No Penalty In SEBI Adjudication Is Not Exoneration Barring Criminal Prosecution Under S. 27 SEBI Act: Bombay High Court - 2025-09-12

No 'Clean Chit' for Karvy Ex-CEO: Bombay High Court Rules Adjudication Without Penalty Doesn't Halt Criminal Trial

MUMBAI: In a significant ruling clarifying the interplay between regulatory proceedings and criminal prosecution, the Bombay High Court has dismissed a discharge application filed by Rajiv Ranjan Singh, the former CEO of Karvy Stock Broking (KSBL). Justice Amit Borkar held that the absence of a monetary penalty in a SEBI adjudication order does not amount to a clean exoneration on merits that would bar a criminal trial on the same facts.

The court affirmed that Singh must face trial for his alleged role in the Rs. 2,700 crore client securities fraud at KSBL, reinforcing the principle of vicarious liability for senior corporate officials under Section 27 of the SEBI Act, 1992.

Background of the Case

The case originates from a criminal complaint filed by the Securities and Exchange Board of India (SEBI) against Karvy Stock Broking and its key officials, including the applicant, Rajiv Ranjan Singh, who served as its CEO. SEBI alleged that KSBL, in a massive fraud, had illegally pledged client securities worth approximately Rs. 2,700 crore without their authorization and diverted the funds for its own use and that of its connected entities.

SEBI's complaint invoked provisions of the SEBI Act, 1992, and regulations prohibiting fraudulent and unfair trade practices. Consequently, Singh was arraigned as Accused No. 5. He subsequently filed an application for discharge before the Special Court, which was rejected. The present revision application before the High Court challenged that rejection order.

Arguments of the Parties

Applicant's Stance: The primary argument advanced by Rajiv Ranjan Singh’s counsel was that he had already been exonerated in a parallel adjudication proceeding conducted by a Whole Time Member of SEBI. He contended that since the final adjudication order dated April 20, 2023, did not impose any penalty on him, it amounted to an exoneration on merits. Relying on the Supreme Court's judgment in Radheshyam Kejriwal vs. State of West Bengal , his counsel argued that where an individual is held innocent in adjudication, a criminal prosecution on the same facts cannot continue due to the higher standard of proof required in criminal cases.

SEBI's Counter-Arguments: SEBI strongly contested this claim, arguing that the adjudication order did not exonerate Singh on merits. SEBI’s counsel highlighted that the order merely refrained from imposing a penalty but contained adverse findings against the applicant. Specifically, the adjudicating officer had noted Singh’s active participation in an "asset collection drive" and his failure to exercise the diligence expected of a CEO, especially given his two decades of experience in the securities market. SEBI maintained that as the CEO, Singh was responsible for the company's day-to-day affairs, attracting the deeming provision of liability under Section 27(1) of the SEBI Act.

Court's Analysis and Legal Precedents

Justice Amit Borkar meticulously analyzed the scope of judicial review at the discharge stage and the legal effect of departmental proceedings on criminal trials. The court revisited a series of landmark Supreme Court judgments to frame its decision.

• Distinction Between Adjudication and Prosecution: The court cited the Constitution Bench judgment in Collector of Customs v. L.R. Melwani , which established that regulatory proceedings are not criminal trials and their findings do not automatically bar prosecution under the principle of double jeopardy.

• The Radheshyam Kejriwal Test: * The court then applied the critical test laid down in Radheshyam Kejriwal***. This precedent holds that while adjudication and criminal proceedings are independent, a criminal case cannot continue if the adjudication order provides a clear finding of innocence on merits, deeming the allegations "wholly unsustainable."

The court found that Singh's case failed this test. It observed:

"Exoneration in departmental or regulatory proceedings will bind criminal prosecution only in very limited situations... there must be a clear conclusion that the allegations were wholly baseless or not proved at all... The order must contain a clean declaration of innocence."

Applying this to the SEBI order, the court noted:

"On the contrary, paragraphs 126 and 127 of the order note that the applicant actively participated in the asset collection drive and, as Chief Executive Officer, failed to exercise the diligence expected of him. These are adverse findings against the applicant and rule out any claim of complete exoneration."

Vicarious Liability under Section 27 of the SEBI Act

The judgment pivoted on the interpretation of Section 27(1) of the SEBI Act, which imputes liability on every person in charge of and responsible for the company's business at the time of the offence. The court held that Singh's position as CEO inherently placed him in this category.

"Under Section 27(1) of the SEBI Act, it is not necessary to show that the officer himself committed the wrongful act. The liability arises simply because the person was in charge of and responsible for the conduct of business of the company when the offence took place... These findings support, and do not negate, the statutory presumption of liability."

The court concluded that at the stage of discharge, a detailed evaluation of evidence is impermissible. The presence of prima facie material, including SEBI's inspection report, NSE's reports, and a forensic audit, was sufficient to raise a "strong suspicion" of his involvement, warranting a full trial.

Final Decision and Implications

Dismissing the revision application, the High Court upheld the Special Court's order, directing Rajiv Ranjan Singh to face trial.

This judgment serves as a stern reminder to corporate executives that escaping penalties in regulatory proceedings does not guarantee immunity from criminal prosecution, especially when their role involves a failure of diligence and oversight in large-scale corporate frauds. It reinforces SEBI's authority to pursue parallel criminal action to hold key managerial personnel accountable for their company's transgressions.