http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 12  

CASE NO.: Appeal (civil)  9523-9524 of 2003

PETITIONER: The Chairman, SEBI                                               

RESPONDENT: Shriram Mutual Fund & Anr.                               

DATE OF JUDGMENT: 23/05/2006

BENCH: Dr. AR. Lakshmanan & Lokeshwar Singh Panta

JUDGMENT: J U D G M E N T

Dr. AR. Lakshmanan, J.

The Securities and Exchange Board of India (hereinafter  referred to as ’the SEBI’) is the appellant in the present appeal  under Section 15-Z of the Securities and Exchange Board of  India Act, 1992.  This appeal was filed against the final judgment  and order dated 21.08.2003 passed by the Securities Appellate  Tribunal, Mumbai (hereinafter referred to as ’the Tribunal’) in  appeal No. 50 of 2002 and 51 of 2002 raising an important  question of law as to whether once it is conclusively established  that the Mutual Fund has violated the terms of the Certificate of  Registration and the statutory Regulations i.e. SEBI (Mutual  Funds) Regulations, 1996 (hereinafter referred to as ’the  Regulations") the imposition of penalty becomes a sine qua non of  the violation.   The respondents have not chosen to enter appearance  though they were served with the notice.  Since the service is  complete and the appeals are ready for hearing, the above  appeals were listed for final hearing.  The Appellant Board, a body corporate, has been  established under the Securities and Exchange Board of India  Act, 1992 by the Central Government, inter alia, to protect the  interest of the investors in securities and to promote the  development of, and to regulate the securities market and for  matters connected therewith.  Shriram Mutual Fund was registered in the year 1994.  It  had floated 5 schemes.  It conducted business through brokers  associated with its sponsor in excess of the permissible limits  prescribed under Regulation 25(7)(a) of the Regulations, 1996 on  12 occasions.  The respondent failed to comply with the terms  and conditions attached to the Certificate of Registration which  are statutory in nature, as prescribed by Regulation 15 (D)(b) of  the Securities and Exchange Board of India Act, 1992.  The instances of excess transactions conducted by the  respondents are as follows:- Sr.     Quarter ended           Name of the Associate           Percentage of No.                                     Brokers                                 Business

1.      June 1998                       Springfield Securities          10.65% 2.      September 1998                          -do-                    6.6% 3.      March 1999                              -do-                    16.57% 4.      September 1999                          -do-                    9.57% 5.      December 1999                           -do-                    91.68% 6.      September 1998          SIS Shares and Stock            19.59%                                         Brokers

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 12  

7.      March 1999                              -do-                    33.81% 8.      September 1999                          -do-                    38.01% 9.      September 1998          Shriram Indus Stock             9.86% 10.     December 1998                           -do-                    6.39% 11.     March 1999                              -do-                    28.95% 12.     September 1999                          -do-                    52.42%

The Chairman, SEBI in exercise of the powers conferred on  it under Section 15(I) of the said Act and Rule 3 of the SEBI  (Procedure for Holding Enquiry and Imposing Penalty by  Adjudicating Officer) appointed an Adjudicating Officer to enquire  into the violations of exceeding by the respondents of the  permissible limit of 5% of aggregate purchases and sales of  securities made by the Mutual Fund in all its Schemes, as  prohibited under Regulations 25(7)(a) of the said Regulations.  The Appellant-Board issued notice dated 01.04.2002 under  Rule 4 of Rules, 1995 calling upon the respondents to show  cause as to why an inquiry should not be held and penalty  imposed under the Rules, 1995.  The respondents filed a  common reply before the Enquiry and Adjudicating Officer, SEBI.  The Adjudicating Officer, after hearing the parties, imposed  penalty of Rs. 5 lacs under Section 15E on respondent No.2 for  failure to comply with Regulations 25 (7)(a) of SEBI (Mutual  Funds) Regulations, 1996 with regard to routing of transactions  through associate brokers.   The Adjudicating Officer also imposed a penalty of Rs. 2  lacs under Section 15D(b) of SEBI Act, 1992 on respondent No.1  for its failure to comply with the terms and conditions of  Certificate of Registration granted to it.   Aggrieved by the order dated 24.06.2002 passed by the  Adjudicating Officer, the respondents filed appeals before the  Securities Appellate Tribunal, Mumbai on 21.08.2003, inter alia,  contending that the transactions with the associate brokers were  related to thinly traded Securities, for which there were no ready  markets available through the normal Stock Exchange, or were  relating to securities which did not have any large volume or  trade in the market.  It was further contended that these  securities were either thinly traded, or did not have any volumes.   It was submitted that the percentage of excess business  carried out with associate brokers were as high as 91.68% and  52.42%, while the total volume of business done with the  associate brokers was Rs.4.55 lacs.   The Tribunal set aside the order of the Adjudicating Officer  on the purported ground that the penalty to be imposed for  failure to perform a statutory obligation is a matter of discretion.   The Tribunal has held that the penalty is warranted by the  quantum which has to be decided by taking into consideration  the factors stated in Section 15-J.  Aggrieved by the order dated  21.08.2003, the Chairman, SEBI filed the above statutory appeal  under Section 15-Z of the Act of 1992 as amended by the  Securities and Exchange Board of India (Amendment) Act, 2002. We heard Mr. L. Nageswara Rao, learned senior counsel  ably assisted by his junior counsel for the appellant. Mr. Rao advanced elaborate arguments and took us  through the pleadings, the reply received to the show cause  notice, the order of the Adjudicating Authority and of the  Appellate Tribunal.  He drew our specific attention to Regulation  25 (7)(a) of the Securities and Exchange Board of India (Mutual  Funds) Regulations, 1996 and Sections 15-D(b), 15-E, 15-I, 15-J,  and 12-B of the SEBI Act, 1992 which are extracted hereunder:  "25. Asset management company and its obligations: 1.      \005 2.      \005 3.      \005 4.      \005

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 12  

5.      \005 6.      \005 7.      (a) An Asset management company shall not  through any broker associated with the  sponsor, purchase or sell securities, which is  average of 5% or more of the aggregate  purchases and sale of securities made by the  mutual fund in all its schemes; Provided that for the purpose of this sub- regulation, aggregate purchase and sale of  security shall exclude sale and distribution of  units issued by the mutual fund: Provided further that the aforesaid limit of 5%  shall apply for a block of any three months".

"15-D Penalty for certain defaults in case of mutual  funds: (a)     If any person, who is\005.

(b)     Registered with the Board as a collective  investment scheme, including mutual funds,  for sponsoring or carrying on any investment  scheme, fails to comply with the terms and  conditions of certificate of registration, he shall  be liable to a penalty of one lakh rupees for  each day during which such failure continues  or one crore rupees, whichever is less;"

"15-E Penalty for failure to observe rules and  regulations by an asset management company \026 Where  any asset management company of a mutual fund  registered under this Act fails to comply with any of the  regulations providing for restrictions on the activities of the  asset management companies, such asset management  company shall be liable to a penalty of one lakh rupees for  each day during which such failure continues or one crore  rupees, whichever is less."

"15(I) For the purpose of adjudging under Sections 15A,  15B, 15C, 15D, 15E, 15F, 15G and 15H, the Board shall  appoint any officer not below the rank of a Division Chief  to be an adjudicating officer for holding an enquiry in the  prescribed manner after giving any person concerned a  reasonable opportunity of being heard for the purpose of  imposing any penalty.  

(2) While holding an inquiry the adjudicating officer shall  have power to summon and enforce the attendance of any  person acquainted with the facts and circumstances of the  case to give evidence or to produce any document which in  the opinion of the adjudicating officer, may be useful for or  relevant to the subject-matter of the inquiry and if, on  such inquiry, he is satisfied that the person has failed to  comply with the provisions of any of the sections specified  in sub-section (1), he may impose such penalty as he  thinks fit in accordance with the provisions of any of those  sections."

"15-J. While adjudging quantum of penalty under Section  15-I, the adjudicating officer shall have the due regard to  the following factors, namely:-

(a)     the amount of disproportionate gain or unfair  advantage, wherever quantifiable, made as a  result of the default;

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 12  

(b)     the amount of loss caused to an investor or  group of investors as a result of the default;

(c)     the repetitive nature of the default."   

Statutory Scheme Chapter VI-A of the SEBI Act provides for Penalties and  Adjudication, which provisions were introduced in SEBI Act by  the Amendment Act 9 of 1995.  Section 15-A to Section 15 HB  are in the form of mandatory provisions imposing penalty in  default of the provisions of the SEBI Act and Regulations.  The  provisions of penalty for non-compliance of the mandate of the  Act is with an object to have an effective deterrent to ensure  better compliance of the provisions of the SEBI Act and  Regulations, which is crucial for the appellant Board in order to  protect the interests of investors in securities and to promote the  development of the securities market. Chapter VI-A of the SEBI Act deals with the penalties and  the adjudication.  Section 15-l of the SEBI ACT envisages  appointment of Adjudicating Officer for holding an inquiry in the  prescribed manner, after giving reasonable opportunity of being  heard for the purpose of imposing any penalty. Section 15-J provides various factors which are to be taken  into consideration while adjudging the question of penalty under  Section 15-l namely, the amount of disproportionate gain or  unfair advantage whenever quantifiable, loss caused to an  investor or group of investors and the repetitive nature of default.   The legislature in its wisdom had not included mens rea or  deliberate or wilful nature of default as a factor to be considered  by the Adjudicating Officer in determining the quantum of  liability to be imposed on the defaulter. Sections 15A to 15H and 15HA employ the words "shall be  liable" and, therefore, mandatorily provides for imposition of  monetary penalties for respective breaches or non-compliance of  provisions of the SEBI Act and the Regulations.  Default or  failure, as contemplated under the Act includes : 15A \026 Failure to furnish information, return  15B \026 Failure to enter into agreement with clients 15C \026 Failure to redress investors’ grievances 15D \026 Default in case of mutual funds 15E \026 Failure to observe rules and regulations by an            asset management company 15F \026 Default in case of stock brokers 15G \026 For insider trading 15H \026 Non-disclosure of acquisition of shares and takeovers 15HA \026 Fradulent and unfair trade practices 15HB \026 Penalty, if not separately provided

       The Scheme of the SEBI Act of imposing penalty is very  clear.  Chapter VI nowhere deals with criminal offences.  These  defaults for failures are nothing, but failure or default of  statutory civil obligations provided under the Act and the  Regulations made thereunder.  It is pertinent to note that Section  24 of the SEBI Act deals with the criminal offences under the Act  and its punishment.  Therefore, the proceedings under Chapter  VI A are neither criminal nor quasi-criminal.  The penalty leviable  under this Chapter or under these Sections, is penalty in cases of  default or failure of statutory obligation or in other words breach  of civil obligation.  In the provisions and scheme of penalty under  Chapter VI A of the SEBI Act, there is no element of any criminal  offence or punishment as contemplated under criminal  proceedings.  Therefore, there is no question of proof of intention  or any mens rea by the appellants and it is not essential element

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 12  

for imposing penalty under SEBI Act and the Regulations.      As already noticed, the Tribunal allowed the appeals of the  respondent on the ground that there was no mala fide intention  to act in violation of Regulation 25 (7((a) and Section 15(D)(b) of  the SEBI Act but due to circumstances respondents were forced  to act in excess of the limits prescribed under Regulation 25(D)(b)  of the said Regulation.  Question of law The important question of law which arises for  consideration in the present appeal is whether the Tribunal was  justified in allowing the appeals of the respondent herein and  that whether once it is conclusively established that the Mutual  Fund has violated the terms of the Certificate of Registration and  the statutory Regulations i.e. the SEBI (Mutual Funds)  Regulation, 1996, the imposition of penalty becomes a sine qua  non of the violation.  In other words, the breach of a civil obligation which  attracts penalty in the nature of fine under the provisions of the  Act and the Regulations would immediately attract the levy of  penalty irrespective of the fact whether the contravention was  made by the defaulter with any guilty intention or not.   Mr. Rao took us through the orders passed by the  Adjudicating Authority.  It is seen that the respondents  themselves have admitted the violation of the Regulations during  a continuous period of 2= years in 12 instances, covering 6  quarters.  Regulation 25 (7)(a) of the Regulation provides that an  Asset Management Company shall not through any broker  associated with sponsor, purchase or sell securities, which is  average of 5% or more of the aggregate purchases and sale of  securities made by the Mutual Fund in all its schemes.  The  second proviso to the said Regulation clearly provides that the  aforesaid limit shall apply for a block of 3 months.  Hence, there  has been a repetitive violation of the said Regulation, and the  terms of the Certificate of Registration.  In these circumstances,  the learned senior counsel submitted that the Tribunal has  erroneously allowed the appeals filed by the respondents against  the order passed by the Adjudicating Officer on 24.06.2002.  The  Tribunal has given a clear finding that the respondent No.1 Fund  has admittedly exceeded the prescribed limit of more than 5%  when it had transacted business through brokers, associated  with its sponsors which is in contravention of provisions of  Regulation 25(7)(a) of the SEBI (Mutual Funds) Regulation, 1996.  We have already noticed the instances of excess  transactions conduced by the respondents and reproduced the  same in paragraphs (supra).  It is an admitted fact that the  respondent had on 12 occasions routed transactions through its  associated brokerage houses in excess of the permissible limits  prescribed under Regulation 25 (7)(a) of the Regulations.  In the present case, the contesting respondent is a Mutual  Fund and the Asset Management Company.  During the period  from June, 1998 to September, 1999, the respondent had  conducted business through associated brokers, in excess of the  limits prescribed under Regulation 25 (7)(a) of the Regulations on  12 occasions covering 6 quarters.  The respondent had failed to  comply with the terms and conditions attached to the Certificate  of Registration granted to it, inasmuch as it did not exercise  diligence to ensure that the transactions by its own Asset  Management Company were confined to the permissible limits.  In this case, the SEBI appointed an Adjudicating Officer in  terms of Section 15-I to inquire into and adjudge the alleged  contravention of Section 15-E of the Act of 1992.  The  Adjudicating Officer, after inquiry, confirmed the charges and  imposed a sum of Rs. 5 lacs as penalty on respondent No.2  under Section 15-E of the said Act for failure to comply with  Regulation 25 (7)(a) and Rs. 2 lacs on the other respondent for

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 12  

failure to comply with the terms and conditions attached to the  Certificate of Registration.  Mr. Rao submitted that under Regulation 25 (7)(a) an Asset  Management Company shall not through any broker associated  with the sponsor, purchase or sell securities, which is average of  5% or more of the aggregate purchases and sale of securities  made by Mutual Funds in all its schemes and that the aforesaid  limit of 5% shall apply for a block of any three months.   In the present case, the respondents on their own  admission have violated the aforesaid statutory Regulations  during 6 quarters.  Hence Mr. Rao submitted that the violation is  ex facie wilful and hence the penalty imposed by the Adjudicating  Officer ought not to have been set aside by the single member  Tribunal.  Mr. Rao further argued that unless the language of the  statute indicates the need to establish the element of mens rea it  is generally sufficient to prove that a default in complying with  the statute has occurred.  Under Sections 15-D(b) and 15-E of  the Act, there is nothing which requires that mens rea must be  proved before penalty can be imposed under these provisions.   Hence, it was contended that once the contravention is  established, the penalty has to follow.  The Tribunal set aside the order passed by the Adjudicating  Officer on the ground that the penalty to be imposed for failure to  perform a statutory obligation is a matter of discretion which has  to be exercised judicially and on a consideration of all the  relevant facts and circumstances.  The Tribunal also held that  the Adjudicating Officer has to be satisfied with the material  placed before him that the violation deserves punishment.  It was  held that the penalty is warranted by the quantum which has to  be decided by taking into consideration the factors stated in  Section 15J of SEBI Act.  In our opinion, the Tribunal has  miserably failed to appreciate that by setting aside the order of  the Adjudicating Officer the Tribunal was setting a serious wrong  precedent whereby every offender would take shelter of alleged  hardships to violate the provisions of the Act.  In our opinion,  mens rea is not an essential ingredient for contravention of the  provisions of a civil act.  In our view, the penalty is attracted as  soon as contravention of the statutory obligations as  contemplated by the Act is established and, therefore, the  intention of the parties committing such violation becomes  immaterial.  In other words, the breach of a civil obligation which  attracts penalty under the provisions of an Act would  immediately attract the levy of penalty irrespective of the fact  whether the contravention was made by the defaulter with any  guilty intention or not.  This apart that unless the language of  the statute indicates the need to establish the element of mens  rea, it is generally sufficient to prove that a default in complying  with the statute has occurred.  Under a close scrutiny of Section  15 D(b) and 15-E of the Act, there is nothing which requires that  mens rea must be proved before penalty can be imposed under  these provisions.  Hence, we are of the view that once the  contravention is established, then the penalty has to follow and  only the quantum of penalty is discretionary.  Discretion has  been exercised by the Adjudicating Officer as is evident from  imposition of lesser penalty than what could have been imposed  under the provisions.  The intention of the parties is wholly  irrelevant since there has been a clear violation of the statutory  Regulations and provisions repetitively, covering a period of 6  quarters.  Hence we hold that the respondents have wilfully  violated statutory provisions with impunity and hence the  imposition of penalty was fully justified.  The Tribunal, in this  context, failed to appreciate that every Mutual Fund has to  redeem the units as per terms and conditions of the scheme on  the request of the unit holders and this cannot, in any manner,  be considered as an extraordinary circumstance or something

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 12  

which was not known to the respondents.  The facts and  circumstances of the present case in no way indicate the  existence of special circumstances so as to waive the penalty  imposed by the Adjudicating Officer.  A perusal of the order  passed by the Adjudicating Officer would clearly go to show that  factors such as small size of the funds, low volume of  transactions, thinly traded securities, administrative and  operational exigencies were duly considered and appreciated by  the Adjudicating Officer while passing the order and that is why  the Adjudicating Officer did not impose the maximum  permissible penalty.  The Tribunal failed to appreciate that the  objective behind imposing certain limit on the business that can  be conducted by mutual fund through the associate broker is to  eliminate any undue advantage to the class of brokers by virtue  of their close association with the Asset Management Company,  sponsors etc.  In other words, the object of imposing such limits  is to ensure that there is no concentration of business only in  such entities, so that there is an indirect pecuniary advantage to  the person associated with the Asset Management Company,  sponsors etc.  Any undue concentration on the business of the  mutual fund with its affiliated brokers by paying huge  commissions to such brokers is neither desirable nor in the  interest of the unit holders.  It is a matter of record that in the 12  admitted instances of violation by the respondents, the  percentage of the business through the associated brokers was  as high as 91.68% and 52.2% in certain factors.  This apart, the  respondent’s excessive exposure to the associate brokers is not  only established from the record, but has also been admitted by  respondents.  It is settled law that when a penalty is imposed by an  Adjudicating Officer, it is done so in adjudicatory proceedings  and not by way of fine as a result of prosecution of an accused  for commission of an offence in a criminal proceeding.  In the  instant case, the Tribunal has failed to appreciate that the  respondents had given undue and unfair advantage to the  associated brokers, which is detrimental to the interest of the  unit holders.   In the present case, it has been established by the  Adjudicating Officer as well as admitted by the respondents that  there has been a conscious disregard of the obligation inasmuch  as the respondents were aware that they were acting in violation  of the provisions of Regulations.  The Adjudicating Officer had,  after taking into account all the facts and circumstances of the  case, imposed only a token of Rs. 5 lacs against the respondents  for its failure on 12 occasions though the charging section  permits imposition of a maximum penalty of Rs. 5 lacs for each  such violation.   The Appellant Board has been established by the  Parliament under the Securities and Exchange Board of India  Act, 1992 to protect the interest of investors in securities and to  promote the development of, and to regulate the securities  market and for matter connected therewith or incidental thereto.   The Board was set up to promote orderly and healthy growth of  the securities market and for investors protection SEBI has been  monitoring and regulating the activities of Stock Exchanges,  Mutual Funds and Merchant Bankers, etc. to achieve these  goals.  The Capital market has witnessed tremendous growth in  recent times, characterized particularly by the increasing  participation of the Public.  Investors’ confidence in the capital  market can be sustained largely by ensuring investors protection.   That it became imperative to impose monetary penalties also in  addition to other penalties in cases of default.  Mens rea  : Whether an essential element for imposing  penalty for breach of civil obligations?         This Court in a catena of decisions have held that mens rea

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 12  

is not an essential element for imposing penalty for breach of  civil obligations. (a)     Director of Enforcement vs. MCTM Corporation Pvt.  Ltd. & Ors. , (1996) 2 SCC 471 "It is thus the breach of a "civil obligation" which  attracts "penalty" under Section 23(1)(a) FERA,  1947 and a finding that the delinquent has  contravened the provisions of Section 10  FERA  1947 that would immediately attract the levy of  "penalty" under Section 23, irrespective of the fact  whether the contravention was made by the  defaulter with any "guilty intention" or not.   Therefore, unlike in a criminal case, where it is  essential for the ’prosecution’ to establish that the  ’accused’ had the necessary guilty intention or in  other words the requisite ’mens rea’ to commit the  alleged offence with which he is charged before  recording his conviction, the obligation on the part  of the Directorate of Enforcement, in cases of  contravention of the provisions of Section 10 of  FERA, would be discharged where it is shown that  the "blameworthy conduct" of the delinquent had  been established by wilful contravention by him of  the provisions of Section 10, FERA 1947.  It is the  delinquency of the defaulter itself which establishes  his ’blameworthy’ conduct, attracting the provisions  of Section 23(1)(a) of FERA, 1947, without any  further proof of the existence of "mens rea".  Even  after an adjudication by the authorities and levy of  penalty under Section 23(1)(a) of FERA, 1947, the  defaulter can still be tried and punished for the  commission of an offence under the penal  law\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005."

"In Corpus Juris Secundrum. Vol.85 at page 580,  para 1023, it is stated thus:

"A penalty imposed for a tax delinquency is a civil  obligation, remedial and coercive in its nature, and  is far different from the penalty for a crime or a fine  or forfeiture provided as punishment for the  violation of criminal or penal laws."

"We are in agreement with the aforesaid view and in  our opinion what applies to "tax delinquency"  equally holds good for the ’blameworthy’ conduct for  contravention of the provisions of FERA, 1947.  We,  therefore, hold that mens area (as is understood in  criminal law) is not an essential ingredient for  holding a delinquent liable to pay penalty under  Section 23(1)(a) of FERA, 1947 for contravention of  the provisions of Section 10 of FERA, 1947 and that  penalty is attracted under Section 23(1)(a) as soon  as contravention of the statutory obligation  contemplated by Section 10(1)(a) is established.   The High Court apparently fell in error in treating  the "blameworthy conduct" under the Act as  equivalent to the commission of a "criminal offence",  overlooking the position that the "blameworthy  conduct" in the adjudicatory proceedings is  established by proof only of the breach of a civil  obligation under the Act, for which the defaulter is  obliged to make amends by payment of the penalty  imposed under Section 23(1)(a) of the Act  irrespective of the fact whether he committed the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 12  

breach, with or without any guilty intention."

(b)     J.K. Industries Ltd. & Ors. Vs. Chief Inspector  of Factories and Boilers & Ors., (1996) 6 SCC  665

"The offences under the Act are not a part of  general penal law but arise from the breach of a  duty provided in a special beneficial social  defence legislation, which creates absolute or  strict liability without proof of any mens rea.  The  offences are strict statutory offences for which  establishment of mens rea is not an essential  ingredient.  The omission or commission of the  statutory breach is itself the offence.  Similar type  of offences based on the principle of strict  liability, which means liability without fault or  mens rea, exist in many statutes relating to  economic crimes as well as in laws concerning  the industry, food adulteration, prevention of  pollution etc. in India and abroad.  "Absolute  offences" are not criminal offences in any real  sense but acts which are prohibited in the  interest of welfare of the public and the  prohibition is backed by sanction of  penalty\005\005\005"

(c)     R.S. Joshi Sales Tax Officer, Gujarat & Ors.  Vs. Ajit Mills Ltd. & anr.etc. , (1977) 4 SCC 98

"\005\005\005\005\005Even here we may reject the notion  that a penalty or a punishment  cannot be cast in  the form of an absolute or no-fault liability but  must be preceded by mens rea.  The classical  view that ’no mens rea, no crime’ has long ago  been eroded and several laws in India and  abroad, especially regarding economic crimes and  departmental penalties, have created severe  punishments even where the offences have been  defined to exclude mens rea.  Therefore, the  contention that Section 37(1) fastens a heavy  liability regardless of fault has no force in  depriving the forfeiture of the character of  penalty."

(d)     M/s Gujarat Travancore Agency, Cochin vs.  C.I.T. , (1989) 3 SCC 52.

"\005\005\005\005\005It is sufficient for us to refer to Section  271(1)(a), which provides that a penalty may be  imposed if the Income Tax Officer is satisfied that  any person has without reasonable cause failed  to furnish the return of total income, and to  Section 276-C which provides that if a person  wilfully fails to furnish in due time the return of  income required under Section 139(1), he shall  be punishable with rigorous imprisonment for a  term which may extend to one year or with fine.   It is clear that in the former case what is  intended is a civil obligation while in the latter  what is imposed is a criminal sentence.  There  can be no dispute that having regard to the  provisions of Section 276-C, which speaks of  wilful failure on the part of the defaulter and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 12  

taking into consideration the nature of the  penalty, which is punitive, no sentence can be  imposed under that provision unless the element  of mens rea is established.  In most cases of  criminal liability, the intention of the legislature  is that the penalty should serve as a deterrent.   The creation of an offence by statute proceeds on  the assumption that society suffers injury by the  act or omission of the defaulter and that a  deterrent must be imposed to discourage the  repetition of the offence.  In the case of a  proceeding under Section 271(1)(a), however, it  seems that the intention of the legislature is to  emphasise the fact of loss of revenue and to  provide a remedy for such loss, although no  doubt an element of coercion is present in the  penalty.  In this connection, the terms in which  the penalty falls to be measured is significant.   Unless there is something in the language of the  statute indicating the need to establish the  element of mens rea it is generally sufficient to  prove that a default in complying with the statute  has occurred.  In our opinion, there is nothing in  Section 271(1)(a) which requires that mens rea  must be proved before penalty can be levied  under that provision."

(e)     Swedish Match AB and Anr. Vs. SEBI & anr. ,  (2004) 11 SCC 641.

"\005\005\005\005The provisions of Section 15-H of the Act  mandate that a penalty of rupees twenty five  crores may be imposed.  The Board does not have  any discretion in the matter and, thus the  adjudication proceeding is a mere formality.   Imposition of penalty upon the appellant would,  thus, be a forgone conclusion.  Only in the  criminal proceedings initiated against the  appellants, existence of mens rea on the part of  the  appellants will come up for consideration."

(f)     SEBI vs. Cabot International Capital  Corporation, (2005) 123 Comp. Cases 841  (Bom).

"Thus, the following extracted principles are  summarised:

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

(B)     Strait jacket formula of mens rea cannot be  blindly followed in each and every case.   Scheme of particular statute may be diluted  in a given case.                 

(C)     If, from the scheme, object and words used in  the statute, it appears that the proceedings  for imposition of the penalty are adjudicatory  in nature, in contra-distinction to criminal or  quasi criminal proceedings, the determination  is of the breach of the civil obligation by the  offender.  The word "penalty" by itself will not  be determinative to conclude the nature of  proceedings being criminal or quasi-criminal.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 12  

The relevant considerations being the nature  of the functions being discharged by the  authority and the determination of the  liability of the contravenor and the  delinquency.

(D)     Mens rea is not essential element for imposing  penalty for breach of civil obligations or  liabilities\005..

(E)     There can be two distinct liabilities, civil and  criminal under the same Act.

(Para 52)  The SEBI Act and the Regulations  are intended to regulate the Security Market  and related aspects, the imposition of penalty,  in the given facts and circumstances of the  case, cannot be tested on the ground of "no  mens rea no penalty".  For breaches of  provisions of SEBI Act and Regulations,  according to us, which are civil in nature,  mens rea is not essential.  On particular facts  and circumstances of the case, proper  exercise or judicial discretion is a must, but  not on a foundation that mens rea is an  essential to impose penalty in each and every  breach of provisions of the SEBI Act. (para 54) However, we are not in agreement  with the appellate authority in respect of the  reasoning given in regard to the necessity of  mens rea being essential for imposing the  penalty.   According to us, mens rea is not  essential for imposing civil penalties under  the SEBI Act and Regulations."

       The Trbunal has erroneously relied on the judgment in  the case of Hindustan Steel Ltd. Vs. State of Orissa, AIR  1970 SC 253 which pertained to criminal/quasi-criminal  proceeding.  That Section 25 of the Orissa Sales Tax Act which  was in question in the said case imposed a punishment of  imprisonment up to six months and fine for the offences under  the Act.  The said case has no application in the present case  which relates to imposition of civil liabilities under the SEBI  Act and Regulations and is not a criminal/quasi-criminal  proceeding.

In our considered opinion, penalty is attracted as soon as  the contravention of the statutory obligation as contemplated  by the Act and the Regulation is established and hence the  intention of the parties committing such violation becomes  wholly irrelevant.  A breach of civil obligation which attracts  penalty in the nature of fine under the provisions of the Act  and the Regulations would immediately attract the levy of  penalty irrespective of the fact whether contravention must  made by the defaulter with guilty intention or not.  We also  further held that unless the language of the statute indicates  the need to establish the presence of mens rea, it is wholly  unnecessary to ascertain whether such a violation was  intentional or not.  On a careful perusal of Section 15(D)(b)  and Section 15-E of the Act, there is nothing which requires  that mens rea must be proved before penalty can be imposed  under these provisions.  Hence once the contravention is  established then the penalty is to follow.         In our view, the impugned judgment of the Securities

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 12  

appellate Tribunal has set a serious wrong precedent and the  powers  of the SEBI to impose penalty under Chapter VIA are  severely curtailed against the plain language of the statute  which mandatorily imposes penalties on the contravention of  the Act/Regulations without any requirement of the  contravention having been deliberated or contumacious.  The  impugned order sets the stage for various market players to  violate statutory regulations with impunity and subsequently  plead ignorance of law or lack of mens rea to escape the  imposition of penalty.  The imputing mens rea into the  provisions of Chapter VI A is against the plain language of the  statute and frustrates entire purpose and object of introducing  Chapter VIA to give teeth to the SEBI to secure strict  compliance of the Act and the Regulations. In the result, the Civil Appeal Nos. 9523 and 9524 of 2003  are allowed and the order passed by the Securities Appellate  Tribunal, Mumbai dated 21.08.2003 in Appeal Nos. 50 and 51 of  2002 are set aside.  No costs.