Full Judgment Text
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CASE NO.:
Appeal (civil) 9523-9524 of 2003
PETITIONER:
The Chairman, SEBI
RESPONDENT:
Shriram Mutual Fund & Anr.
DATE OF JUDGMENT: 23/05/2006
BENCH:
Dr. AR. Lakshmanan & Lokeshwar Singh Panta
JUDGMENT:
J U D G M E N T
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
1. June 1998 Springfield Securities 10.65%
2. September 1998 -do- 6.6%
3. March 1999 -do- 16.57%
4. September 1999 -do- 9.57%
5. December 1999 -do- 91.68%
6. September 1998 SIS Shares and Stock 19.59%
Brokers
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7. March 1999 -do- 33.81%
8. September 1999 -do- 38.01%
9. September 1998 Shriram Indus Stock 9.86%
10. December 1998 -do- 6.39%
11. March 1999 -do- 28.95%
12. 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:
"25. Asset management company and its obligations:
1. \005
2. \005
3. \005
4. \005
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5. \005
6. \005
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 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:
(a) If any person, who is\005.
(b) 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 \026 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.
(2) 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:-
(a) the amount of disproportionate gain or unfair
advantage, wherever quantifiable, made as a
result of the default;
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(b) the amount of loss caused to an investor or
group of investors as a result of the default;
(c) 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 :
15A \026 Failure to furnish information, return
15B \026 Failure to enter into agreement with clients
15C \026 Failure to redress investors’ grievances
15D \026 Default in case of mutual funds
15E \026 Failure to observe rules and regulations by an
asset management company
15F \026 Default in case of stock brokers
15G \026 For insider trading
15H \026 Non-disclosure of acquisition of shares and takeovers
15HA \026 Fradulent and unfair trade practices
15HB \026 Penalty, 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
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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
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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
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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
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is not an essential element for imposing penalty for breach of
civil obligations.
(a) 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\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005."
"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
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breach, with or without any guilty intention."
(b) J.K. Industries Ltd. & Ors. Vs. Chief Inspector
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\005\005\005"
(c) R.S. Joshi Sales Tax Officer, Gujarat & Ors.
Vs. Ajit Mills Ltd. & anr.etc. , (1977) 4 SCC 98
"\005\005\005\005\005Even 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."
(d) M/s Gujarat Travancore Agency, Cochin vs.
C.I.T. , (1989) 3 SCC 52.
"\005\005\005\005\005It 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
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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."
(e) Swedish Match AB and Anr. Vs. SEBI & anr. ,
(2004) 11 SCC 641.
"\005\005\005\005The 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."
(f) SEBI vs. Cabot International Capital
Corporation, (2005) 123 Comp. Cases 841
(Bom).
"Thus, the following extracted principles are
summarised:
(A) Mens rea is an essential or sine qua non for
criminal offence.
(B) 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.
(C) 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.
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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.
(D) Mens rea is not essential element for imposing
penalty for breach of civil obligations or
liabilities\005..
(E) 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
the case of Hindustan Steel Ltd. Vs. State of Orissa, AIR
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
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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.