Holding

Minors cannot be penalised under the SEBI Act for the fraud; the father is liable, and the 1995 FUTP Regulations, being prospective, cannot be applied retroactively, rendering the ten‑year debarment of the minor promoters invalid.

Summary

The Supreme Court examined SEBI’s action against the promoters of Ritesh Polyster Ltd., whose 1995 public issue was found to be a fraudulent hoax. SEBI directed the promoters – including the father, his wife and two sons who were minors at the time – to disassociate from the capital market for ten years under Sections 11 and 11B of the SEBI Act and Regulation 11 of the 1995 FUTP Regulations. The appellants argued that the minors could not be penalised and that the 1995 Regulations, which came into force after the issue, could not apply retrospectively. The Court held that the wife and sons fall within the definition of “promoter” under Regulation 2(h) of the 1997 Takeover Regulations, but as minors they cannot be subjected to penalty; the father, who committed the fraud in their names, is liable. The FUTP Regulations are prospective and cannot be applied to conduct completed before 25‑Oct‑1995, rendering the ten‑year debarment of the minors invalid. Other remedial directions, including share buy‑back, were upheld. The appeal was partly allowed.

Issues considered

The applicability of penalty provisions under the SEBI Act to persons who were minors at the time of the alleged fraud.
Whether individuals not named as promoters in the prospectus can be treated as promoters under SEBI regulations.
The retrospective effect of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 on conduct occurring before their commencement.
The scope of SEBI’s power under Section 11B to impose debarment as a penalty.

Legislation cited

Companies Act, 1956s. 63, s. 77
Constitution of Indias. Article 19(1)(g)
Indian Contract Act, 1872s. 11
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997s. 2(h)
Securities and Exchange Board of India Act, 1992s. 11, s. 11B, s. 12, s. 24, s. 30, s. 4(3)

Subjects

Securities lawSEBIpromoter definitionminorretrospective penaltypublic issue fraudcapital market debarmentinvestor protectionContract ActCompanies Act

Judgment

[2008] 8 S.C.R. 553
.. ~

RITESH AGARWAL AND ANR. A
V.
SECURITIES AND EXCHANGE BOARD OF INDIA AND
ORS.
(Civil Appeal No. 4681 Of 2006)
MAY 13, 2008
B

[S.B. SINHA AND LOKESHWAR SINGH PANTA, JJ]

SECURITIES AND EXCHANGE BOARD OF /NOIA
ACT, 1992: C
ss. 11 and 11B - Irregularities committed by 'promoters'
of target company in its public issue and allotment of shares
-SEBI holding the public issue by the promoters to be a hoax
with an intention to perpetrate fraud on investors - Board
- * directing all promoters to disassociate themselves in every D
respect from the capital market related activities and not to
access the capital market for a period of ten years - Two of the
promoters claiming themselves to be minor at the relevant
time - Held: The persons who committed fraud in the names·
of the minors would be proceeded against not only for com- E ·
mission of act of fraud on their own behalf but also on behalf
of the minors - Minors being not party to the fraud, could not
have been subjected to penalty under the Act - Contract Act,
1872 .
•
SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR F
TRADE PRACTICES RELATING TO SECURITIES MAR-
KETS) REGULATIONS, 1995:
Regulations 3-6 and 11 - Penalty - Retrospective op-
eration of Regulations-Held: A penal statute will not have any G
,., t retrospective effect or retroactive operation - The Regulations
coming into force w. e. f. 25. 10. 1995, would not apply where the
cause of action arose prior thereto - In absence of any valid
law operating in the field, there would not be any source for
553 H
554 SUPREME COURT REPORTS [2008] 8 S.C.R.

iii
A imposing penalty - On facts, commission of fraud having
completed prior to coming into force of Regulations, question
of invoking penal provisions would not arise - Constitution of
India, 1950 - Articles 19(1) (g) and (6).
SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND
B TAKEOVERS) REGULATIONS, 1977:
Regulation 2(h) - 'Promoter' - Held: Wife and children
of the promoter making contribution towards the target com-
pany would come within the purview of the term 'promoter'.
C Securities and Exchange Board of India noticed ir-
regularities in the matter of public issue of a company.
The SEBI found that the public issue by the promoters of
the company was hoax with an intention to perpetrate
fraud on investors. It, therefore, directed the promoters
D of the company to buy back the shares from the allotteesl ~ -
shareholders. It further, in exercise of powers uls 4(3) r/w
ss. 11 and 11-B of the Securities and Exchange Board of
India Act, 1992 and Regulation 11 of SEBI (Prohibition of
Fraudulent and Unfair Trade Practices) Regulations, 1995
E (the FUTF Regulations) directed the company and its pro-
moters including the two appellants to dissociate them-
selves from the capital market related activities and not
to access the capital market for a period of ten years. The
two appellants contended in appeal before the Securities
F Appellate Tribunal that they were minors when the com-
•
pany went in for the public issue and, therefore, the Board
was not justified in issuing directions to them. The plea
was rejected by the Tribunal.
In the instant appeal it was contended that the appel-
G lants being minors, no order of penalty could have been
imposed on them; that they were not shown as promoters
in the brochure; that the public issue of the company hav-
ing been opened on 12.6.1995 and closed on 22.6.1995,
the 1995 Regulations which came into force w.e.f.
H 25.10.1995, could not be said to have any application.
RITESH AGARWAL AND ANR. v. SECURITIES 555
AND EXCHANGE ORS.

Partly allowing the appeal, the Court A
HELD: 1. It may be true that only the father of the appel-
lants was shown as a promoter in the brochure along with
two others, but, indisputably the two appellants and their
mother also made contributions. They, therefore, come
within the purview of the term 'promoter' as defined in Regu- 8
.. 1- lation 2(h) of the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997. [para 11] [566-B,C, 565-A]
2. The fact that the issue was under-subscribed is not
in dispute. The question that the under-writers have not c
subscribed is also not in issue. The fact that there had been
divergence of funds is also neither in doubt nor in dispute.
The promoter's contribution has not come in, furthermore,
is not in question. The findings of the Board are not in ques-
;; tion. The Board, therefore, has rightly proceeded to take ac-
0
tion in terms of the SEBI Act, 1992. [Para 11] [567-A,B,G,H]
Sterlite Industries (India) Ltd. V Securities and Exchange
Board of India (2001) 31 SCL 485: (2001) 45CLA195 (SAT);
BPL Limited vs. Securities and Exchange Board of India, SEBI
(2002] 38 SCL 310 (SAT) and Videocon International Ltd. V E
Securities and Exchange Board of India, ShriD.R. Mehta,
Chairman, SEBI and Dr. R.K. Kakkar, Division Chief, SEBI

• . [2002] 38 SCL 422 - referred to .
3.1 In view of s. 11 of the Contract Act, 1872, a minor
cannot enter into a contract. The appellants are said to F
be minors and, therefore, having regard to the provisions
of the Contract Act, they could not have been proceeded
against. The Tribunal unfortunately did not go into this
question in detail. Finding of the Tribunal in this regard is
wholly unsustainable. It is not based on any legal prin- G
.. t ciple. No reason has been assigned therefor. (pare 11 and
·19) [572-E,H, 573-A, 566-F,G] .
3.2 If the appellants were minors, they being not
party to the fraud, could not have been subjected to pen- H
556 SUPREME COURT REPORTS [2008] 8 S.C.R.

A alty under the SEBI Act. The person who committed the
fraud in their names, viz., their father, himself, should have
been proceeded against not only for commission of act
of fraud on his own behalf but also on behalf of the mi-
nors. [Para 11] [556-G, 567-A]
8 4.1 The SEBI (Prohibition of Fraudulent ~nd ·Unfair
Trade Practices) Regulations, 1995 are prospective in
nature. Ex facie, a penal statute will not have any retro-
spective effect or retroactive operation. Indisputably, in
respect of the irregularities committed by the Company
C and/or its promoters, the Board issued a notice only on
28.1.2003. The FUTP Regulations, 1995 came into force
w.e.f. 25.10.1995. If commission of fraud was complete .
prior to the said date, the question of invoking the penal
provisions including Regulations 3 to 6 contained in the
D. said Regulations 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. Any restric-
tion imposed thereupon must be made by r<)ason of a
law contemplated under Clause (6) thereof. (para 8 and
E 18) [563-0, 568-B,C,O] .
'
';
4.2 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 a/ia has taken away
F the said constitutional right for a period of ten years which
is impermissible in law as the Regulations were not at-
tracted. (para 18) 568-0,E]
Ster/ite Industries (India) Ltd. v. Securities and Exchange
G Board of India (2001) 31 SCL 485: (2001) 45CLA195(SAT)
- referred to.
5. Subject to any other or further order which. the ·
Board may pass as against the promoter and his wife,
the impugned directions would not be binding on the ap-
H pellants. The other directions issued by the Board includ-
RITESH AGARWAL AND ANR. v. SECURITIES 557
AND EXCHANGE ORS. [S.B. SINHA, J]
.• -1
ing the action taken in respect of the offences purported A
to have been committed are upheld. Liberty is granted to
the authorities to proceed against the offenders not only
for other or further charges to which they made them-
selves liable under the SEBI Act but also under the Com-
panies Act, 1956 and other penal statutes, if attracted. B
(para 20 and 23) [578-B;D,E]
.. '1'
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 4681
of 2006
From the final Order and Judgment dated 31/7/2006 of c
the Securities Appellate Tribunal, Mumbai in Appeal Nos. 41 to
44/2004
C.A. Sundaram, Gaurav Goel, Mahesh Agarwal; Rishi
Agrawala, A. Garg, Amit Sharma, Rohini Musa, Abhishek Gupta,
- ~ Zafar, A. Agarwal and E.C. Agrawala for the Appellants. D
Suruchii Aggarwal and Rakesh Kumar Singh for the Re-
spondents.
The Judgment of the Court was delivered by
E
S.B. SINHA, J : 1. Ritesh Polysters Ltd. (Company) was
a company incorporated and registered under the provisions
of the Companies Act, 1956.
One Surender Kumar Agarwal was shown to be a pro-
• .A moter in the brochure issued by the Company. However, his F
wife Rookprekha Agarwal and their two sons Ritesh Agarwal
and Deepak Agarwal. (Appellants, who were said to be minors
at the relevant time) also purported to have made contributions.
The Company came out with a public issue of 30 lakh equity
shares of Rs. 10/- each at a premium of Rs. 5/- per share ag-
.._. G
., gregating to Rs. 450 lakhs. A prospectus therefor was issued .
The issue opened on 12.06.1995. It closed on 22.06.1995. 15
lakh shares of Rs. 10/- each for cash at a premium of Rs. 5/-
per share were reserved for firm allotment to the promoters and
directors of the company and their friends and relatives. A sum
H
558 SUPREME COURT REPORTS [2008] 8 S.C.R.

A of Rs. 2.25 crores (Rs. 225/- lakhs) was to be invested by the
promoters. The issue went through. It later transpired that Pratha
Investments, Ritesh Capital and Ritesh Agarwal asked for issu-
ance of duplicate shares contending that the shares allotted in
their favour had been misplaced. An advertisement was issued.
B A notice was also sent to the Stock Exchange. The Stock Ex-
change, however, on an enquiry made in that behalf, came to
learn that the alleged lost shares had in fact been sold in the
market. The trading in the scrip of the Company was suspendea.
2. The matter was referred to the Securities and Exchange
C Board of India (for short "the Board"). In an enquiry conducted
by the Board, it was discovered that only 7.96% of the public
issue had been subscribed by the public till the closing date
and the promoters who were required to subscribe Rs. 225/-
lakhs had invested a sum of Rs. 35/- lakhs only. A large number
D of other irregularities were also found.
As the Board has noticed the said irregularities in great
details, it is not necessary for us to repeat the same once over
again. The Board, by its order dated 9.02.2004, directed:

E "40. Therefore, in the interest of the investors and safety
and security of the capital market, in exercise of powers
conferred on me under Section 4(3) read with Section 11

.
and 11 B of SEBI Act and Regulation 11 of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices)
A
F Regulations, 1995, I, hereby, direct M/s. Ritesh Polyster ~
Limited and its promoters, viz., Ritesh Exports Ltd., Sh.
Surendra Kumar Agarwal, Smt. Roop RekhaAgarwal, Sh.
Ritesh Agarwal and Sh. Deepak Agarwal to disassociate
themselves in every respect from the capital market related
••
activities and not to access the capital market for a period
G
of ten years.
41. Further, in light of the facts and circumstances of the
~ < ... •
case, it is already made out that the public issue by the ~

~
promoters was hoax with an intention to perpetrate fraud
H on investors. Therefore, I am of the view that it would be

•
RITESH AGARWAL AND ANR. v. SECURITIES 559
AND EXCHANGE ORS. (S.B. SINHA, J]
, ~ ·--'! appropriate to pass a direction under section 11 B of the A
SEBI Act as a remedial measure. I hereby direct the
above named promoters of Ritesh Polyster Ltd. to buy
back the shares from the allottees/ shareholders offering
an amount at which the shares were issued i.e. Rs. 15/-
per share if the shares are fully paid or@ Rs. 7.50 per B
share if the shares are partly paid and delist Ritesh Polyster
. ) Ltd. from the stock exchanges."
3. An appeal was preferred thereagainst before the Tri-
bunal. However, none of the findings of fact were in question.
The said findings of fact, therefore, had attained finality. c
The Tribunal, by reason of the impugned judgment, nega-
tived the plea of the appellants Ritesh Agarwal and Deepak
Agarwal that they were minors at the relevant time, stating:
'The appellants in appeal no. 43/2004 have taken a plea D
- ~ that they were minors at the time when the company went
in for the public issue and, therefore, the Board was not
justified in issuing any direction to them. We are unable
'- to accept this plea. We are informed that the Board has
launched prosecution against the company and its E
promoters. In those proceedings it may be relevant for
these appellants to contend that they were minors, but in
the present proceedings which are of civil nature, the plea
can have no relevance. At any rate, they had attained
J, majority on the date when the impugned order was passed F
• and, therefore, the direction restraining them from
accessing the capital market could be issued by the
Board."
4. The Tribunal opined-that the Company and its promot-
ers played fraud on the public and the Board was justified in G

. ~
debarring the promoters and the Company from having access
to the capital market for a period of 10 years. It also agreed
with the other directions of the Board.
5. In the aforementioned backdrop, the questions which
H
560 SUPREME COURT.REPORTS [2008] 8 S.C.R.

A have been raised before us by Mr. C.A. Sundaram, learned
.,.._ ..
senior counsel appearing on behalf of the appellants, have to
be noticed, which are as under:
(i) Ritesh Agarwal and Deepak Agarwal being minors,
no order of penalty could have been imposed on
B them.
(ii) Apart from Surender Kumar Agarwal, others having
not been shown as promoters in the brochure, the
~- .
impugned judgment cannot be sustained.
c (iii) The issue in question having been opened on
12.06.1995 and closed on 22.06.1995, the Securities
and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices Relating To
Securities Markets) Regulations, 1995 (for short "the
D FUTP Regulations) which came into force on and
from 25.10.1995 cannot be said to have any 1 •
application.
6. Ms. Suruchii Aggarwal, learned counsel appearing on
behalf of the respondents, on the other hand, would contend:
E
(i) Till the FUTP Regulations came into force, the matter
used to be governed by the Securities and Exchange
Board of India Act, 1992 (for short "the SEBI Act")
and application thereof was not dependant upon the
F coming into force of the FUTP Regulations. A
'
(ii) In the proceedings before the Board, which is civil in
nature, the appellants Ritesh Agarwal and Deepak
Agarwal never claimed themselves to be the minors
and, thus, such a plea cannot be raised where they
G have been held guilty of defrauding the public fund.
(iii) The nature of the fraud practised being that they -4 •
purported to have transferred their money to the
Company on one day and on the next day they took
the same back and, thus, the promoter having not
H
RITESH AGARWAL AND ANR. v. SECURITIES 561
AND EXCHANGE ORS. [S.B. SINHA, J]
,.~
admittedly contributed in the fund, the impugned A
judgment should not be interfered with.
7. The SEBI Act was enacted to provide for the establish-
ment of a Board to protect the interests of investors in securi-
ties and to promote the development of, and to regulate, the
securities market and for matters connected therewith or inci- B
. )- dental thereto .
"Board" has been defined in Section 2(1)(a) of the SEBI
Act to mean "the Securities and Exchange Board of India es-
tablished under Section 3" thereof. c
Chapter IV of the SEBI Act provides for powers and func-
tions of the Board. Sub-section (1) of Section 11 thereof en-
joins a duty upon the Board to protect the investors in securities
and to promote the development of and to regulate the securi-

- "' ties market by such measures as it thinks fit. The measures D
referred to in Sub-section (1) of Section 11 may provide for,
without prejudice to the generality of the foregoing provisions,
inter alia the following:
"(a) regulating the business in stock exchanges and any
other securities markets; E
•
(b) registering and regulating the working of stock brokers,
sub-brokers, share transfer agents, bankers to an issue,
~ trustees of trust deeds, registrars to an issue, merchant
• A bankers, underwriters, portfolio managers, investment F
advisers and such other intermediaries who may be
associated with securities markets in any manner;
(ba) ***
(c) ***
G
... ~ (d) ***
(e) prohibiting fraudulent and unfair trade practices relating
to securities markets;
(f) *** H
562 SUPREME COURT REPORTS [2008) 8 S.C.R.

A (g) prohibiting insider trading in securities;
(h) ***
(i) ***
(ia) ***
B
U) performing such functions and exercising such powers
under the provisions of the Securities Contracts
(Regulation) Act, 1956 (42of1956), as may be delegated
to it by the Central Government;"
c Section 11A of the SEBI Act specifies the matters which
are required to be disclosed by the companies. Section 11M
thereof provides for collective investment scheme. Section 11 B J
provides for certain remedial measures which read as under:
"118. Power to issue directions
D
Save as otherwise provided in section 11, if after making
or causing to be made an enquiry, the Board is satisfied that it
is necessary-
(i) in the interest of investors, or orderly development of JI!
E securities market; or
(ii) to prevent the affairs of any intermediary or other "
persons referred to in section 12 being conducted in a

F
manner detrimental to the interests of investors or securities
market; or A
'
..
(iii) to secure the proper management of any such
intermediary or person,
it may issue such directions,-
G (a) to any person or class of persons referred to in section
12, or associated with the securities market; or ~ ..
(b) to any company in respect of matters specified in
section 11A, as may be appropriate in the interests of
investors in securities and the securities market."
H
RITESH AGARWAL AND ANR. v. SECURITIES 563
AND EXCHANGE ORS. [S.S. SINHA, J]
;~
Section 12 of the SEBI Act provides for registration of A
stock brokers, sub-brokers, share transfer agents, etc. Chap-
ter VI A of the SEBI Act provides for penalties and adjudication.
Section 15H provides for penalty for non-disclosure of acquisi-
tion of shares and take-overs.
Section 24 of the SEBI Act provides for the offences com- B
mitted under the SEBI Act.
J. }

Section 30 of the SEBI Act provides for regulation making
power. The Board in exercise of its power conferred upon it
under Section 30 of the SEBI Act made the FUTP Regulations. c
The said Regulations came into force on and from 25.10.1995.
8. Indisputably, when the irregularities committed by the
Company and/ or its promoters came to the notice of the Board,
it had issued a notice only on 28.01.2003.
D
~ The FUTP Regulations are prospective in nature. Chap-
'
ter II of the FUTP Regulations provides fur prohibition offraudu-
lent and unfair trade practices relating to securities market.
Regulation 4 prohibits against market manipulation; Clause (a)
whereof reads as under:
E
"4. 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 F
any person"
Regulation 5 of the FUTP Regulations provides for pro-
hibiting misleading statements to induce sale or purchase of
securities. Regulation 6 thereof prohibits unfair trade practices G
relating to securities. Regulation 11 empowers the Board to
.. ~ issue directions in the following terms:
· "11. The Board may, after consideration of the report
referred to in regulation 1O and after giving reasonable
opportunity of hearing to the person cOricerned, issue H
'564 SUPREME COURT REPORTS [2008] 8 S.C.R.

A directions for ensuring due compliance with the provisions
of the Act, rules and regulations made thereunder, for the
purposes specified in regulation 12."
Regulation 12 of the FUTP Regulations specifies the pur-
pose of directions.
B
9. We may also notice that a Company has certain duties
and functions under the Companies Act, 1956. Section 63
thereof provides for criminal liability for mis-statements in the
prospectus, which reads as under:
C "63 - Criminal liability for mis-statements in prospectus
( 1) Where a prospectus issued after the commencement
of this Act includes any untrue statement, every person
who authorised· the issue of the prospectus shall be
punishable with imprisonment for a term which may extend }-
D ~
to two years, or with fine which may extend to fifty thousand
rupees, or with both, unless he proves either that the
statement was immaterial or that he had reasonable
ground to believe, and did up to the time of the issue of the
prospectus believe, that the statement was true.
E
(2) A person shall not be deemed for the purposes of this QR
section to have authorised the issue of a prospectus by
reason only of his having given-
(a) the consent required by section 58 to the inclusion A
F therein of a statement purporting to be made by him as an
•
expert, or
(b) the consent required by sub-section (3) of section 60."
Section 77 of the Companies Act provides for restrictions
G on purchase or loans by Company for purchase of its own
shares. Any person violating the provisions of the Companies -1 ..
Act may be proceeded thereunder.
10. The word "promoter", however, has not been defined
H either under the Companies Act or under the SEBI Act. The
RITESH AGARWAL AND ANR. v. SECURITIES 565

. _. AND EXCHANGE ORS. [S.B. SINHA, J]

definition of promoter has, however, been provided in Section A
2(h) of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 in the
following terms:
"2(h). 'Promoter' means -
B
(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 c
any person belonging to the promoter group as mentioned
in Explanation I:
Provided that a director or officer of the target company

- ....
or any other person shall not be a promoter, if he is acting
as such merely in his professional capacity.
Explanation I: For the purpose of this clause, 'promoter
D

group' shall include:
(a) ***
E
(b) in case the promoter is an individual -
(i) the spouse of that person, or any parent, brother, sister
or child of that person or of his spouse;
• ..... (ii) any company in which 10% or more of the share capital F
is held by the promoter or an immediate relative of the
promoter or a firm or HUF in which the promoter or any
one or more of his immediate relative is a member;
(iii) any company in which a company specified in (i) above,
holds 10% or _more, of the share capital; and G
~-
~
(iv) any HUF or firm in which the aggregate share of the
promoter and his immediate relatives is equal to or more
than 10% of the total.
Explanation II: Financial Institutions, Scheduled Banks, H
566 SUPREME COURT REPORTS [2008] 8 S.C.R.

A Foreign Institutional Investors (Flis) and Mutual Funds shall
not be deemed to be a promoter or promoter group merely
by virtue of their shareholding. Provided that the Financial ·
Institutions, Scheduled Banks and Foreign Institutional
Investors (Flis) shall be treated as promoters or promoter
B group for the subsidiaries or companies promoted by them
or mutual funds sponsored by them."
11. It may be true that only Surender Kumar Agarwal was
shown as a promoter in the Brochure along with Shiv Shanker
Agarwal and Mahender Kumar Agarwal, but, indisputably,
C Rooprekha Agarwal, Ritesh Agarwal and Deepak Agarwal who
are wife and sons of Surender Kumar Agarwal made contribu-
tions. They, therefore, come within the purview of the said term.
Su render Kumar Agarwal ex facie suppressed the fact that
Ritesh Agarwal and DeepakAgarwal were minors. Such a con-
0
tention appeared to have been raised for the first time before
the Tribunal.
It is one thing to say that as minors they could not have
entered into a contract having regard to the provisions of the
E Indian Contract Act, 1872 and, thus, any act committed by them
should be ignored, but, this, itself, goes to show how Surender
Kumar Agarwal played an important role in resorting to wholly
unfair practices and fraudulent acts. It is, therefore, not pos-
sible for us to hold that Su render Kumar Agarwal alone was the
F promoter.
However, a minor cannot enter into a contract. The Tribu-
nal unfortunately did not go into this question in details. Finding
of the Tribunal which has been noticed by us hereinbefore, with
respect, is wholly unsustainable. It is not based on any legal
G principle. No reason has been assigned therefor.
If they were minors, they being not party to the fraud, could
not have been subjected to penalty under the SEBI Act. The
person who committed the fraud in their names, viz .. Surender
Kumar Agarwal himself, should have been proceeded against
H
RITESH AGARWAL AND ANR. v. SECURITIES 567
AND EXCHANGE ORS. [S.B. SINHA, J]
.
* not only for commission of act of fraud on his own behalf but A
also on behalf of the minors.
The fact that the issue was under-subscribed is not in dis-
pute. The question that the under-writers have not subscribed
is also not in issue. The fact that there had been divergence of
funds is also neither in doubt nor in dispute. The promoter's B
contribution has not come in, furthermore, is not in question.
• ~
The Board did not find any justification in the cause shown
by the appellants herein.

The violations which have been found are: c
"1) The entire amount collected as subscription was not
kept in a separate account (public issue account) opened
for this purpose and was being deposited in other account
of other banks also.
D
2) Ritesh Polyster received only Rs. 35 lakhs as promoters
contribution instead of Rs. 2.25 crores. However, they
have fraudulently allotted shares worth Rs. 2.25 crores to
the promoters and hence cheated the other genuine
investors/ underwriters. E
3) Ritesh purchased the shares back from the financiers
who had bailed out the issue (under the garb of
subscription) using the public issue proceeds. This is in

• .. violation of Section 77 of the Companies Act, 1956. Thus,
the public issue proceeds have not been utilized for the F
purpose it has been raised. Hence, there has been
misstatement in the prospectus to this effect.
4) The issue did not receive the minimum subscription of
90% even after the devolvement period. Hence, the issue G
should have been refunded which was not done. Thus,
,. ~ there has been a misstatement in the prospectus to this
effect."
·""The said findings are not in question. The Board, therefore,
has· rightly proceeded to take action in terms of the SEBI Act. H
568 SUPREME COURT REPORTS [2008] 8 S.C.R.

A The question as to whether the provisions of the FUTP
Regulations are attracted in this case may now be examined.
_ 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
8 have any retrospective effect or retroactive operation. If com-
mission of fraud was complete prior to the said date, the ques-
tion of invoking the penal provisions contained in the said Regu-'
lations including Regulations 3 to 6 would not arise. It is not that
the Parliament did not provide for any penal provision in this
C behalf. If the appellants have violated the provisions of the Com-
panies Act, they can be prosecuted thereunder. If they have
violated the ·provisions of the SEBI Act, all actions taken there-
under may be taken to their logical conclusion. A citizen of India
has a right to carry on a profession or business as envisaged
D by Article 19(1 )(g) of the Constitution of India. Any restriction
imposed thereupon mu$t be made by reason of a law contem-
plated under Clause (6) thereof. In absence of any valid law
operating in the field, there would not be any source for impos-
ing penalty. A right to carry on trade is a constitutional right. By
E 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.

F
In Sterlite Industries (India) Ltd. v Securities and Ex-
change Board of India [(2001) 31 SCL 485: (2001) 45 CLA
). .
195 (SAT)] , the Chairman of the Board vide its order had pro-
hibited the appellant, a public limited company through its di-
rectors from accessing the capital market for a period of two
year,s and also ordered to initiate prosecution proceedings un-
G der Section 24 read with Section 27 of the Act for violation of
Regulation 4(a) and 4(d) of the FUTP regulations against the
appellant.
Setting aside the impugned order, the Tribunal on the ap-
H pl ifability of Sections. 11 and 11 B of the Act on barring the ap-
RITESH AGARWAL AND ANR. v. SECURITIES 569
AND EXCHANGE ORS. [S.B. SINHA, J]

pellant from accessing the capital market while referring to its A
decision in Bank of Baroda opined:
"104. It is seen from the order that the direction debarring
the appellant accessing the capital market was issued
invoking the powers vested in the respondent under
sections 11 and 11 B. .. .The Tribunal had occasion to B
examine the scope and reach of these sections in Bank
of Baroda v. SEBI [2000] 26 SCL 532 (SAT) (Mum.) and
had expressed the following view:
"53. Section 11 and Section 11 B are interconnected and c
co-extensive as both these sections are mainly focussed
on investor protection. On a careful perusal of the said
Section 13 referred to in the earlier paragraphs, it could
be seen that the respondent has been in no uncertain
terms mandated to protect the interests of investors in D
securities by such measures as it thinks fit. Of course
those measures are subject to the provisions of the Act.
The expression 'measure' has not been defined in the
Act. So we have to go by its generally understood meaning.
According to Corpus Juris Secundum measure means
'anything desired or done with a view to the E
accomplishment of a purpose, a plan or course of action
intended to obtain some object, any course of action
proposed or adopted by a Government'. However, I am
not inclined to agree with the respondent's view that the
power under Section 11 is unlimited. I am of the view that F
the legislature has circumscribed the power, by putting
the caveat that these measures are subject to the
provisions of the Act. The ambit of power is contained
within the frame work of the Act. But within the statutory
frame work such power reigns. G
54. While Section 11 deals with the functions of the Board,
Section 11 B is on the powers of the Board. Section 11 B
is more action oriented, in a sense it is a functional tool in
the hands of the Board. In effect Section 11 B is one of the
H
570 SUPREME COURT REPORTS [2008] 8 S.C.R.

A executive measures available to the respondent to enforce "* :
its prime duty of investor protection. As could be seen
from the text of the section reproduced above, the
respondent is empowered to issue directions in the
interests of investors of any person or class of persons
B referred to in Section 12 of the Act or associated with the
securities market. In other words the section identifies the
persons to whom and the purposes for which, directions
-· A
can be issued.
55. The Gujarat High Court had examined the scope of
c Section 11 and Section 11 B vis-a-vis the respondent's
position, while deciding an appeal against the Single
Judge's order in Alka Synthetics Ltd. case [1999] 19 SCL
460. The basic issue for consideration before the Division
Bench in the said appeal was as to whether the respondent
D had the authority to issue an order under Section 11 B .of ,._
the Act for impounding or forfeiting the money received by
stock exchanges, as per the concluded transactions under
its procedure, until final decision is made ... "
While negating the views of the Single Judge, and uphold-
E ing the respondent's power to issue such a direction under
Section 11 B it was held that the Act provides for remedial mea-
sures and, thus, it was entitled to issue any direction.
It was, however, held :
).
F "106. It has to be noted that Section 11 B does not even
~

remotely empower the respondent to impose penalties."
It was furthermore held :
"108. The legislature has clearly spelt out the penal
G provisions in the Act at 3 places - Section 12(3) provides
for suspension or cancellation of the certificate of -i .....'
registration granted to the market intermediaries in the
event of their proven misconduct, provision under Chapter
VIA, provides for imposition of monetary penalty for certain
H offences specified therein; section 24 empowers Courts
RITESH AGARWAL AND ANR. v. SECURITIES 571
AND EXCHANGE ORS. [S.B. SINHA, J]
~
to award punishment for violation of offences under the A
Act etc. Since legislature has deliberately chosen to
create specific offences and penalties thereto, it is not
possible to view that under Section 11 B the respondent
is competent to issue a direction which tantamounts to
imposition of penalties, While widening the scope of 'such B
measures' used in Section 11, to include penalties, and
' ~ thereby stretching the scope of issuing directions under
Section 11 B to cover imposition of penalties, the
limitation stated above need be kept in mind. However,
it is understood that the respondent has also been taking c
the view that Section 118 is not a penal provision, but
preventive and remedial in its application. If that is so, it
has to be seen whether the impugned direction
prohibiting the appellant from accessing the capital
market for a period of 2 years from the date of the order
D
is preventive or remedial. In the absence of any
explanation from the respondent as to what exactly is
meant by 'accessing the capital market', it has to be
understood as is understood in the common parlance -
i.e., entry to the capital market for issuing/offering
securities. In this context, it is to be noted that the charge E
against the Appellant is of market manipulation. The
shares of the appellant are listed/traded in the stock

•
.. exchanges even today That being the case preventing
the appellant raising further capital/offering shares to the
public in the next two years cannot serve as a preventive F
measure to debilitate the appellant indulging in market
manipulation. Similarly, by no stretch of imagination the
said direction can be considered even remedial as
prospective barring of a public issue cannot remedy an
act of market manipulation allegedly indulged for a G
,., ,, specific purpose, 3 years ago. A remedial action is
normally seen as one intended to correct, remove or
lessen a wrong, fault or defect. Purport of preventive or .
remedial directions which can be issued in a proven
case of fraudulent and unfair trade practice is discernible H
572 SUPREME COURT REPORTS [2008] 8 S.C.R.
,,...._
:i
A from the provisions of regulation 12 of the Regulations,
already cited in this order. In my view the impugned order
is neither remedial nor preventive but punitive in effect
as it takes away the appellant's right to mobilise funds
from the public to carry on its business. According to
B Webster's Encyclopaedic Unabridged Dictionary 'penalty
means a punishment imposed or incurred for a violation
of law or rule'. In the instant case it is seen that the order ~ )

is made in the light of the finding - by the authority, that the
appellant has violated the regulations. This nexus also
c strengthens the view that the order debarring the appellant
from accessing the capital market is a penalty. In this view
of the matter the order has no legal backing and therefore
cannot sustain."
[Emphasis supplied]
D
Similar observations were made in BPL Limited v. Secu~ +-
rities & Exchange Board of India, SEBI [2002] 38 SC~ 310
(SAT) and Videocon International Ltd. v. Securities & Exchange
Board of India, Shri D.R. Mehta, Chairman, SEBI and Dr. R.K.
Kakkar, Division Chief, SEBI [2002] 38 SCL 422.
E
19. Ritesh Agarwal and Deepak Agarwal are said to be
minors. As they were minors having regard to the provisions of
the Indian Contract Act, they could not have been proceeded
against strictly in terms of the provisions of the said Act. Apart
).
F from the actions taken by the Board, the persons who under- ~

took those fraudulent actions may also be held to be guilty of
making a mis-representation and commission of fraud not only
before the prospective purchasers of the shares but also be-
fore the statutory authority. The same, however, would itself not
mean that a minor would not be penalized for entering into a
G
contract which per se was not enforceable. A contract must be
entered into by a person who can make a promise or make an ~
'"·
offer. If he cannot make an offer or in his favour an offer cannot
be made, the contract would be void as an agreement which is
not enforceable in law would be void. Section 11 of the Indian
H
RITESH AGARWAL AND ANR. v. SECURITIES 573
AND EXCHANGE ORS. [S.B. SINHA, J)

Contract Act provides that the person who is competent to con- A
tract must be of the age of majority. If Ritesh Agarwal and
Deepak Agarwal were minors, as would appear from their birth
certificates, they could not have entered into the contract.
20. We, therefore, are of the opinion that subject to any
other or further order which the Board may pass as against Shri B
• ,._ Surender Kumar Agarwal and Smt. Rooprekha Agarwal, the im-
pugned directions would not be binding on Ritesh Agarwal and
Deepak Agarwal.

21. We do not accept the contention of Ms. Aggarwal that c
the offence is a continuing one.

22. We do not also accept the contention that Rooprekha
Agarwal was not a promoter and only promoters were Ritesh
Polyesters Limited and Surender Kumar Agarwal. We, how-
~ ever, accept the contention of Mr. Sundaram that Ritesh Agarwal D
ar.d Deepak Agarwal could not have proceeded against for vio-
lation of the FUTP Regulations.
23. We, however, uphold other directions issued by the
Board including the action taken in respect of the offences pur- E
ported to have been committed. We also grant liberty to the
authorities to proceed against the offenders not only for other
or further charges to which they made themselves liable under
the SEBI Act but also under the Companies Act, 1956 and other
. penal statutes, if attracted .
F
24. For the reasons aforementioned, the appeal is allowed
to the aforementioned extent. No costs.
R.P. Appeal partly allowed.