The Hindu Business Line : Fear of prosecution

Section 25 of the SCRA needs to be amended so that search and arrest cannot be invoked without SEBI approval and without the nod of a magistrate having jurisdiction.

IN THE shadow of the police

Corporate governance made a modest beginning in India with the introduction of Clause 49 in the standard Listing Agreement in 2000, pursuant to the recommendations of the Kumar Mangalam Birla Committee report. However, with the global scene changing rapidly and with the introduction of stringent corporate governance norms in the US through the Sarbanes-Oxley Act, Clause 49 underwent a major reform. The new avatar came into force recently despite stiff resistance from some quarters against some of its stringent provisions.

All listed companies are mandatorily required to comply with the clause. However, even the new clause is not fully free of controversies and the most prominent among them relates to the consequences of its violation. Any violation of the said clause is punishable under Section 23 of the SCRA (Securities Contracts (Regulation) Act, 1956), which involves imprisonment for a term which may extend up to 10 years or fine of up to Rs 25 crore or both.

This type of offence classifies to be a `cognisable offence' under the Criminal Procedure Code (Cr. PC), which stipulates that if an offence under laws other than the Indian Penal Code (IPC) is punishable with imprisonment of more than seven years, then the same shall be a cognisable and non-bailable offence.

Even Section 25 of SCRA stipulates that "notwithstanding anything contained in Cr PC, any offence punishable under Section 23 of SCRA shall be deemed to be a cognisable offence within the meaning of that Code."

Thus the offence of violation of the terms of the Listing Agreement is a cognisable one within the meaning of the Cr. PC. However, this is exactly where a grave danger arises, as many a fertile brain has opined that in such offences the police officers have the authority to arrest the accused without any warrants and also conduct searches and raids on their official and residential premises.

Further, since the offence is non-bailable, the accused has no recourse but to approach the court for bail. This viewpoint is supported by the Bombay High Court in Deputy Chief Controller of Import and Export, Mumbai vs (i) M/s Surendra Industries,(ii) Shri H.C Kumar, (iii) Shri T. N. Shah and (iv) State of Maharastra (Criminal Writ petition No-962 of 1999).

"Once an offence is cognisable, it is competent for the police to initiate investigation and search the office and residential premises of the accused without any order of the court and it is also competent for the police to arrest the accused without a warrant of arrest... "

A prima facie reading of the said observation gives rise to the fear of vexatious actions by vested interests resulting in harassment of the directors and other officers of the company by the police. A bare perusal of the provisions of SCRA and the SEBI Act gives rise to two different situations:

a) Offences under SEBI Act, 1992 (including the Rules/Regulations/Guidelines issued thereunder) are cognisable only when the complaint is filed by SEBI itself (Section 26 of the SEBI Act). The SEBI Act does not refer to such power being discharged by any officer authorised by the Central Government. Thus, the question of any police officer taking action is totally ruled out by the statute itself.

b) Under the SCRA, a similar provision does not exist — Section 25 does not specifically provide that offences (including violation of the Listing Agreement) shall be cognisable only on complaint filed by SEBI.

Thus, the SCRA is silent on this issue, giving rise to fears of prosecution at the hands of the police. However, one can find succour in the contention that unless the Central Government authorises the police specifically to take action in cases of violation of the Listing Agreement, no such action against directors and officers of the company can be taken.

But this does not rule out the need to amend Section 25 of the SCRA to the effect that the provisions of search and arrest would not be invoked without the prior approval of the SEBI chairman and without the approval of a magistrate having jurisdiction.

Such provisions would be on a similar footing with the provisions provided in the SEBI (Prohibition of Insider Trading) Regulations and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations.

(The author is Counsel (Company Affairs and Legal) of L&T Ltd, Mumbai.)

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