Liability for Promoting Unauthorized Investments Under SEBI and RBI Regulatory Frameworks

Is Promoting Unauthorized Company Investments Illegal Under SEBI & RBI?

In today's fast-paced investment landscape, opportunities to grow wealth through company promotions abound. But what happens when an individual or entity promotes investments in a company that lacks the necessary approvals from regulators like SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India)? This raises a critical legal question: whether an accused can promote investment of money in a company which is not authorized to collect money as per SEBI and RBI regulations?

The short answer is no—such promotion is generally illegal and can lead to significant penalties. This blog post dives deep into the regulatory framework, key judgments, and real-world cases to explain why, helping investors, promoters, and businesses navigate these rules safely.

Understanding the Regulatory Framework

SEBI and RBI play pivotal roles in safeguarding public money in India. They impose strict licensing requirements for entities collecting funds from the public.

SEBI's Role in Collective Investment Schemes

SEBI regulates collective investment schemes (CIS), mutual funds, and venture capital funds under the SEBI Act, 1992. Only registered entities can sponsor or operate such schemes. As per Section 12(1B) of the SEBI Act, No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment scheme including mutual funds, unless he obtains a certificate of registration from the Board 2016 5 Supreme 417.

Promoting investments in unregistered companies violates these provisions, exposing promoters to civil and criminal liability 2016 5 Supreme 417. SEBI has issued orders barring unauthorized entities from collecting funds, as seen in cases where companies were directed not to collect any money from investors

GREEN RAY INTERNATIONAL LIMITED REPRESENTED BY ITS GENERAL MANAGER SK NURUL HOSSAIN Vs THE STATE OF JHARKHAND

RBI's Restrictions on Public Deposits

The RBI governs deposits through the RBI Act, 1934, particularly Section 45-S, which prohibits unincorporated bodies or individuals from accepting public deposits without authorization. The Supreme Court has upheld this, stating, The impugned Section 45-S does not in any way prohibit or restrict any unincorporated body or individual from carrying on the business that it likes. It is open to unincorporated bodies to carry on their financial business either from their own funds or the funds borrowed from their relatives or from financial institutions 2000 4 Supreme 726. However, public mobilization is strictly off-limits for unregulated entities.

In practice, RBI and courts have cracked down on violations. For instance, directions were issued to companies and directors not to collect any more money from the investors

SHRIKANT MOHTA vs REPUBLIC OF INDIA(CBI)

Why Promoting Unauthorized Investments is Prohibited

Promoting or facilitating investments in non-compliant companies isn't just a regulatory oversight—it's a direct contravention of law. Here's why:

Investor Protection: Unregulated schemes often lead to fraud, as seen in cases where accused companies were legally empowered to collect money from the public but failed to return funds, abusing positions of trust
SHRIKANT MOHTA vs REPUBLIC OF INDIA
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Financial Stability: RBI aims to prevent systemic risks from unchecked deposit schemes 2000 4 Supreme 726.
Legal Precedents: Courts consistently hold that entities must verify compliance before promotion. In one case, SEBI confirmed preferential issues but emphasized strict adherence to rules, noting penalties under SEBI are of deterrent with nature of civil to ensure compliance 2004 0 Supreme(Bom) 321.

Even defenses like lack of knowledge are typically adjudicated at trial, not framing of charges. The defense of the accused regarding their knowledge of the company's activity cannot be adjudicated at the time of framing of charge and should be considered during trial 2022 0 Supreme(Cal) 645.

Criminal Liability and Penalties

Violators face severe consequences:

SEBI Act Violations: Penalties, disgorgement, and imprisonment under Sections 11, 11B, 24, etc. 2016 5 Supreme 417.
RBI Act Breaches: Criminal proceedings for unauthorized deposits 2000 4 Supreme 726.
IPC Charges: Sections 406 (criminal breach of trust), 420 (cheating), and 120B (conspiracy) often apply, especially in fraud cases 2016 5 Supreme 417. Additional laws like Prize Chits and Money Circulation Schemes (Banning) Act, 1978, target pyramid-like schemes 2019 0 Supreme(Kar) 403.

Real cases illustrate this:- Companies raising funds without ROC, MCA, or SEBI approval faced complaints under SEBI Act Sections 24 and 27 2022 0 Supreme(Cal) 645.- Directors of firms collecting deposits without RBI/SEBI licenses were prosecuted, with bail granted only under stringent conditions due to lack of overt acts 2019 0 Supreme(Kar) 403.- In HBN Dairies, SEBI ordered cessation of collections, deeming schemes as illegal fund mobilization 2021 0 Supreme(Chh) 24.

Penalties under SEBI are civil-deterrent in nature, not requiring mens rea proof like criminal law, pushing strict compliance 2004 0 Supreme(Bom) 321.