SEBI: Establishment of Mens Rea is Not Essentially Required to be Proved for Penal Action Against Contravention of the Securities Laws

SEBI: Establishment of Mens Rea is Not Essentially Required to be Proved for Penal Action Against Contravention of the Securities Laws

The Securities Exchange Board of India (SEBI) while barring Anugrah Stock and Broking and four other entities from the securities market for up to seven years and barring two other entities for five years observed that, as the contravention under the securities laws are of civil nature, it de hors the requirement of establishment of ‘mens rea,’ as opposed to the requirement under the provisions of other laws including criminal law under the provisions of Indian Penal Code, 1860.

The present case pertains to engagement and providing unregulated portfolio management services (PMS). The others banned by the regulator are the brokerage house’s directors — Paresh Mulji Kariya (Noticee No.2) and Sadhana Paresh Kariya (Noticee No. 3) — Teji Mandi Analytics (Noticee No. 5), its director Anil Gopal Gandhi (Noticee No. 6) and Om Sri Sai Investments (Noticee No. 4), an associate entity of Anugrah Stock (Noticee No. 1), as per its order.

These activities were being carried out without seeking requisite registration under the PMS rules, and while indulging in such activities, they committed series of violations including stock brokers norm, PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) rules and PMS rules.

Previously, in March 2021, the Securities and Exchange Board of India (SEBI) had imposed a fine of Rs 90 lakh on Anugrah Stock for misusing client funds and making incorrect reporting to stock exchanges.

In the present case the order was followed by a joint investigation by Sebi, BSE, NSE and Central Depository Services India Ltd between April 2017 and September 2018. In November 2020, Anugrah Stock was declared as “defaulter” by stock exchanges, besides there was also a proceeding going on for the liquidation of the brokerage house.

The whole-time member (WTM) S.K. Mohanty stated that was no bar on SEBI in pursuing civil and criminal proceedings on the same set of facts against an entity especially when it is a well settled position of law that SEBI has power to pursue multiple proceedings.

The following issues came for consideration before the board:

I. Whether the Noticee nos. 1 and 4 have engaged in providing DAS in the nature of PMS promising assured returns to their clients, without having requisite registration from SEBI and whether the Noticee nos. 5 has aided and abated the Noticee no. 1 in this regard.

The SEBI found that there was no dispute to the fact of deleting the data relating to the emails of the Noticee no. 5 from the server of Noticee no. 1. It was also not disputed that the contents of the said emails containing presentation on “Options Advisory Services” and the performance report of such unauthorized DAS services, lead to an undisputed observation that the said two emails were sent to the clients for luring them to give their funds and securities to Noticee no. 1 to avail the services of DAS. Therefore, the SEBI was of view that the allegation of deleting the evidence also stood established. Thus, SEBI held by deleting its own client data from the server of Noticee no. 1, Noticee no. 5 had aided and abated the Noticee no. 1 in providing DAS in the nature of PMS while promising assured returns to the clients of the Noticee no. 1.

II. Whether the Noticee no. 1, a stock broker registered with SEBI, has mis-utilized clients’ funds & securities and has not maintained its books of accounts.

The SEBI found that Noticee no. 1 had mis-utilized clients’ funds and securities and not maintained its books of accounts as mandated under applicable provisions. The Noticee no. 1 was found to be involved in falsification of records and offering assured returns through a scheme run as “Derivatives Advisory Services”, in an unauthorized manner, directly as well as through its associated entity i.e., the Noticee no. 4. The Noticee no. 1 had promised “assured returns” to mobilize clients’ money knowing fully well that every investment in the market is subject to market risks and the investments made by the client can also run into losses.

Thus, the claims/representations made by the Noticee no. 1 were blatantly misleading and were made only to allure the investors to avail the DAS, being offered by the Noticee no. 1 again knowing fully well, that fund-based activities are not allowed in derivative segments to a Trading Member. The above discussed misleading representations made by the Noticee no. 1 were therefore, deceptive and fraudulent in nature and are well covered within the definition of “fraud” defined under regulation 2(1)(c) of the PFUTP Regulations, 2003, SEBI held.

III. Whether the Noticee nos. 1, 4 and 5 have violated the relevant provisions of SEBI Circulars, the SCR Rules 1957, the SEBI Act read with the PMS Regulations, 1993, the Stock Broker Regulations and the PFUTP Regulations, 2003 as applicable to them.

SEBI in its order observed, “the entire gamut of activities of the Noticee no. 1, namely, maintaining incorrect client ledgers, falsifying balance sheet, falsifying records of clients’ account statements and other books of accounts, were thus fraudulent in nature resulting in causing damage to the interest of thousands of innocent clients. Therefore, I find that the Noticee no. 1 along with the Noticee no. 4, through their DAS activities, have indulged in manipulative, fraudulent or deceptive schemes and deceived its clients while dealing in securities market.”

In view of the aforesaid discussion, SEBI held and concluded that the Noticee no. 1 violated SEBI Circular dated 18 November, 1993, SEBI circular dated 26 September, 2016, Rules 8(3)(f) & 15 of the SCR Rules 1957, Section 12(1) of the SEBI Act, 1992 read with regulation 3 of the PMS Regulations, 1993, regulation 17 of the Stock Broker Regulations, 1992 and regulation 4(1), 4(2)(f) and 4(2)(p) of the PFUTP Regulations, 2003.

The Noticee no. 4 had violated Rule 8(3)(f) of the SCR Rules, 1957, Section 12(1) of the SEBI Act, 1992 read with regulation 3 of the PMS Regulations, 1993 and regulation 4(1), 4(2)(f) and 4(2)(p) of the PFUTP Regulations, 2003. Further, SEBI held that the Noticee no. 5 had violated Rules 8(3)(f) of the SCR Rules 1957, Section 12(1) of the SEBI Act, 1992 read with regulation 3 of the PMS Regulations, 1993.

IV. What was the role of the directors and partners of the Noticee nos. 1 and 4 namely, Mr. Paresh Mulji Kariya (Noticee no. 2) and Ms. Sadhana Paresh Kariya (Noticee no. 3) and what was the role of the directors of the Noticee no. 5 viz., Mr. Anil Gopal Gandhi (Noticee no. 6) and Ms. Riddhi Kalapi Shah (Noticee no. 7).

The WTM member commented, “it is a well settled law that the position of a director of a company is embodiment of a fiduciary relationship with the company and a director is under a legal obligation to observe utmost good faith towards the company in any transaction done with it or on its behalf.”

Therefore, under the facts and circumstances of the present matter, SEBI while noting the statutory and fiduciary obligation, stated that Noticee no. 3 director was expected to discharge her fiduciary duties towards the Noticee no. 1 company, and further she cannot plead complete ignorance about the unauthorized DAS activities carried out in the nature of PMS by the Noticee no. 1 (of which she held the position of a director) or the resultant fraudulent activities the Noticee no. 1 has indulged into.

The WTM asserted that, “it is strongly observed that it was a deliberate act by the Noticee nos. 1 and 4 to provide DAS without having requisite registration under the PMS Regulations, 1993 and more so, promising assured returns to their clients, knowing fully well that the investments in securities markets are subject to market risks, and returns on such investments are dependent on so many factors which are ever changing and dynamic in nature and therefore, are beyond the control of any stock broker.”

Lastly, the Board reiterated that the PFUTP Regulations, 2003 and the PMS Regulations, 1993 have been formulated with the main objective of prohibiting fraud in the securities markets and regulating portfolio management activities so as to safeguard the interests of investors and hence, registration of portfolio management activities with SEBI has been made mandatory.

In view of the same, the SEBI imposed a penalty of Rs 8 crore on Anugrah Stock, its directors and the associate entity, which must be paid within 45 days.