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TMI Blog2004 (3) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... ering 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is a company incorporated under the Companies Act, 1956. CIL was listed in Bombay Stock Exchange on 16th December, 1996, CICC, the foreign collaboration of the CIL, held 51% of paid up capital of the CIL. After the Board Meeting of the CIL dated 24th December, 1996, the Board of Directors approved the recommendations for the Preferential Issue to the members and shareholders of the CIL and accordingly, Extraordinary General Meeting was convened and conducted on January 23, 1997, which was duly notified to the Bombay Stock Exchange on January 2, 1997. 5. By Certificate dated 14th January, 1997, S.R. Batliboi & Associates, Chartered Accountants, being the statutory Auditors of the CIL, addressed a certificate to the SEBI and the Reserve Bank of India (for short 'RBI') and it was confirmed that the preferential issue could be made by the CIL at a price, less than Rs. 421 per share. This was done in accordance with the provisions of the SEBI Guidelines for Preferential Allotment dated 4th August, 1994 and the RBI Guidelines determining issue price of preferential shares, dated 3rd June, 1994, regarding approval for raising foreign equity in existing Companies. From 4th November, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of the issued capital of the CIL. On 2nd June, 1997, the respondents ought to have filed a Report with the SEBI under Regulation 3(4), 3(5) of SEBI Takeover Regulations, 1997, within 21 days of the said allotment. On 28th October, 1998, the SEBI Takeover Regulations, 1997 were amended. 7. DSP Merill Lynch Limited, on 10th November, 1998, on behalf of the CICC, made an application to the SEBI in respect of acquisition of further 14% of the shares and sought an exemption under regulation 3 of the SEBI Takeover Regulations, 1997. 8. Sometime in November, 1998, appellants raised query and pointed out that the SEBI Takeover Regulations, 1997, were applicable and the respondents were under an obligation to file a Report under regulation 3(4) of the SEBI Takeover Regulations, 1997. The respondents (CICC), by its letter dated 3rd December, 1998, replied that basic formalities had been complied with, before the SEBI Takeover Regulations, 1997 came into force. Respondents (CICC), also expressed that they understood that it was not necessary to submit a Report and, therefore, its non-compliances with those requirements were unintentional. The respondents, however, submitted the requisite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver Regulations of 1994/1997. It was only a technical or venial flaw from a bona fide belief that the respondents were not liable to act in the manner prescribed under the provisions of SEBI Takeover Regulations, 1997. That alleged breach was without 'mens rea' and no advantage of any kind accrued to the respondents or any loss to the investors. There was no occurrence of default or repetition of the alleged violation by the respondents. They had complied with other laws and regulations. Therefore, no case of penalty was made out and the learned Adjudicating Officer failed to exercise discretion judiciously. The appellants, resisted the above grounds by its Affidavit dated 14th November, 2000. 11. The SAT, after hearing both the parties, by its order dated 25th January, 2001, allowed the appeal of the respondents and held that the order imposing penalty on the respondents was unsustainable and same was set aside. 12. The appellants-SEBI, therefore, preferred the present Appeal No. 7 of 2001, under section 15Z of the SEBI Act, on 23rd March, 2001. The present Appeal was admitted and, therefore, heard finally. As important common issues were involved, other Senior Counsel and Advoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore in the regulations, fails to file return or furnish the same within the time specified therefore in the regulation, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues; (c)To maintain books of account or records, fails to maintain the same, he shall be liable to a penalty not exceeding ten thousand rupees for every day during which the failure continues. 15J. Factors to be taken into account by the Adjudicating Officer.--While adjudging the quantum of penalty under section 15-I, the Adjudicating Officer shall have 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; (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.' 13. It is very clear that above functions are provided to protect the interest of the investors in securities and to promote the development of, and to regulate the securities market, by appropriate and suitable rules, regulations, directions and orders. Those statutory functions and duties are in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole statute relating to the subject matter. 'A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word'; 'No part of a statute and no word of a statute can be construed in isolation'; ****** 29. It is clear from the provisions referred above, that it is an obligation and duty of the acquirer to provide and furnish detailed information with documents through the format of report as prescribed. This format further makes it clear that general information about the acquisition of shares must be submitted to the Board by acquirer with details including details of 'promoter' and 'target company' etc. The format is always for the convenience of acquirer such other person, so that maximum detail information can be submitted and or called by the appropriate authorities. It is clear that the purpose of collection of this information is to take appropriate recommendations or decisions on such acquisition. Therefore, scheme of the regulation in such cases would be defeated, if such acquirer after acquisition allow to take it's own time to fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not act as a Court, but acts for the purpose of determining the liability for the breach of civil obligations imposed by the SEBI Act and the Regulations. (F) The Adjudicating Officer, after taking into consideration all facts and circumstances and the provisions of section 15J, had imposed a nominal penalty of Rs. 1,50,000 only. Therefore, discretion exercised by the Adjudicating Officer ought not to have been interfered with. The Adjudicating Officer had not imposed any penalty under section 15H(ii) of the SEBI Act as no offence under that section was made out. (G) The penalties prescribed under the SEBI Act are the liabilities for breach of civil obligation in complying with civil obligations imposed by the SEBI Act and Regulations and, therefore, penalty imposed cannot be equated to a fine imposed in criminal proceedings. The SEBI Act and Regulations have been set up to promote, develop and regulate the securities market and to protect the interest of investors. Breach of any provisions in question does not require mens rea. (H) When penalty is to be imposed under the SEBI Act for breach of a civil obligation by adjudicatory proceedings, which is civil in nature, that does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were absolute offences and not conditioned by guilty intent or mens rea. D. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be judicially exercised and on a consideration of all the relevant circumstances/the entirety of circumstances." 17. Senior Counsel Mr. Janak Dwarkadas for the respondents in other appeal supported the arguments of Senior Counsel Mr. Aspi Chinoy and in addition to that, he referred to the Judgment of this Court in Appeal No. 2 of 2001, dated 5th December, 2003 (supra), Nathulal v. State of MP AIR 1966 SC 43 (3 Judges) and Gannon (Hongkong) v. Attorney General of Hongkong 1984 (2) All. ER 503 (PC). He further submitted that non-compliance of the order of the Adjudicating Officer results into offence under section 24 of the SEBI Act. Therefore, existence of mens rea is necessary. Consideration 18. We have scanned the authorities cited by the counsel for the parties and observed as under : Authorities of Respondents : (i) State of Maharashtra v. Mayer Hans George AIR 1965 SC 722. This was a case of smuggling; and on the issue that 'mens rea', was an essential ingredient for offence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to exercise judiciously and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." This was a case under the Sales Tax Act, 1947 and penalty provision was in addition to the failure to register itself as a dealer. The observations of the Supreme Court that penalty for failure to carry out a statutory obligation would not be, ordinarily, imposed unless the delinquent party acted deliberately or was guilty of contumacious conduct or dishonest or in conscious disregard of its obligation is based on the proceeding being quasi-criminal proceeding. Obviously the said conservations shall not be applicable as it is, if the imposition of the penalty is for the breach of civil obligation. Moreover, the Supreme Court has held that imposition of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 'offence' is not defined in the Constitution. Article 367 of the Constitution says that unless the context otherwise provides for words which are not defined in the Constitution, the meaning assigned in the General Clauses Act, 1897 may be given. Section 3(38) of the General Clauses Act defines 'offence' as any act or omission made punishable by any law for the time being in force. The marginal note of our article 20 is 'protection in respect of conviction for offences'. The presence of the words 'conviction' and 'offences', in the marginal note 'convicted of an offence', 'the act charged as an offence' and 'commission of offence' in clause (1) of article 20, 'prosecuted and punished' in clause (2) of article 20 and 'accused of an offence' and 'compelled to be a witness against himself' in clause (3) of article 20 clearly suggests that article 20 relates to the constitutional protection given to persons who are charged with a crime before a criminal court [see H.M. Seervai : Constitutional Law of India (3rd edn.), Vol. 1, p. 759]. The word 'penalty' is a word of wide significance. Sometimes, it means recovery of an amount as a penal measure even in a civil proceeding. An exacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Consolidated Coffee Ltd. v. Agrl. ITO [2001] 1 SCC 278 : This judgment elaborates the meaning of the words 'interest' and 'penalty' in reference to the Agricultural Income-tax. 19. Mr. Dwarkadas relied on Nathulal's case (supra). This was a case of offence under Essential Commodities Act, 1955 r/w section 40 of the Indian Penal Code. This was again a case of criminal offence. The principle noted above and in Mayer Hans George's case (supra) has been followed. The paragraph referred vehemently in support of his submissions is reproduced as under : "Having regard to the object of the Act, namely, to control in general public interest, among others, trade in certain commodities, it cannot be said that the object of the Act would be defeated if mens rea is read as an ingredient of the offence. The provisions of the Act do not lead to any such exclusion. Indeed, it could not have been the intention of the Legislature to impose heavy penalties like imprisonment for a period upto 3 years and to impose heavy fines on an innocent person who carries on business in an honest belief that he is doing the business in terms of the law. Having regard to the scope of the Act it would be legitim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIR 1992 SC 1762 : This judgment is again in reference to section 271(1)(a) of the Income-tax Act and concluded as under in paragraph 11 : "11. In view of this, it is no longer open to argument whether any mens rea is required to be established under section 271(1)(a). As a matter of fact, in the subsequent decision of this Court in CIT v. Kalyan Das Rastogi [1992] 193 ITR 713, squarely applied this ratio. In the result, the reference is answered in favour of the revenue. The appeals will stand allowed setting aside the judgments of the High Court and the Tribunal. The order of assessment as passed by the Assessing Authority and as confirmed by the Assistant Appellate Commissioner in relation to penalty is hereby confirmed. There shall be no order as to costs." (p. 1765) 22. In Director of Enforcement v. MCTM Corpn. (P.) Ltd. AIR 1996 SC 1100, the Apex Court was seized of the penalty proceedings under section 23(1)(a) FERA, 1947. The Apex Court, after taking into consideration Maqbool Hussain v. State of Bombay AIR 1953 SC 325 observed as under : "7. . . . 'mens rea' is a state of mind. Under the criminal law, mens rea is considered as the 'guilty intention' and unless, it is fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 this '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, where the act of the defaulter also amounts to an offence the penal law and the bar under article 20(2) of the Constitution of India in such a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y guilty intention. Our answer to the first question, formulated by us above is, therefore, in the negative." [Emphasis supplied] (pp. 1103-1106) 23. R.S. Joshi v. Ajit Mills Ltd. AIR 1977 SC 2279 : A Constitution Bench of 7 Judges, while dealing with the constitutionality of certain provisions of the Bombay Sales Tax Act, observed thus : "19. . . . 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." (p. 2287) 24. Union of India v. Mustafa & Najibai Trading Co. AIR 1998 SC 2526 : This was a case under sections 30 & 111 of the Customs Act, 1962 whereby, imposition of the penalty by the fact finding authority was upheld as the discretion was us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adjudicatory Officer for holding an inquiry in the prescribed manner, after giving reasonable opportunity of being heard for the purpose of imposing any penalty. This section read with concerned Rules provide power to the Adjudicating Officer to summon and enforce the attendance of any person to give evidence or to produce relevant or useful document for an inquiry and, provides a sequence of the procedure to conduct the inquiry before imposing any penalty. Furthermore, it is also provided in section 15J to consider various factors while adjudging the question of penalty under section 15-I, after taking into account, the amount of disproportionate gain or unfair advantage, whenever quantifiable, loss caused to an investor or group of investors, the repetitive nature of default. These twin sections basically deal with the procedure of monetary penalty under the Act. All these sections 15A, 15B, 15C, 15D, 15E, 15F, 15G, 15H, 15HA and 15HB, provide monetary penalties for respective breaches or non-compliances of provisions of the SEBI Act and the Regulations. Default or failure, as contemplated under the Act includes: (15A) failure to furnish information, return, (15B) failure to ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEBI Act or the Regulations. 30. The SEBI Act and the Regulations, are intended to regulate the Security Market and the 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. 31. Now, the question, of the penalty, by the Adjudicating Authority, in the facts and circumstances of the case, was warranted or not. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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