SEBI consent order cannot erase criminal liability: Bombay High Court

The Bombay High Court has held that a Securities and Exchange Board of India (SEBI) consent order cannot wipe out or nullify independent criminal prosecutions [Manoj Gokulchand Seksaria v. State of Maharashtra].

The Court refused to quash two Central Bureau of Investigation (CBI) cases arising from the Yes Bank–IDFC IPO scam against stock-market intermediary Manoj Gokulchand Seksaria.

A Division Bench of Justices AS Gadkari and Ranjitsinha Raja Bhonsale dismissed Seksaria’s writ petitions seeking to terminate proceedings in the CBI cases. It observed:

"Permitting quashing of proceedings, in matters, in which the offence is against society, would be a mockery of the process of law and the criminal justice system. It would erode the faith of the common man/general public in the criminal justice system and give rise to the perception that an accused can get away with a serious prima facie charge/offence by settling the matter or making payments to the regulator. This for sure is not the objective of SEBI and also that of the criminal justice system."

It ruled that SEBI’s settlement mechanism does not extend to grievous, serious, fraudulent and unfair trade practices affecting the securities market and retail investors.

SEBI had first referred to the CBI complaints regarding irregularities in the 2005 IPOs of Yes Bank and Infrastructure Development Finance Company (IDFC). Based on SEBI’s communication, the CBI registered two first information reports (FIRs).

The prosecution alleged that Seksaria, a sub-broker associated with Karvy Stock Broking, opened numerous forged bank and demat accounts in fictitious names and applied for shares in the retail investor category. These applications allegedly cornered shares meant for genuine retail subscribers, which were later transferred to the accused and sold in the market.

The CBI filed chargesheets in 2007 and 2009. The agency also alleged the involvement of public sector bank officials who aided the fraudulent opening of accounts.

While the cases were pending, Seksaria applied for settlement before the SEBI under its consent mechanism. On December 7, 2009, SEBI’s Whole Time Member passed a consent order directing disgorgement of ₹2.05 crore and settlement charges of ₹20.51 lakh, disposing of SEBI’s regulatory proceedings.

The Court held that SEBI’s consent order had no impact on the CBI’s prosecution, emphasising that the consent framework is limited to SEBI’s own administrative and civil proceedings and, in restricted cases, to proposed criminal complaints under the SEBI Act alone.

The Bench noted that the consent order expressly stated that it disposed of proceedings under Sections 11(4), 11B, adjudication proceedings and “proposed prosecution” under the SEBI Act.

“There is no reference to the present criminal prosecutions,” the judges said, adding that cognizance in the CBI cases had been taken in March 2008, well before the 2009 consent order.

Referring to SEBI’s circulars governing consent orders, the Court highlighted that the regulator had itself excluded settlement of serious, fraudulent and unfair trade practices which cause substantial loss to investors or affect their rights.

“The rights of retail investors were adversely affected and the market mechanism was disturbed,” the Court observed.

The Court rejected the argument that the monetary settlement with SEBI rendered further prosecution futile, noting that the offences included forgery, falsification of documents, criminal conspiracy and corruption involving public servants. These, the Court opined, were acts of a public character that cannot be quashed merely because financial liabilities were settled with a regulator.

The petitioner was represented by Senior Advocate Aabad Ponda, with Advocates Jugal Kanani, Rahul Pandey and Alok Singh.

Advocates MM Deshmukh and Vinod Chate represented the State of Maharashtra.

Advocate Kuldeep Patil appeared for the CBI.

[Read Judgment]