being the
chairman and whole time director was a part of the board of directors which approved the financial
results. This being so, we are satisfied that the provisions of Regulations 3 and 4 of the Securities
and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 were violated. These regulations, among others, prohibit any
person from employing any device, scheme or artifice to defraud in connection with dealing in or
issue of securities which are listed or proposed to be listed on an exchange. They also prohibit
persons from engaging in any act, practice, course of business which operates or would operate as
fraud or deceit upon any person in connection with any dealing in or issue of securities that are
listed on stock exchanges. These regulations also prohibit persons from indulging in a fraudulent
or unfair trade practice in securities which includes publishing any information which is not true
or which he does not believe to be true. Any advertisement that is misleading or contains
information in a distorted manner which may influence the decision of the investors is also an
unfair trade practice in securities which is prohibited. The regulations also make it clear that
planting false or misleading news which may induce the public for selling or purchasing securities
would also come within the ambit of unfair trade practice in securities. It is by now well understood
that unaudited financial results that are required to be published by every listed company on a
quarterly basis do form the basis for the investing public to take informed decisions. Any false
information or false accounts depicting inflated revenues and profits by fictitious entries in
accounts is, indeed, a very serious wrong doing which directly impacts the securities market and
the investors. Since the appellant was a part of the board of directors which approved the financial
results of the company which were actually false and untrue, we are satisfied that the appellant is
guilty of the charges levelled against him. Having regard to the nature of the serious market
violation committed by the appellant, the Board was justified in keeping him out of the market for
a period of three years and not allowing him to be a director on any listed company for that period.
 ROLE OF SEBI IN MARKET PROTECTON
N. NARAYANAN VS. SEBI

Securities Market-Market abuse

35. Prevention of market abuse and preservation of market integrity is the hallmark of Securities
Law. Section 12A read with Regulations 3 and 4 of the Regulations 2003 essentially intended to
preserve 'market integrity' and to prevent 'Market abuse'. The object of the SEBI Act is to protect
the interest of investors in securities and to promote the development and to regulate the securities
market, so as to promote orderly, healthy growth of securities market and to promote investors
protection. Securities market is based on free and open access to information, the integrity of the
market is predicated on the quality and the manner on which it is made available to market. 'Market
abuse' impairs economic growth and erodes investor's confidence. Market abuse refers to the use
of manipulative and deceptive devices, giving out incorrect or misleading information, so as to
encourage investors to jump into conclusions, on wrong premises, which is known to be wrong to
the abusers. The statutory provisions mentioned earlier deal with the situations where a person,
who deals in securities, takes advantage of the impact of an action, may be manipulative, on the
anticipated impact on the market resulting in the "creation of artificiality'. The same can be
achieved by inflating the company's revenue, profits, security deposits and receivables, resulting
in price rice of scrip of the company. Investors are then lured to make their "investment decisions"
on those manipulated inflated results, using the above devices which will amount to market abuse.

36. We have, on facts, clearly found that the Directors of the company have "created artificiality"
by projecting inflated figures of the company's revenue, profits, security deposits and receivables
and that the manipulation in the financial results of the company resulted in price rise of the scrip
of the company and the promoters of the company then pledged their shares to raise substantial
funds from financial institutions. The conduct of the Appellant and Ors. was, therefore, fraudulent
and the practices they had adopted, relating to securities, were unfair, which attracted the penalty
provisions contained in Section 15HA read with 15J of the SEBI Act.

In Re: Greentouch Projects Limited and Ors. (01.12.2015 - SEBI / SAT) :

MANU/SB/0207/2015
7. I have considered the interim order cum show cause notice, the reply and written submissions
filed by the Company, the oral submissions made in the personal hearing, documents submitted by
the Company and the other material available on record. Before proceeding to deal with the
allegations, I wish to deal with certain contentions raised by the Company in its written
submissions dated July 03, 2015.
"(a) The Company has contended that under section 11(4) of the SEBI Act, opportunity of hearing
was mandated and there was no express provision for passing of an ex-parte order. It is further
contended that SEBI has to exercise its powers within the four walls of the SEBI Act. The
Company, through its counsel, has argued that SEBI cannot ignore the requirements of natural
justice and cannot exceed jurisdiction in the matter by passing an ex-parte order and that there was
no notice setting out the charges prior to the interim order and therefore the interim order was ultra
vires the SEBI Act and cannot be sustained. The Company also contended that it should have been
given a show cause notice calling upon it to answer to specific charges as to the nature of its
business and whether the funds raised by it amounted to public offer or not. The Company further
contended that if such a show cause notice had been issued by SEBI, the Company would have
had its say to defend itself and explain its business and whether raising debt indeed amounted to
public offer or not.
I have considered such submissions. The interim order was issued in exercise of powers under
sections 11, 11(4) and 11B of the SEBI Act. SEBI, in the interest of investors and the securities
market, is empowered to issue suitable directions under sections 11(4) and 11B. Proviso to section
11(4), provides that SEBI shall, either before or after passing such orders, give an opportunity of
hearing to such persons concerned. Therefore, it cannot be said that SEBI does not have powers to
issue ex-parte orders. As mentioned above, the interim order afforded opportunity to file
submissions and personal hearing in the matter to the noticees. The noticees have availed such
opportunity and have filed replies/written submissions and appeared in personal hearings. These
submissions are therefore without merit.
RETROSPECTIVE APPLICATION OF PIT REGULATIONS 2015.

Ritesh Agarwal and Anr. Vs. Securities and Exchange Board of India and Ors.

The FUTP Regulations came into force for the first time on 25.10.1995. Would it apply in a case
where the cause of action arose prior thereto? Ex facie, a penal statute will not have any
retrospective effect or retroactive operation. If commission of fraud was complete prior to the said
date, the question of invoking the penal provisions contained in the said Regulations including
Regulations 3 to 6 would not arise. It is not that the Parliament did not provide for any penal
provision in this behalf. If the appellants have violated the provisions of the Companies Act, they
can be prosecuted thereunder. If they have violated the provisions of the SEBI Act, all actions
taken thereunder may be taken to their logical conclusion. A citizen of India has a right to carry
on a profession or business as envisaged by Article 19(1)(g) of the Constitution of India. Any
restriction imposed thereupon must be made by reason of a law contemplated under Clause (6)
thereof. In absence of any valid law operating in the field, there would not be any source for
imposing penalty. A right to carry on trade is a constitutional right. By reason of the penalty
imposed, the Board inter alia has taken away the said constitutional right for a period of ten years
which, in our opinion, is impermissible in law as the Regulations were not attracted.

FRAUD- INGRIDIENTS

STATE OF MAHARASHTRA VS. DR. BUDHIKOTA SUBHARAO [1993] INSC 132 (16
MARCH 1993)

Fraud' is false representation by one who is aware that it was untrue with an intention to mislead
the other who may act upon. it to his prejudice and to the advantage of the representor. It is defined
in Oxford Dictionary as, ` using of false representations to obtain an unjust advantage or to injure
the rights or interests of another'. In Webster it is defined as, 'deception in order to gain by another's
loss; craft; trickery-, guile; any artifice or deception practiced to cheat, deceive, or circumvent
another to his injury. It has been defined statutorily in Section 17 of the Contract Act as including
certain acts committed with connivance or with intent to deceive another. In Administrative Law
it has been extended to failure to disclose 333 all relevant and material facts which one has a
positive duty to disclose. It is thus understood as deliberate act or omission to mislead other to gain
undue advantage. 'It consists of some deceitful practice of wilful device, resorted to with intent to
deprive another of his right or in some manner to do him an injury' (Black's Law Dictionary).
Effect of fraud on any proceeding, or transaction is that it becomes nullity. Even the most solemn
proceedings stand vitiated if they are actuated by fraud. Such being the nature and consequence of
it the law requires not only strict pleading of it but strict proof as well.

FOR APPELLANT-

Sebi vs Indsec Securities And Finance ... on 17 May, 2005

7. On a comparative analysis of the definition of "fraud" as existing in the 1995 Regulations and
the subsequent amendments in the 2003 Regulations, it can be seen that the original definition of
"fraud" under the SEBI (FUTP) Regulations, 1995 adopts the definition of "fraud" from the Indian
Contract Act, 1872 whereas the subsequent definition in the 2003 Regulations is a variation of the
same and does not adopt the strict definition of "fraud" as obtained in the Indian Contract Act. It
includes many situations which may not be a "fraud" under the Contract Act and the 1995
Regulations, but nevertheless amounts to a "fraud" under the 2003 Regulations for the limited
purpose of transaction in securities.

8. There is considerable force in the argument of the learned counsel that "fraud" as defined in the
amended Regulations should not be made applicable retrospectively to the impugned transaction
which had taken place in March 2001. The broker stated that to make out a charge of fraud under
the said 1995 Regulations, the party to a contract or his agent must make a false suggestion or
active concealment or a false promise or a deceptive/fraudulent act or omission to deceive the other
party to the contract to induce him to enter into the contract. Furthermore, mere silence is not fraud
unless there is a duty to speak, even though it may affect the willingness of the other party to enter
into the contract. I find that the Enquiry Officer has incorrectly applied the definition of fraud
under the 2003 Regulations to the impugned transactions that were executed in the year 2001. It is
inapposite to retrospectively apply the amended definition to transactions that were completed
prior to the amendments. I find that by applying either of the Regulations, it cannot be said that
the broker was guilty of making any suggestions, concealment, false promise, deception, omission
or silence or of making a representation in a reckless and careless manner so as to amount to
"fraud".

FOR APPELLANT

BANKIM J. SHAH VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA

9 A reading of the contents of the news items as mentioned in the impugned order makes it clear
that the report has been published by the newspaper/journal by way of news items, prepared by
the correspondents of the journal. There is no specific reference to the appellants in the news items,
nor is there any evidence to show that the appellants were responsible for the publication of the
news items. Of course, there is reference to Shri Aushim Khetrapal, the managing director of the
company, in some of the news items. In another news item it is mentioned that the company had
informed Bombay Stock Exchange Limited (BSE) about opening of office in London and Tokyo.
The respondent Board was specifically directed to produce copies of the said news items for
perusal. The Board could produce only two news items published by the Express newspaper group.
However, the learned counsel for the respondent could not establish that the appellants were
involved in or were responsible for the publication of the said news items. Even though six
instances are referred to in the impugned order, the respondents learned counsel could produce
only two instances.

The regulation is person specific and publication specific. The regulation makes it clear that no
person shall make any statement or disseminate any information which is false or misleading as
mentioned in the regulations above. So, when a person is charged with violation of the said
regulations, it is necessary to establish that the delinquent has violated the regulation by making a
statement or disseminating any information by himself. In the present case, even though reference
is made to certain news items appearing in newspapers/journals in the show cause notice and no
attempt has been made in the impugned order to connect the same to the appellants so as to
establish their positive involvement in their dissemination. On the one hand, the Board has not
provided the appellants with copies of the news items relied upon. On the other hand, it has been
able to produce only two news items during the hearing of the appeal wherein there is no material
pertaining to the role of the appellants.

State Of Orissa & Ors vs Harpiya Bisoi on 20 April, 2009

33. By "fraud" is meant an intention to deceive; whether it is from any expectation of advantage
to the party himself or from the ill will towards the other is immaterial. The expression "fraud"
involves two elements, deceit and injury to the person deceived. Injury is something other than
economic loss, that is, deprivation of property, whether movable or immovable or of money and it
will include and any harm whatever caused to any person in body, mind, reputation or such others.
In short, it is a non-economic or non-pecuniary loss. A benefit or advantage to the deceiver, will
almost always cause loss or detriment to the deceived. Even in those rare cases where there is a
benefit or advantage to the deceiver, but no corresponding loss to the deceived, the second
condition is satisfied. (See Dr. Vimla v. Delhi Administration (1963 Supp. 2 SCR 585) and Indian
Bank v. Satyam Febres (India) Pvt. Ltd. (1996 (5) SCC 550).

34. A "fraud" is an act of deliberate deception with the design of securing something by taking
unfair advantage of another. It is a deception in order to gain by another's loss. It is a cheating
intended to get an advantage. (See S.P. Changalvaraya Naidu v. Jagannath (1994 (1) SCC 1).

35. "Fraud" as is well known vitiates every solemn act. Fraud and justice never dwell together.
Fraud is a conduct either by letter or words, which includes the other person or authority to take a
definite determinative stand as a response to the conduct of the former either by words or letter. It
is also well settled that misrepresentation itself amounts to fraud. Indeed, innocent
misrepresentation may also give reason to claim relief against fraud. A fraudulent
misrepresentation is called deceit and consists in leading a man into damage by willfully or
recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes
representations, which he knows to be false, and injury enures therefrom although the motive from
which the representations proceeded may not have been bad. An act of fraud on court is always
viewed seriously. A collusion or conspiracy with a view to deprive the rights of the others in
relation to a property would render the transaction void ab initio. Fraud and deception are
synonymous. Although in a given case a deception may not amount to fraud, fraud is anathema to
all equitable principles and any affair tainted with fraud cannot be perpetuated or saved by the
application of any equitable doctrine including res judicata. (See Ram Chandra Singh v. Savitri
Devi and Ors. (2003 (8) SCC 319).

36. "Fraud" and collusion vitiate even the most solemn proceedings in any civilized system of
jurisprudence. It is a concept descriptive of human conduct. Michael Levi likens a fraudster to
Milton's sorcerer, Comus, who exulted in his ability to, `wing me into the easy hearted man and
trap him into snares'. It has been defined as an act of trickery or deceit. In Webster's Third New
International Dictionary "fraud" in equity has been defined as an act or omission to act or
concealment by which one person obtains an advantage against conscience over another or which
equity or public policy forbids as being prejudicial to another. In Black's Legal Dictionary, "fraud"
is defined as an intentional perversion of truth for the purpose of inducing another in reliance upon
it to part with some valuable thing belonging to him or surrender a legal right; a false representation
of a matter of fact whether by words or by conduct, by false or misleading allegations, or by
concealment of that which should have been disclosed, which deceives and is intended to deceive
another so that he shall act upon it to his legal injury. In Concise Oxford Dictionary, it has been
defined as criminal deception, use of false representation to gain unjust advantage; dishonest
artifice or trick. According to Halsbury's Laws of England, a representation is deemed to have
been false, and therefore a misrepresentation, if it was at the material date false in substance and
in fact. Section 17 of the Indian Contract Act, 1872 defines "fraud" as act committed by a party to
a contract with intent to deceive another. From dictionary meaning or even otherwise fraud arises
out of deliberate active role of representator about a fact, which he knows to be untrue yet he
succeeds in misleading the representee by making him believe it to be true. The representation to
become fraudulent must be of fact with knowledge that it was false. In a leading English case i.e.
Derry and Ors. v. Peek (1886-90) All ER 1 what constitutes "fraud" was described thus: (All ER
p. 22 B-C) "fraud" is proved when it is shown that a false representation has been made (i)
knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false".
But "fraud" in public law is not the same as "fraud" in private law. Nor can the ingredients, which
establish "fraud" in commercial transaction, be of assistance in determining fraud in
Administrative Law. It has been aptly observed by Lord Bridge in Khawaja v. Secretary of State
for Home Deptt. (1983) 1 All ER 765, that it is dangerous to introduce maxims of common law as
to effect of fraud while determining fraud in relation of statutory law. "Fraud" in relation to statute
must be a colourable transaction to evade the provisions of a statute. "If a statute has been passed
for some one particular purpose, a court of law will not countenance any attempt which may be
made to extend the operation of the Act to something else which is quite foreign to its object and
beyond its scope. Present day concept of fraud on statute has veered round abuse of power or mala
fide exercise of power. It may arise due to overstepping the limits of power or defeating the
provision of statute by adopting subterfuge or the power may be exercised for extraneous or
irrelevant considerations. The colour of fraud in public law or administration law, as it is
developing, is assuming different shades. It arises from a deception committed by disclosure of
incorrect facts knowingly and deliberately to invoke exercise of power and procure an order from
an authority or tribunal. It must result in exercise of jurisdiction which otherwise would not have
been exercised. The misrepresentation must be in relation to the conditions provided in a section
on existence or non-existence of which the power can be exercised. But non-disclosure of a fact
not required by a statute to be disclosed may not amount to fraud. Even in commercial transactions
non-disclosure of every fact does not vitiate the agreement. "In a contract every person must look
for himself and ensures that he acquires the information necessary to avoid bad bargain. In public
law the duty is not to deceive. (See Shrisht Dhawan (Smt.) v. M/s. Shaw Brothers (1992 (1) SCC
534).

37. In that case it was observed as follows:

"Fraud and collusion vitiate even the most solemn proceedings in any civilized system of
jurisprudence. It is a concept descriptive of human conduct. Michael levi likens a fraudster to
Milton's sorcerer, Comus, who exulted in his ability to, 'wing me into the easy-hearted man and
trap him into snares'". It has been defined as an act of trickery or deceit. In Webster's Third New
International Dictionary fraud in equity has been defined as an act or omission to act or
concealment by which one person obtains an advantage against conscience over another or which
equity or public policy forbids as being prejudicial to another. In Black's Legal Dictionary, fraud
is defined as an intentional perversion of truth for the purpose of inducing another in reliance upon
it to part with some valuable thing belonging to him or surrender a legal right; a false representation
of a matter of fact whether by words or by conduct, by false or misleading allegations, or by
concealment of that which should have been disclosed, which deceives and is intended to deceive
another so that he shall act upon it to his legal injury. In Concise Oxford Dictionary, it has been
defined as criminal deception, use of false representation to gain unjust advantage; dishonest
artifice or trick. According to Halsbury's Laws of England, a representation is deemed to have
been false, and therefore a misrepresentation, if it was at the material date false in substance and
in fact. Section 17 of the Contract Act defines fraud as act committed by a party to a contract with
intent to deceive another. From dictionary meaning or even otherwise fraud arises out of deliberate
active role of representator about a fact which he knows to be untrue yet he succeeds in misleading
the representee by making him believe it to be true. The representation to become fraudulent must
be of the fact with knowledge that it was false. In a leading English case Derry v. Peek [(1886-90)
ALL ER Rep 1: (1889) 14 AC 337 (HL)] what constitutes fraud was described thus : (All Er p. 22
B-C) `Fraud is proved when it is shown that a false representation has been made (i) knowingly,
or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false'."
38. This aspect of the matter has been considered by this Court in Roshan Deen v. Preeti Lal(2002
(1) SCC 100) Ram Preeti Yadav v. U.P. Board of High School and Intermediate Education (2003
(8) SCC 311), Ram Chandra Singh's case (supra) and Ashok Leyland Ltd. v. State of T.N. and
Another (2004 (3) SCC 1).

39. Suppression of a material document would also amount to a fraud on the court.
(see Gowrishankar v. Joshi Amba Shankar Family Trust (1996 (3) SCC 310) and S.P.
Chengalvaraya Naidu's case (supra).

40. "Fraud" is a conduct either by letter or words, which induces the other person or authority to
take a definite determinative stand as a response to the conduct of the former either by words or
letter. Although negligence is not fraud but it can be evidence on fraud; as observed in Ram Preeti
Yadav's case (supra).

ROLE OF STOCK EXCHANGES

47. Stock Exchanges traditionally were constituted by brokers and dealers, who were in
management. This position has undergone a radical change in several countries. Andreas M Flicker
in a seminal article titled "Stock Exchanges at the Crossroads" Fordham Law Review- April, 2006
notes that with increased competition caused by deregulation, technological advances and
globalization, the organization of stock exchanges was at crossroads. The organization of stock
exchanges was altered with the onset of demutualization: Traditionally, stock exchanges were
organized as not for profit organizations founded and owned by brokers and dealers who managed
"their" stock exchange like an exclusive club, with high barriers for new entrants and a regional or
even national monopoly, comparable to a medieval gild. Today, domestic and international
competition increasingly compel stock exchanges to give up their exclusivity, undergo
restructuring, and become publicly traded for profit companies, a process referred to as
demutualization. At firstglance, it might seem incestuous that stock exchanges themselves issue

stock. But in fact this development brings a kind of normalization: The public

corporation - the most efficient organizational form for large enterprises - will
help stock exchanges catch up with domestic and international competitors.

48. Stock exchanges, as the author notes, bring together sellers and buyers, investors

and issuers and through information distribution, informed and uninformed market

participants. What makes stock exchanges institutions with a distinctive character is

that they are both regulators and regulated entities. They are regulators because they

oversee the market which they organize. They are regulated because they are subject

to the control and supervision of a regulator (SEBI in India).

49. Flicker identifies five functions of stock exchanges:

(i) Stock exchanges are market organizers. In this role they provide a market place where stocks
can easily be bought and sold. Stock markets serve the economy and the public by bringing
together those who demand capital (corporations) and those who supply capital (investors).
Investors can reduce risk by spreading their investments. Stock exchanges make those investments
liquid enough to invest and divest without significant price changes by providing liquidity.
Traditionally, this function was performed on the floor of the stock exchange where brokers met,
negotiated and agreed upon the price for stock transfers executed for their principals. In an
electronic age, the trading floor of the stock exchange is becoming increasingly obsolescent with
stock exchanges maintaining electronic systems world wide that can match orders for the buying
and selling of shares automatically;

(ii) Stock exchanges are information distributors. This function consists of the trades executed, the
volume, price, and parties involved. This function has a considerable economic value in providing
financial services such as market reports and analysis of stocks. Information about previous trades
is of material significance in the market for derivatives which are financial instruments whose
value is derived from an underlying asset such as stocks. Information about settled trades has a
regulatory function since it is the basis of market surveillance and helps in detecting securities
fraud such as insider trading or market manipulation;
(iii) Stock exchanges are regulators of the market which they organize. This ranges from
compliance surveillance to enforcement. The broker dealers who trade on the market are subject
to rules of the stock exchanges. Stock exchanges also monitor compliance by participants with the
regulatory regime including that directed by the statutory regulator. Stock exchanges perform an
important role to ensure fair trading and accurate price discovery both of which are critical in
creating investor confidence;

(iv) Stock exchanges set standards of corporate governance through their listing rules;

(v) Finally, while fulfilling this function, stock exchanges carry on business enterprises. As
business enterprises (though the business of running a stock exchange may not necessarily be
commercial), the performance of the stock exchange has a bearing on its competitive position in
relation to its own competitors.

50. Commencing with the Stockholm Stock Exchange in 1993 stock exchanges worldwide
transformed themselves from member owned companies into publicly held companies, a
development known as demutualization. Consequently, the right to trade at the stock exchange
came to be separated from ownership. Among the factors that fostered competition among stock
exchanges worldwide, were deregulation, technological progress and globalization. Capital and
investors seamlessly cross borders in a globalised world, brought together by modern technology.
The consequence of demutualization was to provide stock exchanges with access to capital
suppliers, high end technology and state of the art information systems. Demutualisation also
resulted in changes in the management structure of stock exchanges. Under the traditional structure
broker dealers were key decision makers. With demutualization there was a separation of
ownership and the control. If the shareholding is dispersed, the role of management ought to stand
transferred, at least in theory, to senior management.

51. Stock exchanges provide what is described as "the first layer of oversight". In many areas,
stock exchanges are self regulators. As self regulatory organizations, stock exchanges have a
frontline responsibility for regulation of their markets and for controlling compliance by members
of rules to which they are subject. They ensure in that capacity, compliance of the requirements
established the statutory regulator. Apart from the regulation of members, market surveillance
carried on by stock exchanges in certain jurisdictions regulates issuers. They do so by ensuring
that the stocks of issuers are reliably traded and that issuers meet standards of corporate
governance. In exercising these powers, stock exchanges may face issues involving a conflict of
interest. Such conflicts of interest have to be handled and addressed effectively within the
regulatory framework.

52. Stock exchanges as institutional mechanisms have an important role to play in ensuring the
stability of the financial and economic system. The orderly functioning of the market for securities
is no longer a matter of a private concern, for those who transact on the market. The market for
securities can be volatile. Transactions in the securities' market and the transparency of
institutional mechanisms have a significant bearing on the wealth of investors. Inflows and
outflows of capital from the stock market have an immediate and, often serious, impact on financial
stability in the country. The orderly functioning of stock exchanges as institutions through which
transactions in securities take place is a matter of public interest. The regulatory powers which
have been conferred upon SEBI to recognize stock exchanges must be understood in the context
of ensuring the protection of investors on one hand and the public interest that is involved on the
other. SEBI is an expert regulatory body which is vested with the power to direct and regulate the
functioning of stock exchanges. SEBI, as a regulatory authority, is vested with wide powers to
ensure the protection of the interest of investors and the orderly development of the securities
market. Ensuring the proper management of stock exchanges is a matter which falls within the
regulatory framework which SEBI directs. Where the affairs of a recognized stock exchange are
conducted in a manner detrimental to the interest of the investors or the securities market, it has
consequences not just for the stock holders in the market, but for the financial stability of the
nation. Stock exchanges are the first frontiers of regulation, for it is their duty to ensure, in the first
instance, that transactions are conducted in a transparent manner and in accordance with the rules
and regulations and bye laws that have been approved. Their duty to report to SEBI is an adjunct
of the power conferred upon SEBI to regulate.

DERRY V. PEEK- FRAUD AND MISREPRESENTATION

71. The foundation of the vice of fraud contemplated by Section 17 of the Contract Act manifestly
is that a man making any representation which he intends another to act upon. must be taken to
warrant his belief in its truth. A person making such a representation should be presumed to be
aware of the fact that the person to whom it is made will at least understand that he. the
representator, believes it to be true. Therefore, if the respresentor does not in fact. entertain any
such belief in the truth of his representation. he is as much guilty of fraud as if he had made any
other representation which he knew to be false. or did not believe to be true. In this view of the
matter. the consideration of the grounds of the belief of the person making the statement renders
an important aid in ascertaining whether the belief was really entertained. In Derry v. Peek. (1889)
14 AC (373) Lord Herschell. has made very pertinent remarks on this point: Says the learned Lord:

"At the same time I desire to say distinctly that when a false statement has been made the questions
for believing it. and what were the means of knowledge in the possession of the person making it.
are most weighty matters for consideration. The ground upon which an alleged belief was founded
is a most important test of its reality. I can conceive many cases where the fact that an alleged
belief was destitute of all reasonable foundation would suffice of itself to convince the Court that
it was not really entertained. and that the representation was a fraudulent one. So. too. although
means of knowledge are, as was pointed out by Lord Blackburn inBrowlie v. Campbell. ((1880) 5
AC 925) a very different thing from knowledge. if I thought that a person making a false statement
had shut his eyes to the facts. or purposely abstained from inquiring into them. I should hold that
honest belief was absent. and that he was just as fraudulent as if he had knowingly stated that
which was false".

These remarks are very pertinent so far as the facts of the present case are concerned. The question
which would arise is what were the means of knowledge available to the concerned officers of the
respondent-Board which induced them to represent that a particular amount was the estimate of
cost of the contemplated work. These officers have not preferred to step into the box to disclose
these means of knowledge which they had at their command had clearly suggested to them that
what they were representing to the intending contractors was not true.

72. The decision given by the House of Lords in Derry v. Peek (supra) fraud. Their Lordships in
that case insisted that there must be first some evidence to prove fraud. but. while deciding this.
they have also laid down some guiding principles which may lead the Court to the conclusion that
the representation in question was fraudulent. Lord Herschell has summarised this point in a very
eloquent manner in the following passage extracted from his judgments.
"Having now drawn attention. I believe. to all the cases having a material bearing upon the question
under consideration. I proceed to state briefly the conclusions to which I have been led. I think the
authorities establish the following propositions: First. in order to sustain an action of deceit. There
must be proof of fraud. and nothing short of that will suffice. Secondly, fraud is proved when it is
shown that false representation has been made knowingly. or without belief in its truth or
recklessly. careless whether it be true or false. Although I have treated the second and third as
distinct cases. I think the third is but an instance of the second. for one who makes a statement
under such circumstances can have no real belief in the truth of what he states. To prevent a false
statement being fraudulent. there must, I think. always be an honest belief in its truth. And this
probably covers the whole ground. for one who knowingly alleges that which is false, has
obviously no such honest belief. Thirdly, if fraud is proved, the motive of the person guilty of it is
immaterial. It matters not that there was no intention to cheat or injure the person to whom the
statement was made".