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TMI Blog2002 (10) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... udicating Officer etc. in each case are substantially same. The Adjudicating Officer (Shri Ananta Barua) who adjudicated the show cause notices in all the four cases was common. In all the cases show cause notices were issued on 7.11.2001. The quantum of monetary penalty imposed is slightly different in each case. The orders under challenge in the present four appeals are: Appeal No. Appellant Date of the Penalaty Company's shares order imposed Acquired (Rs.) 27/2002 Kensington 22.4.2002 2 lacs Shonkh Technologies Investment Ltd. International Ltd., 28/2002 Kensington 16.4.2002 2 lacs Mascon Global Ltd., Investment Ltd., 30/2002 Brentfield 27.5.2002 1 lac Aftek Infosys Ltd., Holdings Ltd., 31/2002 Kensington 25.5.2002 1 lac DSQ Biotech Ltd., Investment Ltd. 2. Since the factual position in each appeal being different, it is felt necessary to briefly state the same separately. Appeal No. 27/2002 3. The Appellant acquired 15,00,000 shares of Shonkh Technologies International Ltd., (Shonkh) on 29th December, 2000 which accounted for 8.57% of Shonkh's share capital. The Appellant acquired 7,50,000 shares more on 3rd January, 2001 and as a result its holding in Shonkh incre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4th January, 2001, which accounted for 11.10% of the company's share capital. According to the Appellant, though it paid the purchase consideration to the broker, it did not receive these shares, either in physical form or demat form, from the said broker. General 7. The Appellants are Overseas Corporate Bodies (OCBs) registered in Mauritius. They have no offices or permanent establishment in India. They are engaged in portfolio investments in terms of the permission granted by the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act, 1973 or under the Foreign Exchange Management Act, 1999. They buy and sell shares on the secondary market through those market intermediaries approved by the Securities and Exchange Board of India (SEBI) and reports such transaction to the authorised dealer through whom the account under the Portfolio Investment Scheme (PIS) is operated. 8. Respondent No. 1 is an authority established under the Securities and Exchange Board of India Act, 1992 (the Act) entrusted with the duty of protecting the interests of investors in securities and to promote the development of and to regulate the securities market, by such measures as it th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and not in acquiring management/control of the investee companies, that this is demonstrated from the facts relating to the acquisitions covered in the impugned order itself, that the shares were bought and sold quickly, in a day or two, that the fluctuation in their holdings in these companies also indicates the same. He also submitted that the Appellants being OCBs can not acquire shares beyond the limit (stipulated by the Reserve Bank ) and it is unthinkable that such limit being just 5% in portfolio investment, acquisition of shares would have any effect on the ownership or management of the concerned companies. He referred to the date of purchase and sale of the shares in question and submitted that the acquisitions were only marginally above the bench mark and these shares were disposed of within a day or two. He admitted that at best these transactions could be said to be technical violations and certainly can not be considered as wilful violation to attract any penalty and these technical violations were in no way against the objective of the 1997 Regulations. 12. Shri. Khambatta referred to the provisions of regulation 7(1) which according to the Respondents have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just for 13 days and it can not be said to be a wilful violation to attract any penalty. 15. Learned Counsel referred to section 15J of the Act and submitted that the section provides factors to be taken into consideration by the Adjudicating Officer for the purpose of imposing penalty, that the section requires the Adjudicating Officer to impose penalty with due regard to factors viz. - disproportionate or unfair advantage made as a result of the default, amount of loss caused to an investor as a result of the default and the repetitive nature of the default. He submitted that the provisions of section 15J has to be properly understood, and not to be mechanically applied, that section 15J requires while "adjudicating quantum of penalty under section 15I, the Adjudicating Officer shall have due regard to the factors" stated therein. In this context he cited the observation made by the Hon'ble Supreme Court in Shri Sitataram Sugar Co. Ltd., V Union of India (AIR 1990 SC 1277), while considering the challenge to the validity of the notification issued by the Central Government in exercise of its powers under sub section 3(c) of the Essential Commodities Act, 1955, fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngworth v Welmsley (1900) 2 QB 142 it was held by the Court of Appeal, to quote a few words from the Judgement of Romer C. J. at page 144: "All that clause 2 means is that the tribunal assessing the compensation is to bear in mind and have regard to the average weekly wages earned before and after the accident respectively. Bearing that in mind, a limit is placed on the amount of compensation that may be awarded...." In another decision of the Court of Appeal in Perry v. Wright (1908) 1 KB 441 Cozens - Hardy M. R. observed at page 451: "No mandatory words are there used; the phrase is simply "regard may be had". The sentence is not grammatical, but I think the meaning is this: Where you cannot compute you must estimate, as best as you can, the rate per week at which the workman was being remunerated, and to assist you in making an estimate you may have regard to analogous cases." It is worthwhile to quote a few words from the judgement of Fletcher Moulton LJ at page 458, Under the phrase "Regard may be had to" the facts which the Court may thus take cognizance of are to be "a guide, and not a fetter". This Court speaking through one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Orissa (AIR 1970 SC 253) "Under the Act penalty may be imposed for failure to register as a dealer: Section 9(1) read with Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially 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 prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding: "On the contrary, as the acquisition was reported to the stock exchanges and thereby the transparency requirement was fully met with, it is difficult to reasonably conclude that the Appellant had deliberately held back reporting under regulation 3(4). There is no reason to disbelieve , in the absence of clinching evidence to show otherwise, the Appellant's version that failure was a genuine lapse, as is evident from its conduct of submitting the report suo motu. Belated reporting has neither resulted in any gain to the Appellant nor caused any loss to anybody........... In the light of the totality of the facts and circumstances of the case and the findings of the Adjudicating Officer thereon, and also in view of the Supreme Court's guidelines in the Hindustan Steel's case, imposition of monetary penalty on the Appellant, in my view is unwarranted." 23. Learned Counsel, in support of his contention that penalty is not justified in the case of unintentional failures to report, cited the Tribunal extensively in Cabot International Capital Corporation V. Adjudicating Officer, SEBI (2001) 29 SCL 399 (Sat) therein the Tribunal had set aside an adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order having been founded on grounds at variance from the one in the show cause notice, of which the appellant was not even made aware of, let alone provided an opportunity to offer his explanation, the allegations made against the appellant did not even prima facie make out a case of abuse of powers of the President" 27. In the impugned order, the Adjudicating Officer has categorically stated "I find from the facts" This assertion is based on "nothing" and this is the basis on which he discarded the decision of the Apex Court and the Tribunal on the principles to be followed while imposing penalty. 28. Learned Counsel submitted that the Adjudicating Officer has not taken into consideration all the aspects which he should have taken into consideration while imposing penalty, that the penalty has been imposed without application of mind and in total disregard to the settled law. He further submitted that the reporting under regulation 7(1) is to be made within 4 days of the acquisition and the Appellants having disposed of the shares in 2 days, the quantum of penalty can not be 2 lakhs or one lakh decided by the Adjudicating Officer as section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion is used in different sections, and even clauses, must be ascertained from the context of the scheme of the Act, the language of the provision and the object intended to be served thereby." 31. Shri Khamabatta submitted that compliance of regulation 7(1) is a post acquisition requirement and it has no application to a pre acquisition stage. To report, one should have share holding or voting rights in the company. In this context he referred to the compliance requirement of regulation 10,11 and 12 and submitted that it could be seen therefrom that the public announcement required to be made therein is a pre acquisition requirement. With reference to the scope of the expression 'acquirer' referred to by the Respondent, Learned Counsel submitted that the Hon'ble Bombay High Court in the case of BPPlc v. SEBI (2001) 34 SCL 469 has held that the word acquirer in the context of regulation 10 includes those who have already acquired shares and also those who have agreed to acquire shares or agreed to acquire control over the target company, that the court relied on regulation 12 and 14 in coming to this conclusion since these Regulations expressly cover both the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t forth by the Appellants in the Adjudication proceedings. 32. Shri Khamabatta referred to Director of Enforcement V. MCTM Corporation P. Ltd., (1996) 2 SCC 471 relied on by the Respondent and submitted that the said decision is also in line with the Apex Court's decision in Hindustan Steel, as it also requires "to establish the blameworthy conduct of the delinquent was wilful contravention by him of the provisions of law." 33. Ms. Poonam A. Bamba, learned Representative appearing for the Respondents explained the factual position relating to each appeal and submitted that in appeals 27, 28 and 30 it has been clearly mentioned that the acquisition of shares exceeded the 5% bench mark prescribed in regulation 7(1). She submitted that the Appellants by their own version are buyers and sellers of securities and their activities are confined not to the Indian market alone and, therefore, can not be unaware of the legal provision in vogue, that the reporting requirement is there world over and referred to the requirement in USA and in UK. Compliance of the requirements of the regulation is to be made by the acquirer and he can not absolve himself of the responsibility th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g five thousand rupees for every day during which such failure continues". She submitted that disposal of the excess holding, will not erase the failure in reporting and till the reporting is done the failure continues, that the failure is relatable to reporting and not with reference to the period of holding of shares after acquisition. 35. Ms. Bamba referred to the decision in Jiwani's case referred to by the Appellants' counsel and submitted that the element of mens rea, referred to therein is not an ingredient of offence under section 15A(b). In this context she referred to this Tribunal's decision in SRG Infotech Ltd., V. Securities and Exchange Board of India (2000 CLC 225) wherein it was viewed that - Referring to the absence of mens rea, it may be stated that it is not an ingredient of the offence prescribed under section 15B" She submitted that it is the case with the offences prescribed under section 15A also. 36. Learned Representative referred to the cases cited by the Appellants' Counsel and submitted that those cases on facts are not comparable to the facts in the Appellants' case and as such the decisions therein can not be applied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to Shri Sitaram Sugar company's case cited by Shri Khambatta the learned Representative submitted that in the same order the Apex Court had made it clear that the words expression "having regard" in the section "are not a fetter, they are not words of limitation, but of general guidance to make an estimate" She submitted that there is no reason to believe that the Adjudicating Officer had imposed the penalty without due regard to the factors mentioned in section 15J. In this context she referred to the text of section 15A(b) and submitted that the said section prescribed the maximum penalty payable for each day's default, that the Appellants have not submitted the report even belatedly, that the failure does not stop by disposing of those shares acquired in excess of the limit. She submitted that, it is not necessary that the Adjudicating Officer should provide the mathematical calculation of the quantum of penalty worked out and imposed. 40. Ms. Bamba referred to Appeal No. 31 which is slightly at variance with facts in other appeals. She submitted that the Appellant has not disputed the quantum of the share which it had contracted to purchase, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares so acquired was perhaps not given to it. 42. Ms. Bamba submitted that once the shares are acquired and the question results in the acquirer's holding in the company crossing the 5% bench mark, the acquirer is required to comply with the requirements of regulation 7(1) and failure to do so would attract penal consequences and therefore in the context of proven failure by the Appellant, imposition of monetary penalty is justified. 43. On a perusal of the orders under challenge in the present appeals it is noticed that the Adjudication Officer has imposed penalty, holding the Appellants guilty of non compliance of the reporting requirements under regulation 7(1) of the 1997 Regulations. According to the said regulation as it stood at the relevant time: "(1) Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any held by him) would entitle him to more than five per cent shares or voting rights in a company, in any manner whatsoever, shall disclose the aggregate of his shareholding or voting rights in that company, to the company. (2) The disclosure mentioned in sub regulation (1) shall be made within fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase Sale 27/2002 The Appellant purchased 15 lakhs (8.57%) shares of Shonkh on 29.12.2000 On 3.1.2001 purchased 7.50 lakhs (4.28%) shares making the total holding accounting for 12.85% (22,50,000 shares) On 16.1.2001 bought 10 lakhs shares accounting for 5.71% in the company's shares capital On 8.1.2001 sold 15,00,000 shares and as a result percentage holding dropped to 4.28% from 12.85%. On 11.1.2001 sold 5,25,000 shares bringing down the holding to 1.28% On 17.1.2001 sold 3,20,000 shares and on 18.1.2001 sold 905000 shares resulting in holding to NIL 28/2002 On 1.12.2000 purchased 20 lakhs shares (9.58%) On 4.12.2000 sold 15,00,000 On 5.12.2000 sold 5,00,000 (holding NIL on 5.12.2000) On 17.1.12001 purchased 25 lakhs shares; (11.97%)(only 25 lakhs share purchase mentioned in the show cause notice) On 16.1.2001 sold 10,00,000 On 18.1.2001 sold 8,80,000 On 23.1.2001 sold 1,45,000 On 30.1.2001 sold 2,56,500 On 1.2.2001 sold 11,50,000 30/2002 On 22.5.2000 purchased 3,03,000 shares(5.54%) as a result the total holding reached 4 lakhs (6.66%) Entire 4 lakhs holding sold on 24.5.2000. 31/2002 On 4.1.2001 contracted to purchase 25,00,000 (11.10%) lakh shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or disinvestment, depending upon their perceptions as to whether the consolidation by one group or exit of the other group or institutions such as FIIs or OCBs would be in the interests of the company as a whole. The information as specified in regulation 7 is, nevertheless, a crucial document which enables the stock exchange to effectively perform is regulatory function being a self-regulatory organisation and to ensure compliance of the said Regulations. The report / information will enable the stock exchange to protect the interests of investors by disseminating the information received from the target company through acquirer which enables the investors to take timely well-informed decision relating to their investment or disinvestment." (emphasis supplied) 49. The failure on the part of the Appellants have to be considered in the light of the above observation. On a perusal of the information available it is clear that the Appellants are OCBs. They buy and sell shares on the secondary market through approved market intermediaries. They are not entitled to hold more than 5% in the capital of a company as per the restrictions put by the RBI.. Thus it is clear that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gone below the 5% mark and that being the position, the details of holding which the company or the stock exchange receive would not be of any use for the purpose stated by the Adjudicating Officer in the order. On the contrary, the reporting would in effect be more disinformative than informative and only historical. However, I am not suggesting that in the strict technical sense, the Appellants had not failed in their obligation. But then, since the failure is linked to penal consequences, one has to look to it in a realistic manner and the consequences arising out of the failure. SEBI Act is not a penal legislation. In this context it is to be noted that Section 15I providing for adjudication, does not direct the Adjudicating Officer to impose penalty for failure per se. According to section 15I(2) if on inquiry the Adjudicating Officer is satisfied that the person has failed to comply with the provisions specified in the section, he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections. The expression 'may' used is not mandatory. Further the 'failure' referred to therein need be considered in the light of judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Shri Khambatta and MCTM Corporation relied on by Ms. Bamba. It is apparent from the Adjudicating Officer's observation cited above that he has gone by the notion that failure per se is punishable. In fact this Tribunal had occasion in Cabot International to examine the legal position regarding imposition of penalty for the failure to report under the 1997 regulations. The observation made in Cabot International on the legal position is considered relevant to the three appeals under consideration. "The third proposition is that imposition of penalty is not warranted in the facts and circumstances of the case. In fact the main thrust of the argument was on this aspect. It is not the Respondent's contention that the acquisition of shares involved is not covered in the exempted category falling under regulation 3 of the 1997 Regulations. In terms of regulation 3(1)(c) preferential allotment made in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956 is out of the purview of regulations 10,11 and 12. But that exemption is available on fulfillment of two conditions - (i) sending the relevant resolution to the concerned stock exchanges and (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oi & Associates, Chartered Accountants, being statutory auditors of the company had written on 14.1.1997 to the Respondent and Reserve Bank , inter alia reporting the company's decision to make preferential allotment under section 81(1A) of the Companies Act, as could be seen from Annexure V to the appeal. It defies logic to believe that the Appellant had intentionally avoided filing such a report with the Respondent as the company had dutifully notified all the other concerned agencies like Registrar of Companies, RBI, stock exchange, etc. the preferential allotment and the relevant details. 54. According to section 15A of the Act, if any person who is required under the Act or any rules or regulation made thereunder fails to comply with the requirements stated therein he shall be liable to a penalty not exceeding the specific sum provided therein, for each such failure. 55. Section 15I which empowers SEBI to adjudicate. Said section 15I reads as under: "15I (1) 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 inquiry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially 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". 59. The back ground of the said case leading to the above observation by the Court is as follows: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of discretion left to the Adjudicating Officer and that discretion has to be exercised judicially and on a consideration of all the relevant facts and circumstances. Further in case it is felt that penalty is warranted the quantum has to be decided taking into consideration the factors stated in section 15J. It is not that the penalty is attracted per se the violation. The Adjudicating Officer has to satisfy that the violation deserved punishment. 64. Supreme Court decision in Additional Commissioner of Income tax (supra), which is a reiteration of the ratio in the Gujarat Travancore Agency case(supra) relied on by the Respondent to show that it is not necessary to prove mens rea for imposing penalty is not relevant to the present case in view of the distinguishable nature of the relevant provisions under the Income Tax and the SEBI Act. These two decisions are with specific reference to provisions of section 271(I)(a) of the Income Tax Act. The said section 271 (1)(a) 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 income. Thus the burden is ultimately on the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally made on settlement date after the trade has been executed. The Appellant's contention that the broker has not delivered shares to him or that its name has not been shown as beneficial owner on D P records and as such it can not be said that it has acquired shares and hence reporting is not required under regulation 7(1) is not tenable. In fact the Appellant has admitted that it had acquired shares by its own statement and it is clear that RBI had directed it to disinvest the shares acquired beyond the 5% limit and the Respondent agreed to disinvest the shares on receipt of the same. The Appellant has not produced any evidence to controvert this factual position. Ms. Bamba had rightly pointed out, that if there was no acquisition of shares the RBI, which oversees the OCB's activities, asking the Appellant to disinvest the holding would not have arisen. Shri Khambatta's contention that the reporting is required under regulation 7(1) only if the shares are acquired and since it has not acquired the shares, reporting is not required is also not tenable. There is enough reason to believe that the Appellant had acquired shares. The Appellant as I could see from the mater ..... X X X X Extracts X X X X X X X X Extracts X X X X
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