With the latest move by the Securities Exchange Board of India (SEBI) to crack down on chit fund companies in the fallout to the Saradha chit fund scam in West Bengal, the Supreme Court in a judgement urged the market regulator not to spare companies indulging in economic frauds, terming that such crimes not only impaired economic growth but eroded investor’s confidence in the market.
The judgement pronounced on Friday by a Bench of Justices KS Radhakrishnan and Dipak Misra dealt with the SEBI decision to impose a cost of Rs 50 lakh against a registered company, Pyramid Saimira Theatre ltd (PSTl) for duping investors by fudging its profits and revenues.
One of its Directors who was refused to buy, sell or deal in securities for two years, was held by the court to be directly responsible for committing the fraud. Applying the principle laid down by the apex court in Sahara India case, the Bench said that the Directors had “deliberately and with full knowledge” committed the illegality as it is the Directors who have access to inside knowledge, such as financial position of the company, dividend rates, annual accounts etc.
Taking lessons from the manner of fraud witnessed in the present case, the Bench sounded caution against the increasing trend by companies indulging in manipulations of records and deceptive devices. “Message should go out that our country will not tolerate market abuse and that we are governed by the Rule of law…SEBI has therefore a duty to protect investors, individual and collective against opportunistic behaviour of Directors and insiders of the listed companies so as to safeguard market’s integrity.”
SEBI’s investigation found out that the company, listed in the Bombay Stock Exchange and National Stock Exchange, made fictitious entries in their accounts to show inflated profits, luring gullible investors to invest in the company. When the price of the company’s scrip rose at the stock exchange, the company pledged over 72 lakh shares of the company with banks and financial institutions to raise a loan of `97.30 crore.