Yogi Sungwon (India) Ltd                                        Appellant

Vs.

Securities & Exchange Board of India                    Respondent
 
 

APPEARANCE:

Mr. Jayant Thakur
Chartered Accountant

Mr. Rajesh Mulani
Director
Yogi Sungwon (India) Ltd                                            for Appellant

Mr. Ananta Barua
Dy. Legal Advisor, SEBI

Mr.K.R.C.V.Seshachalam
Asstt. Legal Adviser,
SEBI                                                                                  for Respondent
 
 

(Appeal arising out of the order dated 19.10.2000 made by the Adjudicating Officer, Securities & Exchange Board of India)

The Appellant is one of the promoters of Highway Resorts Ltd (the company). The Appellant was holding 4, 90, 000 shares, which accounted for 9.78% of the paid up capital of the company. On 7.10.1998/8.10.1998 the Appellant acquired from a co-promoter further 2, 51, 500 (5.02% of the paid up capital) of the company, thereby increasing its total share holding to 14.8% in the company�s paid up capital. However, the acquisition was reported to the Respondent and other agencies belatedly. In the said context, the Chairman, Securities & Exchange Board of India, vide order dated 15.9.1999 appointed an Adjudicating Officer for holding an inquiry into the matter and imposing monetary penalty, if so warranted. The Adjudicating Officer so appointed, after holding inquiry came to the conclusion that the Appellant had failed to comply with the requirements of Section 15A (b) of the Securities and Exchange Board of India Act, 1992 (the Act) and imposed a rupees two lakhs as monetary penalty of against the Appellant. The present appeal is directed against the said order.
 

Shri Jayant M Thakur practicing Chartered Accountant, appearing for the Appellant reiterated the Appellant�s version explained in the rejoinder and written submissions. According to Shri Thakur the basis of levy of penalty by the Adjudicating Officer is that the Appellant had filed certain documents/reports etc., with the concerned authorities belatedly in the context of acquisition of shares of the company. He cited the observation of the Adjudicating Officer that "the acquirer has failed to submit information to stock exchange, target company, within the time specified under regulation 3 (3) 7 (1) 8 (1) /or 8 (2) and acquirer also failed to file a report with SEBI in time specified under the regulation 3 (4)". Shri Thakur submitted that there was no legal requirement to submit such report, etc., though the Appellant may have submitted them to keep the information on record.
 

According to the learned Representative the requirement of regulation 3 (4) gets attracted only when the acquisition of the shares results in crossing the 15% bench of mark holding specified in the regulations, that for the purpose what is to be taken into consideration is not the individual holding but the collective holding of all the persons acting in concert; the provisions of regulation 3 (4) will not apply to a case where such holding remains unchanged. According to him this view is supported by the words in the regulation that "acquisition which (taken together with shares of voting, if any, held by him or by persons acting in concert with him) would entitle such persons to exercise 15% or more of the voting rights in a company"; to attract regulation 3 (4) such acquisition should result in crossing the prescribed limit of 15%; if the holding of the acquirer remain the same, the requirement of the regulation is not attracted. In the instant case, the Appellant�s holding along with the persons acting in concert (promoters) did not change at all. According to Shri Thakur the requirement relating to exemption to inter promoter transfer is to cover those cases where there are two promoter groups in the company and not the cases of transfer between promoters of the same group and that the Adjudicating Officer himself has stated in the order that the acquisition was by transfer between parties who are part of the same promoter group. He submitted that the overall level of holdings immediately before and immediately after the acquisition did not change. According to Shri Thakur, in the circumstances the Appellant was not at all required to submit any report under regulation 3 (4) and as such there was no failure on its part so as to invite any penalty.
 

Shri Thakur further stated that for the same reasons stated with reference to non applicability of regulation 3 (4) it was also not required to file any report under regulation 7 (1), as the said regulation also relates to acquisitions that result in increase in holding of the acquirer and the persons acting in concert with him, beyond the prescribed limit.
 

The learned Representative further submitted that even assuming that there was a contravention of any other provision of law, the fact that the Adjudicating Officer considered only the provisions of regulation 3 (4) and 7 (1) for the purposes of levy of penalty on the impression that these provisions were attracted, the penalty levied would be bad in law with regard to these matters. According to him rationale for levy of penalty followed by the Adjudicating Officer that the acquisition was "price sensitive information" is baseless as could be seen from the fact that there was no change in the holdings of the promoter group.
 

Referring to the provisions of section 15J of the Act, the learned Representative submitted that the Adjudicating Officer is legally required to take into account the three factors stated therein, while adjudging the quantum of penalty, as none of the three factors were present in the Appellant�s case, the Adjudicating Officer should not have imposed the penalty. According to him the Adjudicating Officer did not even consider, far from applying, the provisions of section 15J, as could be seen that in the impugned order, section 15J itself has not been even referred to. The learned Representative submitted though it was clearly made out before the Adjudicating Officer that none of the factors referred in the section 15J is present to any extent in the present case, and the Adjudicating Officer had also accepted the same and stated that the default in question is of pure technical in nature. He submitted that the onus is on the Adjudicating Officer to make out the presence of such factors and since he has not done so in the present case, the order-levying penalty ought to fail.
 

Shri Thakur further stated that without prejudice to the contention that the requirements of regulation 3 (4) and 7 (1) are not attracted., the delay in filing the report/document was unintentional, and a mere default should not necessarily attract penalty. In this context he cited this Tribunal�s view in Housing Development Finance Corporation [(2000) 28 SCL 289(SAT)], that "default per se is not dominant guiding principle for imposition of penalty. It is the consequence of the default that weighs in taking the decision to impose penalty and its quantum" and submitted that even after holding that the failure was technical, the Adjudicating Officer without giving any justification, has imposed the monetary penalty.
 

Learned Representative further submitted that while imposing the penalty, the Respondent went by the provisions of section 15A (b) ignoring the provisions of section 15A (a) though the requirement of filing report vide regulation 3 (4) is covered under section 15A (a) as has already been viewed by this Tribunal in the Housing Development Finance Corporation�s case (supra).
 

The Appellant also stated that penalty should not be levied merely because there is default. In support of this the Appellant cited this Tribunal�s decision in Chandrakant Gandhi Stock Broker P. Ltd. Vs. Securities and Exchange Board of India [2000 (37) CLA 238 SAT]
 

Shri Thakur submitted that for any reason this Tribunal is not prepared to accept the submission that it is not a fit case to impose penalty, the penalty be reduced to a token amount as the alleged omission on the part of the Appellant has not caused any loss to any person, or resulted in any gain or advantage to any person including the Appellant and that the Appellant is not a habitual defaulter.
 

Learned Representative reiterated the version that the Appellant had come forward on its own without being asked by any authority and made good the deficiencies that the Adjudicating Officer has not considered this factor, that the Appellant�s bonafide conduct should be given due weightage in deciding the penalty.
 

Though the Respondent had raised preliminary objection in its reply stating that the appeal is not maintainable as it is time barred and that the Appellant has failed to remit the penalty amount, these objections were not pressed. Even otherwise these objections cannot sustain in the light of the factual and legal position applicable to the case.
 

It has been submitted that the Appellant filed the report to the Respondent as required under regulation 3 (4) involving a delay of 190 days as against the outer limit of 21 days prescribed for the purpose. According to the Respondent the Appellant contravened the provisions of regulation 3 (3) 3 (4) 7 (1) 8 (1) and 8 (2), that the penalty of Rs. 2 lakhs imposed under section 15A (b) is reasonable., as it is much less than the maximum penalty which the Adjudicating Officer could have imposed by working out at the rate of Rs. 5000/- for each day of the failure. According to the learned Representative failure under section 15A (b) continued for 169 days. Quoting the information furnished by the Appellant, the learned Representative stated that as a result of acquisition of 5.02% shares of the company�s paid up capital on 7.10.1998/8.10.1998, the Appellant�s holding in the company rose from 9.78% to 14.8%., which is beyond the prescribed bench mark, that the reason given by the Appellant that the failure to comply with the legal requirements as �inadvertence� is only an alibi. Learned Representative refuted the Appellant�s version that failure to report as required under the regulations was only a technical violation. According to him the purpose of reporting/filing information with public authorities is to enable the investors to provide information so as to help them to make timely and informed investment or disinvestment decisions and also to ensure transparency in the transactions and to assist in monitoring all the exempted transactions by SEBI.
 

Referring to the Appellant�s submission that the penalty has been levied without taking into consideration the factors provided in section 15J, the learned Representative submitted that section 15J stipulates only the criteria for deciding the quantum of penalty and it does not enable the Adjudicating Officer to decide whether there must be a penalty or not. Once he comes to the conclusion that a violation deserves penalty under 15A, then he falls back on 15J to decide the quantum of penalty. According to the learned Representative nowhere in the order it has been stated that the default is purely technical; that on the contrary the Adjudicating Officer had stated that the default is not merely technical in nature. It was also submitted that taking into consideration the nature of the failure on the part of the Appellant, it stands to reason to invoke section 15A (b) to levy penalty.
 

The learned Representative submitted that in the light of the facts and circumstances of the case, ratio of the Tribunal�s decision in Housing Development Finance Corporation�s case and Chandrakant Gandhi Stock Brokers (P) Ltd., has no application to the case, as the facts of these cases are distinguishable from the facts of the present case. With a view to counter the ratio in the Hindustan Steel�s case relied on by the Tribunal in Chandrakant Gandhi�s case, the learned Representative cited Supreme Court�s decision in Gujarat Travancore Agency v. Commissioner of Income Tax, Kerala (AIR 1989 SC 1671).
 

The Appellant has taken conflicting stand in the Memorandum of Appeal and in the rejoinder and written submission on the applicability of the provisions of the concerned regulation. In the Memorandum of Appeal it has been stated that the Appellant inadvertently delayed informing the company of the fact of the acquisition. It has been further stated therein that the Appellant, on its own, informed the company and the stock exchanges concerned of the fact of the acquisition at a later point of time. The Appellants also filed the necessary reports as required under regulation 3 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997. In the appeal the Appellant had nowhere questioned the applicability of the legal requirements in the context of acquisition of 5.02% shares of the company. However, in the �rejoinder and written submissions� submitted, it has been stated that "there was no legal requirement of submission of any report or intimation in connection with the said acquisition though the Appellant may have submitted them to keep the information on record". In this regard instead of going into the technicalities involved in such a situation it is felt that the best course is to consider the legal position The Appellant�s submission that there is no legal requirement to submit the information etc., is based on the view that there was no change in the over all ownership of the shareholding by the Appellant and the persons acting in concert, as the transaction was interse shareholders in the same promoter group. But this contention is not supported by the provisions of the regulations. It is clear from the wording of regulation 3 (4) and 7 (1) etc., that what is contemplated in the regulation is not the total holding of the promoter group, but the holding of the individual. The argument that the acquisition was from other shareholders in the same group and as a result of acquisition, the holding of group did not change is not of any force to claim non-applicability of the regulation to the transaction in question. If the interpretation of the Appellant is accepted then the very exemption provided under section 3 (1) (e) itself would become redundant.
 

Yet another legal issue raised by the Appellant is the scope of section 15I read with section 15J of the Act, empowering the Adjudicating Officer to impose monetary penalty.
 

According to section 15A of the Act, if any person who is required under the Act or any rules or regulation made thereunder fails to comply with the requirements stated therein he shall be liable to a penalty not exceeding the specific sum provided therein, for each such failure.

Section 15I, which empowers SEBI to adjudicate. Said section 15I reads as under:

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:

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 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.
 

It is seen from the impugned order that the Adjudicating Officer had viewed that the acquisition of shares by the Appellant is covered under regulation 3 (1) (e) (iii) for the reason that the (i) acquirer and transferor are promoters in terms of regulation 2 (h) and that they were holding not less than 5% in the company for not less than 3 years preceding the acquisition. In this context it is felt that it would be advantageous for the purpose of easy reference to extract the impugned order in toto (except the preliminary portion). The material portion of the order reads as under:

In terms of regulation 3 (3) the acquirer is required to notify the concerned stock exchanges the details of the proposed transactions at least 4 working days in advance of the proposed acquisition in case of the acquisition exceeding the prescribed limit. Since the particulars are required to be notified before the acquisition, furnishing of the same after acquisition of shares cannot be considered as compliance of the said regulation. It is to be treated as non-compliance of the requirement of the law and as such quantification of delay and consequential imposition of penalty relatable to the duration of delay extending beyond the date of acquisition is not legally tenable. However, that is not the case with reference to regulation 7 (1), as thereunder requisite disclosures are to be made to the target company within 4 working days of (a) the receipt of intimation of allotment of shares; or (b) the acquisition of shares or voting rights, as the case may be. The impugned order is silent about the relevant date for reckoning the date of compliance. Though the order is wanting in specifics in this regard, it is felt that "October 1998" as referred to in the order can be to some extent considered as the relevant referral point for calculating the delay. But there is no indication as to on what date the requisite disclosure was made to the company. According to regulation 8 (1) every person including a person mentioned in Regulation (6) who holds more than fifteen percent shares or voting rights in any company, shall, within 21 days from the financial year ending March 31, make yearly disclosures to the company, in respect of his holdings as on 31^st March. There is no reference at all in the order as to the failure is with reference to which year and at least belatedly the requirement has been complied with or not. In terms of regulation 8 (2) a promoter or every person having control over a company shall, within 21 days from the financial year ending March 31, as well as the record date of the company for the purposes of declaration of dividend, disclose the number and percentage of shares or voting rights held by him and by persons acting in concert with him, in that company to the company. There is no indication in the order about any specifics relating to the alleged contravention of the regulation.
 

As per regulation 3 (4) the acquirer is required to submit, within 21 days of the date of acquisition a report along with supporting documents with details to SEBI. In this case also though the specific date of submission has not been mentioned, it has been stated that the delay involved was approximately 160 days.
 

Penalty for non-compliance of the requirement under regulation 3 (4) is provided in section 15A (a) and failure to furnish information, returns etc., to other entities are punishable under section 15A (b) of the Act. However, the Adjudicating Officer appears to have ignored the provisions of section 15A (a) and invoked section 15A (b) and imposed a "total penalty" for the alleged violation of regulation 3 (3),  3 (4),  7 (1),  8 (1) and 8 (2). In this connection it is to be noted that the Adjudicating Officer is required to consider the specific "failures" and decide the quantum of penalty for each such failure taking into consideration all the relevant circumstances while exercising his discretion in imposing the penalty, as observed by the Supreme Court in Hindustan Steels Case (Supra). But there is nothing in the impugned order even to suggest that the Adjudicating Officer had followed the said principle while imposing monetary penalty against the Appellant.
 

In view of the above, I am of the view that the matter need be considered in detail and decided by passing a speaking order, taking into consideration all the relevant factors. For the purpose, it is felt that the matter need be remanded.
 

Hence I set aside the impugned order and allow the appeal by remand for de novo consideration by the Adjudicating Officer.