TMI Blog2001 (3) TMI 1073X X X X Extracts X X X X X X X X Extracts X X X X ..... fered in material aspects, as the latter did not contain certain key information with respect to associate transactions, investors rights services and grievances and more importantly penalties, pending litigations and criminal cases etc. against the fund and others concerned. Having come to know of the omission on the part of the appellant, SEBI decided to appoint an Adjudicating Officer for holding an inquiry and impose penalty if so warranted. Adjudicating Officer was appointed on 13-1-2000. 2. The Adjudicating Officer concluded the inquiry, holding the appellant guilty of violating the provisions of regulations 29(2) and 29(4) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 ('the Regulations') and vide order dated 10-11-2000 imposed a sum of ₹ 3 lakhs as penalty. The said order is under challenge in the present appeal. 3. Shri Anand Desai, the learned Counsel appealing for the appellant submitted that the Adjudicating Officer has gone beyond his authority and conducted the inquiry and adjudication, ignoring the mandate of the competent authority. He pointed out that it is clear from the order of adjudication dated 13-1-2000 made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned order. 5. Shri Desai submitted that mens rea is an essential ingredient of the offence to warrant penalty and in the absence of the same as has been admitted by the Adjudicating Officer, penalty should not have been imposed. In this context he cited Supreme Court decision in Akbar Badruddin Jiwani v. Collector of Customs 1990 (47) ELT 161, and also a recent Division Bench decision of the Bombay High Court in Mayuri Pulse Mills v. Union of India 2000 Dock 335 Shri Desai, referring to the observation made by the Adjudicating Officer in para 7.11 of the order submitted that the Adjudicating Officer is bound to go by the interpretation of law made by the Tribunal, till such time the Tribunal's view is not overruled by higher judicial authorities. He submitted that, the Adjudicating Officer having cited the Tribunal's decision in the case of VLS Finance has chosen to ignore the same and gone by his own version. In this context to strengthen the view that the Adjudicating Officer is not left with any discretionary powers to overlook the decision of the Tribunal and the Courts above him, Shri Desai cited the observations made by the Supreme Court in the following 3 case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to impose penalty. Thus imposition of penalty is bad and as such the impugned order need be quashed. 7. Shri Krishna Mohan, the learned representative of the respondent submitted that investor protection is best achieved by making proper disclosure of material facts to the investors at the right time. He submitted that the Regulations provide for adequate disclosure to the investors in the offer document and AOD. He cited various regulations and in particular regulation 29, relating to disclosures. The learned representative refuted the appellant's version that it had on its own reprinted the AOD making good the deficiencies and circulated the same bearing additional expenditure. He submitted that the appellant's follow up action does not in any absolve it from the failure to follow the requirements of the Regulation and the consequences attendant to such failure. He stated that in fact only on pointing out the omission by SEBI, the appellant woke up and made good the deficiencies. The appellant is an asset management company entrusted with the entire fund/investment management of the mutual fund and the instant failure is not a simple harmless technical lapse. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 15ED is only a matter of citing the proper section under which the penal provision has been provided in the Act and that it was not a question of resorting to any non-existent penal provision as alleged. In support, he cited the Supreme Court decision in Union of India v. Tulsi Ram Patel (1985) 3 SCC 398, that exercise of a power is referable to the actual source of such power. In the instant case according to him the exercise of power is actually referable to section 15E. He further submitted that there is every reason to believe that the Adjudicating Officer had properly appreciated the factors provided under section 15 J of the Act while deciding the quantum of penalty as could be seen from the order itself, while imposing the penalty. The decision of the Tribunal in the case of VLS Finance Ltd. v. P. Sri Sai Ram [2000] 28 SCL 205 (SAT - Mum.) relied on by the appellant, according to the learned Representative, has no application to the facts and circumstances of the case. Shri Krishna Mohan cited the decision of the Supreme Court in Disciplinary Authority cum Regional Manager v. Nikunju Bihari Patnaik (1996) 9 SCC 69 to bring home the point that blameworthy conduct of a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved offer document or AOD, at its Will. Sub-regulation (4) of regulation 29 mandates that every application form should without fail accompany a memorandum containing such information as may be specified by the SEBI. The SEBI has already notified exhaustive standard offer document and abridged memorandum containing key information. The AOD forming part of the application form is meant to serve as an instant referencer to benefit those who are desirous of making investment in the units offered by mutual funds. Thus it is clear that AOD is a very important document designed to provide material disclosure to help the subscriber to take appropriate decision on investing his funds. The very object of requiring that every application form should accompany the AOD itself is indicative of the importance of the document. 13. The appellant has filed a copy each of the defective AOD and the rectified one at Annexure 'C' and 'G' of the appeal, respectively. On a perusal of these two documents it is clear that some of the particulars left out are of crucial importance. Few extracts from item 24 of the rectified document which was found missing in the version circulated by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriwal before the Magistrate Court, Bhavnagar and First class Judicial Magistrate, Patna against Canbank Mutual Fund and four of its former Trustees respectively in Cantriple + Scheme are pending. A petition filed by one Seth Sagarmal Bagrodia Charitable Trust against Canbank Mutual Fund and others in Cantriple + Scheme is also pending before MRTP, New Delhi. These cases are being defended as legally advised. Cases are also pending before various Consumer Foras claiming three times the investment in Cantriple + Scheme. The cases are at various stages of hearing. The Fund has taken necessary steps as legally advised. 8. Save and except what is stated at item Nos. 2, 3 and 7 above, no criminal cases are pending against the Sponsor, any company associated with the Sponsor in any capacity, AMC, Board of Trustees, any of the Directors or key personnel. The Sponsor, Canara Bank, has about 2500 branches. To the best of our knowledge, no criminal cases which may affect the business of Mutual Fund arc pending against the Sponsor or any company associated with the Sponsor in any capacity or any of the Directors or key personnel. 14. In item 23 of the revised text statistical data f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I intervened. The possibility of selective omission of material facts from the AOD would be advantageous to the fund in mobilising money, seem to have escaped notice of the Adjudicating Officer. Further, the claim of the appellant that it had promptly withdrawn the defective document and circulated the rectified one, immediately on pointing out the deficiencies by SEBI, incurring an expenditure of about 12 lakh rupees is not a factor which would go to prove the appellant's bona fides or innocence in the matter as stated by the Adjudicating Officer. It was an alert SEBI who discovered the fatal omissions in the AOD and called for the explanation of the appellant. It is also to be remembered that the appellant was in possession of an approved AOD and SEBI vide its letter dated 1-4-1999 had, amongst others, directed the appellant to ensure that the Memorandum, ie., Abridged offer document contains all information as prescribed by SEBI . It was also made clear in the said letter that SEBI reserves the right to suspend the circulation of offer document, if the observations made in the Annexures are not incorporated in it, or the offer document contains any ambiguous misleading sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation that Trustees and the asset management company shall render at all times high standards of service, exercise due diligence, ensure proper care and exercise professional judgment , appears to have been given a goodbye, by the appellant in this case. 17. The appellant's submission that the Adjudicating Officer has usurped powers ignoring the order of the competent authority is not of any force. In this context it is considered necessary to have a close look at the relevant portion of the order dated 13-1-2000 whereby the adjudication was ordered. As per the order, the Adjudicating Officer was appointed to inquire into the following alleged violation by Canbank Investment Management Services Ltd., the asset management company of Canbank Mutual Fund : Canpep '93 which was initially launched as a close-ended tax-saving cum growth (ELSS) scheme, was converted into open-ended with effect from 15-5-1999. SEBI had vide letter dated 1-4-1999 advised the Asset Management Company inter alia to ensure that the Memorandum containing key information i.e., the abridged offer document contains all information as prescribed by the SEBI. The standard format and the minimum dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Bombay High Court while considering the provisions of section 138 of the Negotiable Instruments Act had observed that normally in criminal law existence of guilty intent is an essential ingredient of a crime and in principal is expressed the maxim actus non facit rum nisi mens sit rea. This is a general principle. However, the Legislature can always create an offence of absolute liability or strict liability. Where mens rea is not at all necessary, such a measure is resorted to in public interest and such laws of strict liability are justified and cannot be said to be unreasonable . Such an exclusion can be construed from the legislative intent clearly discernible from the concerned statutory provision. The observation made by Dean Rescue Pound in the spirit of common law (cited in the impugned order) is worth remembering in this context. According to him certain statutes are not meant to punish the vicious Will but to put pressure on the thoughtless and inefficient do their whole duly. On a perusal of the penal provisions under various sections of Chapter VI-A including the provisions of section 15-1, irresistible conclusion is that mens rea is not necessary to be establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 lakhs. 22. The Adjudicating Officer in para 7.4 of the order after explaining the provisions of regulation 29 has stated that: the provision is enacted to enable SEBI to ensure that all the information, as it deems fit in the interest of the investors would get disseminated to the investors, and the investors are able to take a well informed decision. In line with that regulatory framework, SEBI has to ensure that all the requisite information, along with the offer document, required for making a well informed decision by investors should be made available to them. For that purpose, it is required to take alert action and to invoke penal provisions of the Act (where required) where there is a failure by AMC to comply with those provisions. Having said the need to penalise the AMC for the failure, the Adjudicating Officer has given a clear finding that: As per the record, it is seen that the AMC of Canbank Mutual Fund had not made certain disclosures like information with respect to associate transactions, investors rights, services and grievances and more importantly, penalties, pending litigations and criminal cases etc., in the document, even though the same w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Mutual Fund did not act in accordance with the restrictions imposed by SEBI for the purpose of circulation of abridged offer document. Regulation 29(2) of SEBI (Mutual Funds) Regulations, 1996 provides for restrictions viz. that the AMC should carry out the modifications if any prescribed by SEBI to the offer document. Regulation 29(4) also provides for restrictions on the AMC to the effect that no AMC should issue application form unless the form is accompanied by the Memorandum containing such information as may be specified by the Board. That is the restriction impose don the AMC by SEBI Regulations. In this case, I find that the AMC failed to comply with that Regulation, which provided for restriction on the activities of the AMC. Thus I find that the AMC violated restrictory provisions contained in Regulation 29 and consequently that of Regulation 19 which read with Regulation 10 of SEBI (Mutual Fund) Regulations, 1996 provides to the effect that the AMC should comply with the Regulations. [Emphasis Supplied] 24. The Adjudicating Officer has thus come to the categorical conclusion that the appellant had failed to make certain material disclosures in the AOD, insp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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