Police Can Investigate SCRA Offences But Cannot Take Cognizance Through Report: Gujarat High Court

The Gujarat High Court on 27 July held that while police can investigate cognizable offences under the Securities Contracts (Regulation) Act, 1956 (SCRA), courts cannot take cognizance of such offences on the basis of a police report and must act only on a complaint filed by the competent authority.

A Bench of Justice P.M. Raval partly allowed a petition seeking quashing of an FIR alleging illegal “dabba trading” and quashed the proceedings relating to offences under Sections 406 and 420 of the Indian Penal Code (criminal breach of trust and cheating) and Sections 13, 14, 19 and 23 of the SCRA. The Court clarified:

“The investigation carried out by the police can be used for the purpose of filing a complaint in writing before the appropriate court. To be precise, whatever materials have been collected by the Investigating Officer could be used by the authority for the purpose of filing a complaint before the competent court.”

The case arose from a petition challenging an FIR registered by the Visnagar Town Police Station, Mehsana, alleging offences under the IPC, the SCRA and the Information Technology Act.

The prosecution alleged that the police registered the FIR after receiving secret information that the applicants were operating an illegal “dabba trading” racket from a residential premises using the “Market Plus” application, mobile phones and dummy SIM cards. It alleged that the applicants provided unauthorised stock market tips without a licence.

Following a raid, the police allegedly recovered mobile phones, SIM cards and account books. The prosecution alleged that the applicants caused financial loss to the Government of India and the Securities and Exchange Board of India (SEBI) by manipulating share prices for unlawful gain.

The applicants contended that even if the allegations in the FIR were accepted in their entirety, they did not disclose the ingredients of criminal breach of trust or cheating under Sections 406 and 420 of the IPC. They further argued that Section 26 of the SCRA bars courts from taking cognizance of offences under the Act on the basis of a police report, as cognizance can only be taken on a complaint filed by the Central Government, State Government, SEBI, a recognised stock exchange or an authorised person.

The State opposed the petition, arguing that despite the bar under the SCRA, the material collected during investigation disclosed offences under the IPC.

The Court held that although offences under Section 23 of the SCRA are cognizable and allow police to investigate, Section 26 prevents courts from taking cognizance of such offences on the basis of a police report. It noted:

“...a plain reading of Section 26 of the Act suggests that no court can take cognizance of any offence punishable under the Act except on a complaint made by the Central Government, the State Government, the Securities and Exchange Board of India, a recognised stock exchange, or any authorised person.”

The Bench observed that the competent authority can rely on the investigation material collected by the police to file a complaint before the court, but the court cannot proceed on the basis of the police report itself.

It also held that the FIR did not disclose the essential ingredients of criminal breach of trust or cheating. It found no material to show that the applicants caused financial loss to any person or obtained wrongful gain. It noted that the investigating agency failed to produce evidence of financial loss and could not explain how the offence of criminal breach of trust was made out.

Accordingly, the High Court partly allowed the petition and quashed the FIR and consequential proceedings against the applicants relating to Sections 406 and 420 of the IPC and Sections 13, 14, 19 and 23 of the SCRA. It, however, clarified that the investigating agency could continue the investigation in respect of the remaining offences.

For the Applicants: Mr Pratik B. Barot

For the Respondents: DS Aff. Not Filed (N) for Respondent No. 2, K.M. Antani, Additional Public Prosecutor (APP), for Respondent No. 1.