Ritesh Agarwal Vs. SEBI (2008)

Author: Priya Kumari, student at National University of Study and Research in Law, Ranchi.

Introduction

Where Section 10 of the Indian Contract Act enlists the pre-requisites for the formation of a valid contract, Section 11 of the Indian Contract Act elaborates one of such pre-requisites of competent parties by detailing the qualifications required in a party to be considered as competent to enter into a legally valid contract. It broadly speaks of the age of the majority of a party, his soundness of mind, and the disqualification of any individual by any law from entering into any type of contract.

This work is basically to ascertain the validity of obligations that a minor endures under the provisions of other branches of law and various acts under the corporate law including major subjection to the Securities and Exchange Board of India Act, 1992, prevalent in India, majorly focussing on the age of parties involved in an agreement at the time of indirectly entering into the contract.

The general rule holds that any contract entered upon with minors is void-ab-initio. The work however, elaborates on whether it is a blind fold provision of law or whether it can form an exception under any circumstance where public fraud is involved.

Section 11 speaks of personal capacity of three types arising from (a) age, (b) soundness of mind, and, (c) provisions of law.^[1] It safeguards minors from liabilities in general which may generate from them entering into any contract which of course is void. For clarifying in consensus, on the age of majority, this section relies upon Section 3 of the Indian Majority Act, 1875 which was later amended in 1999 providing for a uniform age of majority in India which is eighteen years of age. However, in case a minor takes any loan or enter into any agreement by misrepresenting himself as a major, he is estopped by Section 115 of the Indian Evidence

Act,1872. Also, since a minor’s contract is void, it cannot be specifically enforced. In any case, where a person wishes to seek relief under the umbrella of being a minor, the burden of proof lies on the party trying to seek the same that is, to show his minority on the date of the contract.

The section further details the soundness of mind at the time of contract to be a pre-requisite to hold a contract as valid in its terms. The section also then speaks about the parties disqualified either wholly or from certain specific types of contracts, by law.

Speaking of ratification, such an agreement with any incompetent person being void, ratification is not permissible.

Essential Details of the Case

Case Citation: (2008) 8 SCC 205

Appellant(s): Ritesh Agarwal and another

Respondent(s): Securities and Exchange Board of India and others Concerned statutes and Provisions:

62(1)(c), (6)(a), 63, 68 and 77 of the Companies Act, 1956
Regulation 2(h) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
10, 11 and 17 of the Indian Contract Act, 1872
4(3), 11, 11-B, 24, 27 and S. 15-HA of the Securities and Exchange Board of India Act, 1992
Regulations 3 to 6 and 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995
Articles 19(1)(g) and (6) of the Constitution of India

Bench: Justice S. B. Sinha, Justice L. S. Panta

Date of Judgement: 13 May, 2008

Background of the Case

That Ritesh Polysters Ltd. company was incorporated and registered under the provisions of the Companies Act, 1956 with Surender Kumar Agarwal shown as the promoter in the brochure issued by the Company.
That wife Rooprekha Agarwal and their two minor (at the relevant time) sons Ritesh Agarwal and Deepak Agarwal, apparently made contributions to the same.
That the company introduced a public issue of 30 lakh equity shares of Rs. 10 each at a premium of Rs. 5 per share aggregating to Rs. 450 lakhs out of which 50 percent was reserved for allotment to the promoters, Directors of the Company and their friends and relatives.
That promoters were required to invest a sum of Rs. 225 lakhs.
That it was later revealed that Pratha Investments, Ritesh Capital and Ritesh Agarwal asked for the issuance of duplicate shares alleging loss by being misplaced despite the fact of being sold in the market; only 7.96% of the public issue had been subscribed by the public till the closing date and that the promoters had just invested Rs. 35 lakhs against the expected sum; besides other irregularities.
That in the course of exercising the authority granted to it by sections 11 and 11-B of the SEBI Act and Regulation 2(h) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, SEBI ordered the company and its promoters to completely distance themselves from the capital market for ten years. An additional directive was given to the promoters to purchase back the shares from allottees/shareholders when it was determined that the public offering by the promoters was a deception with the goal to defraud investors. The stock exchanges delisting of the company was also ordered.

Judgement Held by the Tribunal

That none of the findings of fact was in question before the Tribunal which negatived the plea entertained of the appellant sons held minor at the relevant time.
That the proceedings were civil in nature and the appellants had reached a majority on the date the contested order was passed, the SEBI could issue a directive prohibiting them from entering the capital market.
That the Tribunal found the entire amount collected being deposited in other banks over the legitimate public issue account, that the company cheated genuine investors and underwriters by fraudulently allotting shares worth Rs. 2.25 crores to the promoters, that there had been a falsehood in the prospectus to the effect that the public issue proceeds having not been used for the purpose for which it had been raised, that the refund was not carried out even after not receiving the minimum subscription of 90% after the devolvement period.
That the Tribunal held SEBI justified in all its directions issued.

The matter was further appealed in the apex court.

Issues in Question

Whether the penalties imposed on appellants by Securities and Exchange Board of India are valid for the appellants were minor at the time of offence.
Whether the judgement considering wife Rooprekha Agarwal and the appellants as promoters along with Surender Kumar Agarwal despite their names being not mentioned as promoters in the brochure of the company, is valid and sustainable. iii. Whether the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, which came into force on and from 25-10-1995, is in any way applicable to the issue closing on 226-1995.
Whether the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, retrospective or prospective in nature.

Applicable Laws

Statutes

INDIAN CONTRACT ACT, 1872
- Section 10 which states that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
- Section 11 which states that every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.
- Section 17 which states that ‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it; (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent.

THE CONSTITUTION OF INDIA, 1949
- Article 19(1)(g) which states that all citizens shall have the right to practice any profession, or to carry on any occupation, trade or business.

SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997
- Regulation 2(h) which details in the meaning of the term promoter by stating that

‘Promoter’ means- (a) any person who is in control of the target company; (b) any person named as promoter in any offer document of the target company or any shareholding pattern filed by the target company with the stock exchanges pursuant to the listing agreement, whichever is later; and includes any person belonging to the promoter group as mentioned in explanations enlisted.

SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES

RELATING TO SECURITIES MARKETS) REGULATIONS, 1995

Regulation 4 which states prohibition against market manipulation- No person shall- (a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person.
Regulation 5 which provides for prohibition of misleading statements in order to induce sale or purchase of securities of securities.
Regulation 6 prohibits unfair trade practices relating to securities.
Regulation 11 empowers the Board to issue directions by stating that the Board may, after consideration of the report referred to in Regulation 10 and after giving reasonable opportunity of hearing to the person concerned, issue directions for ensuring due compliance with the provisions of the Act, Rules and Regulations made thereunder, for the purpose specified in Regulation 12.
THE COMPANIES ACT, 1956
- Section 63 which provides for criminal liability for misstatements in prospectus.
- Section 77 which provides for restriction on purchase of loans by a company for further purchase of its own shares.

SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
- Section 4(3)
- Section 11
- Section 11-B details in power of the Board to issue directions.
- Section 24 which provides for offences committed under the SEBI Act.
- Section 27
- Section 15-HA

Precedents

(2002) 38 SCL 422 (Tri), Videocon International Ltd. V. SEBI
(2002) 38 SCL 310 (Tri), BPL Ltd. V. SEBI
(2001) 34 SCL 485: (2001) 45 CLA 195 (Tri), Sterlite Industries (India) Ltd. v. SEBI
(2000) 26 SCL 532 (Tri), Bank of Baroda v. SEBI
(1999) 19 SCL 460, SEBI v. Alka Synthetics Ltd.

Appellants Contentions

That being minors, the appellants were not subject to any punishment orders.
That the impugned judgement was not sustainable for parties not mentioned as promoters in the brochure of the company.

That the issue in question being opened and closed on 12-06-1995 and 22-06-1995, much earlier to the enforcement of the SEBI’s FUTP Regulations, 1995, the mentioned provision had no applicability to the same.

Respondent Contentions

That the application of the provisions of the FUTP Regulations, 1995 was independent of the date of enforcement with the matter being governed by the SEBI Act of 1992 till then.
That the appellants never claimed their minority before the Board during the proceedings which was civil in nature and hence, a plea seeking relaxation cannot be raised against the judgement holding them guilty of defrauding the public fund. iii. That since they claimed to have deposited their money to the company on one day and pulling it back on the next, and since the promoter had not admitted to contributing to the fund, the nature of the deception should not allow for interference with the impugned judgement.

Judgement Held

That even though Shiv Shanker Agarwal, Mahender Kumar Agarwal, and only Surender Kumar Agarwal were listed as promoters in the brochure, it is undeniable that the latter’s wife and sons, Rooprekha Agarwal, Ritesh, and Deepak Agarwal, respectively, also contributed contributions. They were therefore held to be included in the scope of the term “promoter”, as covered under Regulation 2(h) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
That the fact, Ritesh Agarwal and Deepak Agarwal were minors, was initially concealed by Surender Kumar Agarwal. This argument seems to be made before the Tribunal for the first time. However, the Court holds the findings of the Tribunal in this respect to be wholly unsustainable as a minor cannot enter into a contract and that such a contract is void-ab-initio and that no penalties would be attracted to the same as per the provisions of the Indian Contract Act, 1872, except a proceeding on Surender Kumar Agarwal for the commission of fraud on his own behalf and also on behalf of the minors.

That ex facie, a penal statute will not have any retrospective effect or retroactive operation. If commission of fraud was completed prior to the said date of 25-1-1995, the question of invoking the penal provisions contained in the said Regulations including Regulations 3 to 6 would not arise. 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.^[2]Any restriction imposed should be with a valid reason of law contemplated under clause (6) and that in case of absence of any valid law, no source can be considered for the imposition of any penalties. The Court held that the Board inter alia infringed the constitutional right for a period of ten years which was impermissible in law for the Regulations in question were not attracted to the issue in question.

That apart from the directions issued by the Board, the persons undertaking fraudulent actions may also be held guilty for misrepresentation and commission of fraud before the prospective purchasers of the shares and the statutory authority.
That the decision of the Court in no manner implies that a minor would not be penalized for entering into a contract that per se was not enforceable. But hold the opinion that any other or any further order which the Board may pass as against Mr. Surender

Kumar Agarwal and Mrs. Rooprekha Agarwal, the impugned directions would not be binding on Ritesh Agarwal and Deepak Agarwal.^[3]

That the court held Mrs. Rooprekha Agarwal to be a promoter besides Ritesh Polysters Ltd. and Surender Kumar Agarwal and that the appellants being minor with regards to the provisions of the Indian Contract Act, 1872, had not been proceeded against for violations of the FUTP Regulations.

That the Court upheld other directions issued by the Board and granted the authorities the liberty to proceed against the offenders for other or further charges of liability under the SEBI Act as well as the Companies Act, 1956 and other penal statutes, if attracted.
That the appeal was allowed to the aforementioned extent for the stated reasons.

Judgement Reasoning

For the first issue, the Hon’ble Court has given due credit to the provisions of the Indian Contract Act, 1872 stating the fact that the appellants being minors at the time of the commission of the offence cannot be held as a party to the public fraud and hence, exempts from the penalties by the Securities and Exchange Board of India under its power to issue directions.

For the second issue, the Hon’ble Court has critically analyzed the Regulation 2(h) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and has dealt with the entire explanation so provided in the statute hence,

determining the scope to which the term ‘promoter’ extends for setting a precedent for any further disputes regarding the same.

For the third and fourth issues, the Hon’ble Court has especially taken into account the provisions of the fundamental rights given to the citizens in India by the Constitution of India reiterating the importance of the prospective nature of the laws written to drive out the scope of penalizing any citizen beyond the authority that any of the authorities in India has.

Further the Hon’ble Court has also clarified the position of the Board in pronouncing penalties to the person infringing any of the provisions as mentioned under the Securities and Exchange

Board of India Act of 1992 by reiterating the analysis of the Tribunals in cases like Sterlite Industries (India) Ltd. v. SEBI^[4], Bank of Baroda v. SEBI^[5] and Alka Synthetics Ltd. case.^[6]

Critical Analysis

The Hon’ble Supreme Court of India, through the instant case, has provided assistance to all the promoters of any company registered and incorporated under the Companies Act, the investors, equity holders of the capital market, the general public and the Securities and Exchange Board of India with all such fraudulent cases of floatation of shares and misrepresentation to the authorities in power along with the liability that a minor holds in case of any contribution or the liability of any person concealing the matters of general fact. The Court has critically analyzed the sections aforementioned of the prevalent acts in India enlisting the extent to which a section can be stretched before pronouncing the judgement.

With the age of minority at the time of the contract, being a premise for seeking relaxation or exemption from any liability that a person may otherwise endure, a blindfold interpretation and hence exemption does not serve the purpose of the law which intends just to protect the infant owing to the maturity the same is reasonably supposed to not have to understand the legal terms and obligations, from being held liable maybe wrongly for such conduct. The judgement pronounced does not mindlessly uphold the minority of the appellants from being a contributor to public fraud and misrepresentation to the statutory authority, which the company carried out by clearly pronouncing that the judgement does not imply exemption from liability of entering into the contract knowingly, the consideration of which cannot be fulfilled by the same, protects the misuse of law and hence the blind interpretation of the letters of the law. It reiterates the prospective nature of law in India which preserves the judgements and prevents any debates and issues regarding the varying interpretation of laws in accordance with the situation as found suitable thus, maintaining uniformity throughout the country.

The Court while referring to various cases, as enlisted, has weighed the judgements held previously by the Tribunal regarding the scope of powers that the Securities and Exchange Board of India has with regard to the penalties that can be given to person infringing any of the established provision of the Act.

The analysis of the said case and hence the judgement pronounced makes me believe that the laws of India should undergo modifications and alterations with the changing need of the society and the terms should be more expressly broadened in order to address any ambiguity. Proper explanations may be attached to the provisions which can otherwise be manipulated by the parties in their favour and hence, causing difficulty in the delivery of justice to the public at large and hence, creating hindrances in fulfilling the main intent of legislators. It reestablishes the importance of being aware of the competency of the parties beforehand while entering into any contract and also directs the lower courts and tribunals to acknowledge the terms of Section 11 of the Indian Contract Act in a more detailed manner with no negligence or contrary interpretations.

References

[1] Pollock and Mulla, The Indian Contract Act and Specific Relief Acts, pg. 384 (R Yashod Vardhan and Chitra Narayan, 16^th ed., 2019).

[2] Ritesh Agarwal v. SEBI, (2008) 8 SCC 205.

[3] Supra note 2.

[4] Sterlite Industries (India) Ltd. v. SEBI, (2001) 34 SCL 485: (2001) 45 CLA 195 (Tri).

[5] Bank of Baroda v. SEBI, (2006) 26 SCL 532 (Tri).

[6] SEBI v. Alka Synthetics Ltd., (1999) 19 SCL 460: AIR 1999 Guj 221.

Case Briefs