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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 ..... 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. - CIVIL APPEAL NOS. 9523-9524 OF 2003 - - - Dated:- 23-5-2006 - DR. A.R. LAKSHMANAN AND LOKESHWAR SINGH PANTA, JJ. L.N. Rao, Ms. Indu Malhotra, Ms. Liz Mathew, Arjun Suresh for the Appellant. JUDGMENT Dr. AR. Lakshmanan, J. - The Securities and Exchange Board of India ( the SEBI ) is the appellant in the present appeal under section 15Z of the Securities and Exchange Board of India Act, 1992. This appealwas filed against the final judgment and order dated 21-8-2003 passed by the Securities Appellate Tribunal, Mumbai ( the Tribunal ) in appeal Nos. 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 ( 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant-Board issued notice dated 1-4-2002 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 lakhs under section 15E on the respondent No. 2 for failure to comply with Regulation 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 lakhs 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 24-6-2002 passed by the Adjudicating Officer, the respondents filed appeals before the Securities Appellate Tribunal, Mumbai on 21-8-2003, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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;" "15E. Penalty for failure to observe rules and regulations by an asset management company. 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. Power to adjudicate. 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 prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 Failure to furnish information return 15B Failure to enter into agreement with clients 15C Failure to redress investors grievances 15D Default in case of mutual funds 15E Failure to observe rules and regulations by an asset management company 15F Default in case of stock brokers 15G For insider trading 15H Non-disclosure of acquisition of shares and takeovers 15HA Fraudulent and unfair trade practices 15HB Penalty, if not separately provided 5.3 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 24-6-2002. The Tribunal has given a clear finding that the respondent No. 1 Fund has admittedly exceeded the prescribed limit of more than 5 per cent 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 Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 per cent and 52.2 per cent 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 the respondents. 9. 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 hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 of 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... (p. 478) "(12) 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. (13) We are in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssical 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. 110) ( d ) Gujarat Travancore Agency v. CIT [1989] 3 SCC 52 : " It 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 276C 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 276C, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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. 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. (E)There can be two distinct liabilities, civil and criminal under the same Act. ****** 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. ..... 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