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CASE NO.:

Appeal (civil) 9523-9524 of 2003

PETITIONER:

The Chairman, SEBI

RESPONDENT:

Shriram Mutual Fund & Anr.

DATE OF JUDGMENT: 23/05/2006

BENCH:

Dr. AR. Lakshmanan & Lokeshwar Singh Panta

JUDGMENT:

J U D G M E N T

Dr. AR. Lakshmanan, J.

The Securities and Exchange Board of India (hereinafter

referred to as 'the SEBI') is the appellant in the present appeal

under Section 15-Z of the Securities and Exchange Board of

India Act, 1992. This appeal was filed against the final judgment

and order dated 21.08.2003 passed by the Securities Appellate

Tribunal, Mumbai (hereinafter referred to as 'the Tribunal') in

appeal No. 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 (hereinafter referred to as '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 with the notice. Since the service is

complete and the appeals are ready for hearing, the above

appeals were listed for final hearing.

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 15 (D)(b) of

the Securities and Exchange Board of India Act, 1992.

The instances of excess transactions conducted by the

respondents are as follows:-

Sr. Quarter ended Name of the Associate Percentage of

No. Brokers Business

1. June 1998 Springfield Securities 10.65%

2. September 1998 -do- 6.6%

3. March 1999 -do- 16.57%

4. September 1999 -do- 9.57%

5. December 1999 -do- 91.68%

6. September 1998 SIS Shares and Stock 19.59%

Brokers

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7. March 1999 -do- 33.81%

8. September 1999 -do- 38.01%

9. September 1998 Shriram Indus Stock 9.86%

10. December 1998 -do- 6.39%

11. March 1999 -do- 28.95%

12. September 1999 -do- 52.42%

The Chairman, SEBI in exercise of the powers conferred on

it under Section 15(I) of the said Act and Rule 3 of the SEBI

(Procedure for Holding Enquiry and Imposing Penalty by

Adjudicating Officer) appointed an Adjudicating Officer to enquire

into the violations of exceeding by the respondents of the

permissible limit of 5% of aggregate purchases and sales of

securities made by the Mutual Fund in all its Schemes, as

prohibited under Regulations 25(7)(a) of the said Regulations.

The Appellant-Board issued notice dated 01.04.2002 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 lacs under Section 15E on respondent No.2 for

failure to comply with Regulations 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

lacs 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 24.06.2002 passed by the

Adjudicating Officer, the respondents filed appeals before the

Securities Appellate Tribunal, Mumbai on 21.08.2003, 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 not have any large volume or

trade in the market. It was further contended that these

securities were either thinly traded, or did not have any volumes.

It was submitted that the percentage of excess business

carried out with associate brokers were as high as 91.68% and

52.42%, while the total volume of business done with the

associate brokers was Rs.4.55 lacs.

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 15-J. Aggrieved by the order dated

21.08.2003, the Chairman, SEBI filed the above statutory appeal

under Section 15-Z 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

Appellate 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 15-D(b), 15-E, 15-I, 15-J,

and 12-B of the SEBI Act, 1992 which are extracted hereunder:

"25. Asset management company and its obligations:

1. \005

2. \005

3. \005

4. \005

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5. \005

6. \005

7. (a) An Asset management company shall not

through any broker associated with the

sponsor, purchase or sell securities, which is

average of 5% or more of the aggregate

purchases and sale of securities made by the

mutual fund in all its schemes;

Provided that for the purpose of this sub-

regulation, aggregate purchase and sale of

security shall exclude sale and distribution of

units issued by the mutual fund:

Provided further that the aforesaid limit of 5%

shall apply for a block of any three months".

"15-D Penalty for certain defaults in case of mutual

funds:

(a) If any person, who is\005.

(b) Registered with the Board as a collective

investment scheme, including mutual funds,

for sponsoring or carrying on any investment

scheme, fails to comply with the terms and

conditions of certificate of registration, he 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-E Penalty for failure to observe rules and

regulations by an asset management company \026 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) 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 produce any document which in

the opinion of the adjudicating officer, may be useful for or

relevant to the subject-matter of the inquiry and if, on

such inquiry, he is satisfied that the person has failed to

comply with the provisions of any of the sections specified

in sub-section (1), he may impose such penalty as he

thinks fit in accordance with the provisions of any of those

sections."

"15-J. 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;

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(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

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 15-A to Section 15 HB

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.

Chapter VI-A of the SEBI Act deals with the penalties and

the adjudication. Section 15-l of the SEBI ACT envisages

appointment of Adjudicating Officer for holding an inquiry in the

prescribed manner, after giving reasonable opportunity of being

heard for the purpose of imposing any penalty.

Section 15-J provides various factors which are to be taken

into consideration while adjudging the question of penalty under

Section 15-l namely, the amount of disproportionate gain or

unfair advantage whenever quantifiable, loss caused to an

investor or group of investors and the repetitive nature of default.

The legislature in its wisdom had not included mens rea or

deliberate or wilful nature of default as a factor to be considered

by the Adjudicating Officer in determining the quantum of

liability to be imposed on the defaulter.

Sections 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 \026 Failure to furnish information, return

15B \026 Failure to enter into agreement with clients

15C \026 Failure to redress investors' grievances

15D \026 Default in case of mutual funds

15E \026 Failure to observe rules and regulations by an

asset management company

15F \026 Default in case of stock brokers

15G \026 For insider trading

15H \026 Non-disclosure of acquisition of shares and takeovers

15HA \026 Fradulent and unfair trade practices

15HB \026 Penalty, if not separately provided

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 that Section

24 of the SEBI Act deals with the criminal offences under the Act

and its punishment. Therefore, the proceedings under Chapter

VI A are neither criminal nor quasi-criminal. The penalty leviable

under this Chapter or under these Sections, is penalty in cases of

default or failure of statutory obligation or in other words breach

of civil obligation. In the provisions and scheme of penalty under

Chapter VI A of the SEBI Act, there is no element of any criminal

offence or punishment as contemplated under criminal

proceedings. Therefore, there is no question of proof of intention

or any mens rea by the appellants and it is not essential element

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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 15(D)(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

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 whether the contravention was

made by the defaulter with any guilty intention or not.

Mr. Rao took us through the orders passed by the

Adjudicating Authority. It is seen that the respondents

themselves have admitted the violation of the Regulations during

a continuous period of 2= years in 12 instances, covering 6

quarters. Regulation 25 (7)(a) of the Regulation provides that an

Asset Management Company shall not through any broker

associated with sponsor, purchase or sell securities, which is

average of 5% or more of the aggregate purchases and sale of

securities made by the Mutual Fund in all its schemes. The

second 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 24.06.2002. The

Tribunal has given a clear finding that the respondent No.1 Fund

has admittedly exceeded the prescribed limit of more than 5%

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 Management Company. During the period

from June, 1998 to September, 1999, the respondent had

conducted business through associated brokers, in excess of the

limits prescribed under Regulation 25 (7)(a) of the Regulations on

12 occasions covering 6 quarters. The respondent had failed to

comply with the terms and conditions attached to the Certificate

of Registration granted to it, inasmuch as it did not exercise

diligence to ensure that the transactions by its own Asset

Management Company were confined to the permissible limits.

In this case, the SEBI appointed an Adjudicating Officer in

terms of Section 15-I to inquire into and adjudge the alleged

contravention of Section 15-E of the Act of 1992. The

Adjudicating Officer, after inquiry, confirmed the charges and

imposed a sum of Rs. 5 lacs as penalty on respondent No.2

under Section 15-E of the said Act for failure to comply with

Regulation 25 (7)(a) and Rs. 2 lacs on the other respondent for

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failure to comply with the terms and conditions attached to the

Certificate of Registration.

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% 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% 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 unless the language of the

statute indicates 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. Under Sections 15-D(b) and 15-E of

the Act, there is nothing which requires that mens rea must be

proved before penalty can be imposed under these provisions.

Hence, it was contended that once the contravention is

established, the penalty has to follow.

The Tribunal set aside the order passed by the Adjudicating

Officer on the ground that the penalty to be imposed for failure to

perform a statutory obligation is 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 irrespective of the fact

whether the contravention was made by the defaulter with any

guilty intention or not. This apart that unless the language of

the statute indicates 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. Under a close scrutiny of Section

15 D(b) and 15-E of the Act, there is nothing which requires that

mens rea must be proved before penalty can be imposed under

these provisions. Hence, we are of the view that once the

contravention is established, then the penalty has to follow and

only the quantum 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

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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, administrative and

operational exigencies were duly considered and appreciated by

the Adjudicating Officer while passing the order and that is why

the Adjudicating Officer did not impose the maximum

permissible penalty. The Tribunal failed to appreciate that the

objective behind imposing certain limit on the business that can

be conducted by mutual fund through the associate broker is to

eliminate any undue advantage to the class of brokers by virtue

of their close association with the Asset Management Company,

sponsors etc. In other words, the object of imposing such limits

is to ensure that there 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% and 52.2% 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

respondents.

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 holders.

In the present case, it has been established by the

Adjudicating Officer as well as admitted by the respondents that

there has been a conscious disregard of the obligation inasmuch

as the respondents were aware that they were acting in violation

of the provisions of Regulations. The Adjudicating Officer had,

after taking into account all the facts and circumstances of the

case, imposed only a token of Rs. 5 lacs against the respondents

for its failure on 12 occasions though the charging section

permits imposition of a maximum penalty of Rs. 5 lacs for each

such violation.

The Appellant Board has 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.

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?

This Court in a catena of decisions have held that mens rea

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is not an essential element for imposing penalty for breach of

civil obligations.

(a) Director of Enforcement vs. MCTM Corporation Pvt.

Ltd. & Ors. , (1996) 2 SCC 471

"It is thus the breach of a "civil obligation" which

attracts "penalty" under Section 23(1)(a) FERA,

1947 and a finding that the delinquent has

contravened the provisions of Section 10 FERA

1947 that would immediately attract the levy of

"penalty" under Section 23, irrespective of the fact

whether the contravention was made by the

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

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\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005."

"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."

"We are in agreement with the aforesaid view and in

our opinion what applies to "tax delinquency"

equally holds good for the 'blameworthy' conduct for

contravention of the provisions of FERA, 1947. We,

therefore, hold that mens area (as is understood in

criminal law) is not an essential ingredient for

holding a delinquent liable to pay penalty under

Section 23(1)(a) of FERA, 1947 for contravention of

the provisions of Section 10 of FERA, 1947 and that

penalty is attracted under Section 23(1)(a) as soon

as contravention of the statutory obligation

contemplated by Section 10(1)(a) is established.

The High Court apparently fell in error in treating

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

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breach, with or without any guilty intention."

(b) J.K. Industries Ltd. & Ors. Vs. Chief Inspector

of Factories and Boilers & Ors., (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 concerning

the industry, food adulteration, prevention of

pollution etc. in India and abroad. "Absolute

offences" are not criminal offences in any real

sense but acts which are prohibited in the

interest of welfare of the public and the

prohibition is backed by sanction of

penalty\005\005\005"

(c) R.S. Joshi Sales Tax Officer, Gujarat & Ors.

Vs. Ajit Mills Ltd. & anr.etc. , (1977) 4 SCC 98

"\005\005\005\005\005Even 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."

(d) M/s Gujarat Travancore Agency, Cochin vs.

C.I.T. , (1989) 3 SCC 52.

"\005\005\005\005\005It 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 276-C 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 276-C, which speaks of

wilful failure on the part of the defaulter and

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taking into consideration the nature of the

penalty, which is punitive, no sentence can be

imposed under that provision unless the element

of mens rea is established. In most cases of

criminal liability, the intention of the legislature

is that the penalty should serve as a deterrent.

The creation of an offence by statute proceeds on

the assumption that society suffers injury by the

act or omission of the defaulter and that a

deterrent must be imposed to discourage the

repetition of the offence. In the case of a

proceeding under Section 271(1)(a), however, it

seems that the intention of the legislature is to

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."

(e) Swedish Match AB and Anr. Vs. SEBI & anr. ,

(2004) 11 SCC 641.

"\005\005\005\005The provisions of Section 15-H 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 forgone 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."

(f) SEBI vs. Cabot International Capital

Corporation, (2005) 123 Comp. Cases 841

(Bom).

"Thus, the following extracted principles are

summarised:

(A) Mens rea is an essential or sine qua non for

criminal offence.

(B) Strait jacket formula of mens rea cannot be

blindly followed in each and every case.

Scheme of particular statute may be diluted

in a given case.

(C) If, from the scheme, object and words used in

the statute, it appears that the proceedings

for imposition of the penalty are adjudicatory

in nature, in contra-distinction to criminal or

quasi criminal 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.

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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\005..

(E) There can be two distinct liabilities, civil and

criminal under the same Act.

(Para 52) 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.

(para 54) 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."

The Trbunal has erroneously relied on the judgment in

the case of Hindustan Steel Ltd. Vs. State of Orissa, AIR

1970 SC 253 which pertained to criminal/quasi-criminal

proceeding. That Section 25 of the Orissa Sales Tax Act which

was in question in the said case imposed a punishment of

imprisonment up to six months and fine for the offences under

the Act. The said case has no application in the present case

which relates to imposition of civil liabilities under the SEBI

Act and Regulations and is not a criminal/quasi-criminal

proceeding.

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 15-E 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

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appellate Tribunal has set a serious wrong precedent and the

powers of the SEBI to impose penalty under Chapter VIA 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

impugned order sets the stage for various market players to

violate statutory regulations with impunity and subsequently

plead ignorance of law or lack of mens rea to escape the

imposition of penalty. 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.

In the result, the Civil Appeal Nos. 9523 and 9524 of 2003

are allowed and the order passed by the Securities Appellate

Tribunal, Mumbai dated 21.08.2003 in Appeal Nos. 50 and 51 of

2002 are set aside. No costs.