Consent Order by SEBI Cannot Shield Economic Offenders from Criminal Trial for IPO Fraud: Bombay High Court Refuses Quashing

"To quash the proceeding merely because payments are made to SEBI would be nothing short of unwarranted and misplaced sympathy" , In a significant decision aimed at preserving the integrity of the securities market and deterring economic offences, the Bombay High Court dismissed criminal writ petitions filed by Amit Jasvantray Shah and another, who had sought quashing of criminal proceedings arising out of the IPO scam of Yes Bank and IDFC. The petitioners had argued that a consent order passed by SEBI, under which they had paid over ₹2.25 crore in disgorgement and settlement fees, precluded any further criminal prosecution.

Rejecting this contention, the Court held that consent orders under SEBI Act are regulatory in nature and do not grant immunity from criminal liability, especially in cases involving public wrongs, market manipulation, and forgery.

“The acts of the accused including the Petitioner have adversely affected the market mechanism, the IPO process, the rights of retail investors and had a wide market impact... This surely is not good for the orderly development and protection of the securities market,” the Bench of Justice N.J. Jamadar and Justice A.S. Gadkari ruled.

"Fraudulent Cornering of IPO Shares Using Fictitious Demat Accounts Is Not a Mere Regulatory Lapse but a Crime Against Society"

A Conspiracy that Deprived Retail Investors and Undermined Market Integrity

The Court was hearing petitions filed under Section 482 CrPC for quashing of two criminal cases which arose from SEBI complaints regarding manipulation of retail investor quotas in IPOs. The CBI investigation revealed that the accused, including the petitioners, allegedly orchestrated a well-planned conspiracy involving the creation of thousands of fictitious demat and bank accounts, use of forged documents, and cornering of shares meant exclusively for genuine retail investors.

In the case of Yes Bank, the petitioner allegedly submitted 192 IPO applications through fictitious accounts and cornered 14,000 shares, earning an unjust gain of ₹1.98 lakh. In the IDFC IPO, the petitioner was accused of filing 2,000 fictitious applications, cornering 5.30 lakh shares, and reaping profits of ₹1.64 crore. These shares were later sold at a premium.

The accused were charged under Sections 406, 409, 417, 418, 420, 467, 468, 471, 477A, 120B, and 34 of IPC, Section 13(2) r/w 13(1)(d) of the Prevention of Corruption Act, and Section 68-A of the Companies Act, 1956.

“SEBI Consent Order Settles Regulatory Proceedings, Not Crimes with Societal Impact”

SEBI Settlement Cannot Be Equated to Criminal Exoneration

A central issue raised by the petitioner was that since SEBI had accepted a consent application under its 2007 Circular (allowing compounding of certain offences), and had issued a consent order on 7th December 2009 accepting payment of disgorgement and penalties, the ongoing CBI prosecutions ought to be quashed.

The Court, however, emphatically rejected this argument, holding:

“The Consent Order settled only the pending proceedings under Sections 11(4) and 11B of the SEBI Act, the adjudication proceedings, and the proposed prosecution under the SEBI Act. There is no reference in the Consent Order to the present criminal prosecutions by CBI.”

Referring to Section 24A of the SEBI Act, the Court clarified that only certain types of offences – those not punishable with imprisonment only, or imprisonment and fine – are eligible for compounding. Offences involving criminal conspiracy, forgery, and corruption, such as those alleged in the present case, fall outside the scope of Section 24A.

“Only because money has been paid, an accused cannot be exonerated from the criminal liability. To quash the criminal proceedings on this ground would be misplaced and set a wrong precedent,” the Court observed. [Para 36]

"Economic Offences Cannot Be Treated Lightly; They Have Serious Ramifications on Public Trust and the Financial System"

Criminal Conspiracy, Abuse of Banking System, and IPO Fraud: A Public Wrong

The High Court emphasized that the conduct of the accused was not merely a regulatory lapse, but amounted to criminal fraud, adversely affecting the rights of small investors, the credibility of the IPO mechanism, and public trust in financial markets. It also noted that the conspiracy involved collusion with public servants, including PSU bank employees, who facilitated the fraud.

The acts involved:

• Opening thousands of fictitious demat and bank accounts using forged KYC documents

• Availing of loans for IPO applications through fraudulent means

• Transferring cornered shares to personal accounts and selling at a premium

• Misusing IPO quotas meant for small and retail investors

“The present case deals with intelligent and clever persons, who employed devious, dishonest and sinister means to make unjust profits at the cost of the securities market... This is a crime against the society and societal well-being,” the Court held. [Para 34]

Quashing of Proceedings in Economic Offences Is Not Warranted Even if Restitution Is Made

Case Falls in the Category of Public Wrong with Serious Societal Consequences

Rejecting the petitioner’s reliance on precedents like Nikhil Merchant, K. Bharathi Devi, and CBI v. Duncans Agro, the Court distinguished those cases as involving civil disputes with incidental criminal allegations, or where the victim institution had no further claims.

“The present case clearly falls in the category where criminality and criminal intent existed right from inception. The offences are not merely private in nature, but societal wrongs impacting public interest,” the Court noted. [Para 39]

The Court relied heavily on Supreme Court rulings such as:

• CBI v. Maninder Singh (2016) 1 SCC 389

• CBI v. Vikram Anantrai Doshi (2014) 15 SCC 29

• Parbatbhai Aahir v. State of Gujarat (2017) 9 SCC 641

• Prakash Gupta v. SEBI (2021) 17 SCC 451

These judgments underscore the principle that economic offences, especially those involving public institutions or systemic manipulation, should be prosecuted rigorously regardless of settlements.

“To Permit Quashing Would Be a Mockery of the Criminal Justice System”

Court Asserts the Need to Uphold Market Discipline and Rule of Law

In a stern rebuke of the plea to end the prosecution based on the SEBI settlement, the Court concluded:

“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.” [Para 36]

The High Court further observed that allowing such quashing would send a wrong message to the market participants and would undermine SEBI’s regulatory purpose.

The Bombay High Court reaffirmed that settlement under SEBI’s regulatory framework does not extend immunity against criminal prosecution, particularly in cases involving serious economic offences, forgery, conspiracy, and public fraud. It distinguished between civil-regulatory settlements and criminal liability, and upheld the importance of prosecuting such offences in the interest of justice and public confidence in the capital markets.

The petitions were accordingly dismissed, and the Court directed that the criminal proceedings in the Special CBI Cases No. 47 and 48 of 2007 shall continue in accordance with law.

Date of Decision: November 1, 2023