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TMI Blog2006 (5) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... notice. Since the service is complete and the appeals are ready for hearing, the above appeals were listed for final hearing. 2. 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 15D(b) of the Securities and Exchange Board of India Act, 1992. The instances of excess transactions conducted by the respondents are as follows:- Sr. No. Quarter ended Name of the Associate Brokers Percentage of Business 1. June 1998 Springfield Securities 10.65% 2. September 1998 -do- 6.6% 3. March 1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associate brokers was Rs. 4.55 lakhs. 4. 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 15J. Aggrieved by the order dated 21-8-2003, the Chairman, SEBI filed the above statutory appeal under section 15Z 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 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 15D(b), 15E, 15-I, 15J, and 12B of the SEBI Act, 1992 which are extracted hereunder : "25. Asset management company and its obligations.-1. to 6.****** 7(a) An asset man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections." 15J. Factors to be taken into account by the Adjudicating Officer.-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; (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 5. 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 15A to section 15HB 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. 5.1 Chapter VI-A of the SEBI Act deals with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 15D(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 6. 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 whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g officer in terms of section 15-I to inquire into and adjudge the alleged contravention of section 15E of the Act of 1992. The Adjudicating Officer, after inquiry, confirmed the charges and imposed a sum of Rs. 5 lakhs as penalty on respondent No. 2 under section 15E of the said Act for failure to comply with Regulation 25(7)(a) and Rs. 2 lakhs on the other respondent for failure to comply with the terms and conditions attached to the Certificate of Registration. 7. 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 per cent 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 per cent 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantum 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, administ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 10. 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? 11. 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. (a) Director of Enforcement v. MCTM Corporation (P.) Ltd. [1996] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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......" (p. 480) (b) J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers [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 concerni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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..." (p. 55) (e) Swedish Match AB v. SEBI [2004] 54 SCL 549 (SC) "...The provisions of section 15H 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 foregone 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." (p. 578) (f) SEBI v. Cabot International Capital Corporation [2005] 123 Comp. Cas. 84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lates to imposition of civil liabilities under the SEBI Act and Regulations and is not a criminal/quasi-criminal proceeding. 13. 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 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. In our view, the impugned judgment of the Securities Appellate Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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