Dharu Khera Automobile Ltd. mobilised funds from the general public by sponsoring a scheme for the purpose of its operations. Though it was a Collective Investment Scheme (CIS), the Company had mobilised such funds witho

Answer 2(a) The facts and legal issue of the question similar to the case of Dr. Uppal Devinder Kumar (Appellant) vs. SEBI (Respondent) . In this case Securities Appellate Tribunal, judgement dated 25 September, 2019 inter alia observed that a perusal of section 12(1B) of the SEBI Act clearly indicates that no person shall sponsor or cause to be sponsored or carry on or cause to be carried on any collective investment scheme, unless he obtains a certificate of registration from the Board in accordance with the regulations. From the aforesaid, it is clear that the appellant has not made a promise or given surety for another. The appellant has not sponsored not pledged any money in advance. There is no evidence to indicate that he had contributed to bear the expenses of the scheme in return for some gain. Section 12(1B), read with regulations 3 and 4 further states that no person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations. There is no specific finding by the SEBI that the appellant was involved in carrying on the CIS or was involved in the execution of the scheme or was involved in the collection of the money pursuant to the scheme. Appellant was director only for 50 days and there is no evidence brought on record to show that the appellant attended any meeting of the Board of Directors nor there is any document to show that the appellant had any role at all in connection with the CIS or sponsoring a CIS or being responsible for the registration of the CIS. Thus, the finding of the SEBI that appellant had sponsored and carried on the CIS is patently based on surmises and conjectures. Thus, in the absence of any documentary evidence the SEBI was not justified in holding that the appellant had sponsored or carried on the CIS or was instrumental in the collection of the monies pursuant to the scheme especially when the SEBI has specifically recorded that month wise mobilization of the companies was not available. The SEBI by a separate order has already given a finding that the company and its directors were directly responsible for sponsoring the CIS without registration and were instrumental in generating the monies through this scheme in violation of the Regulations and the Act. The SEBI has already imposed penalties against the company and the said directors. The appellant in the instant case no doubt was a director only for a period of 50 days and there is no finding that he was responsible either for sponsoring the scheme or for carrying out the scheme. The appellant was not instrumental in the launching/sponsoring or carrying on the scheme. In the light of the above case law, it can be concluded that a director cannot be held liable in case he was holding onto his position for a short period of time and that proves that he was not aware of the default: Therefore: SEBI was not justified in holding that appellant had sponsored or carried out CIS as director was not aware of the default. The impugned order passed by SEBI imposing penalty upon appellant was not justified as the director had no knowledge of default.