In the matter of:

Housing Development Finance Corporation Ltd       Appellant

Vs.

Securities & Exchange Board of India                         Respondent
 
 

APPEARANCE

Mr. S.N.Shroff
General Manager (Corporate Legal), HDFC

Mr. D.V.Shetty
Manager (Secretarial), HDFC                                                                                 for Appellant

Mr. Ananta Barua
Division Chief, SEBI

Ms Babita Rayudu
Officer (Legal),
SEBI                                                                          for Respondent
 

Order dated 24.7.2000 made by the Adjudicating Officer, imposing a sum of Rs.1, 50,000 as penalty on the Appellant, is under challenge in the present appeal.
 

The Appellant is a public limited company incorporated under the Companies Act, 1956, mainly engaged in housing finance business. The Appellant also invests in shares and other corporate securities. The investment function is an adjunct to support the core business of housing finance, mainly to ensure required level of liquidity.
 

The Appellant had acquired 47, 50, 000 equity shares of Rs. 10 each at a price of Rs. 25/- per share of one of its associate companies namely Hindustan Oil Exploration Company Limited (the company). Since 47,50,000 shares constituted 10.92% of the paid capital of the company, in terms of regulation 3(4) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Regulations), the Appellant was required to submit a report along with supporting documents to the Respondent within 21 days of the date of acquisition of shares. The report was inadvertently not submitted within the stipulated time. It was submitted on its own, on 30.4.1998, when the lapse was noticed while preparing the annual disclosure report required to be filed with the Respondent under the Regulations. The Respondent on knowing about the belated submission of the report decided to take penal action against the Appellant. Accordingly the Respondent vide its order dated 12.11.1999 appointed an Adjudicating Officer to conduct an inquiry in the matter and impose penalty as provided under section 15A of the Securities and Exchange Board of India Act, 1992 (the Act), if considered necessary. The Adjudicating Officer after inquiry concluded that the Appellant was in default in not submitting the report, etc. to the Respondent as required under sub regulation 4 of regulation 3 of the Regulations. In terms of section 15A (b) of the Act, the Adjudicating Officer vide his order dated 24.7.2000 imposed a sum of Rs. 1, 50,000 as penalty against the Appellant. The present appeal is an off shoot of the said order.
 

Mr. S.N.Shroff, authorised Representative of the Appellant, re-iterated various submissions made in the Memorandum of Appeal. He submitted that 47, 50, 000 shares of the company constituted just 10. 92% of the company's capital and the same was allotted to the Appellant in a preferential issue of shares made by the company complying with all the requisite formalities. The allotment was made on 2.7.1997. It was only a pure trade investment in an associate company and not an acquisition or take over in terms of the Regulations. The fact that the company had complied with the disclosure/reporting requirement as required under regulation 3(1)(c) shows that there was no intention to hold back any information from the stock exchanges or from others concerned. In this context Notice of extra ordinary general meeting of the company held on 4.4.1997 and the explanatory statement to the special resolution proposed to be moved in the said meeting, annexed to the appeal was referred to. He further submitted that, though the requisite reporting under regulation 3(4) was inadvertently delayed, on knowing the lapse the Appellant of its own, made good the deficiency by submitting the report to the Board on 30.4.1998. Mr. Shroff, submitted that there was no justification for penalising the Appellant for a procedural default as the Appellant had not committed any willful default of any adverse consequence. In this context he referred to para 6.4.1 of the order and stated that in the Adjudicating Officer's own version there was no loss to the investors, or any undue gain to the Appellant by virtue of belated reporting under regulation 3(4) and that the Appellant had acquired the shares above the price as per the guidelines, issued by the Respondent. He also cited the Adjudicating Officer's affirmative finding recorded in the order that he was satisfied about the genuineness of the submissions and the bonafides of the Appellant. He had also accepted the Appellant's submission before him that the Appellant had no intention to violate the Regulations and the lapse on its part occurred inadvertently. In the light of the observation made by the Adjudicating Officer and the satisfaction arrived at, and the nature of the default involved, the impugned order imposing monetary penalty cannot sustain in view of the Supreme Court's dictum in Hindustan Steel Ltd., Vs. State of Orissa reported in AIR 1975 SC 253 and this Tribunal's order in the case of Chandrakant I. Gandhi Stock Brokers Pvt. Ltd.,
 

Mr. Ananta Barua, learned Representatives of the Respondent submitted that the admitted facts on record conclusively established that the Appellant had contravened regulation 3(4) as well as section 15A(b) of the Act in the matter of acquisition of 47, 50, 000 shares of the company. He submitted that according to regulation 3(4) the Appellant was required to file a report with the Board within 21 days from the date of acquisition, but reporting was done belatedly involving a delay of 286 days, whereby attracting the penal provisions contained in section 15A(b). He submitted that the Appellant's submission that the default was not intentional but inadvertent cannot be a ground to absolve it from the pain of penalty, that if such a view is taken parties would be free to subvert the regulation with impunity, by simply admitting the violation as an inadvertent omission. According to him timely reporting of certain matters as per the Regulation is necessary for achieving the object of the Act. The requirement of submitting a time bound report in respect of acquisition of shares which entitles an acquirer to exercise 15% or more of the voting rights in a listed target company is a very important material information and has a great bearing on the investment or disinvestment decisions of the remaining share holders of the target company, and the interests of the investors. He submitted that the defaults in non-filing of the returns or reports with the Respondent are offences created by statute, and mens rea was not an ingredient of the offence. In support he cited this Tribunal's order in SRG Infotec Ltd ((1999) 35CLA 473). According to him any person violating the statutory provisions would be liable for the penalties prescribed thereunder irrespective of his guilty intent. With reference to the case law relied on by the Appellant, Mr. Barua cited the Supreme Court decision in Gujarat Travancore Agency Vs. Commissioner of Income Tax (AIR 1989 SC 1671) and another case which followed the said case. (Additional Commissioner of Income Tax, Gujarat Vs. I.M.Patel & Co., (AIR 1992 SC 1762)).
 

I have carefully examined the rival contentions putforth by the parties in their pleadings and oral submissions. The factual position that the Appellant acquired 47, 50, 000 equity shares, in a preferential allotment made by the company and as a result thereof the Appellant�s share holding accounted for 10.92% of the voting rights in the company remains admitted. It has also been admitted that shares were allotted on 2.7.1997, and the report required to be submitted in terms of sub regulation (4) of regulation 3 was submitted to the Respondent on 30.4.1998, of its own, by the Appellant on knowing the lapse while preparing the annual disclosures under regulation 8.
 

Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 came into force on its notification on 20.2.1997. Take over Regulations notified in 1994 was repealed by the 1997 Regulations, based on the recommendation of a committee constituted for the purpose (known as Bhagvati Committee). The very object of the 1997 Regulations has been briefly set out by the Committee in para 1.1 of its report submitted to the Respondent on 18.1.1997. Relevant extract in this context from the report is extracted below, as it is considered relevant in the context of the submission made by the Respondent claiming the need for the time rigidity in filing reports, etc.

"1 The Approach of the Committee

1.1 The Committee was of the view that the Regulations for substantial acquisition of shares and takeovers should operate principally to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers. While on the one hand the Regulations should not impose conditions, which are too onerous to fulfil and hence make substantial acquisitions and takeovers difficult, at the same time, they should ensure that such processes do not take place in a clandestine manner without protecting the interests of the shareholders. A balance must necessarily be struck between the two considerations. The objective of the Regulations should therefore be to provide an orderly framework within which such processes could be conducted. The Regulations should also help in evolving good business standards as to how fairness to shareholders can be achieved, as maintenance of such standards is of importance to the integrity of the financial markets, and they should not concern themselves with issues of competition, or financial or commercial advantages or disadvantages of a takeover. The committee also noted that the process of substantial acquisition of shares and takeovers is so intertwined with the warp and weft of the industry, especially in the wake of economic reforms, that it would be unrealistic to make Regulations in this area without taking into account the ground realities of the Indian Industry".
 

Thus it could be seen from the scheme of the Regulations that it is not a penal Regulation. Default per se is not the dominant guiding principle for imposition of penalty. It is the consequences of the default that weighs in taking the decision to impose penalty and its quantum.
 

It is seen from the impugned order that the Respondent through its Chairman, vide order dated 12^th November, 1999, had appointed an Adjudicating Officer "to conduct an inquiry into the alleged contravention of sub regulation (4) of Regulation 3 of the Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997 read with clause (b) of section 15A of Securities and Exchange Board of India Act, 1992, by HDFC, the acquirer in the matter of acquisition of shares of Hindustan Oil Exploration Company Ltd (HOECL)".
 

It is understood that in the show cause notice issued, the Appellant was asked to explain as to why penal provision available under section 15A(b) should not be taken against it for default under regulation 3(4).
 

In para 6.4.1 of the impugned order it has been stated that "the question now arises as to what penalty should be imposed on HDFC in the light of the provisions of clause (b) of section 15A of the said Act, which prescribes a penalty of Rs.5000 for every day during which such failure continues".
 

In para 6.5 of the order the Adjudicating Officer has again stated that "In the light of what is stated above, it may be seen that section 15A (b), ibid without any pre-condition prescribed a penalty for the delay @ Rs.5000 for every day during which failure to submit report continues".
 

In para 7.1 also the Adjudicating Officer has referred to section 15A(b) and stated that "As mentioned above, taking into consideration the above said factors and circumstances, the provisions of sections 15A(b) and 15I of the Securities and Exchange Board of India Act, 1992 I levy a total penalty of Rs.1, 50, 000 on M/s. Housing Development Finance Corporation Ltd.,"
 

It is seen from the Respondent's reply to the appeal that it had re-iterated section 15A(b) as the penal provision applicable to the default under section 3(4) of the Regulations. In para 2 under "preliminary submissions" and paras 2,4 and 5 under the heading "Facts of the Case and Grounds of Appeal" of the reply, the Respondent had attempted to justify imposition of penalty provided under section 15A(b) of the Act.
 

Since the charge against the Appellant is its failure to comply with the requirements of regulation 3(4) and the penalty is imposed under section 15A(b) it is felt necessary to consider the legal provisions of the said regulation and the section. Regulation (3) enumerates certain acquisitions enjoying exemptions from the scope of regulations 10, 11 and 12. One of such exempted acquisitions in terms of regulation 3(1)(c) is acquisition of shares in a preferential allotment, made by a company in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956, subject to fulfilment of the conditions stated thereunder. However, in terms of sub regulation (4) of regulation 3 in respect of acquisition under 3(1)(c) - "the acquirer shall, within 21 days of the date of acquisition, submit a report alongwith supporting documents to the Board giving all details in respect of acquisitions which (taken together with shares or voting rights held by him or by persons acting in concert with him) would entitle such person to exercise 15% or more of the voting rights in a company".
 

It is important to have a look at section 15A of the Act as a whole, as it contains the applicable penal provisions. Section 15A reads as under:

"Penalty for failure to furnish information, return, etc.

15A. If any person, who is required under this Act or any rules or regulations made thereunder: -

While the Appellant acquired the shares in question in July, 1997 the bench mark was only 10% which was raised to 15% with effect from 20.10.1998. In terms of the then existing limit of 10% the Appellant's holding was higher by 0.92%. It appears that "15% or more of voting rights" referred to in para 2 on page 3 of the Respondent's reply is not applicable to the present case as the hike in percentage is post 1997. However, it is a fact that the Appellant's holding stood higher by 0.92% over the then prevailing benchmark.
 

It is seen from the order mandating adjudication, the show cause notice issued to the Appellant in the adjudication, the observations/finding of the Adjudicating officer and also from the reply filed by the Respondent that they had consciously and deliberately resorted to the provisions of clause (b) of section 15A. It was not a wrong labeling or mentioning of the wrong section. During the course of the arguments, I had asked the learned Representative of the Respondent to explain the reason for resorting to the provisions of clause (b) of section 15A, inspite of the clear provision under clause (a) providing penalty specifically for failure to submit report to the Board, in the context of the charge that the Appellant had failed to comply with the requirement of submitting the requisite report to the Board within the stipulated time as provided under sub regulation (4) of regulation 3. Learned Representative submitted that the default is covered under clause (b) and not under clause (a). Mr. Barua, explained that the expression "information" contained in clause (b) need be interpreted to include report as well because the report is also information. He further submitted that the absence of any specific reference to the Board in clause (b) is of no consequence as it is implied. He submitted that the difference between clause (a) and clause (b) was clear from the wording of the section itself. According to him, clause (a) does not prescribe any time limit to furnish any document, return or report, whereas clause (b) specifically provides time limit for compliance and also provides penalty for failure to file return or furnish information, etc. within the time specified for the purpose in the regulations. Since sub regulation (4) of regulation 3 specifically provides 21 days time limit to submit the report to the Board and since the Appellant submitted the report only belatedly, provisions of sub section (b) attracted in the case. According to him only those matters for which regulations do not prescribe any particular time limit for compliance are covered under clause (a).
 

I am not impressed by the argument put forth by the learned Representative justifying the reason for invoking the penal provisions available under clause (b) over the provisions of clause (a) in the instant case. 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 expression "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.
 

The learned Representative's submission that since information includes report as well, failure to file the same can be brought under clause (b) is not tenable. Even if it is admitted that in a generic sense information includes report as well, it is of no help to the Respondent in view of the clear provisions of the law. Sub regulation (4) of regulation 3 specifically requires the acquirer to "submit a report along with supporting documents to the Board giving all details in respect of the acquisition �" So it is very clear that what is basically required to be submitted is a report and that report is required to be submitted to the Board.
 

Clause (a) of section 5A is specific on the said requirement as it inter-alia refers clearly to the requirement of furnishing report to the Board. Since there is a specific provision in clause (a) of section 15A of the Act providing penalty for failure to furnish any report to the Board, as required under the Act, rules or regulations made thereunder, the Respondent�s action in terms of clause (b) of the said section 15A in the instant case cannot be considered legally in order. It is to be noted that clause (a) is with reference to submission of reports, etc., with the Board and in that sense its scope is narrow. Scope of clause (b) is wide to include agencies such as, stock exchanges, companies in certain circumstances, inspection/investigation officers appointed by the Respondent, etc. The Board (the Respondent) is not an entity covered under clause (b) as the requirement of reporting to the Board is specifically covered in clause (a).
 

I am well aware of the views expressed by the Supreme Court in several cases that if source of power exists non-mentioning of it or wrong labeling of it would not invalidate exercise of such powers. But the said principle is not applicable to the present case for the reason that it is not a case of mere mentioning of a wrong provision of law. It is seen from the order of adjudication, show cause notice, impugned order, the reply of the Respondent and the argument put forth by the learned Representative, that it was a deliberate and conscious decision based on the Respondent's interpretation of the scope of the legal provision, clause (b) of section 15A of the Act was invoked instead of clause (a).
 

In the light of the legal Position stated above, imposition of penalty on the Appellant under section 15A(b) is not legally tenable. Since the impugned order cannot survive for the reasons stated above, I do not consider it necessary to examine the other grounds such as applicability of the principles laid down by the Supreme Court in Hindustan Steels Ltd. (Supra) etc, in the matter, as raised by the Appellant.
 

For the reasons stated above, the appeal is allowed and the impugned order is set aside.