2006 (5) TMI 191 - SC - Companies Law

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 ( the Regulations ) the imposition of penalty becomes a sine qua non of the violation? Held that - Appeal allowed. On a careful perusal of section 15(D)( b ) and section 15E 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. Thus 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 VI-A 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 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.

Summary

Issues Involved:
1. Violation of SEBI (Mutual Funds) Regulations, 1996.
2. Imposition of penalty for statutory violations.
3. Role of mens rea in civil penalties under SEBI Act.

Detailed Analysis:

Violation of SEBI (Mutual Funds) Regulations, 1996:
The Mutual Fund in question was found to have conducted business through brokers associated with its sponsor in excess of the permissible limits prescribed under Regulation 25(7)(a) of the SEBI (Mutual Funds) Regulations, 1996. This regulation stipulates that an Asset Management Company shall not conduct transactions exceeding 5% of the aggregate purchases and sales of securities through brokers associated with the sponsor. The respondents admitted to violating this regulation on 12 occasions over a period of six quarters, with percentages as high as 91.68% and 52.42%.

Imposition of Penalty for Statutory Violations:
The SEBI appointed an Adjudicating Officer under section 15-I of the SEBI Act to inquire into these violations. The Adjudicating Officer imposed penalties of Rs. 5 lakhs on the respondent No. 2 for failure to comply with Regulation 25(7)(a) and Rs. 2 lakhs on respondent No. 1 for not adhering to the terms of the Certificate of Registration. The Securities Appellate Tribunal, however, set aside these penalties, stating that the imposition of penalty for failure to perform a statutory obligation is a matter of discretion and must consider factors under section 15J of the SEBI Act.

Role of Mens Rea in Civil Penalties under SEBI Act:
The Supreme Court held that mens rea is not an essential ingredient for imposing penalties for breaches of civil obligations under the SEBI Act. The Court emphasized that the penalty is attracted as soon as the contravention of statutory obligations is established, irrespective of the intention behind the violation. The Tribunal's reliance on the absence of mens rea to set aside the penalties was deemed erroneous. The Court clarified that the SEBI Act and its regulations aim to ensure strict compliance and protect investor interests, and thus, penalties must follow once a violation is proven.

Conclusion:
The Supreme Court allowed the appeal, reinstating the penalties imposed by the Adjudicating Officer. The Court underscored that the imposition of penalties under the SEBI Act does not require proof of mens rea and that the Tribunal's decision had set a dangerous precedent that could undermine the regulatory framework's effectiveness. The judgment reinforces the principle that statutory compliance in the securities market is paramount, and penalties serve as a crucial deterrent against violations.