K.M. VENKATESWARAN Vs. ASSISTANT REGISTRAR OF COMPANIES

JUDGEMENT

(1.) The petitioners are accused Nos. 7 and 8 and they have come forward to file this petition to quash the proceedings in E.O. C.C. No. 147 of 2003 oh the file of the Additional Chief Metropolitan Magistrate, Economic Offences-I, Egmore, Chennai. The respondent/complainant filed a complaint under section 68 of the Companies Act, 1956. The allegations in the complaint runs as follows: Accused No. 1 is the managing director of the company and the other accused are the directors of the company. The officers authorised by the Central Government inspected the records of the company under section 209A of the Act. During the course of inspection they noticed that the company had mobilised Rs. 275 crores on December 30, 1999 and Rs. 29.40 crores on May 20, 2000, through private placement of shares on preferential basis to FIIs/OCHBs/Private Funds/Foreign Companies. However, the shares allotted on May 20, 2000, was fortified by the company for nonpayment of call money. As per the letter of offer issued by the company for the shares allotted on December 30, 1999, the proceeds of the said preferential issue was to be utilised to make the company debt free and also to meet cost of acquisition of additional assets besides funding working capital needs of the company. However, the inspection report revealed that more than Rs. 200 crores of the proceeds of the aforesaid preferential issue was initially utilised by the company to make loans to several companies. On receiving back the loans, the said funds were utilised by the company to invest in the shares of M/s. DSQ Beverages Ltd., M/s. DSQ Holdings Ltd., and M/s. Antarix Applications Ltd., to the extent of Rs. 57.75 crores, 56 crores and 117.60 crores respectively. It is evident from the above that the company had not utilised the funds raised through private placement on December 30, 1999, for the purpose for which it was actually raised and as such the company had fraudulently induced persons to invest in the shares of the company through the aforesaid letter of offer attracting the provisions of section 68 of the Act. Whereas the company did not take any steps to implement the business plan referred to in the letter of offer and has thus failed to fulfill the promise made by it to the FII and others while offering the shares through the letter of offer issued by the company. The statements made by the company in the letter of offer referred to above were, therefore, not true and the same were made with the intent to defraud the persons to whom the shares were offered.

(2.) The company had fraudulently induced persons to invest in the shares of the company through the aforesaid letter of offer and the said offer were made with the intent to defraud the persons to whom the shares were offered. The accused as the directors of the company in the said letter of offer, failed to take reasonable steps to comply with the promises made in the letter of offer as stated above. The accused as the directors of the company are responsible for the functioning of the company and also responsible for the implementation of the promises made in the letter of offer and hence the complainant has reasonable cause to believe that various statements made in the letter of offer were made recklessly with a view to defraud the persons as stated above and hence the accused as the directors of the company are liable for the offence under section 68 of the Act. The said complaint was taken cognisance by the learned Additional Chief Metropolitan Magistrate, Economic Offence, Egmore, Chennai in E.O. C.C. No. 147 of 2003.

(3.) The contention of learned counsel appearing for the petitioners is that the first accused is the managing director of the company and he is the final authority and responsible for the investment. A2 to A8 are the directors of the company. The records revealed that they have mobilised funds only from the friends and relatives and they have not received any amount from the public. Therefore, there cannot, be any prosecution against the petitioners. Further, the petitioners are ceased up from the directorship of the company at the relevant point of time. Hence, he prays that the complaint against the petitioners has to be quashed.