SUPREME COURT CLARIFIES THE LIMITS OF REGULATORY SETTLEMENTS IN CRIMINAL CASES

The Supreme Court of India recently delivered a significant judgment in the case of Central Bureau of Investigation v. Manojdev Gokulchand Seksaria in Criminal Appeal Nos. 3481 – 3482 of 2024 (@Special Leave Petition (Crl.) Nos. 12344-12345/2022, highlighting on the intricate relationship between regulatory settlements and criminal prosecutions. The case, which revolved around allegations of fraudulent activities during the Initial Public Offerings (IPOs) of Yes Bank Ltd. and Infrastructure Development Finance Company Ltd. (IDFC) in 2005, raised essential questions about the extent to which a regulatory settlement can shield an Accused from criminal liability.

Background of the Case

In 2005, the Securities and Exchange Board of India (SEBI) detected irregularities in the IPOs of Yes Bank. Following SEBI’s complaint, the Central Bureau of Investigation (CBI), Appellant, initiated criminal proceedings against 19 Accused individuals. The allegation was with regard to certain fraudulent activities committed in the Initial Public Offering (IPO) of the shares of Yes Bank Ltd., which opened for subscription from 15.06.2005 to 21.06.2005.

That on 21.02.2006, the CBI registered another criminal case being Criminal Case No. RC4(E)/2006/CBI/BS&FC/Mumbai against 26 Accused on the basis of a similar complaint. This time, it pertained to the fraudulent activities committed in the Initial Public Offering (IPO) of the shares of Infrastructure Development Finance Company Ltd. (IDFC), which opened for subscription from 15.07.2005 to 22.07.2005. In this First Information Report (FIR), the Respondent, Manojdev Gokulchand Seksaria was also an Accused.

That 29.09.2007, a chargesheet was filed in Criminal Case No. RC4(E)/2006/CBI/BS&FC/Mumbai after completion of investigation vide Special Case No. 47 of 2007 against 22 Accused including the Respondent herein for offences punishable under Section 120-B of Indian Penal Code, 1860 (IPC) (Punishment of criminal conspiracy) read with Section 420 of IPC (Cheating and dishonestly inducing delivery of property), Section 467 of IPC (Forgery of valuable security, will, etc.), Section 468 of IPC (Forgery for the purpose of cheating) and Section 471 of IPC (Using as genuine a forged document) and Section 13(2) (Criminal misconduct by a public servant) read with 13(1)(d) of the Prevention of Corruption Act, 1988 and Section 68-A of The Companies Act, 1956. A supplementary chargesheet was also filed in Criminal Case No. RC4/E/2006/BS&FC Mumbai which was numbered as Special Case No. 74 of 2014 and further 21 Accused persons were added with the Original 22, totalling to 43 Accused.

On 10.03.2008, on the basis of the charge-sheet and material produced before the Special Court CBI, the said Court took cognizance against the Accused persons including the Respondent for the offences mentioned above in Special Case No. 47 of 2007. Similarly, on 19.03.2008, on the basis of the charge-sheet and material produced by the CBI, the Special Court CBI took Cognizance against the Accused including the Respondent for the offences mentioned above in Special Case No. 48 of 2007.

In 2009, the Respondent sought to resolve the matter by entering into a settlement with SEBI through a Consent Order. This settlement involved the payment of unjust profits and additional charges, effectively ending SEBI’s proceedings against him under Section 11(4) and 11(B) of the SEBI Act, 1992. However, this regulatory settlement did not put an end to the criminal proceedings initiated by the CBI, which led the Respondent to challenge the continuation of the trial.

High Court Analysis

The Respondent filed a Writ Petition No. 406 of 2018 before the Bombay High Court in 2018, seeking to quash the Charge Sheet and FIR filed by the CBI arguing that the SEBI Consent Order should absolve him from the criminal proceedings. The Division Bench of the Bombay High Court dismissed this petition, emphasizing that the criminal trial should proceed on its merits.

Aggrieved by the above order of the High Court, the Respondent filed a Special Leave Petition (Crl.) No. 3495 of 2018 before the Supreme Court. The Supreme Court passed an Order dated 07.01.2020, while permitting the Petitioner to withdraw the Special Leave Petition, that states the following:

“After some arguments, Mr. Mukul Rohatgi, learned Senior Counsel appearing for the petitioner, prays for withdrawal of this petition with liberty to raise the question of effect and legal consequences of Order dated 07.12.2009 passed by the Securities and Exchange Board of India (SEBI), before the High Court. Prayer is allowed. Accordingly, the special leave petition is dismissed as withdrawn with the liberty aforesaid.”

Undeterred, Respondent, Seksaria returned to the Bombay High Court in 2020 with a fresh writ petition, this time challenging the cognizance orders issued by the Special CBI Court in 2008. The Ld. Single Judge of the High Court quashed the criminal proceedings, citing the SEBI consent order and considering the continuation of the trial as an abuse of the legal process.

Supreme Court Analysis

The CBI, unsatisfied with the High Court’s decision, appealed to the Supreme Court by filing Criminal Appeal Nos. 3481-3482 of 2024 (@Special Leave Petition (Crl.) Nos. 12344-12345/2022. The Apex Court faced the complex question of whether a regulatory settlement, such as the SEBI Consent Order, could nullify ongoing criminal proceedings.

The Supreme Court’s response was clear: criminal liability and regulatory settlements operate in distinct domains, and the quashing of criminal proceedings solely based on a regulatory settlement is not justifiable.

The Supreme Court raised concerns about the procedural handling of the case by the Bombay High Court. Specifically, it questioned the jurisdictional shift from a Division Bench to a Single Judge, which occurred due to alterations in the prayers of the Writ Petition. Although the Supreme Court refrained from conclusively ruling on whether this was a tactical manipulation, it highlighted that the matter should have been adjudicated by a Division Bench, given its complexity and implications.

Conclusion

The Supreme Court set aside the Order of the Ld. Single Bench in Writ Petition 245 of 2020 and Writ Petition No. 730 of 2020 and held that the said matter should be remitted back to the Division Bench of the High Court for a fresh hearing, ensuring that the legal nuances between regulatory settlements and criminal prosecutions are thoroughly examined. It further held that the said Division Bench should not be influenced by the observations of the previous Division Bench in Writ Petition 406 of 2018, the Order of the Supreme Court dated 07.10.2020, the Order of the Single Judge in Writ Petition No. 245 of 2020 and Writ Petition No. 730 of 2020 and also by the present Order dated 22.08.2024, the Supreme Court has passed.

 

Kartik Khandekar

Senior Associate

The Indian Lawyer & Allied Services