2004 (3) TMI 430 - HC - Companies Law

Penalty for failure to furnish information, return, etc. -Whether mens rea is sine qua non , for imposing penalty for breach of the provisions of the SEBI Act and the Regulations framed thereunder, apart from the discretion, exercisable by the adjudicating authority - HELD THAT - We find that the allotment in question was undoubtedly covered under the exemption provided in regulation 3(1). There could not have been insistence by the Appellants-SEBI to comply with the requirements of regulation 3(4). It is also clear that when an acquisition is covered under regulation 3 the acquirer is required to report to the Board under the regulation 3(4) within the specified time, as referred above. In view of this undisputed position, merely because there was no Report filed, that itself cannot be read as serious defect or non-compliances of the said provisions. The Appellate Authority, after considering the material on record, including the events, referred in the pleadings, found that the respondents-company had no intention to suppress any material information from the appellants or the share holders. The Company had informed the Stock Exchange, Registrar of Companies and complied with all other provisions of other laws, well in time. It cannot be overlooked that information about the preferential allotment was well within the knowledge of the appellants, as reflected from the letter dated 2nd January, 1997. The appellants were aware of the preferential allotment in question and in fact prevented the respondent-company from monitoring and pursuing further course of action. It is also clear from the record that S.R. Batliboi Associates, Chartered Accountants, being statutory Auditors of the Company, had written on 14th January, 1997, to the respondents, the Reserve Bank of India and reported the Company s decision to make preferential allotment. It appears that there was no intention of the respondents to avoid filing of such a Report with the appellants, as the respondents had in fact complied with and notified the relevant details to all other concerned Authorities, like Registrar of Companies, Reserve Bank of India and Stock Exchange in respect of the preferential allotment and the relevant details. Therefore, SAT, cannot be said to have erred in the factual background of the case that the respondents never intended or consciously or deliberately avoided to comply with the obligations under the SEBI Act and the Regulations and the non-filing of the Report in question was a technical and a minor defect or breach based on bona fide belief that respondents were not liable or required to submit the said Report in view of the admitted exemption available under the SEBI Act and the Regulations. In the facts and circumstances of the present case the reversal of the order of the Adjudicatory Authority, by the SAT cannot be faulted. 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. We, therefore, dispose of the Appeal.

Summary

Issues Involved:
1. Whether mens rea is sine qua non for imposing penalty for breach of SEBI Act and Regulations.
2. Applicability of SEBI Takeover Regulations, 1997 to the preferential allotments.
3. Liability for penalty under section 15A(b) of the SEBI Act due to delay in filing the report.
4. Nature of proceedings under SEBI Act - whether civil or criminal.
5. Discretion of the Adjudicating Officer in imposing penalties.

Summary:

Issue 1: Mens Rea Requirement
The primary issue was whether mens rea is sine qua non for imposing penalty for breach of the SEBI Act and Regulations. The court concluded that mens rea is not essential for imposing civil penalties under the SEBI Act and Regulations. The proceedings for imposition of penalty are adjudicatory in nature and not criminal or quasi-criminal. The penalty under SEBI Act is for breach of civil obligations and does not require proof of mens rea.

Issue 2: Applicability of SEBI Takeover Regulations, 1997
The SEBI Takeover Regulations, 1997, apply to the preferential allotments in question. Both SEBI Takeover Regulations, 1994 and 1997 govern takeover and substantial acquisition of shares. The acquirer availing exemption under regulation 3(1)(c) was required to comply with regulation 3(4) and 3(5) by filing a report with SEBI within 21 days of acquisition.

Issue 3: Liability for Penalty under Section 15A(b)
There was a delay of 529 days in filing the report with SEBI. The report should have been filed by 22nd June 1997 but was filed on 3rd December 1998. The respondents were liable for penalty under section 15A(b) of the SEBI Act due to this delay. The Adjudicating Officer imposed a nominal penalty of Rs. 1,50,000 after considering all facts and circumstances.

Issue 4: Nature of Proceedings under SEBI Act
The court clarified that the SEBI Act and the Regulations are not penal statutes but are regulatory and remedial in nature. Proceedings under Chapter VI-A relating to levy of penalties are adjudicatory and civil in nature, not criminal. The Adjudicating Officer performs quasi-judicial functions to determine liability for breach of civil obligations.

Issue 5: Discretion of the Adjudicating Officer
The Adjudicating Officer, after considering all facts and circumstances and provisions of section 15J, imposed a nominal penalty. The discretion exercised by the Adjudicating Officer was deemed appropriate and should not have been interfered with. The SAT's reversal of the Adjudicating Officer's order was maintained, but the reasoning that mens rea is required for imposing penalty was set aside.

Result:
The court disposed of the appeal by setting aside the SAT's reasoning that mens rea is required for imposing penalties but maintained the SAT's order reversing the penalty imposed by the Adjudicating Officer. There was no order as to costs.