Doogar Associates Vs. SEBI

May 25, 2001

Orders : Orders of SAT

BEFORE THE SECURITIES APPELLATE TRIBUNAL,MUMBAI.

APPEAL NO.60/2002

In the matter of :

Doogar & Associates Ltd. Appellant

Securities and Exchange Board of India. Respondent

APPEARANCE:

Shri Dinesh Agnani

Advocate for Appellant

Shri Vinay Chauhan

Legal Officer for Respondent

ORDER

The Respondent, based on the information in its possession decided to appoint an Adjudicating Officer to inquire into and adjudge under section 15A of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) the alleged contravention of sub regulation (2) of regulation 15 and sub regulation (3) of regulation 24 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations) by the Appellant with reference to its role as the merchant banker in the context of the public offer made by Allianz International Pvt. Ltd., (the Acquirer) on 27.8.2001 to acquire 2,00,000 shares representing 20% of the equity share capital of a company viz. Adhbhut Industrial Resources Ltd.,(the Target Company). The Appellant was the merchant banker appointed for the purpose of the said public offer. The Respondent appointed an Adjudicating Officer for the purpose vide its order dated 5.12.2001. The Adjudicating Officer after inquiry viewed that the Appellant had failed to comply with the requirements of regulation 15(2) read with regulation 24(3) of the Takeover Regulations in as much as a copy of the public announcement was filed with the Respondent, after the publication of the same, as against the requirement of filing it atleast two days in advance of its publication. In that context the Adjudicating Officer imposed a penalty of fifty thousand rupees on the Appellant. The Appellant claiming to be aggrieved by the said order, preferred the present appeal.

Shri Dinesh Agnani, learned Counsel appearing for the Appellant explained the factual matrix relating to the case. He submitted that since the Acquirer had decided to acquire the shares of the Target Company and also the control over the company, in terms of regulation 10 read with regulation 12 of the Takeover Regulations, the acquirer was required to make a public announcement offering to purchase not less than 20% of the paid up capital of the Target Company and for that purpose, the Appellant, a Category I Merchant Banker, was appointed. He submitted that in terms of regulation 15(2), a copy of the public announcement is required to be submitted to SEBI, atleast 2 working days before its issuance, that the public announcement in the instant case was made on 27.8.2001, that on 31.8.2001 the Respondent informed the Appellant that it had not received the copy of the announcement as required to be submitted to it vide regulation 15(2). In that context the Appellant tried to find out the cause as to why the copy of the announcement did not reach the Respondent, though steps had already been taken to submit the same well in time. He submitted that on making enquiries it was found that copies of public announcement which were to be sent to the office of the Respondent had been handed over by the Appellant to its receptionist Ms. Mona Bisht for being delivered to the office of the Respondent, that Ms. Mona Bisht could not post it as her relative suddenly expired on that day and she went to the hospital where the said relative was admitted leaving the office without giving instructions to anyone to post the same and thereafter she continued to remain absent. It was only when a call was received from the office of the Respondent, the Appellant came to know about not posting the copy of the public announcement and on realising the lapse on the part of the official, immediately a copy of the public announcement was sent to the Respondent. Requesting to condone the delay on humanitarian ground and as an exceptional case because it was not the intention of the Appellant not to submit the copy of the announcement in time, and the Appellant also assured that it would take extra precaution and care in future. Learned Counsel submitted that it is also a fact that after the receipt of the copy of the public announcement the Respondent did not point out any error or deficiency in the public announcement.

Learned Counsel submitted that the Appellant in its reply to the show cause notice had clearly explained the circumstances in which the copy of the public announcement did not reach the Respondent’s office in time but after a delay of 3 days, and that the delay was caused due to unavoidable circumstances for the reasons explained therein. The Respondent was also informed that the public announcement made by the Appellant met all the requirements as required under law and from the observation letter dated 19.2.2001 sent by the Respondent’s office also it is clear as the same did not offer any comments thereon. The Appellant was neither asked to make any corrigendum to the public announcement nor any objection was raised during the currency of the offer. The Appellant in its reply had further stated that all the formalities regarding the offer in question had been completed and the Appellant had successfully discharged all the obligations relating to the said offer and no share holder was adversely affected due to the late submission of the copy of the announcement by 3 days. Since there was no malafide involved and the delay was attributable to unavoidable circumstances, the Appellant once again requested the Respondent to condone the delay of 2 to 3 days involved, that in the said letter the Appellant had stated the entire activity chart demonstrating meticulous compliance of the requirements of the regulations.

The factual position made it clear that there has been no default on the part of the Appellant and all the regulations were duly complied with and functions discharged by the Appellant and still the Respondent decided to penalise the Appellant purely on technical grounds ignoring the factual position.

The Learned Counsel submitted that the Adjudicating Officer erred in imposing penalty on the ground that the Appellant had failed to comply with the requirements under clause (a) of Section 15A whereas in fact, admittedly the Appellant had filed the necessary documents with slight delay as against the time specified in the regulations. Therefore imposing the penalty as prescribed under clause(a) of Section 15A and not under clause (b) of Section 15B, has resulted in miscarriage of justice, that the Adjudicating Officer got carried away by the earlier order passed by the Respondent wherein the Appellant has been suspended for a period of two months in the matter of a public issue of M/s. Manu Finlease Ltd., without appreciating the fact that the said order had since been modified by the Appellate authority, and further more the Adjudicating Officer while adjudging the quantum of penalty under Section 15J also failed to appreciate that there has been no disproportionate gain or unfair advantage to the Appellant, no amount of loss has been caused to any investors or group of investors as a result of delay in submitting the copy of the public announcement to SEBI. He submitted that the matter involving Manu Finlease did not relate to identical set of facts, that in that case the matter related to public issue and not public offer under the Takeover Regulations. Holding that the instant case amounts to repetitive default a penalty of Rs.50,000/- was imposed which has resulted in grave miscarriage of justice. Learned Counsel submitted that the Adjudicating Officer has wrongly concluded that non-filing of the copy of the public announcement with the Respondent has obstructed discharge of its statutory duties, as the said observations is without any basis and has been made for the reasons best known to the Adjudicating Officer. The Adjudicating Officer has stated that the purpose of filing public announcement in advance enables the Respondent to examine the same and see that the same is in conformity with the said regulations and also enables it to take appropriate and timely steps in case of any non-compliance with the said regulation is observed, that thus it enables the Respondent to protect the interest of investors/share holders by taking timely action in the matter before the public announcement is issued. Learned Counsel submitted that the Adjudicating Officer lost sight of the fact that in case there had been any discrepancy then it could have asked the Appellant to issue supplementary advertisement/public announcement, that admittedly there were no discrepancies and the public announcement was in confirmation with the said regulations and no prejudice was caused to the interest of investors/share holders. Had there been any discrepancies in the public announcement the Respondent would have called upon the Appellant to modify the public announcement and in that case it could have been viewed that the Appellant had obstructed the Respondent in discharge of its statutory duties by late filing of the public announcement. By not appreciating the said fact and merely holding that the delay involved on the part of the Appellant in filing the public announcement has obstructed the Respondent in discharge of its statutory duty is without any basis. The purpose of filing the public announcement with the Respondent is to ensure that no mis-statement/wrong statement has been made in the said public offer so as to cause prejudice to the shareholders/investors and in the event there are some mis-statement the same could be got rectified before the public announcements are published, that there may be some occasions of delay on the part of SEBI to notify any mistake within the said period of 2 days and in that event the procedure which is valid is to ask the acquirer to issue a corrigendum in furtherance to the original public announcement made, so that the shareholders/investors in the said company do not suffer any hardship or their interest is not adversely affected.

Learned Counsel submitted that the requirement of filing advance copy of the public announcement having found not of any use, the Respondent by an amendment to the regulation 15(2) has now done away with the said requirement and that if the compliance of the said requirement had been of such importance, as the Adjudicating Officer has attempted to project, the Respondent would not have deleted the said regulation. He submitted that the requirement under regulation 15(2) was found redundant and that is why the regulation was deleted and therefore, for non compliance of such a redundant requirement strictly, imposition of penalty is unwarranted. Learned Counsel reiterated that the Respondent has simply invoked the penalty provisions without application of mind, that the Respondent itself had admitted that as a result of the failure to file the advance copy of the public announcement, the interests of the investors have been not affected in any manner. He submitted that the Adjudicating Officer has not taken into consideration the facts required to be followed for the purpose of imposition of penalty as provided in section 15J. He countered the Adjudicating Officer’s contention that the Appellant is a repetitive defaulter, that according to him if a person repeats the same default then only he can be considered as repetitive defaulter, that the Appellant had not defaulted repeatedly as alleged. He submitted that the Adjudicating Officer has totally ignored the fact that the failure to submit the copy of the announcement was beyond the control of the Appellant, that the Appellant had acted in atleast 100 public issues/offer as merchant banker and in none of the cases it had failed to comply with the requirements of regulation 15(2), that by not strictly complying with the said requirements nobody has gained anything, that the public announcement appears in the press and that the public offer document can not be issued thereafter without submitting the same in advance to the Respondent and incorporating modification if any suggested by it, is also a matter which can not be ignored. Shri Agnani in this connection referred to this Tribunals decision in the case of Cabbot International Capital Corporation V Adjudicating Officer (2001) 40 CLA 326 (Sat) wherein the Tribunal had held that the purpose of making disclosure is to ensure transparency, and what is to be considered in the instant case is that the said purpose has been achieved. He submitted that the Appellant in no way suppressed any information and there was no transparency lacking to view the failure, which is purely of technical nature, as one to warrant penalty. Learned Counsel in this context referred further to the view held by the Tribunal in Cabbot’s case that monetary penalty is not warranted in every case of failure that:

“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.

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 bonafide belief that the offender is not liable to act in the manner prescribed by the statute”.

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”.

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 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 bonafide belief of the Appellant that it was not liable to act in the manner prescribed by the statute.

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”.

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 perse the violation. The Adjudicating Officer has to satisfy that the violation deserved punishment.

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.

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 bonafide 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. In fact the Adjudicating Officer himself has admitted in para 4.1.4 of the order that “ this case however relates to a transitional period . The process of acquisition took place while the 1994 regulation was in force. The actual allotment/acquisition took place while the 1997 Regulations came into force. In that process there was lack of clarity on the part of the acquirer as to the applicability of 1997 Regulations”. Keeping all the factors in view , the benefit of doubt was given to the acquirer and no penalty was imposed in terms of section 15H(ii) of the Act. In this context I am tempted to observe that even otherwise regulation 11 will not be attracted to the company’s preferential allotment in view of the fact that the acquisition is covered under regulation 3. Even though the Adjudicating Officer has given the benefit of doubt to the Appellant in the matter of the alleged violation of regulation 11/ section 15(ii), for the reasons best known to him he has not extended that benefit as far as non compliance of regulation 3(4) is concerned, though the facts and circumstances applicable are the same in both the cases. This differential treatment, in the absence of adequate explanation cannot stand. The observation made by the Adjudicating Officer based on his satisfaction, cannot be limited to applicability to regulation 11/section 15(ii) alone as the facts are common. Further the Adjudicating Officer has also clearly stated in the order “that the delay in filing of the report has not resulted in any gain” to the Appellant. There is not even a whisper in the impugned order of any loss to anybody. There is nothing on record to show that the Appellant had a past record of default. None of the factors of section 15J is attracted in this case. In the light of the totality of the facts and circumstances of the case and 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.”

Shri Agnani submitted that the Appellant’s case is in no way different from the Cabbot’s case, that it had not acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation and in the light of the facts and circumstances of the case, the alleged failure did not warrant imposition of monetary penalty.

Shri Vinay Chauhan, learned Representative of the Respondent submitted that for the failure to submit the copy of the text of the public announcement, to SEBI whether clause (a) or clause (b) of section 15A is attracted is no longer an issue in the light of the decision of this Tribunal in Housing Development Finance Corporation Ltd., V Securities and Exchange Board of India (2000) 28 SCL 289 (SAT). He referred to the following portion in the said decision:

“On a careful reading, it is seen that section 15A has been drafted to meet different situations, enumerated under clauses (a)(b) and (c). It is also pertinent to note that the legislature, taking into consideration the gravity of the matter, i.e. the resultant consequences of the default has decided to provide monetary penalties of different quantum. It appears that failure under clause (a) i.e. failure to furnish returns, reports, etc. to the Board, has been viewed rather leniently as the maximum monetary penalty leviable is limited to one lakh and fifty thousand rupees for each such failure. But, under clause(b) the penalty in the event of failure to file returns, furnish any information, books or other documents within the time prescribed by regulation meets with a penalty upto five thousand rupees for every day during which such failure continues. It appears from clause (c), that failure to maintain the requisite books of account or records is viewed more seriously as could be seen from the penal consequences, as the failure attracts a maximum penalty of ten thousand rupees for every day during which the failure continues.

It is also to be noted that the expressions “document” and “return” have been repeated in clause (b) also. If expression “information” referred to in clause(b) can be in a report form, as suggested by the Respondent, all the requirements of (a) are covered under (b) also. If the legislative intention had been to include reporting to the Board also in clause(b) specific provision under clause (a) for the same purpose with a different quantum of penalty would not have been provided in the Act. These two sub clauses are meant to meet different requirements. It is clear that clause(a) takes care of the matters to be exclusively dealt with the Board and clause(b) is to the exclusion of the Board.

The argument that clause (a) does not prescribe any time limit for compliance is incorrect. The opening words in the section that “ if any person who is required under the Act or any rules or regulations made thereunder” should be read in conjunction with clause (a) and in that context it could be seen that every requirement referred in clause (a) is relatable to time limit. If the Respondent’s argument that clause (a) does not prescribe any time limit is accepted, it would lead us to an absurd situation as there would be no referral point of time to decide the occurrence of the default. If the requirement of reporting etc., under clause (a) is not relatable to a time factor for compliance, no offence can be made out and consequently no penalty also will be leviable and thereby clause(a) would become redundant.”

Shri Chauhan Submitted that it is not the Appellant’s contention that it had submitted the text of the public announcement to the Respondent within the time stipulated in regulation 15(2) that the Appellant has also admitted that there was delay on its part in submitting the text to SEBI by 3 days. It’s contention is that since the failure was unintentional no penalty is warranted and it is in that context support has been sought from the decision of this Tribunal in Cabbot’s case (supra).

Learned Representative submitted that in a public offer, merchant banker has a dominant role to play, that the importance of his role has been recognised by the Regulations. In this context he referred to the requirement of regulation 13 whereunder before making any public announcement of offer the acquirer is required to appoint a merchant banker in Category I, who is not associate of or group of the acquirer or the target company, that regulation 24 enumerates the general obligations of the merchant banker appointed for the purpose. Shri Chauhan submitted that regulation 15(2) as it stood at the relevant time required that:

“a copy of the public announcement to be made under regulations 10,11 or 12 shall be submitted to the Board through the merchant banker at least two working days before its issuance”

Shri Chauhan submitted that it is thus clear that submission of the copy of the public announcement is a pre publication requirement, that such a requirement is to enable the Respondent to examine the text of the announcement and decide as to whether the public announcement is in tune with the requirements of the regulations and that whether any modification therein is required to be made to enable the shareholders to take an informed decision on the public offer proposed to be made. Shri Chauhan, to emphasise the important role of the merchant banker in a public offer referred to the provisions of regulation 24 and in particular to the following sub regulations:

Regulation 24

1(d) Before the public announcement of offer is made, the merchant banker shall ensure that the public announcement of offer is made in terms of the regulations.

(3) The merchant banker shall ensure that the draft public announcement and the letter of offer is filed with the Board, target company and also sent to all the stock exchanges on which the shares of the target company are listed in accordance with the regulations;

(5) The merchant banker shall ensure compliance of the regulations and any other laws and rules as may be applicable in this regard

Learned Representative submitted that as could be seen from the provisions of regulation 24, it is the duty of the merchant banker to ensure that the draft copy of the public announcement is filed with the concerned authorities and it is also the merchant banker’s duty to ensure that the requirements of regulations etc., are complied with and that being the case, failure on the part of the Appellant in complying with the requirements of Regulation 15(2) can not be viewed as a matter with which the merchant banker is not concerned. Shri Chauhan submitted that the reason for appointing a merchant banker for the purpose of public offer is that a merchant banker is an expert body and therefore it will ensure regulatory compliance with reference to the public offer. Learned Representative submitted that the fact that the Appellant filed the text of the public announcement within 3 or 4 days of the public announcement does not absolve it from the failure, as the requirement of regulation 15(2) is to submit the copy of the public announcement at least two days before the issuance of the same, that in the instant case the public announcement was made on 27.8.2001 and the copy of the same was filed on 4.9.2001, that once the public announcement is made, copy of the announcement is available to everybody including the Respondent and as such no purpose would be served by the merchant banker also submitting a copy of the same which is otherwise available for scrutiny purpose. Shri Chauhan submitted that if the merchant banker fails to submit the copy of the text of the public announcements required under regulation 15(2), it has to be viewed as a case of absolute failure and subsequent action can not lessen the gravity of the failure.

Learned Representative submitted that the Adjudicating Officer imposed only a sum of fifty thousand rupees as penalty as against a maximum of one lakh rupees leviable for the failure, and it is thus clear that the Adjudicating Officer had taken into consideration the factors required to be considered for the purpose of deciding the quantum of penalty as required vide section 15J of the SEBI Act. In this context he referred to the detailed findings recorded by the Adjudicating Officer in the order that

“For arriving at the quantum of penalty which may be imposed, I take note of the factors as laid down in section 15J of the said Act and sub rule (2) of rule 5 of the SEBI Rules, the facts and circumstances of the case and the mitigating factors as submitted by Doogar & Associates and discussed hereinbelow.

In this regard, Doogar & Associates have submitted that a lenient view in the matter may be taken and no penalty may be imposed in view of the following:

(a) that the said delay has occurred for the reasons beyond their control;

(b) that there were no observations by SEBI on the public announcement which goes to show that the delayed filing was not with the intention of hiding anything.

(d) That such delayed filing of public announcement has not affected the interest of investors in any manner;

(e) That they have unblemished record in the past.

The rationale behind such requirement of advance filing of public announcement with SEBI has already been discussed in detail in the preceding paras. That it was the duty of Doogar & Associates to ensure such filing within the stipulated time. Such failure on the part of Doogar & Associates hindered SEBI in performing in its duty to monitor compliance with the regulations and thereby in performing its duty to safe-guard the interest of investors/shareholders.

Further, so far as the contention of Doogar & Associates that such non filing of Public announcement has not affected the interest of investors and that there were no observation from SEBI on the public announcement goes to show that such delayed filing was not with the intention of hiding anything, is concerned, it may be mentioned that the advance filing of public announcement enables SEBI to examine the same and see that the same is in conformity with the said Regulations. Further, it also enables SEBI to take appropriate and timely steps, in case any non compliance with the said Regulations, is observed. That is, it enables SEBI to protect the interest of investors/ shareholders, by taking timely action in the matter before the public announcement is issued. Such failure on the part of Doogar & Associates has obstructed SEBI in discharge of its statutory duty. Therefore, the said contention of Doogar & Associates cannot be accepted.

So far as their contention that they have unblemished record in the past, is concerned, it is observed that the certificate of registration of Doogar & Associates as a merchant banker was suspended for a period of two months by SEBI vide its order dated January 15, 2001 for its failure to exercise due diligence, proper care and independent professional judgement and also for non compliance with its obligations, in the matter of public issue of Manu finlease Ltd. Therefore , the said submission of Doogar & Associates that it has an unblemished record in the past is not only factually incorrect but it is also misleading. Further, failure to fulfill its obligation by Doogar & Associates in the instant case amounts to repetitive default.

Thus, after taking into account the facts of the case, submissions written as well as oral made by Doogar & Associates & the provisions of the said Regulations, I am of the considered opinion that a penalty of Rs.50,000 shall be commensurate.”

Shri Chauhan countering Shri Agnani’s statement that to be a repetitive defaulter one should repeat the same default i.e. default under regulation 15(2) in the instant case, submitted that the default is relatable to defaults under the SEBI Act, rules and the regulations and not to the repeated failure to comply with the one and the same provision only, and that if the view put forward by the Appellant is accepted that would negate the whole objective of the imposition of penalty.

Learned Representative submitted that the merchant banker being an expert body, and entrusted with compliance of various regulations applicable to a public offer, is expected to exercise utmost care in complying with the provisions of the regulations and since the Appellant having failed in its duty, the Appellant’s failure should not be ignored so as not to warrant penalty. In this connection Shri Chauhan submitted that the Tribunal in J.M. Financial Investment Consultancy Services Ltd., V Ananta Barua (2001) 30 SCL 357 SAT) had viewed that J.M. Financial Investment Consultancy Services Ltd. being category I merchant banker cannot absolve it from its obligation for failure to make reporting under the regulations. He referred to the Tribunal’s observation that :

“The Appellant’s contention that the delay in filing the reports was not intentional but by over sight and that on reporting the failure by its own internal audit team, requirement was complied with, cannot in Appellant’s case help much. The Appellant being a Category I Merchant Banker since 1992 , is supposed to know the statutory requirements to be complied with in matters relating to public issue of shares, acquisition of shares etc. A Merchant Banker is supposed to be diligent and expected to advise its clients about the statutory requirements. In fact the Regulation itself recognizes the expertise in the Merchant Bankers as could be seen from various regulations relating to public announcement, etc. According to regulation 13, before making any public announcement of offer referred to in regulation 10, regulation 11 or regulation 12, the acquirer is required to appoint a merchant banker holding a Category I registration. The public announcement referred to in the Regulation is required to be made by the Merchant Banker and none else. Further, regulation 24 enumerates obligations of the Merchant Bankers appointed under regulation 13 mentioned above. One of the obligations enumerated thereunder is that “ the merchant banker shall ensure compliance of the Regulations and any other laws or rules as may be applicable in this regard”. Since the merchant banker is loaded with the obligation to ensure compliance of the statutory requirements applicable to acquisition of shares by even others, it is difficult to accept the Appellant’s argument that the failure on its part was inadvertent and need be condoned. There is no scope for seeking such a relief, by an expert agency like a Merchant Banker, that failure to comply with the statutory requirements attendant to acquisition of shares was due to inadvertence, as the Merchant Banker itself, by its very role, is required to be diligent and not negligent. Appellant’s failure has to be viewed in the back ground that it is a Category I Merchant Banker fastened with the obligation of ensuring legal compliance by others. A person entrusted with such a duty, himself failing to comply with the legal requirements in a matter directly concerning him, cannot be viewed lightly and the Adjudicating Officer’s decision imposing monetary penalty on the Appellant cannot be considered as unwarranted.”

Learned Representative submitted that in the facts of the case the impugned order need to be sustained.

I have carefully considered the rival contentions and the material on record.

The Appellant is Category I merchant banker holding a certificate of registration granted by the Respondent. The Appellant was the merchant banker appointed in terms regulation 13 of the Takeover Regulations in the matter of a public offer made by the acquirer to acquire 20% of the shares of the Target Company.

The Appellant’s contention that the alleged failure is not one falling under clause (a) of section 15A but under clause (b) of section 15A and as such the penalty of fifty thousand rupees imposed is more than the penalty prescribed for the offence is not correct. The scope of section 15A was examined by this Tribunal in the Housing Development Finance Corporation case (supra) and the observation of this Tribunal have been stated in the earlier part of this order. In the light of the same the Appellant’s argument that the failure to submit the copy of the public announcement to SEBI in terms of regulation 15(2) attracts clause (b) and not clause (a) of section 15A is untenable. The issue for consideration in the present appeal, in the light of facts and circumstances, is the as to whether the Respondent has made out a case warranting imposition of monetary penalty.

The Adjudicating Officer in the impugned order has recorded the following finding:

“It is seen from the record that the public announcement in respect of the public offer made by Allianz International Private Ltd., (acquirer) and Mr. K. T. James (person acting in concert) to acquire 20% of the equity share capital of the target company was submitted to SEBI by Doogar & Associates on September 4, 2001 i.e. subsequent to the issuance of public announcement in Financial Express and Jansatta on August 27, 2001 and even after filing of draft letter of offer, which was filed with the Board on august 30, 2001. The public announcement was filed only after the matter was taken up with Doogar & Associates. Therefore, it is evident from the record as well as from the admission of Doogar & Associates that they have failed to ensure filing of draft public announcement with the SEBI in terms of sub regulation (2) of regulation 15. Doogar & Associates have, therefore, contravened provisions of sub regulation (2) of regulation 15 read with sub regulation (3) of regulation 24 of the said Regulations.”

The only allegation made against the Appellant is failure to comply with the requirements of regulation 15(2). The said sub regulation (2) of regulation 15 and sub regulation (3) of regulation 24 relied on by the Adjudicating Officer are as follows:

Regulation 15(2):

A copy of the public announcement to be made under regulation 10,11 or 12 shall be submitted to the Board through the merchant banker atleast two working days before its issue.

Regulation 24(3):

The merchant banker shall ensure that the draft public announcement and the letter of offer is filed with the Board, target company and also sent to all the stock exchanges on which the shares of the target company are listed in accordance with the regulations;

The factual position that the Appellant had failed to comply with the requirements of filing the copy of the public announcement with the Respondent before the issuance of the same is not in dispute. The Appellant has admitted the failure. It has also given the reason for the same which the Adjudicating Officer has also recorded in the order that:

“Doogar & Associates has admitted that the public announcement in the matter was not filed with the Board as required under sub regulation (2) of regulation 15 i.e. 2 working days, before its issuance. However, the said lapse has been explained by stating that – “The copy of the PA was given to the receptionist – Ms. Mona Bisht in due time to despatch which could not be posted by her as her relative expired on the same day and she left the office without asking anyone to despatch the same. She could not come to the office for one week and since the letter was signed and sent to despatch, during this period the undersigned was unaware of the fact that the public announcement could not be despatched. But as soon as a call was received from your office, inquiring about the public announcement, the matter was immediately looked into and a copy of the public announcement and a letter explaining the circumstances under which it took place (copy enclosed) was sent to your office…”

I have carefully perused the order. But I find that though the Adjudicating Officer having noted the reason given by the Appellant for the failure to submit the copy of the public announcement to the Respondent within the prescribed time, has not questioned the reliability of the said reasoning. The Adjudicating Officer seems to have gone by the notion that since the Appellant has admitted the failure, it was not necessary to go into the reason for such failure and that failure to comply with the requirement of regulation 15(2) the same attracted penalty, holding that “above said explanation does not in any manner lessen the responsibility cast on Doogar & Associates”. The Adjudicating Officer has also recorded that “the irresponsible conduct on the part of the receptionist of the Doogar & Associates Ltd., can not be a justification for not filing the copy of the public announcement with SEBI in terms of regulation 15(2) of the said Regulations.” It is thus clear that the Adjudicating Officer has also accepted the version given by the Appellant for its failure to submit the copy of the public announcement in time – that it had signed and sent the text to despatch and because of the unexpected development the receptionist failure to despatch the same. The Adjudicating Officer has also noted the “irresponsible conduct on the part of the receptionist of the Doogar & Associates.” I agree that an employer cannot escape from his obligation to comply with the statutory requirements on the ground that his employee whom the task was entrusted had failed to discharge his/her duties. But then what is to be seen is that employer had acted honestly and diligently and also whether the omission by the employee could have been avoided. The Adjudicating Officer had noted that the text of the announcement was signed and sent to despatch, that the receptionist on hearing the tragic death of her relative, left the task assigned to her unfinished. It is also noticed that it was not a wilful or intentional act on the part of the Appellant, as could be seen that the Appellant had submitted a copy of the letter of offer to the Respondent 30.8.2001 itself. The letter of offer contains almost all the substantial details contained in the public announcement. If the intention had been to deny information to the Respondent by not filing the public announcement, the Appellant would not have promptly filed the draft letter of offer within just 3 days of the issuance of the public announcement. Further, it is also noted that by holding back the public announcement copy from the Respondent, the Appellant would not have achieved anything as the public announcement in terms of regulation 15(1) is required to be made “in all editions of one English national daily with wide circulation and one Hindi national daily with wide circulation and a regional language daily with wide circulation.” Such a widely published announcement cannot escape the attention of the Respondent and in that context by not filing the copy with SEBI would not have served any purpose. The Adjudicating Officer has attempted to highlight the failure by observing that “Such failure on the part of Doogar & Associates hindered SEBI in performing its duty to monitor compliance with the regulations and thereby in performing its duty to safe guard the interest of investors/shareholders.” But this statement remains unsubstantiated. The Adjudicating Officer has also gone on record explaining the importance of complying with the regulations 15(2) in the following words”that the advance filing of public announcement enables SEBI to examine the same and see that the same is in conformity with the said Regulations. Further, it also enables SEBI to take appropriate and timely steps, in case any non compliance with the said Regulations, is observed. That is, it enables SEBI to protect the interest of investors/shareholders, by taking timely action in the matter before the public announcement is issued.” But the Adjudicating Officer’s said view is contrary to the view held by the Respondent as could be noted that the requirement of advance filing contemplated vide regulation 15(2) was done away with by deleting the said regulation through an amendment effected to the Takeover Regulations in September 2002. The amendment which was brought into force with effect from 9.9.2002 was based on the recommendations of an expert committee appointed by the Respondent for reviewing the Takeover Regulations. The Committee in its report had observed (in para 14 of the report) that “…….the Regulatory requirement cast on the acquirer to file a copy of the public announcement with SEBI, the stock exchange and the target company two working days before its issuance to the public might lead to opportunities for insider trading asymmetry of information etc.” In that context the Committee recommended that “there is no need for the copy of the public announcement to be submitted to anyone at all. It would suffice if the public announcement is given simultaneously in newspapers/stock exchanges/target company and SEBI”. The Respondent accepted the said recommendation and amended the regulation substituting sub regulation (2) by the following new sub regulation:

(2) Simultaneously with publication of the public announcement in the newspapers in terms of sub regulation (1) a copy of the public announcement shall be :

(i) submitted to the Board through the merchant banker

(ii) sent to all the stock exchanges on which the shares of the company are listed

(iii) sent to the target company at its registered office for being placed before the Board of Directors of the company.

Thus the fact is that the regulation 15(2) as it stood originally was found counter productive and that is why it was done away with and in view thereof the Adjudicating Officer’s version that the Appellant “hindered SEBI in performing its duty” to safeguard the interest of shareholders/investors is difficult to accept. However, in this context I would like to make it clear that since the regulation was found subsequently not of any use and that it was therefore, subsequently amended does not mean that for violation of the same when it was in force, no action is called for. As stated earlier, the fact that the requirement of regulation 15(2) was not complied with is an undisputed fact. It is also a fact that the Appellant had not intentionally violated the said regulation, that the failure was because of certain unexpected developments on which the Appellant had no control. Ms. Mona Bisht, the Appellant’s receptionist, to whom the signed forwarding letter with copy of the public announcement was given to despatch the same to SEBI had left the office on knowing the sudden demise of one of her relatives and one could imagine the state of mind of a human being at that point of time to leave instructions behind. It is also noted that, the Respondent had not noted any erroneous or misleading information in the said public announcement. The failure on the part of the Appellant, in the light of the material on record, appears to be unintentional.

In this context it is to be noted that the Hon’ble Supreme Court in Hindustan Steel case (supra) has laid down the principles to be followed in imposing penalty as follows:

The back ground of the said case leading to the above observation by the Court is as follows:

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?” Applying the said principles to the facts of the case in my view, there is little justification for imposition of penalty on the Appellant.

The reliance of the Respondent on this Tribunal’s decision in J. M. Financial Investment Consultancy Services is misplaced, as in the said case there was nothing to show that the failure was because of the circumstances beyond the control of the said company. The facts specific to the present case show that the Appellant had acted bonafide, and an unexpected development was the cause of failure.

In the light of the above discussion I am of the view that the Respondent has not made out a case warranting imposition of monetary penalty on the Appellant and therefore the order is not to be sustained.

For the reasons stated above the Appeal is allowed.

Sd/-

(C. ACHUTHAN)

PRESIDING OFFICER

Place: Mumbai

Date: September 30, 2003