SECURITIES AND EXCHANGE BOARD OF INDIA [Order of Adjudicating Officer under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 in the matter of Sawaca Communications Ltd. acting in concert Mahendra A Shah] 1.1 Sawaca Communications Ltd. (hereinafter referred to as ‘SCL’) was incorporated in March 1995 and operations were commenced in May 1995. The company came out with a public issue in February 1996 and the shares of SCL are listed at Ahmedabad Stock Exchange (ASE) and The Stock Exchange, Mumbai (BSE). 2.0 SEBI ordered an investigation vide order dated 22/10/2001 to investigate into the affairs relating to dealings in the shares of SCL. 2.1 The said investigation was ordered to find out: a. Whether any person / entity is guilty of having contravened the provisions of The SEBI Act, 1992 or the SEBI (Stock Broker and Sub Broker) Rules and Regulations, 1992 framed thereunder. b. Whether there are any circumstances which would render any person guilty of having contravened any of the regulations of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. c. Whether any person / entity is guilty of having contravened the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. d. Whether any person / entity is guilty of having contravened the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992.
2.2 Shri Suresh Menon, Division Chief (hereinafter referred to as Investigating Authority) was appointed as an Investigating Officer to investigate as above and submit report to the Board. 2.3 The Investigating Authority had issued summons to Mr. Mahendra Shah on 02.05.2002 requiring him to appear before him on 10.05.2002 at 3.00 pm with a direction, inter alia, to produce all documents / details as mentioned in Annexure enclosed therewith. 3.0 It was alleged that, Mr. Mahendra Shah failed to comply with the requirements of summons. The undersigned was, therefore, appointed as an Adjudicating Officer under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter called Rules) to enquire and adjudge the alleged violation of Section 15A of the SEBI Act, 1992 by Mr. Mahendra Shah, the Director of SCL, vide order of Chairman dated 13.05.2003.
3.1 The undersigned issued a show cause notice dated 06.06.2004 under Rule 4 of the said Rules, to Mr. Mahendra Shah. The contents of the notice are as under: “i. Whereas the investigating officer issued summons to you on 02.05.02 requiring Mr. Mahendra Shah to appear on 10.05.02 before the investigating officer(s) along with certain information. Mr. Mahendra Shah in response to the said summons visited SEBI office on 10.05.02 and agreed in writing to appear before the investigating authority on 20.05.02 at 11:00 a.m. along with the trading details, which were not available with him. However he failed to appear before the investigating authority on the stipulated date and time. Thereafter another summons was issued to you on 21.05.02 to appear before the investigating officer on 31.05.02 along with the said information. In reply to the same, a letter dated 27.05.02 was received from him whereby he sought an extension of time for 15 days. ii. Whereas another opportunity was given to Mr. Mahendra Shah to appear before the investigating officer along with the said information on 13.06.02 vide summons dated 03.06.02 (copy of the same is enclosed as Annexure 5) but you failed to appear on this date as well. iii. Whereas vide letter dated 11.07.02 Mr. Mahendra Shah had stated that he would be able to appear before the investigating officer within a period of 15 days from 11.07.02 (i.e. 26.07.02), but he neglected and failed to appear before the investigating officer(s) till date, and furnish information as required. From the above, it is noted that, despite being called for information and issued summons repeatedly to appear before the investigating authority, Mr. Mahendra Shah neglected and failed to furnish the information sought and comply with the summons issued.” 4.0 Mr. Mahendra Shah vide letter dated 27.07.2004 replied to the show cause notice as under: 4.1 Mr. Mahendra Shah denied that he had not furnished information required by SEBI. He stated that he could remain present only on some of the days but on account of ill health and other reasons he could not remain present on some of the occasions. He further stated that he had furnished all the required details and papers as and when required by SEBI and that he appeared personally on 10.05.2002 and recorded statement and submitted the details. He stated that he had submitted a detailed reply on 18.12.2003 for letter IVD/ID-3/PKB/JS/SCL/18530 dated 26.10.2003. 4.2 He further stated that the registered office of the company was changed with effect from 08.09.2003 from B-401, Wall Street, Opp. Orient Club , Ellisbridge, Ahemdabad to 309, Mahakant Complex, Opp V S Hospital, Ellisbridge, Ahmedabad 380 006, hence the show cause notice dated 26.05.04 was returned undelivered. 4.3 He contended that he furnished all the information that was necessary for the purpose of investigation and he had not violated any provisions of Section 15(a) of SEBI Act and hence not liable for any hard action under Section 15A (a) of the SEBI Act, 1992 and asked for withdrawal of the show cause notice. 5.0 After considering the reply of Mahendra Shah, the undersigned issued a notice dated 11.10.04 under Rule 4 (3) of the said Rules, giving an opportunity for hearing on 25.10.04 at 11.30 a.m. The said notice was sent by Registered A.D. post and the postal acknowledgement was received back. However, Mahendra Shah did not appear on the said date. 5.1 Since Mahendra Shah filed a written reply to the show cause notice and did not respond to the notice of hearing, I am of the considered view that the principles of natural justice are complied with and the ends of justice will meet if the matter is proceed further basing on the material available. 6.1 The issue that arise for consideration is whether there was failure on the part of Mahendra Shah in furnishing documents/information. I note that the Investigating Authority during the course of preliminary investigation had vide letter dated January 17, 2001 asked for submission of various details listed Item-wise from Sr.1-13 in the said letter. Mahendra Shah as Director of Sawaca did not respond to this communication. Hence, the Investigating Authority issued another letter dated February 5, 2001 wherein he mentioned that the information should be furnished latest by February 16, 2001. In reply to the said letter, Mahendra Shah vide his letter dated 16.2.01 requested for extension of time upto 2nd week of March for submission of the details. Accordingly, the IA, vide letter dated 7.3.01 granted time upto March 15, 2001. I note that Mahendra Shah vide letter dated 14.3.01 failed to submit complete information. Hence, the IA issued another letter dated 12.4.01 to Mahendra Shah stating that he failed to furnish most of the information sought vide letter dated 12.1.01 especially replies to points at Sr.Nos. 3,8,10,11,12 therein. Mahendra Shah was asked to furnish the required information latest by April 30, 2001. Mahendra Shah further submitted in part, some more information vide their letter dated 28.4.01 but, yet again failed to furnish full information. As the information submitted was not complete in all respects, the IA once again issued letter dated 29.6.01 stating that Mahendra Shah’s replies have not been satisfactory and that most of the vital information sought by the IA have not been furnished till date and advised Mahendra Shah to furnish complete information by July 9, 2001 without further reminders. Since no reply was received, Reminder No.4 dated July 17, 2001 was issued to Mahendra Shah asking him to submit the information relating to “preferential allotment” as per the format prescribed thereunder with a direction to submit by 24.7.01. As no reply was received, yet another Reminder No.5 was issued on 29.8.01 requiring Mahendra Shah to provide copies of Bank statements with Indian Overseas Bank together with the details pertaining to “preferential allotment”. Mahendra Shah was specifically advised to furnish this information on or before 14.9.01. Mahendra Shah vide letter dated 13.9.01 submitted some details regarding bank statement and list of preferential share holders, however, these details were incomplete.
6.2 Thus, I note that Mahendra Shah was avoiding submission of complete details, as required by the IA. I have noted that Mahendra Shah by submitting information on a piece-meal basis was trying to buy time and thus delay the process of investigation. I also note that the IA had given sufficient opportunities and continuously corresponded with Mahendra Shah, advising them to submit the information in all respects. I note that Mahendra Shah failed to comply with the requirements of the IA. 6.3 Since the information furnished by Mahendra Shah vide letter dated 13/09/2001 incomplete IA, on appointment as IA vide order dated 22/10/2002, requested for information vider letter dated 12/02/2002 to be submitted on or before 20/03/2002. Mahendra Shah failed to respond to their letters. Mahendra Shah was issued summons dated 30.4.02 advising him to appear before the IA on 10.5.02 at 11.00 a.m. alongwith all documents / details as mentioned overleaf and all documents upon which Mahendra Shah intends to rely in support of their defence or which may be material for the purpose of the said investigation. In response to the summons, Shri Mahendra Shah, Director of Mahendra Shah appeared before the Investigating Authority on 10.05.2002 and stated that the earlier Director of Mahendra Shah viz. Shri Satish Shah has resigned from the post of Director wef 1.12.01 and that he (Mahendra Shah) has joined as Director wef 28.1.2000. Shri.Mahendra Shah stated in his letter dated 10.5.02 that they have submitted the details asked by the IA vide their letters dated 14.3.01, 28.4.01, 10.7.01 and 13.9.01.
However, I note that the information submitted vide these letters were not complete and hence did not meet with the requirements of the IA. Mahendra Shah had agreed to appear before the Investigating Authority on May 20, 2002 at 11.00 a.m alongwith the requisite details. However, Mahendra Shah failed to appear before the Investigating Authority on the stipulated date and time. Hence, the Investigating Authority issued another letter dated 21.5.02 enclosing summons dated 21.5.02 requiring Mahendra Shah to appear on 31.5.02 at 11.00 a.m. alongwith all documents / details as mentioned overleaf and all documents upon which Mahendra Shah intends to rely in support of their defence or which may be material for the purpose of the said investigation.
6.4 Mahendra Shah did not comply with the aforementioned summons. Hence, another summons dated 3.6.02 was issued to Mahendra Shah directing him to appear before the Investigating Authority on 13.6.02 at 11.30 a.m. alongwith all documents / details as mentioned overleaf and all documents upon which Mahendra Shah intends to rely in support of their defence or which may be material for the purpose of the said investigation.
6.5 Mahendra Shah did not respond to this summons either. Accordingly, the IA finally issued letter dated July 2, 2002 to Mahendra Shah stating that he had been given several opportunities to appear in person and since Mahendra Shah failed to appear before the Investigating Authority on the stipulated dates, it is decided to proceed against Mahendra Shah based on the facts and records available with SEBI and also stated that Mahendra Shah’s non-compliance is in violation of Section 24 of SEBI Act, 1992 and prosecution proceedings may also be initiated. Mahendra Shah in reply to this letter stated vide their letter dated 11.7.02 that they would appear before the IA within a period of 15 days from the letter date i.e. by 25.7.02. However Mahendra Shah failed to appear on the promised date.
6.6 Whether Mahendra Shah is liable to pay penalty and if so, the quantum of penalty to be paid
The period of failure by Mahendra Shah to furnish information is tabulated as under:
As observed above, Mahendra Shah failed to furnish complete information/obey summons and the failure commences from 20.5.02, since on 10.5.02 Mahendra Shah first appeared before the Investigating Authority and had promised that they would appear before the IA on 20.5.02 with all the details but failed to do so. Therefore, the violation of Mahendra Shah attracts penalty under Section 15A of the SEBI (Act), 1992, which 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:-
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less]; (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to [ a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less]; (c) to maintain books of account or records, fails to maintain the same, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less];
6.7 It is therefore, clear that the penalty that is envisaged under this provision was for each day during which the failure continued. In this case, the failure to furnish information continued for a period of 2 years and 4 months and 22 days (i.e. 876 days).
6.8 The next issue that should be adjudicated is the quantum of penalty that can be imposed. The maximum penalty that can be imposed on the noticee in the present case would be applied as per the provisions of section 15A of SEBI Act, 1992. Hence, the maximum penalty that Mahendra Shah is liable to pay is Rs.1 crore.
6.9 However, the quantum of penalty has to be decided based on the criteria laid down in section 15J of the SEBI Act, 1992. The Hon’ble Securities Appellate Tribunal rightly called the said provision a benevolent provision, (Appeal No 164/ 03 in the matter of Vijt Krishna Pillai Vs SEBI) and the same should be given due regard.
However, the Hon'ble Securities Appellate Tribunal has, in the recent appeals before it laid down certain other criteria for determining the quantum of penalty, which can be summarized as under:
1. The first one is whether the information called for in summons was deliberately withheld for malafide reasons, or with ulterior motives? (Appeal no 148/ 2003 filed by Silverline Holdings Corporation and others Vs Securities and Exchange Board of India)
2. The second one is financial situation of the noticee. In appeal No. 163 & 165 by S Ramesh and others Vs. Securities and Exchange Board of India it was interalia held that “taking into account the sad financial situation of both the parties and their admission, it would be appropriate to consider reducing the penalty” (emphasis supplied).
In the appeal no 93/ 2002 filed by Mazsher N Laila and others Vs Securities and Exchange Board of India, the Hon'ble Tribunal while upholding the order of the Adjudicating officer, held that “However, taking into account the fact that the company employs 400 workers and share capital had to be increased to avail loan from IDBI to upgrade the technology, we reduce the penalty to 50,000”
3. When the criteria in section 15J are not complied with, the penalty has to be bare minimum. In the appeal No106/ 2002 filed by Global infrastructure Holdings Ltd., the Hon'ble Tribunal held, after quoting the provisions of section 15J which benevolently envisaged the factors to be taken into account by the Adjudicating Officer, held that “We find all these factors missing in the present case and therefore, the quantum of penalty has to be bare minimum”
6.10 I have duly considered the said factors enumerated u/s 15J of SEBI Act and under Rule 5(2) of (Procedure for Holding Inquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995.
It is difficult to give a finding as to the amount of disproportionate gain and unfair advantage Mahendra Shah got by not furnishing the information to Investigating Authority. It can only be stated that by doing so they could effectively stall the investigation proceedings for a period of 876 days (from 20.5.02 till date).
I also find it difficult to give a finding as to the quantum of loss caused to any investor or investor group on account of this failure. However, when a regulatory action was effectively stalled for a period of 876 days and when an investigation to find out the market misdemeanor, if any, cannot be completed within time, it is theoretically possible to hold in general terms that a loss is caused to the investors at large.
6.11 Lastly, I find that the noticee had not responded to the summons dated 21.05.02 and 03-06-023. Therefore, I hold that the non compliance with the summons is repetitive in nature. Further, Mahendra Shah has also failed to avail of the opportunity given to him, for appearing in person, before the Adjudicating Officer.
Applying the criteria laid down by the Tribunal in the above cases and also the statutory criteria mentioned in section 15 J, I find that the non-submission of information was with ulterior motive. Hence the failure is without any reasonable cause and can be termed as willful default. Hence it is a blameworthy conduct and a clear breach of civil obligation imposed by a statute.
The Hon’ble Bombay High Court on examining Chapter VI of SEBI Act in the case of SEBI v/s Cabot International Capital (OOCJ Appeal no. 7 of 2001 in SEBI Appeal No. 24 of 2000), inter alia, held that the Adjudication Proceedings are not quasi criminal and ‘Mens rea’ is not relevant. The Hon’ble High Court was pleased to hold as under:
“30. Therefore, for respective default or failure, penalty is provided under the Act. The scheme of the SEBI Act of imposing monetary penalty is very clear. This Chapter nowhere deals with criminal offence. These defaults or failures are nothing, but failure or default of statutory civil obligations provided under the Act and the Regulations made thereunder. It is pertinent to note that Section 24 of SEBI Act deals with the criminal offences under the Act and its punishment.
31. The adjudication for imposing penalty by Adjudicating Officer, after due inquiry, is neither a criminal nor a quasi criminal proceeding. The penalty leviable under this Chapter or under these Sections is penalty in cases of default or failure of statutory obligation or in other words breach of civil obligation. The provisions and scheme of penalty under SEBI Act and the Regulations, there is no element of any criminal offence or punishment as contemplated under criminal proceedings. Therefore, there is no question of proof of any mens rea by the Appellants and it is not essential element for imposing penalty under SEBI Act and the Regulations.
The penalty imposable under the SEBI Act and the Regulations under Sections 15I and 15J, is deterrent in nature to see that the parties or person concerned complies with the Regulations strictly. The imposition of the penalty under SEBI Act and Regulations is civil in nature and cannot be equated with penal in character as referred and submitted by the respondents and / or observed by the Appellate Authority. It is also clear that the word “penalty” has different colour and shades and facets and that has to be interpreted and imposed on the basis of particular act and policies or scheme. It is also clear that there can be two distinct liabilities under the same act i.e. civil and / or criminal. The Authorities or Regulatory Authority have ample power to initiate, both proceedings, if case is made out, within the framework of the SEBI Act or the Regulations.
32. The SEBI Act and the Regulations, are intended to regulate the Securities Market and the related aspects, the imposition of penalty, in the given facts and circumstances of the case, cannot be tested on the ground of “no mens rea, no penalty”. For breaches of provisions of SEBI Act and Regulations, according to us, which are civil in nature, mens rea is not essential. On particular facts and circumstances of the case, proper exercise of judicial discretion is a must, but not on a foundation that mens rea is essential to impose penalty in each and every breach of provisions of the SEBI Act.....”
6.12 In this matter I find that Mahendra Shah, in his capacity as the Director of Sawaca Communications failed to furnish complete information as required by IA. In other words, Mahendra Shah furnished some information as demanded by IA but neglected and failed to furnish the rest of the information. Hence, giving due respect to the Judgements of Hon’ble Bombay High Court and also the criteria laid down by Hon’ble SAT in the cases cited above and taking into account all other facts, I hold that Mahendra Shah, who was required under SEBI Act to furnish documents and information to the Investigating Authority failed to furnish documents and that the failure continued for a period of 876 days (i.e. from 20.5.02 to 12.10.02). I have also considered the fact that the Company viz. Sawaca Communications, in which Mahendra Shah is a Director has already been penalized with a penalty of Rs.2,00,000/- for the similar failure, in the same investigation. In view of this and as Shri Mahendra Shah has been found guilty of non-furnishing of information in his capacity as Director of Sawaca Communications, I am of the view that it will meet the ends of justice if a penalty of Rs.25,000/- is imposed.
Mahendra Shah Is directed to pay a penalty of Rs.25,000/- (Rupees twenty five thousand only) by way of a crossed Demand Draft drawn in favour of “SEBI – PENALTIES REMITABLE TO GOVERNMENT OF INDIA” and forward the same to Shri P.K. Bindlish, General Manager, SEBI, 224, Mittal Court, “B” Wing, Nariman Point, Mumbai – 400 021. Mahendra Shah shall pay the penalty within 45 days of receipt of this order.
As required under Rule 6 of the said Rules, 1997 a copy of the instant order is being sent to Mahendra Shah and also to SEBI.
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