Securities Appellate Tribunal
Kensigton Investment Ltd. vs Securities And Exchange Board Of India ... on 11 October, 2002
ORDER
C. Achuthan, Presiding Officer
1. These four appeals are directed against the four separate orders made by the Adjudicating Officer imposing monetary penalty on the Appellants, holding them guilty of violating certain reporting requirements under regulation 7 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 (the 1997 Regulations). The details such as the name of the company whose shares were purchased, date of purchase, quantum of shares purchased etc. differ in each appeal. The submissions/explanations from the Appellants, the charges/findings and the reasoning by the Adjudicating 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.27/20023. 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 increased to 12.85%. The Appellant sold 15,00,000 shares on 8th January, 2001 which brought down its holding to 4.28%. On 11th January, 2001 the Appellant sold 5,25,000 shares more and as a result its holding in the company's capital further dropped to 1.28%. Thus the Appellant was holding over 5% in Shonkh for 6 working days during the period from 29th December 2000 to 8th January, 2001. On 16th January 2001 the Appellant acquired 10,00,000 shares which accounted for 5.71% of Shonkh's capital and as a result its total holding reached 6.99% of the share capital of the company. Out of the said holding the Appellant sold 3,20,000 shares on 17.1.2001 and 9,05,000 shares on 18.1.2001. The Appellant thus divested its entire holding in Shonkh i.e the acquisition made on 16th January, 2001 (10,00,000 shares) as well as its earlier share holding (2,25,000 shares) within 4 days.
Appeal No.28/20024. The Appellant acquired 20,00,000 shares of Mascon Global Ltd., (Mascon) on 1st December, 2000 which accounted for 9.58% of Mascon's share capital Out of the said acquisition the Appellant sold 15,00,000 shares on 4th December 2000 and 5,00,000 shares on 5th December, 2000. The Appellant acquired 25,00,000 shares by 17th January, 2001 (out of which the acquisition of 10,00,000 shares made on 15th January, 2001 and 10,00,000 shares on 17th January, 2001 is the subject matter of the show cause notice) and as a result its holding reached 11.97% in Mascon's share capital The Appellant sold 10,00,000 shares on 16th January, 2001, 8,80,000 shares on 18th January, 2001, 1,45,000 shares on 23rd January, 2001, 2,56,500 shares on 30th January, 2001 and 11,50,000 shares on 1st February, 2001 and thereby its holding in the company reduced to 0.33%. The said 0.33% holding was also disposed of on 19th February, 2001.
Appeal No.30/2002.
5. The Appellant acquired 3,03,000 shares of Aftek Infosys Ltd., (Aftek) on 22nd May, 2000 which accounted for over 5% of Aftek's share capital. Prior to the said acquisition, on 12th May 2000 the Appellant had acquired 97,000 shares of the company. The Appellant sold its entire share holding of 4,00,000 shares on 24th May, 2000.
Appeal No.31/2002.
6. The Appellant entered into a contract for purchase of 25,00,000 shares of DSQ Biotech Ltd., (DSQ Biotech) through a registered broker viz. Triumph International Finance India Ltd., on 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 thinks fit. Respondent No.2 is an officer of SEBI, appointed under the Act as Adjudicating Officer for holding enquiry into the alleged violation of the regulations, and to impose such penalty as he thinks fit, as per the law.
9. Since the main issues involved being common and the legal submissions proposed to be advanced also being common in all the appeals, it was decided that one of the appeals out of the four be taken for referral purpose, and accordingly appeal No.27 was taken up for the purpose. Appeal No.31/2002 being slightly different is considered separately.
10. Shri D. J. Khambatta, learned Counsel appearing for the Appellants in all the four appeals briefly explained the factual background leading to the adjudications. He submitted that the Appellants have not intentionally violated any of the provisions of the law to warrant any penalty, that the Respondents have not made any allegation in the show cause notice, that there was any wilful default by the Appellants, that wrongly the Respondents have held that the Appellants have violated regulation 7(1) of the 1997 regulations so as to attract the penalty. Shri Khambatta submitted that the facts are not disputed. He admitted that the Appellants' (except in Appeal No.31) acquisition of shares in the concerned companies had crossed slightly the bench mark of 5% provided in regulation 7(1) but this "over the bench mark" holding was only for a couple of days and in any case less than 4 days that the only exception was one transaction (Appeal No.28) that even in the said case the holding was divested within a very short time. Learned Counsel submitted that in a scenario, where the factual position is not under dispute, the only question to be considered is as to whether the monetary penalty imposed by the Adjudicating Officer, for a sheer technical breach of a regulation with no consequence is sustainable or not. According to him there was absolutely no justification to penalise the Appellants for the technical fault on their part in not reporting their shareholding to the companies, on crossing the 5% bench mark.
11. Shri Khambatta referred to the show cause notices - all dated 7th November, 2001 -- issued by the Adjudicating Officer to the Appellants and the replies filed thereto by them. Learned Counsel submitted that the Appellants are interested only in buying and selling shares 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 violated by the Appellants, and submitted that the reporting required thereunder is purpose oriented, and the so called failure on the part of the Appellants has not in any way, caused any harm to anybody or defeated the purpose. He submitted that compliance of regulation should not be insisted upon just for the sake of compliance only, devoid of the purpose. He submitted that as per the said regulation an acquirer who acquires shares or voting rights which would entitle him to more than five per cent shares or voting rights in a company is required to disclose his aggregate share holding or voting rights to the company within 4 days of acquisition and every such company is required to disclose to all the concerned stock exchanges, the aggregate number of shares held by each such person within 7 days from the date of receipt of the aggregate holding of the acquirers. According to Shri Khambatta in the Appellant's case by the time such information could reach the company and the exchange the factual position had changed and the information so furnished would in effect be misinformation, as the Appellants had divested the shares by then, that reporting that it was holding 5% or 6% in the capital of the company few days ago, would serve no purpose as the company and the shareholders are interested in the current position and not on the past holding.
13. Learned Counsel further submitted that the Appellants have no office outfit in India and they go by the feed back from the intermediaries in the market and in the absence of information from them the Appellants are incapacitated in complying with the requirements, that by way of example he stated that they were not having the full details about the concerned company's capital structure and as a result while buying shares, could not stick to the 5% limit.
14. Shri Khambatta referred to section 15A(b) of the Act and submitted that the penalty provided therein is attracted only if a person wilfully fails to furnish the report within the time specified in the regulation that, as per regulation 7(2) the reporting is to be done within 4 days of the acquisition. He submitted that except in one transaction, the investment was divested in less than 4 days and as such there was nothing to report in terms of regulation 7(1) read with regulation 7(2). He further submitted that in the remaining case the holding was 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, fixing the price of levy sugar. In that context the Court had held:--------"......the expression "having regard to" must be understood in the context in which it is used in the statute. See Union of India V. Kamlabhai Harjiwandas Parekh (1968) ISCR 463 at 471: (AIR 1968 SC 377 at P 382) These words do not mean that the Government cannot, after taking into account the matters mentioned in clause (a) to (d), consider any other matter which may be relevant. The expression is "not having regard only to" but "having regard to" These words are not a fetter, they are not words of limitation, but of general guidance to make an estimate. The Government must, of course, address itself to the questions to which it must have regard, and, having done so, it is for the Government to determine what it is empowered to determine with reference to what it reasonably considers to be relevant for the purpose The Judicial Committee in Commnr. Of Income-tax v. Williamson Diamonds Ltd., (1958) AC 41, 49 observed with reference to the expression "having regard to":
"The form of words used no doubt lends itself to the suggestion that regard should be paid only to the two matters mentioned, but it appears to their Lordships that it is impossible to arrive at a conclusion as to reasonableness by considering the two matters mentioned isolated from other relevant factors. Moreover, the statute does not say "having regard only" to losses previously incurred by the company and to the smallness of the profits made. No answer, which can be said to be in any measure adequate, can be given to the question of "unreasonableness" by considering these two matters alone...."
16. See Commr. Of Income-tax, West Bengal, Calcutta v. Gungadhar Banerjee and Co.(P) Ltd., (1965) 3 SCR 439 at pp.444-45: (AIR 1965 SC 1977 at p;.1980) See also Saraswati Industrial Syndicate Ltd., v. Union of India (1975) 1 SCR 956 at p. 959; AIR 1975 SC 460 at p. 462). In State of Karnataka v. Ranganatha Reddy (1978) 1 SCR 641 at pp. 657-58: (AIR 1978 SC 215 at p.227) this Court stated:
"The content and purport of the expressions "having regard to" and "shall have regard to" have been the subject matter of consideration in various decisions of the Courts in England as also in this country. We may refer only to a few. In Illingworth 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 of us (Beg J., as he then was ), has expressed the same opinion in the case of Saraswati Industrial Syndicate Ltd., etc. v. Union of India (1975) 1 SCR 956: (AIR 1975 SC 460). Says the learned Judge at page 959 (of SCR): (at p. 462 of AIR) : "The expression "having regard to" only obliges the Government to consider as relevant data material to which it must have regard".
17. In the State of U.P. V. Renusagar Power Co., (1988) 4 SCC 59(AIR 1988 SC 1737), one of us (Mukharji, J., as he then was) observed:
"The expression "having regard to" only obliges the government to consider as relevant data material to which it must have regard..."
18. In O'May and Ors. v. City of London Real Property Co. Ltd., (1982) 1 All ER 660 at 665 (H,L.), Lord Hailsham stated:
"A certain amount of discussion took place in argument as to the meanaing of 'having regard to' in S.35. Despite the fact that the phrase has only just been used by the draftsman of S.34 in an lmost mandatory sense, I do not in any way suggest that the court is intended or should in any way attempt to bind the parties to the terms of the current tenancy in any permanent form......"
19. Learned Counsel submitted that the three factors stated in section 15J are not the only factors, that other relevant factors also can be considered, but the Adjudicating Officer has not only failed to consider those three factors, but also did not bother to consider other factors such as the role of the Appellants, their inability to get full details of the share holdings of the investee companies, that they were not interested in acquiring companies etc. He further submitted that on a perusal of section 15J it is clear that it predicates the commission of offence, despite the section directs the Adjudicating Officer to have due regard to the factors stated therein, that the section though presumes default still cautions the Adjudicating Officer on imposition of penalty, that it means that each and every default/failure to comply with specific procedural requirements enumerated in Section 15A to 15H need not be penalised with monetary penalties.
20. He further submitted that the Adjudicating Officer has not followed the principles laid down by the Hon'ble Supreme Court while imposing penalties. In this context he cited Hindustan Steel Ltd., V. The State 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 prescribed by the statute. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out."
21. He also cited the Hon'ble Supreme Court in Akbar Badrudin Badrudin Jiwani V. Collector of Customs, Bombay (AIR 1990 SC 1579) that:
"We refer in this connection the decision of Merck Spares v. Collector of Central Excise & Customs, New Delhi, 1983 ELT 1261, Shama Engine Valves Ltd.., Bombay v. Collector of Customs, Bombay (1984) 18 ELT 533 and Madhusudhan Gordhandas & Co. v. Collector of Customs, Bombay, (1987) 29 ELT 904, wherein it has been held that in imposing penalty the requisite mens rea has to be established. It has also been observed in Hindustan Steel Ltd., v State of Orissa, (1970) 1 SCR 753; (AIR 1970 SC 2563) by this Court that:-
"The discretion to impose a penalty must be exercised judicially. A penalty will ordinarily be imposed in cases where the party acts deliberately in defiance of law, or is guilty of contumacious or dishonest conduct, or acts in conscious disregard to its obligation; but not, incases where 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".
"In the instant case, even if it is assumed for arguments sake that the stone slabs imported for home consumption are marble still in view of the finding arrived at by the Appellate Tribunal that the said product was imported on a bona fide belief that it was not marble, the imposition of such a heavy fine is not at all warranted and justifiable."
22. Learned counsel also cited the decision of this Tribunal in Chandra Kant Gandhi Stock Brokers P. Ltd.., V. Securities and Exchange Board of India (2000) 25 SCL 1 (SAT) therein it was held that since the failure to comply with the requirements of section 15A was due to factors beyond the control of the Appellant, imposition of penalty was not justified. He also cited the Tribunal's decision setting aside the monetary penalty imposed for the failure to report under regulation 3(3) and 3(4) by the acquirer in Samrat Holdings Ltd., V. Securities and Exchange Board of India (2001) 29 SCL 417 (Sat) 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 adjudication order passed against Cabot for its failure to report under regulation 3(4) taking into consideration the attendant facts and circumstances and also the principles laid down by the Hon'ble Supreme Court in Hindustan Steel (Supra).
24. Shri Khambatta submitted that the Adjudicating Officer while imposing the monetary penalty on the Appellants had not taken into consideration the principles laid down by the Supreme Court in Hindustan Steel (supra) and the Tribunal's decisions, that on the contrary the Adjudicating Officer has stated that "whether or not the act of non-disclosure was intentional or unintentional, the failure on the part of the acquirer in complying with the regulation 7 of the Takeover Regulations, 1997 by any standard attracts the penal provisions mentioned in the regulations."
25. Shri Khambatta referred to appeal No.30 and submitted that the Appellants purchased shares on 22.5.2000 which crossed the 5% bench mark but on 24.5.2000 its entire holding in the company (not the excess portion above) was disposed of. But for some strange reason the Adjudicating Officer in his order has held that:
"I find from the facts that the acquisition in question was for the purpose of retaining their control in the target company and also to ensure that these shares do not fall into undesirable hands. Therefore, the case of Hindustan Steel as well as other cases relied on by them is of no assistance."
26. Learned Counsel submitted that this is a new finding not based on the facts that the Respondents were aware of the fact of disposal of the Appellants entire holding within 2 days of the purchase of shares. This was not put forth in the show cause notice. In this context he cited the decision of the Hon'ble Supreme Court in Tarlochan Devsharma v. State of Punjab (2001) 6 SCC 260 wherein the Hon'ble Court was considering an appeal challenging the removal of the petitioner from the post of President and from membership of a municipal council to which he was elected that:
"There is nothing in the show cause notice or the ultimate order to hold how the act of the appellant had "obstructed the working of the Municipal Council" or was "against the interest of the Council". We are, therefore, clearly of the opinion that not only the principles of natural justice were violated by the factum of 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 15A (b) provides a penalty of only Rs.5000/- per day for each day of the default.
29. Learned Counsel submitted, that the alleged violation has not resulted in any gain to the Appellants or any loss to the investors. He also submitted that the repetitive nature of default does not mean numerical size of the defaults. According to the learned counsel the Adjudicating Officer has also not considered the other factors which are to be given due regard in terms of Section 15J.
30. With reference to Appeal No.31/2002 he stated that the maximum holding of the Appellant in the investee company was only 11.10% and not 15.46% as alleged in the notice, that the 11.10% is well below the 15% limit provided in the regulation and as such there is no requirement of any public announcement to be made to attract section 15H of the Act, as alleged in the notice. With reference to the applicability of regulation 7 (1) to the purchase of shares in DSQ Biotech, learned Counsel submitted that the acquirer is required to comply with the requirements only when he actually acquires the shares and not on merely agreeing to purchase, as otherwise the compliance of the regulation is not possible, that because there is an agreement to purchase shares - which may or may not fructify - it is not possible to quantify his aggregate holding, that the requirement is to notify the aggregate holding and not the would be aggregate holding. He submitted that from the facts of the transaction stated by the Appellant and that the Adjudicating Officer having not controverted the same, it can not be said that the Appellant had acquired shares requiring reporting of the same. He submitted that the explanation "acquirer" recognises two situations - (1) an agreement to purchase shares and (ii) actual acquisition of shares, and this has to be taken into consideration with reference to compliance of requirements of the regulation. In this context the learned counsel cited Hon'ble Supreme Court decision in Anand Nivas P. Ltd., V Anandji Kalyanji Pedhi (AIR 1965 SC 414). In the said decision the Hon'ble Court had observed that while interpreting the expressions used in different sections of a statute, sense to be gathered from the context in which it is observed. The Hon'ble Court had observed:
"Having regard to the plurability of its meaning, the sense in which the expression 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 cases where the acquirer acquires and "agrees to acquire shares". He submitted that in BPPCC the Hon'ble Court was not considering a case under regulation 7, that regulation 7 falls in Chapter II which has no provision similar to Regulation 12 and 14. Thus under regulation 7, the word acquirer is used only in the context of an acquirer who actually acquires the shares and does not apply to the case of an acquirer who merely agreed to acquire the shares. Shri Khamabatta submitted that in the said view of the matter, since the Appellant had not received delivery of shares or its name was not even entered in the Depository Register as a beneficial owner, only for the reason that it had paid money to the broker the Appellant can not be said to have acquired the shares. In this context he referred to the Respondent's reliance on the words used by the Appellant in its reply to the show cause notice that "Kensington acquired shares of DSQ Biotech for the first time on 4th January, 2001 when it acquired the said 2,50,000 shares" and stated that the Respondent has picked up one sentence ignoring the rest of the submissions and used against the Appellants. In this context he referred to the written submission made by the Appellant before the Adjudicating Officer wherein it was clearly stated that - "Kensington can not be said to have acquired the shares as it is neither the beneficial owner of the shares of DSQ Biotech nor has it obtained possession of the said shares. Kensington can not therefore, be said to have acquired the shares within the meaning of Regulation 7 of the SEBI Regulations, 1997 by Kensington merely entering into an agreement (with its broker) for acquisition of the said shares of DSQ Biotech." He submitted that the Respondents have conveniently ignored this submission; that in any case a statement by itself does not change the law. Learned counsel submitted that the contract between the Appellant and the broker for purchase of shares has failed, so there is no requirement of complying with the provisions of regulation 7. He submitted that regulation 7 attracts genuine acquisitions, that if failed contracts are viewed as concluded contracts, bogus agreements will be made by unscrupulous parties to manipulate the transactions. Shri Khamabatta submitted that the Respondents have not answered many of the submissions put 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 that his broker or other associates did not tell him to do so or failed to furnish the information. She submitted that it is not the Appellants' case that they have not violated the requirements of law, but their stand is that the violations are of pure technical nature and as such penalty is not attracted. The Appellants have also made an attempt to justify their stand stating that they were holding shares for a very short period and hence not liable to penalties. Ms. Bamba in this context referred to the provisions of regulation 7(1) and 7(2) and stated that the moment the share holding of the acquirer in the investee company exceeded the 5% bench mark stated therein, he is liable to report the holding and the 4 days time provided in regulation 7(2) is the upper time limit, that the liability for compliance arises the moment the investor's aggregate holding cross the 5% bench mark. Ms. Bamba referred to the text of regulation 7 and explained the purpose for which reporting therein has been provided. In this context she referred to the decision of the Hon'ble Calcutta High Court in Arunkumar Bajoria V Securities and Exchange Board of India & Ors (WP No.311/2001 decided on 27.3.2001):
"The object of Regulation 7 of the said Regulations is two fold. Firstly, as soon as a group of persons in league with each other acquires 5 per cent shares in a company, they must disclose their identity to the company indicating how many shares of the company they have acquired and the second object is to compel the company to disclose the same to the Stock Exchanges on which the shares of the said company are listed, so that the investors of the said company are aware of the identity of such group which is holding 5 per cent shares in the company. This is really a lock gate for the purpose of giving a forewarning to the investors in the concerned company."
34. She submitted that the information required to be provided in the report to the company is very important from the investor angle. In this context she referred to the observation made by the Adjudicating officer in his order that :
Learned Representative submitted that section 15A(b) has prescribed the penalty for failure to comply with the statutory reporting, that according to the said section the person who has failed to comply with the requirements "is liable to a penalty not exceeding 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 the present appeals. She submitted that the decision in Chandrakant Gandhi was based on the adjudicating officer's admission of the Appellant's version that non compliance of the requirement of the regulations was due to factors beyond control. It is not so with the Appellants herein. She further submitted that in Cabot International the Adjudicating Officer had stated that the Appellants therein had made substantial compliance of the requirement and also took note of the difficulty faced by the Appellant in complying with the requirements and gave benefit of doubt, and still imposed penalty. The present case is not like that. In Samrat Holding, she submitted, the complaint related to an exempted transaction, with no harmful effect on anybody.
37. Ms. Bamba referred to MCTM Corporation(Supra) case and submitted that the Hon'ble Court had observed therein that for breach of a "civil obligation which attracts" 'penalty' it is not necessary to establish mens rea, that it would be sufficient if it is established that the "blameworthy" conduct of delinquent was wilful, that the court had observed that "it is the delinquency of the defaulter itself which establishes his "balmeworthy" conduct", that the court had further observed that - "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 adjudication 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" Ms. Bamba submitted that the Appellants have failed to comply with the requirements of the regulation and, therefore, in the light of the observation of the Apex Court cited above, they are liable to be penalised.
38. With reference to the quantum of penalty imposed, she referred to section 15J of the Act and submitted that the section is applicable only for the purpose of deciding the quantum of penalty and that it does not prohibit imposition of penalty to a case even if the factors stated therein are absent.
39. Referring 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 the Appellant has also admitted that it had entered into a contract with Triumph International Finance India Ltd., for the purpose, that its argument is that the broker did not give delivery of shares or put their name as a beneficial owner in the company's records. In this context she submitted that the shares were purchased on 4.1.2001 (Thursday) by paying the purchase consideration, delivery was due on 15.1.2001, that the broker claims it was debarred in May 2001 (in fact the broker was debarred in April 2001), much after concluding the contract. She submitted that the fact of debarring the broker is only an alibi, that even though the Appellant claims that Triumph International Finance India Ltd., had allegedly failed to deliver contracted quantum of shares, still the Appellant was transacting business with Triumph Securities Ltd., a close associate of the said Triumph International as is evidenced from the copy of the contract Note dated 1.2.2001 filed with the appeal. She referred to the Appellant's version that it had only paid the purchase consideration, but did not receive the delivery and stated that the purchase consideration is paid only on receiving delivery of securities, and having admitted that it had paid the purchase consideration, it can not claim that shares have not been acquired, that in any case the Appellant has not produced any evidence to support its contention that the contract failed. She submitted that the Appellant in its reply dated 6.12.2001 to the show cause notice had admitted that it had acquired the shares. The Appellant had stated - "It may be mentioned that Kensington acquired shares of DSQ Biotech for the first time on January 2001 when it acquired the said 250000 shares" that it had admitted that it had informed Reserve Bank that it would disinvest the shares as soon as the shares were received". In the reply it had stated: "On 12th July 2001 Kensington undertook to disinvest as soon as the shares were received from the broker."
41. Ms. Bamba submitted that if the Appellant had not acquired shares beyond the limit of 5 % acquisition limit for OCBs put by RBI, there was no question of RBI asking it to disinvest the shares and the Appellant giving an undertaking to do so. She submitted that there is overwhelming evidence to show that the Appellant had acquired shares and only possession 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 four working days of -
(a) the receipt of intimation of allotment of shares; or
(b) the acquisition of shares or voting rights, as the case may be (3) Every company, whose shares are required in a manner referred to in sub-regulation (1) shall disclose to all the stock exchanges on which the shares of the said company are listed the aggregate number of shares held by each of such persons referred to above within seven days of receipt of information under sub-regulation (1)
44. The expression "acquirer" appearing in regulation 7(1) has been defined in regulation 2 (b) as follows:
"acquirer means any person who directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer"
45. Section 15A, which the Adjudicating Officer has invoked for imposition of penalty is as under:
"15A. If any person, who is required under this Act or any rules or regulations made thereunder;--
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousand rupees for each such failure;
(b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues;
to maintain books of account or records, fails to maintain the same, he shall be liable to penalty not exceeding ten thousand rupees for every day during which the failure continues.
46. There is no dispute about acquisition of shares beyond the 5% limit prescribed by the regulation, except in appeal No.31/2002. In appeal number 31/2002 the Appellant has stated that the broker who was transacting for the Appellant has not given delivery of the shares or entered the name of the Appellant as a beneficial owner of the shares in the concerned records, despite having paid full purchase consideration by the Appellant.
47. The factual position relating to delay involved in reporting, as culled out from the material available on record is as under:
Appeal No 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 Shares were not delivered by the broker to the Appellant even after making payment
48. It is thus apparent that the Appellants' purchase of shares had exceeded the prescribed 5% and the excess holding remained with them for a short period. In appeal no 31/2002 the "holding" period was not that short. The Adjudicating Officer noting the failure on the part of the Appellants as offence per se has imposed the penalty. In this context it is felt necessary to consider the object for which the reporting is required to be made under regulation 7(1). The Adjudicating Officer has stated his perception in this regard, justifying his decision imposing the penalty . The factual position, therefore, requires to be tested in the said perspective. According to the Adjudicating Officer:
" The provisions of regulation 7 of the Takeover Regulations, 1997 have been enacted with an objective to ensure transparency in the transaction and assist regulatory bodies to effectively monitor such transactions to safeguard the interests of the investors/existing shareholders of the company or for defence mechanism and providing the shareholder an opportunity to exit at that stage, in case of a change in shareholding pattern or control over their company where it is not to the satisfaction of a shareholder. In the age of automated and demat trading, a position can be built very fast and the investors or the persons in control and the target company need to know about the change in shareholding which is a material information as far as possible and, therefore, under regulation 7(1) the upper limit of 4 days has been specified to inform the target company by the acquirer after the acquisition exceeding 5% limit. The subsequent divestment or sale even if within 4 days of acquisition does not absolve the acquirer from informing the target company within the stipulated time.
The purpose of notifying the target company by the acquirer and the company in turn has to inform the exchange, is for the public to take informed investment or disinvestment decision. Securities are liquid instrument like money and fast investment/disinvestment are required to be taken. In case of increase in holding of one group, the say or influence of other group or person to that extent is reduced in the target company. The investors have to take timely informed decision as regards investment 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 cannot be considered as "raiders" aiming to usurp the management or control of the investee company. The Appellants' conduct has to be viewed in that context. On a perusal of the transaction pattern revealed, it is noticed that they were not building up positions for long. Coming to the question of delay in reporting the acquisition it is noticed that in all the appeals except in appeal No 31/2002 they had brought down the excess holding within a very short period over the time limit provided for reporting. It is seen that in appeal no 27/2002 the Appellants had crossed 5% mark on 29.12.2000 - but brought it down to 4.28% on 8.1.2001. Further its holding of 5.71% as on 16.1.2001 was liquidated by 18.1.2001. In Appeal No.28 it is seen that 9.58% (20 lakhs shares) of the share capital acquired on 1.12.2000 was disposed of by selling 15 lakhs shares on 4.12.2000 and the balance 5,00,000 shares on 5.12.2000. Similarly out of the 25 lakhs shares (11.97%)held on 17.1.2001, 18.80 lakhs shares were sold by 18.1.2001. In appeal no 30/2001 it is noticed that 6.66% of the share capital held on 22.5.2000 was fully disposed of on 24.5.2000.
50. In terms of regulation 7(2) the acquirer is required to report the acquisition to the investee company within 4 days and the investee company in turn to the concerned stock exchange within 7 days. This reporting serves two purposes - the company is informed of sizeable holding so that if necessary as the Adjudicating Officer stated it can take steps to prevent a raider acquiring further shares and dislodging the management, the stock exchange is informed so that the investing public will come to know of the position enabling them to stick on with or exit from the company. But if an acquirer can not acquire shares of the company beyond 5% of the company's paid up capital as per the RBI regulation etc. and the excess holding was just for a "lightning duration" such an acquisition should not be a concern of the company or the investor, for whose benefit the reporting is stated to be provided.
51. In this context it has to be noted that by the time the report would have reached the company and from the company to the stock exchanges (4 days from the acquirer to the company and 7 days from company to the exchanges) the position had changed as the acquirer had ceased to be a shareholder, or his holding had 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 pronouncements explaining the situation. The case laws cited by Shri Khambatta on this aspect is considered relevant.
52. Shri Khambatta had referred to Hindustan Steel, Jivani and few decisions of this Tribunal. In fact this Tribunal in Chandrakant Gandhi , Samrat Holdings and Cabot International had referred to the decision of the Hon'ble Supreme Court in Hindustan Steel regarding the principles to be followed for imposing penalties. In Even in the MCTM case relied on by the Respondent also the Hon'ble Supreme Court had viewed that the authority imposing penalty has to establish wilful contravention of law by the person concerned to attract penalty. It is thus clear that the principle laid down in MCTM Corporation is also in tune with the principles laid down in Hindustan Steel. In Hindustan Steel the Hon'ble Court had set out the principles as follows:
"An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, 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 brach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." (emphasis supplied)
53. The principles laid down by the Supreme Court are binding on the Adjudicating Officer of SEBI also. Therefore, his observation that "whether or not the act of non disclosure was intentional or unintentional the failure on the part of the acquirer in complying with the regulation 7 of the Takeover Regulation, 1997 by any standard attracts the penal provisions mentioned in the regulation":, in my view is in total disregard to the principles laid down by the Hon'ble Supreme Court in Hindustan Steel relied on 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 (ii) disclosure of the identity of the class of allottees and the name, etc. of these allottees who would be exercising 5% or more of the post issued capital and certain other information, in the notice of the general meeting called for the purpose of the preferential allotment. It is on record that the said two conditions have been fulfilled . Therefore, the allotment is undoubtedly covered under the exemption provided in regulation3(1(c). The Respondent has also accepted this position, otherwise it would not have asked the Appellant to comply with the requirements of regulation 3(4). Only when an acquisition is covered under regulation3, the acquirer is required to report to the Board under sub regulation 4 within the specified time. There is no denial of the fact that the reporting was delayed and the delay was unintentional. According to the Respondent's version the essence of making disclosure under regulation 3(4) is to ensure transparency and provide input to the regulator to ascertain whether the requirement of public offer attracted the case and if so the same has been done. Objective is no doubt laudable. But the question is whether non-reporting in the instance case has in any way defeated the said objective, affected transparency or the share holders' interest. On a perusal of the sequence of events narrated in the pleadings it is clear that the Appellant or the company had no intention to suppress any material information from the Respondent or the share holders. The company had informed the stock exchange, Registrar of Companies, etc. well in time the details of the proposal such as the quantum of shares proposed to be issued by way of preferential allotment, the price at which the shares were proposed to be issued , the name of the party to whom the allotment was proposed to be made, etc. In fact , while forwarding to the stock exchange the notice of the Extra Ordinary Meeting of the share holders convened for seeking approval for the preferential allotment, the company had requested the exchange to display the notice on the Notice Board for information of the members of the exchange, as could be seen from the copy of the forwarding letter dated 2.1.1997 annexed to the appeal. It is not that the Respondent was unaware of the preferential allotment and for that reason prevented from monitoring/pursuing further course of action. S.R.Batliboi & 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 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".
56. Section 15J is on factors to be taken into account by the Adjudicating Officer reads as under:
" 15J .While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have 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".
57. On a perusal of section 15I it could be seen that imposition of penalty is linked to the subjective satisfaction of the Adjudicating Officer. The words in the section that "he may impose such penalty" is of considerable `significance, especially in view of the guidelines provided by the legislature in section 15J. "The Adjudicating Officer shall have due regard to the factors" stated in the section is a direction and not an option. It is not incumbent on the part of the Adjudicating Officer, even if it is established that the person has failed to comply with the provisions of any of the sections specified in sub section (1) of section 15I, to impose penalty. It is left to the discretion of the Adjudicating Officer, depending on the facts and circumstances of each case.
58. In this context, it is relevant to have a look at the clear cut guidelines provided by the Supreme Court in Hindustan Steel's case (supra). Para 7 from the judgement considered relevant in this context is extracted below:
" 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 prescribed by the statute".
59. The back ground of the said case leading to the above observation by the Court is as follows:
"In proceedings for assessment of tax under the Orissa Sales Tax Act, 1947, the Sales Tax Officer held that the Company was a dealer in building material, and had sold the material to contractors and was on that account liable to pay tax at the appropriate rates under the Orissa Sales Tax Act. The Sales Tax Officer directed the Company to pay tax due for ten quarters ending December 31, 1958, and penalty in addition to the tax for failure to register itself as a dealer. The Appellate Assistant Commissioner confirmed the order of the Sales Tax officer. In second appeal the Tribunal agreed with the tax authorities and held that the Company was liable to pay tax on its turnover from bricks and cement and steel supplied to the contractors. The Tribunal however substantially reduced the penalty imposed upon the company".
60. The observation of the Court cited above was in answer to the question "whether the Tribunal is right in holding that the penalties under section 12(5) of the Act (Orissa Sales Tax Act, 1947) had been rightly levied?"
61. The facts of the present case are reasonably comparable with the case cited above. In the light of the clear observation of the Court as to when penalty for failure to carry out a statutory obligation could be imposed, it is to be seen as to whether the facts of the present case warranted penalty. The facts to be considered are that whether there is anything to show that the Appellant acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. It is also to be seen that whether the breach flows from a bona fide belief of the Appellant that it was not liable to act in the manner prescribed by the statute.
62. In this context it is also relevant to know the significance of the expression "shall be liable to a penalty" appearing in the section 15A. The Supreme Court in Superintendent & Remembrancer of Legal Affairs to Govt. of West Bengal (supra) held that the expression "shall be liable to a penalty" occurring in many statutes has been held as not conveying the sense of an absolute obligation or penalty but merely importing a possibility of such obligation or penalty".
63. As already stated above, in terms of section 15I whether penalty should be imposed for failure to perform the statutory obligation is a 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 assessee to plead and prove the reasonable cause. Consequently no mens rea could arise at all. On the contrary there is no such requirement in section 15A.The section does not require pre-existence of a guilty mind to impose penalty. But the Act itself circumscribes the powers of the Adjudicating Officer in the field of imposition of penalty. The case law relied on by the Respondent is of no help to the Respondent to justify imposition of penalty against the Appellant in view of the facts and circumstances peculiar to this case, discussed in detail above.
65. It is not the case of the Respondent, that the Appellant had "acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation". On the contrary from the conduct of the company which is also a party to the preferential allotment, in furnishing information and making disclosures to the agencies like stock exchange, Registrar of Companies, etc. it is impossible to conclude that reporting under regulation 3(4) was held back intentionally. There is no reason, in the absence of clinching evidence, to disbelieve the Appellant's version that it was under genuine belief that regulation 3(4) was not applicable to the allotment. The breach flows from the bona fide belief that it was not liable to comply with the requirements under rule 3(4) and this has to be viewed in the light of the Supreme Court's observation in Jiwani's case relied on by the Appellant."
66. There is nothing on record to show that the Appellants acted deliberately in defiance of law, or guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligations. Taking into consideration, the relevant facts, the legal provision and the principles laid down by the Hon'ble Supreme Court in Hindustan Steel, MCTM Corporation and Jiwani's case I am of the view that imposition of penalty on the Appellants in appeal Nos.27/2002, 28/2002 and 30/2002 is not justified and accordingly I set aside the orders passed by the Respondent against the Appellants in the said appeals.
67. With reference to Appeal No.31/2002 is concerned it is seen that the Appellant had contracted to purchase shares on 4.1.2001. The Appellant has admitted that it has paid the purchase consideration. It is the accepted market practice that payments are normally 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 material/ submission before me had acquired shares on 4.1.2001 and the same has not been disposed of till date and despite knowing the requirements of regulation 7(1) it has not reported the position to the company. The fact that the Appellant is holding a block of 11.10% share is a vital information, as far as the company and the investors are concerned. The failure to report, despite knowing the requirement of the regulation, in my view is deliberate defiance of law, and as such imposition of penalty is justified. Therefore, the Appellant's case in appeal No.31/2002 is different from the facts in the other 3 appeals and the benefit available in those appeals, based on the facts specific to those appeals, can not be made available to the Appellant in this appeal. In the light of the facts relating to the acquisition of shares of DSQ Biotech, in appeal no.31/2002 I am inclined to agree with the view taken by the Respondents that the Appellant has failed to comply with the requirements of regulation 7(1) and hence liable to the penal consequences provided in section 15A(b). The Appellant's argument that the Adjudicating Officer has not taken into consideration the factors specified in section 15J appears to be baseless. The scope of section 15J has already been discussed in Cabot case extracted above, and as such I am not repeating the same again here. The Adjudicating Officer himself has stated in the order that he has taken into consideration the factors mentioned in section 15J. The fact that he has imposed only a sum of Rs. one lakh as penalty, though the failure continues from 4.1.2001 till date itself, is indicative of the fact that he has taken a very reasonable stand in imposing the penalty. The principle laid down by the Hon'ble Supreme Court in Hindustan Steel cited by Shri Khambatta is not applicable to this case, as the Appellant has not filed the report even today, despite the fact of holding more than 5% in the company's capital was brought to its notice, as back in July 2001 by RBI.
68. For the reasons stated above, three appeals bearing nos. 27/2002, 28/2002 and 30/2002 allowed and appeal no. 31/2002 dismissed.