The
Chairman, SEBI Vs. Shriram Mutual Fund & Anr [2006] Insc 334 (23 May 2006)
Dr.
Ar. Lakshmanan & Lokeshwar Singh Panta Dr. Ar. Lakshmanan, J.
The
Securities and Exchange Board of India (hereinafter referred to as 'the SEBI')
is the appellant in the present appeal under Section 15-Z of the Securities and
Exchange Board of India Act, 1992. This appeal was filed against the final
judgment and order dated 21.08.2003 passed by the Securities Appellate
Tribunal, Mumbai (hereinafter referred to as 'the Tribunal') in appeal No. 50
of 2002 and 51 of 2002 raising an important question of law as to whether once
it is conclusively established that the Mutual Fund has violated the terms of
the Certificate of Registration and the statutory Regulations i.e. SEBI (Mutual
Funds) Regulations, 1996 (hereinafter referred to as 'the Regulations")
the imposition of penalty becomes a sine qua non of the violation.
The
respondents have not chosen to enter appearance though they were served with
the notice. Since the service is complete and the appeals are ready for
hearing, the above appeals were listed for final hearing.
The
Appellant Board, a body corporate, has been established under the Securities
and Exchange Board of India Act, 1992 by the Central Government, inter alia, to
protect the interest of the investors in securities and to promote the
development of, and to regulate the securities market and for matters connected
therewith.
Shriram
Mutual Fund was registered in the year 1994. It had floated 5 schemes. It
conducted business through brokers associated with its sponsor in excess of the
permissible limits prescribed under Regulation 25(7)(a) of the Regulations,
1996 on 12 occasions. The respondent failed to comply with the terms and
conditions attached to the Certificate of Registration which are statutory in
nature, as prescribed by Regulation 15 (D)(b) of the Securities and Exchange
Board of India Act, 1992.
The
instances of excess transactions conducted by the respondents are as follows:-
Sr. Quarter ended Name of the Associate Percentage of No. Brokers Business
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June 1998 Springfield Securities 10.65%
-
September 1998
-do- 6.6%
-
March 1999 -do-
16.57%
-
September 1999
-do- 9.57%
-
December 1999
-do- 91.68%
-
September 1998
SIS Shares and Stock 19.59% Brokers
-
March 1999 -do-
33.81%
-
September 1999
-do- 38.01%
-
September 1998 Shriram
Indus Stock 9.86%
-
December 1998 -do- 6.39%
-
March 1999 -do- 28.95%
-
September 1999 -do- 52.42% The
Chairman, SEBI in exercise of the powers conferred on it under Section 15(I) of
the said Act and Rule 3 of the SEBI (Procedure for Holding Enquiry and Imposing
Penalty by Adjudicating Officer) appointed an Adjudicating Officer to enquire
into the violations of exceeding by the respondents of the permissible limit of
5% of aggregate purchases and sales of securities made by the Mutual Fund in
all its Schemes, as prohibited under Regulations 25(7)(a) of the said
Regulations.
The
Appellant-Board issued notice dated 01.04.2002 under Rule 4 of Rules, 1995
calling upon the respondents to show cause as to why an inquiry should not be
held and penalty imposed under the Rules, 1995. The respondents filed a common
reply before the Enquiry and Adjudicating Officer, SEBI.
The
Adjudicating Officer, after hearing the parties, imposed penalty of Rs. 5 lacs
under Section 15E on respondent No.2 for failure to comply with Regulations 25
(7)(a) of SEBI (Mutual Funds) Regulations, 1996 with regard to routing of
transactions through associate brokers.
The
Adjudicating Officer also imposed a penalty of Rs. 2 lacs under Section 15D(b)
of SEBI Act, 1992 on respondent No.1 for its failure to comply with the terms
and conditions of Certificate of Registration granted to it.
Aggrieved
by the order dated 24.06.2002 passed by the Adjudicating Officer, the
respondents filed appeals before the Securities Appellate Tribunal, Mumbai on
21.08.2003, inter alia, contending that the transactions with the associate
brokers were related to thinly traded Securities, for which there were no ready
markets available through the normal Stock Exchange, or were relating to
securities which did not have any large volume or trade in the market. It was
further contended that these securities were either thinly traded, or did not
have any volumes.
It was
submitted that the percentage of excess business carried out with associate
brokers were as high as 91.68% and 52.42%, while the total volume of business
done with the associate brokers was Rs.4.55 lacs.
The
Tribunal set aside the order of the Adjudicating Officer on the purported
ground that the penalty to be imposed for failure to perform a statutory
obligation is a matter of discretion.
The
Tribunal has held that the penalty is warranted by the quantum which has to be
decided by taking into consideration the factors stated in Section 15-J. Aggrieved
by the order dated 21.08.2003, the Chairman, SEBI filed the above statutory
appeal under Section 15-Z of the Act of 1992 as amended by the Securities and
Exchange Board of India (Amendment) Act, 2002.
We
heard Mr. L. Nageswara Rao, learned senior counsel ably assisted by his junior
counsel for the appellant. Mr. Rao advanced elaborate arguments and took us
through the pleadings, the reply received to the show cause notice, the order
of the Adjudicating Authority and of the Appellate Tribunal. He drew our
specific attention to Regulation 25 (7)(a) of the Securities and Exchange Board
of India (Mutual Funds) Regulations, 1996 and Sections 15-D(b), 15-E, 15-I,
15-J, and 12-B of the SEBI Act, 1992 which are extracted hereunder:
-
"Asset management company and
its obligations:
-
-
-
-
-
-
-
-
An Asset management company shall
not through any broker associated with the sponsor, purchase or sell
securities, which is average of 5% or more of the aggregate purchases and sale
of securities made by the mutual fund in all its schemes;
Provided
that for the purpose of this sub- regulation, aggregate purchase and sale of
security shall exclude sale and distribution of units issued by the mutual
fund:
Provided
further that the aforesaid limit of 5% shall apply for a block of any three
months".
15.D
" Penalty for
certain defaults in case of mutual funds:
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If any person,
who is.
-
Registered with
the Board as a collective investment scheme, including mutual funds, for
sponsoring or carrying on any investment scheme, fails to comply with the terms
and conditions of certificate of registration, he shall be liable to a penalty
of one lakh rupees for each day during which such failure continues or one crore
rupees, whichever is less;"
15-E
"Penalty for
failure to observe rules and regulations by an asset management company Where
any asset management company of a mutual fund registered under this Act fails to
comply with any of the regulations providing for restrictions on the activities
of the asset management companies, such asset management company shall be liable
to a penalty of one lakh rupees for each day during which such failure continues
or one crore rupees, whichever is less."
15.I
"For the purpose
of adjudging under Sections 15A, 15B, 15C, 15D, 15E, 15F, 15G and 15H, the Board
shall appoint any officer not below the rank of a Division Chief to be an
adjudicating officer for holding an enquiry in the prescribed manner after
giving any person concerned a reasonable opportunity of being heard for the
purpose of imposing any penalty.
-
While holding an inquiry the
adjudicating officer shall have power to summon and enforce the attendance of
any person acquainted with the facts and circumstances of the case to give
evidence or to produce any document which in the opinion of the adjudicating
officer, may be useful for or relevant to the subject-matter of the inquiry and
if, on such inquiry, he is satisfied that the person has failed to comply with
the provisions of any of the sections specified in sub-section (1), he may impose
such penalty as he thinks fit in accordance with the provisions of any of those
sections."
15.J
"While adjudging
quantum of penalty under Section 15-I, the adjudicating officer shall have the
due regard to the following factors, namely:-
-
the amount of
disproportionate gain or unfair advantage, wherever quantifiable, made as a
result of the default;
-
the amount of
loss caused to an investor or group of investors as a result of the default;
-
the repetitive
nature of the default." Statutory Scheme Chapter VI-A of the SEBI Act
provides for Penalties and Adjudication, which provisions were introduced in
SEBI Act by the Amendment Act 9 of 1995. Section 15-A to Section 15 HB are in
the form of mandatory provisions imposing penalty in default of the provisions
of the SEBI Act and Regulations. The provisions of penalty for non-compliance
of the mandate of the Act is with an object to have an effective deterrent to
ensure better compliance of the provisions of the SEBI Act and Regulations,
which is crucial for the appellant Board in order to protect the interests of
investors in securities and to promote the development of the securities
market.
Chapter
VI-A of the SEBI Act deals with the penalties and the adjudication. Section
15-l of the SEBI ACT envisages appointment of Adjudicating Officer for holding
an inquiry in the prescribed manner, after giving reasonable opportunity of
being heard for the purpose of imposing any penalty.
Section
15-J provides various factors which are to be taken into consideration while adjudging
the question of penalty under Section 15-l namely, the amount of
disproportionate gain or unfair advantage whenever quantifiable, loss caused to
an investor or group of investors and the repetitive nature of default.
The
legislature in its wisdom had not included mens rea or deliberate or wilful
nature of default as a factor to be considered by the Adjudicating Officer in
determining the quantum of liability to be imposed on the defaulter.
Sections
15A to 15H and 15HA employ the words "shall be liable" and,
therefore, mandatorily provides for imposition of monetary penalties for
respective breaches or non-compliance of provisions of the SEBI Act and the
Regulations. Default or failure, as contemplated under the Act includes :
15.A
Failure to
furnish information, return
15.B
Failure to enter
into agreement with clients
15.C
Failure to
redress investors' grievances
15.D
Default in case
of mutual funds
15.E
Failure to
observe rules and regulations by an asset management company
15.F
Default in case
of stock brokers
15.G
For insider
trading
15.H
Non-disclosure of
acquisition of shares and takeovers
15.HAFradulent
and unfair trade practices
15.HBPenalty,
if not separately provided The Scheme of the SEBI Act of imposing penalty is
very clear. Chapter VI nowhere deals with criminal offences. These defaults for
failures are nothing, but failure or default of statutory civil obligations
provided under the Act and the Regulations made thereunder. It is pertinent to
note that Section 24 of the SEBI Act deals with the criminal offences under the
Act and its punishment. Therefore, the proceedings under Chapter VI A are
neither criminal nor quasi-criminal. The penalty leviable under this Chapter or
under these Sections, is penalty in cases of default or failure of statutory
obligation or in other words breach of civil obligation. In the provisions and
scheme of penalty under Chapter VI A of the SEBI Act, there is no element of any
criminal offence or punishment as contemplated under criminal proceedings.
Therefore, there is no question of proof of intention or any mens rea by the
appellants and it is not essential element for imposing penalty under SEBI Act
and the Regulations.
As
already noticed, the Tribunal allowed the appeals of the respondent on the
ground that there was no mala fide intention to act in violation of Regulation
25 (7((a) and Section 15(D)(b) of the SEBI Act but due to circumstances
respondents were forced to act in excess of the limits prescribed under
Regulation 25(D)(b) of the said Regulation.
Question
of law The important question of law which arises for consideration in the
present appeal is whether the Tribunal was justified in allowing the appeals of
the respondent herein and that whether once it is conclusively established that
the Mutual Fund has violated the terms of the Certificate of Registration and
the statutory Regulations i.e. the SEBI (Mutual Funds) Regulation, 1996, the
imposition of penalty becomes a sine qua non of the violation.
In
other words, the breach of a civil obligation which attracts penalty in the
nature of fine under the provisions of the Act and the Regulations would
immediately attract the levy of penalty irrespective of the fact whether the
contravention was made by the defaulter with any guilty intention or not.
Mr. Rao
took us through the orders passed by the Adjudicating Authority. It is seen
that the respondents themselves have admitted the violation of the Regulations
during a continuous period of 2= years in 12 instances, covering 6 quarters.
Regulation 25 (7)(a) of the Regulation provides that an Asset Management
Company shall not through any broker associated with sponsor, purchase or sell
securities, which is average of 5% or more of the aggregate purchases and sale
of securities made by the Mutual Fund in all its schemes. The second proviso to
the said Regulation clearly provides that the aforesaid limit shall apply for a
block of 3 months. Hence, there has been a repetitive violation of the said
Regulation, and the terms of the Certificate of Registration. In these
circumstances, the learned senior counsel submitted that the Tribunal has
erroneously allowed the appeals filed by the respondents against the order
passed by the Adjudicating Officer on 24.06.2002. The Tribunal has given a
clear finding that the respondent No.1 Fund has admittedly exceeded the
prescribed limit of more than 5% when it had transacted business through
brokers, associated with its sponsors which is in contravention of provisions
of Regulation 25(7)(a) of the SEBI (Mutual Funds) Regulation, 1996.
We
have already noticed the instances of excess transactions conduced by the
respondents and reproduced the same in paragraphs (supra). It is an admitted
fact that the respondent had on 12 occasions routed transactions through its
associated brokerage houses in excess of the permissible limits prescribed
under Regulation 25 (7)(a) of the Regulations.
In the
present case, the contesting respondent is a Mutual Fund and the Asset
Management Company. During the period from June, 1998 to September, 1999, the
respondent had conducted business through associated brokers, in excess of the
limits prescribed under Regulation 25 (7)(a) of the Regulations on 12 occasions
covering 6 quarters. The respondent had failed to comply with the terms and
conditions attached to the Certificate of Registration granted to it, inasmuch
as it did not exercise diligence to ensure that the transactions by its own
Asset Management Company were confined to the permissible limits.
In
this case, the SEBI appointed an Adjudicating Officer in terms of Section 15-I
to inquire into and adjudge the alleged contravention of Section 15-E of the
Act of 1992. The Adjudicating Officer, after inquiry, confirmed the charges and
imposed a sum of Rs. 5 lacs as penalty on respondent No.2 under Section 15-E of
the said Act for failure to comply with Regulation 25 (7)(a) and Rs. 2 lacs on
the other respondent for failure to comply with the terms and conditions
attached to the Certificate of Registration.
Mr. Rao
submitted that under Regulation 25 (7)(a) an Asset Management Company shall not
through any broker associated with the sponsor, purchase or sell securities,
which is average of 5% or more of the aggregate purchases and sale of
securities made by Mutual Funds in all its schemes and that the aforesaid limit
of 5% shall apply for a block of any three months.
In the
present case, the respondents on their own admission have violated the
aforesaid statutory Regulations during 6 quarters. Hence Mr. Rao submitted that
the violation is ex facie wilful and hence the penalty imposed by the
Adjudicating Officer ought not to have been set aside by the single member
Tribunal. Mr. Rao further argued that unless the language of the statute
indicates the need to establish the element of mens rea it is generally
sufficient to prove that a default in complying with the statute has occurred.
Under Sections 15-D(b) and 15-E of the Act, there is nothing which requires
that mens rea must be proved before penalty can be imposed under these
provisions.
Hence,
it was contended that once the contravention is established, the penalty has to
follow.
The
Tribunal set aside the order passed by the Adjudicating Officer on the ground
that the penalty to be imposed for failure to perform a statutory obligation is
a matter of discretion which has to be exercised judicially and on a
consideration of all the relevant facts and circumstances. The Tribunal also
held that the Adjudicating Officer has to be satisfied with the material placed
before him that the violation deserves punishment. It was held that the penalty
is warranted by the quantum which has to be decided by taking into
consideration the factors stated in Section 15J of SEBI Act. In our opinion,
the Tribunal has miserably failed to appreciate that by setting aside the order
of the Adjudicating Officer the Tribunal was setting a serious wrong precedent
whereby every offender would take shelter of alleged hardships to violate the
provisions of the Act. In our opinion, mens rea is not an essential ingredient
for contravention of the provisions of a civil act. In our view, the penalty is
attracted as soon as contravention of the statutory obligations as contemplated
by the Act is established and, therefore, the intention of the parties
committing such violation becomes immaterial. In other words, the breach of a
civil obligation which attracts penalty under the provisions of an Act would
immediately attract the levy of penalty irrespective of the fact whether the
contravention was made by the defaulter with any guilty intention or not. This
apart that unless the language of the statute indicates the need to establish
the element of mens rea, it is generally sufficient to prove that a default in
complying with the statute has occurred. Under a close scrutiny of Section 15 D(b)
and 15-E of the Act, there is nothing which requires that mens rea must be
proved before penalty can be imposed under these provisions. Hence, we are of
the view that once the contravention is established, then the penalty has to
follow and only the quantum of penalty is discretionary. Discretion has been
exercised by the Adjudicating Officer as is evident from imposition of lesser
penalty than what could have been imposed under the provisions. The intention
of the parties is wholly irrelevant since there has been a clear violation of
the statutory Regulations and provisions repetitively, covering a period of 6
quarters. Hence we hold that the respondents have wilfully violated statutory
provisions with impunity and hence the imposition of penalty was fully
justified. The Tribunal, in this context, failed to appreciate that every
Mutual Fund has to redeem the units as per terms and conditions of the scheme
on the request of the unit holders and this cannot, in any manner, be
considered as an extraordinary circumstance or something which was not known to
the respondents. The facts and circumstances of the present case in no way
indicate the existence of special circumstances so as to waive the penalty
imposed by the Adjudicating Officer. A perusal of the order passed by the Adjudicating
Officer would clearly go to show that factors such as small size of the funds,
low volume of transactions, thinly traded securities, administrative and
operational exigencies were duly considered and appreciated by the Adjudicating
Officer while passing the order and that is why the Adjudicating Officer did
not impose the maximum permissible penalty. The Tribunal failed to appreciate
that the objective behind imposing certain limit on the business that can be
conducted by mutual fund through the associate broker is to eliminate any undue
advantage to the class of brokers by virtue of their close association with the
Asset Management Company, sponsors etc. In other words, the object of imposing
such limits is to ensure that there is no concentration of business only in
such entities, so that there is an indirect pecuniary advantage to the person
associated with the Asset Management Company, sponsors etc. Any undue
concentration on the business of the mutual fund with its affiliated brokers by
paying huge commissions to such brokers is neither desirable nor in the
interest of the unit holders. It is a matter of record that in the 12 admitted
instances of violation by the respondents, the percentage of the business
through the associated brokers was as high as 91.68% and 52.2% in certain
factors. This apart, the respondent's excessive exposure to the associate
brokers is not only established from the record, but has also been admitted by
respondents.
It is
settled law that when a penalty is imposed by an Adjudicating Officer, it is
done so in adjudicatory proceedings and not by way of fine as a result of
prosecution of an accused for commission of an offence in a criminal
proceeding. In the instant case, the Tribunal has failed to appreciate that the
respondents had given undue and unfair advantage to the associated brokers,
which is detrimental to the interest of the unit holders.
In the
present case, it has been established by the Adjudicating Officer as well as
admitted by the respondents that there has been a conscious disregard of the
obligation inasmuch as the respondents were aware that they were acting in
violation of the provisions of Regulations. The Adjudicating Officer had, after
taking into account all the facts and circumstances of the case, imposed only a
token of Rs. 5 lacs against the respondents for its failure on 12 occasions
though the charging section permits imposition of a maximum penalty of Rs. 5 lacs
for each such violation.
The
Appellant Board has been established by the Parliament under the Securities and
Exchange Board of India Act, 1992 to protect the interest of investors in
securities and to promote the development of, and to regulate the securities
market and for matter connected therewith or incidental thereto.
The
Board was set up to promote orderly and healthy growth of the securities market
and for investors protection SEBI has been monitoring and regulating the
activities of Stock Exchanges, Mutual Funds and Merchant Bankers, etc. to
achieve these goals. The Capital market has witnessed tremendous growth in
recent times, characterized particularly by the increasing participation of the
Public. Investors' confidence in the capital market can be sustained largely by
ensuring investors protection.
That
it became imperative to impose monetary penalties also in addition to other
penalties in cases of default.
Mens
rea :
Whether
an essential element for imposing penalty for breach of civil obligations? This
Court in a catena of decisions have held that mens rea is not an essential
element for imposing penalty for breach of civil obligations.
-
Director of
Enforcement vs. MCTM Corporation Pvt. Ltd. & Ors. , (1996) 2 SCC 471
"It is thus the breach of a "civil obligation" which attracts
"penalty" under Section 23(1)(a) FERA, 1947 and a finding that the
delinquent has contravened the provisions of Section 10 FERA 1947 that would
immediately attract the levy of "penalty" under Section 23,
irrespective of the fact whether the contravention was made by the defaulter
with any "guilty intention" or not.
Therefore,
unlike in a criminal case, where it is essential for the 'prosecution' to
establish that the 'accused' had the necessary guilty intention or in other
words the requisite 'mens rea' to commit the alleged offence with which he is
charged before recording his conviction, the obligation on the part of the
Directorate of Enforcement, in cases of contravention of the provisions of
Section 10 of FERA, would be discharged where it is shown that the
"blameworthy conduct" of the delinquent had been established by wilful
contravention by him of the provisions of Section 10, FERA 1947. It is the
delinquency of the defaulter itself which establishes his 'blameworthy'
conduct, attracting the provisions of Section 23(1)(a) of FERA, 1947, without
any further proof of the existence of "mens rea". Even after an
adjudication by the authorities and levy of penalty under Section 23(1)(a) of
FERA, 1947, the defaulter can still be tried and punished for the commission of
an offence under the penal law." "In Corpus Juris Secundrum. Vol.85
at page 580, para 1023, it is stated thus:
"A
penalty imposed for a tax delinquency is a civil obligation, remedial and
coercive in its nature, and is far different from the penalty for a crime or a
fine or forfeiture provided as punishment for the violation of criminal or
penal laws." "We are in agreement with the aforesaid view and in our
opinion what applies to "tax delinquency" equally holds good for the
'blameworthy' conduct for contravention of the provisions of FERA, 1947. We,
therefore, hold that mens area (as is understood in criminal law) is not an
essential ingredient for holding a delinquent liable to pay penalty under
Section 23(1)(a) of FERA, 1947 for contravention of the provisions of Section
10 of FERA, 1947 and that penalty is attracted under Section 23(1)(a) as soon
as contravention of the statutory obligation contemplated by Section 10(1)(a)
is established.
The
High Court apparently fell in error in treating the "blameworthy
conduct" under the Act as equivalent to the commission of a "criminal
offence", overlooking the position that the "blameworthy
conduct" in the adjudicatory proceedings is established by proof only of
the breach of a civil obligation under the Act, for which the defaulter is
obliged to make amends by payment of the penalty imposed under Section 23(1)(a)
of the Act irrespective of the fact whether he committed the breach, with or
without any guilty intention." of Factories and Boilers & Ors., (1996)
6 SCC 665 "The offences under the Act are not a part of general penal law
but arise from the breach of a duty provided in a special beneficial social defence
legislation, which creates absolute or strict liability without proof of any mens
rea. The offences are strict statutory offences for which establishment of mens
rea is not an essential ingredient. The omission or commission of the statutory
breach is itself the offence. Similar type of offences based on the principle
of strict liability, which means liability without fault or mens rea, exist in
many statutes relating to economic crimes as well as in laws concerning the
industry, food adulteration, prevention of pollution etc. in India and abroad. "Absolute
offences" are not criminal offences in any real sense but acts which are
prohibited in the interest of welfare of the public and the prohibition is
backed by sanction of penalty"
-
R.S. Joshi Sales
Tax Officer, Gujarat & Ors.
"Even
here we may reject the notion that a penalty or a punishment cannot be cast in
the form of an absolute or no-fault liability but must be preceded by mens rea.
The classical view that 'no mens rea, no crime' has long ago been eroded and
several laws in India and abroad, especially regarding economic crimes and
departmental penalties, have created severe punishments even where the offences
have been defined to exclude mens rea. Therefore, the contention that Section
37(1) fastens a heavy liability regardless of fault has no force in depriving
the forfeiture of the character of penalty."
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M/s Gujarat Travancore Agency, Cochin vs. C.I.T. , (1989) 3 SCC 52.
"It
is sufficient for us to refer to Section 271(1)(a), which provides that a
penalty may be imposed if the Income Tax Officer is satisfied that any person
has without reasonable cause failed to furnish the return of total income, and
to Section 276-C which provides that if a person wilfully fails to furnish in
due time the return of income required under Section 139(1), he shall be
punishable with rigorous imprisonment for a term which may extend to one year
or with fine.
It is
clear that in the former case what is intended is a civil obligation while in
the latter what is imposed is a criminal sentence. There can be no dispute that
having regard to the provisions of Section 276-C, which speaks of wilful
failure on the part of the defaulter and taking into consideration the nature
of the penalty, which is punitive, no sentence can be imposed under that
provision unless the element of mens rea is established. In most cases of
criminal liability, the intention of the legislature is that the penalty should
serve as a deterrent.
The
creation of an offence by statute proceeds on the assumption that society
suffers injury by the act or omission of the defaulter and that a deterrent
must be imposed to discourage the repetition of the offence. In the case of a
proceeding under Section 271(1)(a), however, it seems that the intention of the
legislature is to emphasise the fact of loss of revenue and to provide a remedy
for such loss, although no doubt an element of coercion is present in the
penalty. In this connection, the terms in which the penalty falls to be
measured is significant.
Unless
there is something in the language of the statute indicating the need to
establish the element of mens rea it is generally sufficient to prove that a
default in complying with the statute has occurred. In our opinion, there is
nothing in Section 271(1)(a) which requires that mens rea must be proved before
penalty can be levied under that provision." (2004) 11 SCC 641.
"The
provisions of Section 15-H of the Act mandate that a penalty of rupees twenty
five crores may be imposed. The Board does not have any discretion in the
matter and, thus the adjudication proceeding is a mere formality.
Imposition
of penalty upon the appellant would, thus, be a forgone conclusion. Only in the
criminal proceedings initiated against the appellants, existence of mens rea on
the part of the appellants will come up for consideration."
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SEBI vs. Cabot
International Capital Corporation, (2005) 123 Comp. Cases 841 (Bom).
"Thus,
the following extracted principles are summarised:
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Mens rea is an
essential or sine qua non for criminal offence.
-
Strait jacket
formula of mens rea cannot be blindly followed in each and every case.
Scheme
of particular statute may be diluted in a given case.
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If, from the
scheme, object and words used in the statute, it appears that the proceedings
for imposition of the penalty are adjudicatory in nature, in contra-distinction
to criminal or quasi criminal proceedings, the determination is of the breach
of the civil obligation by the offender. The word "penalty" by itself
will not be determinative to conclude the nature of proceedings being criminal
or quasi-criminal.
The
relevant considerations being the nature of the functions being discharged by
the authority and the determination of the liability of the contravenor and the
delinquency.
-
Mens rea is not
essential element for imposing penalty for breach of civil obligations or
liabilities..
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There can be two
distinct liabilities, civil and criminal under the same Act.
(Para 52) The SEBI Act and the Regulations are intended to
regulate the Security Market and related aspects, the imposition of penalty, in
the given facts and circumstances of the case, cannot be tested on the ground
of "no mens rea no penalty". For breaches of provisions of SEBI Act
and Regulations, according to us, which are civil in nature, mens rea is not
essential. On particular facts and circumstances of the case, proper exercise
or judicial discretion is a must, but not on a foundation that mens rea is an
essential to impose penalty in each and every breach of provisions of the SEBI
Act.
(para
54) However, we are not in agreement with the appellate authority in respect of
the reasoning given in regard to the necessity of mens rea being essential for
imposing the penalty. According to us, mens rea is not essential for imposing
civil penalties under the SEBI Act and Regulations." The Trbunal has
erroneously relied on the judgment in 1970 SC 253 which pertained to
criminal/quasi-criminal proceeding. That Section 25 of the Orissa Sales Tax Act
which was in question in the said case imposed a punishment of imprisonment up
to six months and fine for the offences under the Act. The said case has no
application in the present case which relates to imposition of civil
liabilities under the SEBI Act and Regulations and is not a
criminal/quasi-criminal proceeding.
In our
considered opinion, penalty is attracted as soon as the contravention of the
statutory obligation as contemplated by the Act and the Regulation is
established and hence the intention of the parties committing such violation
becomes wholly irrelevant. A breach of civil obligation which attracts penalty
in the nature of fine under the provisions of the Act and the Regulations would
immediately attract the levy of penalty irrespective of the fact whether
contravention must made by the defaulter with guilty intention or not. We also
further held that unless the language of the statute indicates the need to
establish the presence of mens rea, it is wholly unnecessary to ascertain
whether such a violation was intentional or not. On a careful perusal of
Section 15(D)(b) and Section 15-E of the Act, there is nothing which requires
that mens rea must be proved before penalty can be imposed under these
provisions. Hence once the contravention is established then the penalty is to
follow.
In our
view, the impugned judgment of the Securities appellate Tribunal has set a
serious wrong precedent and the powers of the SEBI to impose penalty under
Chapter VIA are severely curtailed against the plain language of the statute
which mandatorily imposes penalties on the contravention of the Act/Regulations
without any requirement of the contravention having been deliberated or
contumacious. The impugned order sets the stage for various market players to
violate statutory regulations with impunity and subsequently plead ignorance of
law or lack of mens rea to escape the imposition of penalty. The imputing mens rea
into the provisions of Chapter VI A is against the plain language of the
statute and frustrates entire purpose and object of introducing Chapter VIA to
give teeth to the SEBI to secure strict compliance of the Act and the
Regulations.
In the
result, the Civil Appeal Nos. 9523 and 9524 of 2003 are allowed and the order
passed by the Securities Appellate Tribunal, Mumbai dated 21.08.2003 in Appeal
Nos. 50 and 51 of 2002 are set aside. No costs.
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