Calcutta High Court Quashes ROC-Initiated Criminal Proceedings Against Binani Cements Officials Over Filing Error

The Calcutta High Court on Thursday quashed criminal proceedings initiated by the Registrar of Companies against the Company Secretary and a Director of Binani Cements Ltd. over an error in XBRL filings made with the Registrar, holding that the absence of mens rea and non-compliance with the mandatory procedure under Section 202 CrPC rendered the prosecution unsustainable.

Justice Uday Kumar, while dealing with criminal revisional applications filed by Atul Pukhraj Falgunia and Ramkrishna Moogimane, set aside the summoning order dated September 10, 2013 passed by the Chief Judicial Magistrate, Alipore.

Terming it a fit case for the court to exercise its inherent powers to prevent abuse of process, the court observed:

“In accordance with the Bhajan Lal (supra) guidelines, this is a fit case for the exercise of this Court's inherent powers to prevent the judicial machinery from being utilized as an instrument of professional harassment.”

The case arose from a discrepancy in the XBRL filing for FY 2010–11, where the EPS for the previous year was incorrectly shown as Rs. 1.371 instead of Rs. 13.71 due to a decimal error during digital conversion. The ROC alleged that this amounted to a false statement under Section 628 of the Companies Act, 1956.

However, the court noted that the correct figures were simultaneously disclosed in around 20,000 physical annual reports, stock exchange filings and other public documents, which, it held, undermined the allegation that the petitioners had “knowingly” made a false statement.

The court further found that the summoning order itself was vitiated, as the magistrate had issued process against accused residing outside jurisdiction without conducting the mandatory inquiry under Section 202 of the CrPC, rendering the summoning order ab initio void and unsustainable in law.

Holding that the petitioners had acted honestly and reasonably, the court observed that the error was a bona fide “teething issue” arising from the initial phase of the XBRL digital mandate, which caused no wrongful gain or loss. The court said:

“It is further concluded that the Petitioners acted "honestly and reasonably" within the meaning of Section 633 of the Act. The error was a bona fide "teething problem" of a digital mandate that resulted in no wrongful gain to the Petitioners nor any actual loss to the stakeholders. To permit a criminal prosecution to persist for over a decade for a triviality lacking any "motive to mislead" would be a gross departure from the principles of equity and judicial conscience.”

Rejecting the ROC's theory of a “manipulated growth story”, the court termed it “absurd” and “self-contradictory”, observing that criminal intent cannot coexist with the simultaneous and widespread disclosure of correct financial data. The court observed:

“The "absurdity" in the present case is found in the ROC's own theory of a "manipulated growth story." For this Court to accept that the Petitioners intended to manipulate the market via a digital file, it must also accept that they were foolish enough to simultaneously distribute the "un-manipulated truth" in 20,000 physical reports to the very same shareholders and stock exchanges. Such a contention is self-contradictory.”

The court also held that in the presence of a designated “officer in default” for financial compliance, the Company Secretary and Director could not be held vicariously liable for a technical data-entry error in a specialized digital filing process.

Accordingly, the proceedings against the petitioners were quashed, and they were discharged from the case, while the trial court was directed to proceed against other accused persons, if any, in accordance with law.