In the matter of.

Samrat Holdings Limited                                            Appellant

Vs.
1. Securities & Exchange Board of India
2. Shri D.R.Mehta, Chairman, SEBI
3. Shri P.Sri Sai Ram, Adjudicating Officer, SEBI   Respondents
 

APPEARANCE:

Mr. J.B.Lentin
Advocate I/b M/s. Bodhanwalia & Company
Representatives of the Appellant

Ms K.Vazifdar

Mr. V.P.Joshi                                                        for Appellant

Mr. Ananta Barua
Division Chief, SEBI                                            for Respondents

Under challenge in the present appeal is the order dated 31.8.2000 made by the Adjudicating Officer imposing a sum of Rs. 1, 21, 500 as penalty on the Appellant, on the basis of his findings that section 15A of the Securities and Exchange Board of India Act, 1992 (the Act), was violated in the context of acquisition of 47, 50, 000 equity shares of Timex Watches Limited (TWL) by the Appellant.
 

The background in which the impugned order was made, as could be seen the appeal, is asunder:

The appellant, a private limited company registered under the companies Act, 1956 with its registered office in Mumbai is a wholly owned subsidiary of another private limited company namely RDI Print & Publishing Pvt Ltd(RDI). RDI is a group company of Titan Industries Ltd (TIL). TIL and its associate companies held 1,15,00,000 equity shares accounting for 28.75% of the paid up capital of TWL. Out of the said holding 2, 50, 000 shares were transferred to the Appellant on 19.3.1997 and 45,00,000 shares on 31.3.1997. As a result of the said transfer, the Appellant's share holding accounted for 11.87% of the equity share capital of TWL. As per regulation 3 (1) (e) (i) of the SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997 (the Regulations), interse transfer of shares amongst group companies are exempt from the provisions of regulations 10, 11 and 12 of the Regulations. Since the instant acquisition was entirely from group companies, said regulations 10, 11 and 12 did not attract. However, in terms of regulation (4) the Appellant was required to report to the 1^st Respondent the details of the acquisition as specified therein within 21 days of the acquisition. Since this requirement was complied with belatedly, involving a delay of about 240 days, the 2^nd Respondent in his capacity as Chairman of the 1^st Respondent ordered adjudication and appointed the 3^rd Respondent as the Adjudicating Officer. After concluding necessary inquiry, 3^rd Respondent penalised the Appellant by imposing a monetary penalty of Rs. 1, 21, 500 vide his order dated 31.8.2000. The Appellant is aggrieved by the said order. Hence the present appeal.
 

Shri J.B.Lentin, learned Counsel, appearing for the Appellant focussed his argument on the rationale of imposing monetary penalty on the Appellant in the light of the facts of the case and the legal provisions.
 

Shri Lentin submitted that acquisition of shares of TWL by the Appellant from group companies was part of an internal restructuring. The acquisition has not brought any change in the controlling or management structure of TWL. It was uneventful. He admitted that the delay in submitting the report to the Is' Respondent was a matter of fact. There was no dispute about the factual position of the delay involved in filing the report. But it was not deliberate. He submitted that, the report was filed on 17. 1. 1997 by the Appellant of its own, when it came to know about the lapse. After more than a year, the Respondent vide its letter dated 27.1.1998 sought certain details. The Appellant promptly furnished the same on February 6 and 12, 1998. Learned Counsel submitted that the delay in filing the report was unintentional and there was no malafide intention on the part of the Appellant. There was nothing the Appellant gained by not making timely report. The requirement was overlooked, though the necessary information to TWL and Stock Exchange had been sent, as per the Regulations. The Appellant had explained to the first respondent the reason for the delay vide its letter dated 17.12.1997, while submitting their report. The Appellant was under the impression that the delay has been condoned and the matter was over, till it received a Show Cause Notice from the 3^rd Respondent on 19.11.1999 after about 2 years from the submission of the report/submission of details. He submitted that the delayed filing of the report has not resulted in any harm or loss to any of the investor/investors. No gain or unfair advantage was sought to be obtained and no gain or advantage resulted to the Appellant from the delay. This was the first lapse on the part of the Appellant and not a repetitive one.
 

Shri Lentin submitted that the objective of regulation 3 (4) as explained by the 1^st Respondent in its reply was to ensure fair and equal treatment of all the shareholders in relation to substantial acquisition of shares and takeovers and also to evolve good business standards and transparency which is of importance to the integrity of the financial markets. Having said so, the Respondents have not pointed out that in what manner the delayed filing of the details of transfer of shares interse the promoters of TWL has affected the integrity of the financial market, etc. On the contrary the Adjudicating Officer had admitted and appreciated the version of the Appellant as could be seen from his observations in the impugned order. Learned Counsel took me through various paragraphs of the impugned order to show that the Adjudicating Officer himself had admitted 'the Appellant's version. In particular he cited paras 6.4.5.2, 6.4.5.4 and 6.4.5.6. Shri Lentin submitted that the Adjudicating Officer having satisfied about the genuineness of the submissions viz. that the delay was unintentional and the delay has not affected adversely anybody, should not have proceeded with imposing penalty.
 

Shri Lentin further submitted that in terms of the provisions of section 15J read with section I5J of the Act, the Adjudicating Officer is required to exercise penal powers judicially taking into consideration the mandatory factors provided in section 15J. An offence per se under section 151 is not punishable. The Tribunal's attention s drawn to the Supreme Court's decision in Hindustan Steel Ltd. Vs. State of Orissa (AIR 1970 SC 253: 1969 (2) SCC 627) to show that the impugned order was made taking into consideration the guidelines provided by the Supreme Court therefore the order need be set aside as it is against the law declared by the Court. The learned Counsel stated that he is not pursuing the ground of challenge made in the Memorandum of Appeal about the applicability of a particular sub-section or other of section 15A to the case as it is of not much significance, that in any case the penalty cannot stick on, for the submissions already made by him.
 

Shri Ananta Barua, Authorised Representative of the Respondents on the other hand would submit that in view of the Appellant's admission that the report was filed involving a delay of 243 days, violation of regulation 3 (4) stood established. Therefore the Adjudicating Officer was perfectly justified in imposing the penalty in exercise of his powers under section 15I read with section 15A of the Act. According to him, for imposition of penalty under section 151 'guilty intent' or 'mens rea' was not required to be established. Failure to comply with the statutory requirement mentioned therein per se attracted the penalty. In support he cited Supreme Court decision in Gujarat Travancore Agency Vs. The Commissioner of Income Tax (AIR 1989 SC 1671) and another case following the same ratio in Additional Commissioner of Income Tax Vs. I.M. Pate] & Co. (AIR 1992 SC 1762). The view expressed by this Tribunal in SRG Infotech Ltd. Vs. SEBI (1999 (22) SCL 422: 1999 (35) CLA 473: 2000 CLC 225) was also cited. Shri Barua submitted that even though 15A provided for a higher quantum of monetary penalty, the fact that only Rs. 1, 20, 000 was imposed as penalty would show that the Adjudicating Officer had taken into consideration the factors required to be considered for the purpose of imposing penalty as provided under section I5J of the Act. According to him reporting in terms of regulation 3 (4) was meant to ensure transparency in the transactions and provide input to the regulator to monitor the transactions and ensure that public offer, in case required is not avoided, to the disadvantage of the investors.
 

I have duly considered the submissions made by the parties in their respective pleadings and oral submissions. In this appeal there is no dispute about the facts. The Appellant has admitted that the report under regulation 3 (4) was filed involving a delay of 243 days, that the delay was unintentional and the moment it came to know about the lapse the report was filed of its own, seeking condonation of the delay. The Respondent's order imposing penalty has been challenged on the ground that it was not in accordance with the provisions of section 151 read with section I5J of the Act and against the principles laid down by the Supreme Court in Hindustan Steel's case (Supra).
 

SEBI (Substantial Acquisition of Shares and Takeovers)Regulations, 1997 (the Regulations) regulates acquisition of shares and takeovers, through certain measures provided therein. As very often acquisition of shares or voting rights may become necessary in commercial and business interests and also such cases of transfer of shares among two set of persons may not result in a takeover and jeopardise the interest of shareholders, regulations have exempted certain categories of acquisition from the scope of its substantive requirements. Exempted types of acquisitions have been specified under regulation 3 of the Regulations. One such exempted type of acquisitions is interse transfer of shares amongst group companies. Even though the acquisitions exempted under regulation 3 are exempted from the purview of the substantive provisions like making public offer, etc. in the Regulations, the acquirer is required to inform the concerned stock exchange details of the proposed acquisition at least 4 working days in advance of the proposed acquisition in terms of regulation 3 (3). In terms of regulation 3 (4) the acquirer is also required within 21 days of the date of acquisition, submit a report along with supporting documents to the Board giving all details in respect of acquisition which would entitle him to exercise 10% or more of the voting rights in the target company. Object of these two sub-regulations are different. While reporting to the concerned stock exchanges under regulation 3 (3) is meant to enlighten the investing public in their investment decision in the shares of the company, requirement under regulation 3 (4) is meant to serve as an input to enable SEBI to ensure whether the acquisition is one enjoying exemption and if not, to follow up further course of action in the interest of investors- such as directing public offer, etc. Regulation 3 (4) is more relevant from the enforcement point of view. In the present case it is on record that the TWL had complied with the requirements of regulation 3 (3) and failure is confined to compliance of regulation 3 (4) by the Appellant. Since, the Respondent has admitted that the acquisition is covered under regulation 3, there is no question of any public offer, etc. required as a result of the acquisition. So the consequence of delayed filing has not in any way affected any follow up requirement on the part of the Respondents. Therefore it could be said that the non-compliance remained in effect only a technical formality. It may not be so in all cases as the report would be crucial in certain cases depending on the facts and circumstances of each case. It is made clear that the report is not to be discounted or irrelevant as such, in all the cases.
 

For failure to comply with the requirement of reporting to SEBI penalty has been provided in section 15A of the Act. In terms of the said section if any person who is required under the Act or any rules or regulation made thereunder fails to with the requirements stated therein, he shall be liable to a penalty not exceeding the specific sum provided therein, for each such failure.
 

Section 15I which empowers SEBI to adjudicate reads as under:

"15I (1) for the purpose of adjudication under section 15A, 15B, 15,C, 15D, 15E, 15F, 15G, 15H, the board shall appoint any officer but not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

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

" I5J While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely: -

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

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

(c) the repetitive nature of the default".

In the case of Cabot International Capital Corporation Vs. Adjudicating Officer, SEBI (Appeal No.24/2000 decided on 25.1.2001) this Tribunal considered the scope of section 151 and I5J in the context of unintentional failure on the part of the Appellant to comply with the requirement of regulation 3 (4) and held:

"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 I5J. "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 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 I5J. It is not that the penalty is attracted per se 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, as the acquisition was reported to the stock exchanges and thereby the transparency requirement was fully met with, it is difficult to reasonably conclude that the Appellant had deliberately held back reporting under regulation 3 (4). There is no reason to disbelieve, in the absence of clinching evidence to show otherwise, the Appellant's version that failure was a genuine lapse, as is evident from its conduct of submitting the report suo moto. Belated reporting has neither resulted in any gain to the Appellant nor caused any loss to anybody. The Adjudicating Officer also endorsed the same view as is evident from his own words. In para 6.4.5.2 he stated as under:

Thus the Adjudicating Officer's findings and the order-imposing penalty cannot stand together. The findings should serve as the basis for penalty. But in this his findings serve only to absolve the Appellant from the reach of penalty. There is nothing in the order supporting the Adjudicating Officer's decision imposing the penalty. In the light of the totality and circumstances of the case and the finding of the Adjudicating Officer thereon, and also in view of the Supreme Courts guidelines in the Hindustan Steel's case, imposition of monetary penalty on the Appellant, in my view is unwarranted.
 

For the reasons stated above, the impugned order cannot be sustained. Therefore the appeal is allowed and the impugned order is set aside.