Holding

Penalty under Sections 15(D)(b) and 15(E) is mandatory upon proof of contravention, and mens rea is not required for such civil penalties.

Summary

The Securities and Exchange Board of India (SEBI) appealed against Shriram Mutual Fund and another respondent for repeatedly exceeding the 5% limit on transactions through associate brokers, violating Regulation 25(7)(a) of the SEBI (Mutual Funds) Regulations, 1996, and failing to comply with the terms of its Certificate of Registration under Section 15(D)(b) of the SEBI Act. An adjudicating officer imposed penalties of Rs. 5 lakh and Rs. 2 lakh respectively under Sections 15(E) and 15(D)(b). The Securities Appellate Tribunal set aside those penalties, holding that mens rea was required and that penalty imposition was a matter of discretion. The Supreme Court held that the statutory provisions impose a mandatory penalty once a contravention is established; mens rea is not an essential element for civil penalties under Chapter VI‑A of the SEBI Act. Consequently, the Court restored the adjudicating officer’s penalties, emphasizing that only the quantum of the fine is discretionary, not its imposition. The appeals were allowed and the Tribunal’s order was set aside.

Issues considered

Whether the imposition of penalty is a sine qua non of a breach of the Certificate of Registration and SEBI (Mutual Funds) Regulations.
Whether mens rea is an essential element for imposing penalties for breach of civil obligations under the SEBI Act.

Legislation cited

Securities and Exchange Board of India Act, 1992s. 15(1), s. 15(D)(b), s. 15(E), s. 15(J), s. 15-Z

Subjects

penaltymens reacivil liabilitySEBImutual fundregulatory breachadjudicationsecurities law

Judgment

CHAIRMAN S.E.B.I. A
v.
SHRJRAM MUTUAL FUND AND ANR.

MAY 23, 2006

[DR. AR. LAKSHMANAN AND LOKESHWAR SINGH PANTA, JJ.]
B

SEBI (Mutual Funds) Regulations, 1996-Regulation 25(7)(9)-
Securities and Exchange Board of India Act, 1992~ection 15(D)(b)-
Violation of terms of Certificate of Registration and Statutory Regulations
by Mutual Fund-Imposition of penalty for the violations-Whether sine C
qua non or mens rea required-Held: Mens rea is not an essential
ingredient for contravention of the provisions of a civil act-The penalty
is attracted as soon as contravention of the statutory obligations as
contemplated by the Act is established-Unless the language of the statute
indicates the need to establish the element of mens rea, it is sufficient to D
prove that a default in complying with the statute has occurred.

Respondent conducted business through brokers in excess of the
permissible limits prescribed under Regulation 25(7)(a) of SEBI (Mutual
Funds) Regulations, 1996 on 12 occasions covering 6 quarters and also
failed to comply with the terms and conditions attached to the Certificate
E
of Registration which are statutory in nature, as prescribed by Regulation
15(D)(b) of the Securities and Exchange Board of India Act, 1992. SEBI
appointed an Adjudicating Officer to enquire into the violations. It
imposed penalty of 5 lacks under Section 15 E on respondent No. 2 for
failure to comply with Regulations 25(7)(a) with regard to routing of F
transactions through associate brokers. It imposed penalty of 2 lacs
under Section lS(D)(b) on respondent No. 1 for its failure to comply
with the terms and conditions of Certificate of Registration granted to
it. In. appeal, Securities Appellate Tribunal set aside the order of
Adjudicating Officer on the ground that the penalty to be imposed for G
failure to perform a statutory obligation is a matter of discretion; that
there was no malajide intention to act in violation of Regulation 25 (7)
(a) and Section 15(D)(b); and that the penalty is warranted by the
quantum which has to be decided by ·taking into consideration the
factors stated in Section 15 J. Hence the present appeals.
H
833
834 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A The questions for determination before this Court were whether
once it is conclusively established that the Mutual Fund has violated
the terms of the Certificate of Registration and the Statutory Regulations,
the imposition of penalty becomes sine qua non of the violation; and
whether mens rea is an essential element for imposing penalty for
breach of civil obligations.
B
Allowing the appeals, the Court

HELD: 1. Penalty is attracted as soon as the contravention of the
statutory obligation as contemplated by the Act and the Regulation is
c established and hence the intention of the parties committing such
violation becomes wholly irrelevant. A breach of civil obligation which
attracts penalty in the nature of fine under the provisions of the Act and
the Regulations would immediately attract the levy of penalty irrespective
of the fac~ whether contravention was made by the defaulter with guilty
intention or not. Unless the language of the statute indicates the need
D to establish the preser.ce of mens rea, it is wholly unnecessary to
ascertain whether such a violation was intentional or not. On a careful
perusal of Section 15(D)(b) and Section 15-E of the Act, there is nothing
which requires that mens rea must be proved before penalty can be
imposed under these provisions. Hence once the contravention is
E established then the penalty is to follow. (851-F-H)

Director of Enforcement v. MCTM Corporation Pvt. Ltd. and Ors.
(1996) 2 SCC 471; JK. Industries Ltd and Ors. v. Chief Inspector of
Factories and Boilers and Ors., (19961 6 SCC 665; R.S. Joshi Sales Tax
F Officer. Gujarat and Ors. v. Ajit Mills Ltd and Anr. Etc., [1977) 4 SCC
98; Mis Gujarat Travancore Agency, Cochin v. C.J. T., (1989) 3 SCC 52
and Swedish Match AB and Anr. v. SEBI and Anr. , (2004) 11 SCC 641,
relied on.

Hindustan Steel Ltd v. State of Orissa, AIR 1970 SC 253,
G distinguished.

SEBI v. Cabot International Capital Corporation, (2005) 123 Comp.
Cases 841 (Born), referred to.

H 2. Imputing mens rea into the provisions of Chapter VI A is
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND 835

against the plain language of the statute and frustrates entire purpose A
and object of introducing Chapter VIA to give teeth to the SEBI to
secure strict compliance of the Act and the Regulations. [852-C-D]

3. Once the contravention is established, then the penalty has to
follow and only the quantum of penalty is discretionary. Discretion has
been exercised by the Adjudicating Officer as is evident from imposition B
of lesser penalty than what could have been imposed under the
provisions. The intention of the parties is wholly irrelevant since there
has been a clear violation of the statutory Regulations and provisions
repetitively, covering a period of 6 quarters. Hence the respondents
have wilfully violated statutory provisions with impunity and hence the C
imposition of penalty was fully justified. The Tribunal, in this context,
failed t9 appreciate that every Mutual Fund has to redeem the units
as per terms and conditions of the scheme on the request of the unit
holders and this cannot, in any manner, be considered as an
extraordinary circumstance or something which was not known to the D
respondents. The facts and circumstances of the present case in no way
indicate the existence of special circumfitances so as to waive the
penalty imposed by the Adjudicating Officer. (845-A-D]

4. When a penalty is imposed by an Adjudicating Officer, it is
done so in adjudicatory proceedings and not by way of fine as a result E
of prosecution of an accused for commission of an offence in a criminal
proceeding. In the instant case, the Tribunal has failed to appreciate
that the respondents had given undue and unfair advantage to the
associated brokers, which is detrimental to the interest of the unit
holders. (846-A-B] F
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 9523-9524
of 2003.

From the Order dated 21.8.2003 of the Securities Appellate .Tribunal
Mumbai, in Appeal No. 50-51/2002. G
L.N. Rao, Sr. Advs., Ms. Indu Malhotra, Ms. Liz Mathew and Arjun
Suresh, Advs., with him for the Appellant.

The Judgment of the Court was delivered by
H
836 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A DR. AR. LAKSHMANAN, J. : The Securities and Exchange Board
of India (hereinafter referred to as 'the SEBI') is the appellant in the present
appeal under Section 15-Z of the Securities and Exchange Board of India
Act, 1992. This appeal was filed against the final judgment and order dated
21.08.2003 passed by the Securities Appellate Tribunal, Mumbai (hereinafter
referred to as 'the Tribunal') in appeal No. 50 of 2002 and 51 of 2002
B
raising an important question of law as to whether once it is conclusively
established that the Mutual Fund has violated the terms of the Certificate
of Registration and the statutory Regulations i.e. SEBI (Mutual Funds)
Regulations, 1996 (hereinafter referred to as 'the Regulations") the imposition
of penalty becomes a sine qua non of the violation.
c
The respondents have not chosen to enter appearance though they
were served with the notice. Since the service is complete and the appeals
are ready for hearing, the above appeals were listed for final hearing.

D The Appellant Board, a body corporate, has been established under
the Securities and Exchange Board of India Act, 1992 by the Central
Government, inter a/ia, to protect the interest of the investors in securities
and to promote the development of, and to regulate the securities market
and for matters connected therewith.
E Shriram Mutual Fund was registered in the year 1994. It had floated
5 schemes. It conducted business through brokers associated with its sponsor
in excess of the permissible limits prescribed under Regulation 25(7)(a) of
the Regulations, 1996 on 12 occasions. The respondent failed to comply with
the terms and conditions attached to the Certificate of Registration which are
F statutory in nature, as prescribed by Regulation l 5(D)(b) of the Securities
and Exchange Board of India Act, 1992.

The instances of excess transactions conducted by the respondents are
as follows:-
G
Sr. Quarter ended Name of the Associate Percentage of
No. Brokers Business

I. June 1998 Springfield Securities 10.65%

2. September 1998 -do- 6.6%
H
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.) 837

3. March 1999 -do- 16.57% A
4. September 1999 -do- 9.57%

5. December 1999 -do- 91.68%

6. September 1998 SIS Shares and Stock 19.59%
Brokers B
7. March 1999 -do- 33.81%

8. September 1999 -do- 38.01%

9. September 1998 Shriram Indus Stock 9.86%

10. December 1998 -do- 6.39%
c
11. March 1999 -do- 28.95%

12. September 1999 -do- 52.42%

The Chairman, SEBI in exercise of the powers conferred on it under D
Section 15(1) of the said Act and Rule 3 of the SEBI (Procedure for Holding
Enquiry and Imposing Penalty by Adjudicating Officer) appointed an
Adjudicating Officer to enquire into the violations of exceeding by the
respondents of the permissible limit of 5% of aggregate purchases and sales
of securities made by the Mutual Fund in all its Schemes, as prohibited under E
Regulations 25(7)(a) of the said Regulations.

The Appellant-Board issued notice dated 01.04.2002 under Rule 4 of
Rules, 1995 calling upon the respondents to show cause as to why an inquiry
should not be held and penalty imposed under the Rules, 1995. The
respondents filed a common reply before the Enquiry and Adjudicating F
Officer, SEBI.

The Adjudicating Officer, after hearing the parties, imposed penalty of
Rs. 5 lacs under Section 15E on respondent No.2 for failure to comply with
Regulations 25 (7)(a) ofSEBI (Mutual Funds) Regulations, 1996 with regard
to routing of transactions through associate brokers. G

The Adjudicating Officer also imposed a penalty of Rs. 2 lacs under
Section I 5(D)(b) of SEBI Act, 1992 on respondent No.I for its failure to
comply with the terms and conditions of Certificate of Registration granted
~~ H
838 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A Aggrieved by the order dated 24.06.2002 passed by the Adjudicating
Officer, the respondents filed appeals before the Securities Appellate
Tribunal, Mumbai on 21.08.2003, inter alia, contending that the transactions
with the associate brokers were related to thinly traded Securities, for which
there were no ready markets available through the normal Stock Exchange,
or were relating to securities which did not have any large volume or trade
B in the market. It was further contended that these securities were either
thinly traded, or did not have any volumes.

It was submitted that the percentage of excess business carried out
with associate brokers were as high as 91.68% and 52.42%, while the total
c volume of business done with the associate brokers was Rs.4.55 lacs.

The Tribunal set aside the order of the Adjudicating Officer on the
purported ground that the penalty to be imposed for failure to perform a
statutory obligation is a matter of discretion. The Tribunal has held that the
penalty is warranted by the quantum which has to be decided by taking into
D
consideration the factors stated in Section 15-J. Aggrieved by the order dated
21.08.2003, the Charrman, SEBI filed the above statutory appeal under
Section 15-Z of the Act of 1992 as amended by the Securities and Exchange
Board of India (Amendment) Act, 2002.

E We heard Mr. L. Nageswara Rao, learned senior counsel ably assisted
by his junior counsel for the appellant.

Mr. Rao advanced elaborate arguments and took us through the
pleadings, the reply received to the show cause notice, the order of the
F Adjudicating Authority and of the Appellate Tribunal. He drew our specific
attention to Regulation 25 (7)(a) of the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996 and Sections 15-D(b), 15-E, 15-1,
15-J, and 12-B of the SEBI Act, 1992 which are extracted hereunder:

"25. Asset management company and its obligations:
G
!.

2.
3.
H
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 839

4. A
5.

6.

7. (a) An Asset management company shall not through any broker B
associated with the sponsor, purchase or sell securities, which is
average of 5% or more of the aggregate purchases and sale of
securities made by the mutual fund in all its schemes;

Provided that for the purpose of this sub-regulation, aggregate
purchase and sale of security shall exclude sale and distribution C
of units issued by the mutual fund:

Provided further that the aforesaid limit of 5% shall apply for a
block of any three months''.

"15-D Penalty for certain defaults in case of mutual funds: D
(a) If any person, who is.

(b) Registered with the Board as a collective investment
scheme, including mutual funds, for sponsoring or
carrying on any investment scheme, fails to comply with E
the terms and conditions of certificate of registration, 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;"
F
"15-E Penalty for failure to observe rules and regulations by an
asset management company-Where any asset management company
of a mutual fund registered under this Act fails to comply with any
of the regulations providing for restrictions on the activities of the
asset management companies, such asset management company
shall be liable to a penalty of one lakh rupees for each day during G
which such failure continues or one crore rupees, whichever is less."

"15(1) For the purpose of adjudging under Sections 15A, 15B, 15C,
150, I SE, l 5F, l 5G and J 5H, the Board shall appoint any officer
not below the rank of a Division Chief to be an adjudicating officer H
840 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A for holding an enquiry 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
B 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
c 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."

"15-J. While adjudging quantum of penalty under Section 15-I, the
adjudicating officer shall have the due regard to the following
D
factors, namely:-

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

E (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."

Statutory Scheme
F
Chapter VI-A of the SEBI Act provides for Penalties and Adjudication,
which provisions were introduced in SEBI Act by the Amendment Act 9 of
1995. Section 15-A to Section 15 HB are in the form of mandatory provisions
imposing penalty in default of the provisions of the SEBI Act and
G Regulations. The provisions of penalty for non-compliance of the mandate
of the Act is with ar1 object to have an effective deterrent to ensure better
compliance of the provisions of the SEBI Act and Regulations, which is
crucial for the appellant Board in order to protect the interests of investors
in securities and to promote the development of the securities market.
H
CHAIRMAN S.E.B.L v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 841

Chapter VI-A of the SEBI Act deals with the penalties and the A
adjudication. Section 15-1 of the SEBI ACT envisages appointment of
Adjudicating Officer for holding an inquiry in the prescribed manner, after
giving reasonable opportunity of being heard for the purpose of imposing
any penalty.

Section 15-J provides various factors which are to be taken into B
consideration while adjudging the question of penalty under Section 15-1
namely, the amount of disproportionate gain or unfair advantage whenever
quantifiable, loss caused to an investor or group of investors and the
repetitive nature of default. The legislature in its wisdom had not included
mens rea or deliberate or wilful nature of default as a factor to be considered c
by the Adjudicating Officer in determining the quantum of liability to be
imposed on the defaulter.

Sections 15A to l 5H and l 5HA employ the words "shall be liable" and,
therefore, mandatorily provides for imposition of monetary penalties for
respective breaches or non-compliance of provisions of the SEBI Act and D
the Regulations. Default or failure, as contemplated under the Act includes

15A - Failure to furnish information, return

158 - Failure to enter into agreement with clients
E

15C - Failure to redress investors' grievances

I 5D - Default in case of mutual funds

15E - Failure to observe rules and regulations by an asset
F
management company

15F - Default in case of stock brokers

l 5G - For insider trading
G
l 5H - Non-disclosure of acquisition of shares and takeovers

15HA-Fradulent and unfair trade practices

15HB-Penalty, if not separately provided H
842 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A The Scheme of the SEBI Act of imposing penalty is very clear. Chapter
VI nowhere deals with criminal offences. These defaults for 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 the SEBI Act deals with the criminal offences under the Act
and its punishment. Therefore, the proceedings under Chapter VI A are
B neither criminal nor quasi-criminal. 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. In the provisions and
scheme of penalty under Chapter VI A of the SEBI Act, there is no element
of any criminal offence or punishment as contemplated under criminal
c proceedings. Therefore, there is no question of proof of intention or any mens
rea by the appellants and it is not essential element for imposing penalty
under SEBI Act and the Regulations.

As already noticed, the Tribunal allowed the appeals of the respondent
on the ground that there was no ma/a fide intention to act in violation of
D Regulation 25(7)(a) and Section 15(D)(b) of the SEBI Act but due to
circumstances respondents were forced to act in excess of the limits
prescribed under Regulation 25(D)(b) of the said Regulation.

Question of law
E
The important question of law which arises for consideration in the
present appeal is whether the Tribunal was justified in allowing the appeals
of the respondent herein and that whether once it is conclusively established
that the Mutual Fund nas violated the terms of the Certificate of Registration
and the statutory Regulations i.e. the SEBI (Mutual Funds) Regulation,
F 1996, the imposition of penalty becomes a sine qua non of the violation.

In other words, the breach of a civil obligation which attracts penalty
in the nature of fine under the provisions of the Act and the Regulations
would immediately attract the levy of penalty irrespective of the fact
whether the contravention was made by the defaulter with any guilty
G intention or not.

Mr. Rao took us through the orders passed by the Adjudicating
Authority. It is seen that the respondents themselves have admitted the
violation of the Regulations during a continuous period of 2Y:z years in 12
H instances, covering 6 quarters. Regulation 25(7)(a) of the Regulation provides
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 843

that an Asset Management Company shall not through any broker associated A
with sponsor, purchase or sell securities, which is average of 5% or more
of the aggregate purchases and sale of securities made by the Mutual Fund
in all its schemes. The second proviso to the said Regulation clearly provides
that the aforesaid limit shall apply for a block of 3 months. Hence, there has
been a repetitive violation of the said Regulation, and the terms of the
B
Certificate of Registration. In these circumstances, the learned senior counsel
submitted that the Tribunal has erroneously allowed the appeals filed by the
respondents against the order passed by the Adjudicating Officer on
24.06.2002. The Tribunal has given a clear finding that the respondent No. I
Fund has admittedly exceeded the prescribed limit of more than 5% when
it had transacted business through brokers, associated with its sponsors which c
is in contravention of provisions of Regulation 25(7)(a) of the SEBI (Mutual
Funds) Regulation, 1996.

We have already noticed the instances of excess transactions conduced
by the respondents and reproduced the same in paragraphs (supra). It is an D
admitted fact that the respondent had on 12 occasions routed transactions
through its associated brokerage houses in excess of the permissible limits
prescribed under Regulation 25(7)(a) of the Regulations.

·In the present case, the contesting respondent is a Mutual Fund and the
E
Asset Management Company. During the period from June, 1998 to
September, 1999, the respondent had conducted business through associated
brokers, in excess of the limits prescribed under Regulation 25(7)(a) of the
Regulations on 12 occasions covering 6 quarters. The respondent had failed
to comply with the terms and conditions attached to the Certificate of
Registration granted to it, inasmuch as it did not exercise diligence to ensure F
that the transactions by its own Asset Management Company were confined
to the permissible limits.

In this case, the SEBI appointed an Adjudicating Officer in terms of
Section 15-I to inquire into and adjudge the alleged contravention of Section G
15-E of the Act of 1992. The Adjudicating Officer, after inquiry, confirmed
the charges and imposed a sum of Rs. 5 lacs as penalty on respondent No.2
under Section 15-E of the said Act for failure to comply with Regulation
25 (7)(a) and Rs. 2 lacs on the other respondent for failure to comply with
the terms and conditions attached to the Certificate of Registration. H
844 SUPREME COURT REPORTS [2006) SUPP. 2 S.C.R.

A Mr. Rao submitted that under Regulation 25(7)(a) an Asset Management
Company shall not through any broker associated with the sponsor, purchase
or sell securities, which is average of5% or more of the aggregate purchases
and sale of securities made by Mutual Funds in all its schemes and that the
aforesaid limit of 5% shall apply for a block of any three months.

B In the present case, the respondents on their own admission have
violated the aforesaid statutory Regulations during 6 quarters. Hence Mr.
Rao submitted that the violation is ex facie wilful and hence the penalty
imposed by the Adjudicating Officer ought not to have been set aside by the
single member Tribunal. Mr. Rao further argued that unless the language of
c the statute indicates the need to establish the element of mens rea it is
generally sufficient to prove that a default in complying with the statute has
occurred. Under Sections 15-D(b) and 15-E of the Act, there is nothing
which requires that mens rea must be proved before penalty can be imposed
under these provisions. Hence, it was contended that once the contravention
is established, the penalty has to follow.
D
The Tribunal set aside the order passed by the Adjudicating Officer on
the ground that the penalty to be imposed for failure to perform a statutory
obligation is a matter of discretion which has to be exercised judicially and
on a consideration of all the relevant facts and circumstances. The Tribunal
also held that the Adjudicating Officer has to be satisfied with the material
E placed before him that the violation deserves punishment. It was held that
the penalty is warranted by the quantum which has to be decided by taking
into consideration the factors stated in Section 151 of SEBI Act. In our
opinion, the Tribunal has miserably failed to appreciate that by setting aside
the order of the Adjudicating Officer the Tribunal was setting a serious
F wrong precedent whereby every offender would take shelter of alleged
hardships to violate the provisions of the Act. In our opinion, mens rea is
not an essential ingredient for contravention of the provisions of a civil act.
In our view, the penalty is attracted as soon as contravention of the statutory
obligations as contemplated by the Act is established and, therefore, the
intention of the parties committing such violation becomes immaterial. In
G other words, the breach of a civil obligation which attracts penalty under the
provisions of an Act would immediately attract the levy of penalty irrespective
of the fact whether the contravention was made by the defaulter with any
guilty intention or not. This apart that unless the language of the statute
indicates the need to establish the element of mens rea, it is generally
H sufficient to prove that a default in complying with the statute has occurred.
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 845

Under a close scrutiny of Section 15(D)(b) and 15-E of the Act, there is A
nothing which requires that mens rea must be proved before penalty can be
imposed under these provisions. Hence, we are of the view that once the
contravention is established, then the penalty has to follow and only the
quantum of penalty is discretionary. Discretion has been exercised by the
Adjudicating Officer as is evident from imposition of lesser penalty than
what could have been imposed under the provisions. The intention of the
B
parties is wholly irrelevant since there has been a clear violation of the
statutory Regulations and provisions repetitively, covering a period of 6
quarters. Hence we hold that the respondents have wilfully violated statutory
provisions with impunity and hence the imposition of penalty was fully
justified. The Tribunal, in this context, failed to appreciate that every Mutual c
Fund has to redeem the units as per terms and conditions of the scheme on
the request of the unit holders and this cannot, in any manner, be considered
as an extraordinary circumstance or something which was not known to the
respondents. The facts and circumstances of the present case in no way
indicate the existence of special circumstances so as to waive the penalty D
imposed by the Adjudicating Officer. A perusal of the order passed by the
Adjudicating Officer would clearly go to show that factors such as small size
of the funds, low volume of transactions, thinly traded securities, administrative
and operational exigencies were duly considered and appreciated by the
Adjudicating Officer while passing the order and that is why the Adjudicating
Officer did not impose the maximum permissible penalty. The Tribunal E
failed to appreciate that the objective behind imposing certain limit on the
business that can be conducted by mutual fund through the associate broker
is to eliminate any undue advantage to the class of brokers by virtue of their
close association with the Asset Management Company, sponsors etc. In
other words, the object of imposing such limits is to ensure that there is no F
concentration of business only in such entities, so that there is an indirect
pecuniary advantage to the person associated with t~e Asset Management
Company, sponsors etc. Any undue concentration on the business of the
mutual fund with its affiliated brokers by paying huge commissions to such
brokers is neither desirable nor in the interest of the unit holders. It is a matter
G
of record that in the 12 admitted instances of violation by the respondents,
the percentage of the business through the associated brokers was as high
as 91.68% and 52.2% in certain factors. This apart, the respondent's
excessive exposure to the associate brokers is not only established from the
record, but has also been admitted by respondents.
H
846 SUPREME COURT REPORTS (2006] SUPP. 2 S.C.R.

A It is settled law that when a penalty is imposed by an Adjudicating
Officer, it is done so in adjudicatory proceedings and not by way of fine as
a result of prosecution of an accused for commission of an offence in a
criminal proceeding. In the instant case, the Tribunal has failed to appreciate
that the respondents had given undue and unfair advantage to the associated
brokers, which is detrimental to the interest of the unit holders.
B
In the present case, it has been established by the Adjudicating Officer
as well as admitted by the respondents that there has been a conscious
disregard of the obligation inasmuch as the respondents were aware that they
were acting in violation of the provisions of Regulations. The Adjudicating
C Officer had, after taking into account all the facts and circumstances of the
case, imposed only a token of Rs. 5 lacs against the respondents for its failure
on 12 occasions though the charging section permits imposition of a
maximum penalty of Rs. 5 lacs for each such violation.

The Appellant Board has been established by the Parliament under the
D Securities and Exchange Board of India Act, 1992 to protect the interest of
investors in securities and to promote the development of, and to regulate
the securities market and for matter connected therewith or incidental thereto.
The Board was set up to promote orderly and healthy growth of the securities
market and for investors protection SEBI has been monitoring and regulating
E the activities of Stock Exchanges, Mutual Funds and Merchant Bankers, etc.
to achieve these goals. The Capital market has witnessed tremendous growth
in recent times, characterized particularly by the increasing participation of
the Public. Investors' confidence in the capital market can be sustained
largely by ensuring investors protection. That it became imperative to impose
monetary penalties also in addition to other penalties in cases of default.
F
Mens rea : Whether an essential element for imposing penalty for breach
of civil obligations 7

This Court in a catena of decisions have held that mens rea is not an
G essential element for imposing penalty for breach of civil obligations.

(a) Director of Eriforcement v. MCTM Corporation Pvt. Ltd. & Ors.,
[1996] 2 sec 471.

"It is thus the breach of a "civil obligation" which attracts
H "penalty" under Section 23(l)(a) FERA, 1947 and a finding that
CHAIRMAN S.E.B.l. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 847

the delinquent has contravened the provisions of Section 10 FERA A
1947 that would immediately attract the levy of "penalty" under
Section 23, irrespective of the fact whether the contravention was
made by the defaulter with any "guilty intention" or not. Therefore,
unlike in a criminal case, where it is essential for the 'prosecution'
to establish that the 'accused' had the necessary guilty intention
or in other words the requisite 'mens rea' to commit the alleged
B
offence with which he is charged before recording his conviction,
the obligation on the part of the Directorate of Enforcement, in
cases of contravention of the provisions of Section 10 of FERA,
would be discharged where it is shown that the "blameworthy
conduct" of the delinquent had been established by wilful c
contravention by him of the provisions of Section 10, FERA 1947.
It is the delinquency of the defaulter itself which establishes his
'blameworthy' conduct, attracting the provisions of Section 23(1 )(a)
of FERA, 1947, without any further proof of the existence of
"mens rea''. Even after an adjudication by the authorities and levy
D
of penalty under Section 23(l)(a) of FERA, 1947, the defaulter
can still be tried and punished for the commission of an offence
under the penal law ...."

"In Corpus Juris Secundrum. Vol. 85 at page 580, para 1023, it
is stated thus: E
"A penalty imposed for a tax delinquency is a civil obligation,
remedial and coercive in its nature, and is far different from the
penalty for a crime or a fine or forfeiture provided as punishment
for the violation of criminal or penal laws."
F
"We are in agreement with the aforesaid view and in our opinion
what applies to "tax delinquency" equally holds good for the
'blameworthy' conduct for contravention of the provisions of
FERA, 1947. We, therefore, hold that mens area (as is understood
in criminal law) is not an essential ingredient for holding a G
delinquent liable to pay penalty under Section 23(l)(a) ofFERA,
1947 for contravention of the provisions of Section 10 of FERA,
1947 and that penalty is attracted under Section 23(l)(a) as soon
as contravention of the statutory obligation contemplated by
Section lO(l)(a) is established. The High Court apparently fell in H
848 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A error in treating the "blameworthy conduct" under the Act as
equivalent to the commission of a "criminal offence", overlooking
the position that the "blameworthy conduct" in the adjudicatory
proceedings is established by proof only of the breach of a civil
obligation under the Act, for which the defaulter is obliged to
make amends by payment of the penalty imposed under Section
B 23(l)(a) of the Act irrespective of the fact whether he committed
the breach, with or without any guilty intention."

(b) JK. Industries ltd. & Ors. v. Chief Inspector of Factories and
Boilers & Ors., [1996] 6 SCC 665.
c
"The offences under the Act are not a part of general penal law
but arise from the breach of a duty provided in a special beneficial
social defence legislation, which creates absolute or strict liability
without proof of any mens rea. The offences are strict statutory
offences for which establishment of mens rea is not an essential
D
ingredient. The omission or commission of the statutory breach
is itself the offence. Similar type of offences based on the
principle of strict liability, which means liability without fault or
mens rea, exist in many statutes relating to economic crimes as
well as in laws concerning the industry, food adulteration,
E prevention of pollution etc. in India and abroad. "Absolute
offences" are not criminal offences in any real sense but acts
which are prohibited in the interest of welfare of the public and
the prohibition is backed by sanction of penalty"

F (c) R.S. Joshi Sales Tax Officer, Gujarat & Ors. v. Ajit Mills Ltd.
& Anr. Etc., [ 1977] 4 SCC 98.

" ....... Even here we may reject the notion that a penalty or a
punishment cannot be cast in the form of an absolute or no-fault
liability but must be preceded by mens rea. The classical view that
G 'no mens rea, no crime' has long ago been eroded and several
laws in India and abroad, especially regarding economic crimes
and departmental penalties, have created severe punishments
even where the offences have been defined to exclude mens rea.
Therefore, the contention that Section 37(1) fastens a heavy
H liability r~gardless of fault has no force in depriving the forfeiture

r -
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 849

of the character of penalty." A
(d) Mis Gujarat Travancore Agency, Cochin v. C.l.T., [1989] 3 SCC
52.

"... .It is sufficient for us to refer to Section 271(1)(a), which
provides that a penalty may be imposed ifthe Income Tax Officer
B
is satisfied that any person has without reasonable cause failed to
furnish the return of total income, and to Section 276-C which
provides that if a person wilfully fails to furnish in due time the
return of income required under Section 139(1), he shall be
punishable with rigorous imprisonment for a term which may c
extend to one year or with fine. It is clear that in the former case
what is intended is a civil obligation while in the latter what is
imposed is a criminal sentence. There can be no dispute that
having regard to the provisions of Section 276-C, which speaks
of wilful failure on the part of the defaulter and taking into D
consideration the nature of the penalty, which is punitive, no
sentence can be imposed under that provision unless the element
of mens rea is established. In most cases of criminal liability, the
intention of the legislature is that the penalty should serve as a
deterrent. The creation of an offence by statute proceeds on the
E
assumption that society suffers injury by the act or omission of
the defaulter and that a deterrent must be imposed to discourage
the repetition of the offence. In the case of a proceeding under
Section 27l(l)(a), however, it seems that the intention of the
legislature is to emphasise the fact of loss of revenue and to
provide a remedy for such loss, although no doubt an element F
of coercion is present in the penalty. In this connection, the terms
in which the penalty falls to be measured is significant. Unless
there is something in the language of the statute indicating the
need to establish the element of mens rea it is generally sufficient
to prove that a default in complying with the statute has occurred. G
In our opinion, there is nothing in Section 271(1)(a) which
requires that mens rea must be proved before penalty can be
levied under that provision."

(e) Swedi!f.._h Match AB and Anr. v. SEBI & Anr., [2004) 11 SCC 64 I.
H
850 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A " ... The provisions of Section 15-H of the Act mandate that a
penalty of rupees twenty five crores may be imposed. The Board .
does not have any discretion in the matter and, thus the adjudication
proceeding is a mere formality. Imposition of penalty upon the
appellant would, thus, be a forgone conclusion. Only in the
criminal proceedings, initiated against the appellants, existence of
B mens rea on the part of the appellants will come up for
consideration."

(f) SEBI v. Cabot International Capital Corporation, [2005] 123
Comp. Cases 841 (Born).
c
"Thus, the following extracted principles are summarised:

(A) Mens rea is an essential or sine qua non for criminal
offence.
D
(B) Strait jacket formula of mens rea cannot be blindly
followed in each and every case. Scheme of particular
statute may be diluted in a given case.

(C) If, from the scheme, object and words used in the statute,
E it appears that the proceedings for imposition of the
penalty are adjudicatory in nature, in contra-distinction
to criminal or quasi criminal proceedings. the
determination is of the breach of the civil obligation by
the offender. The word "penalty" by itself will not be
F determinative to conclude the nature of proceedings
being criminal or quasi-criminal. The relevant
considerations being the nature of the functions being
discharged by the authority and the determination of the
liability of the contravenor and the delinquency.
G
(D) Mens rea is not essential element for imposing penalty
for breach of civil obligations or liabilities ..

(E) There can be two distinct liabilities, civil and criminal
under the same Act.
H
CHAIRMAN S.E.B.I. v. SHRIRAM MUTUAL FUND [LAKSHMANAN, J.] 851
,.
(Para 52) The SEBI Act and the Regulations are intended A
to regulate the Security Market and 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
B
circumstances of the case, proper exercise or judicial
discretion is a must, but not on a foundation that mens
rea is an essential to impose penalty in each and every
breach of provisions of the SEBI Act.
c
(Para 54) However, we are not in agreement with the
appellate authority in respect of the reasoning given in
regard to the necessity of mens rea being essential for
imposing the penalty. According to us, mens rea is not
essential for imposing civil penalties under the SEBI Act D
and Regulations."

The Tribunal has erroneously relied on the judgment in the case of
Hindustan Steel Ltd. v. State of Orissa, AIR (1970) SC 253)"'hich pertained
to criminal/quasi-criminal proceeding. That Section 25 of the Orissa Sales
Tax Act which was in question in the said case imposed a punishment of E
imprisonment up to six months and fine for the offences under the Act. The
said case has no application in the present case which relates to imposition
of civil liabilities under the SEBI Act and Regulations and is not a criminal/
quasi-criminal proceeding.
F
In our considered opinion, penalty is attracted as soon as the
contravention of the statutory obligation as contemplated by the Act and ·
the Regulation is established and hence the intention of the parties
committing such violation becomes wholly irrelevant. A breach of civil
obligation which attracts penalty in the nature of fine under the provisions
of the Act and the Regulations would immediately attract the levy of penalty G
irrespective of the fact whether contravention must made by the defaulter
with guilty intention or not. We also further held that unless the language
of the statute indi.cates the need to establish the presence of mens rea, it is
wholly unnecessary to. ascertain whether such a violation was intentional or
not. On a careful perusal of Section 15(D)(b) and Section 15-E of the Act, H
852 SUPREME COURT REPORTS (2006) SUPP. 2 S.C.R.

A there is nothing which requires that mens rea must be proved before penalty
can be imposed under these provisions. Hence once the contravention is
established then the penalty is to follow.

In our view, the impugned judgment of the Securities appellate
Tribunal has set a serious wrong precedent and the powers of the SEBI to
B impose penalty under Chapter VIA are severely curtailed against the plain
language of the statute which mandatorily imposes penalties on the
contravention of the Act/Regulations without any requirement of the
contravention having been deliberated or contumacious. The impugned order
sets the stage for various market players to violate statutory regulations with
C impunity and subsequently plead ignorance of law or lack of mens rea to
escape the imposition of penalty. The imputing mens rea into the provisions
-
of Chapter VI A is against the plain language of the statute and frustrates
entire purpose and object of introducing Chapter VIA to give teeth to the
SEBI to secure strict compliance of the Act and the Regulations.

D
In the result, the Civil Appeal Nos. 9523 and 9524 of2003 are allowed
and the order passed by the Securities Appellate Tribunal, Mumbai dated
21.08.2003 in Appeal Nos. 50 and 51 of 2002 are set aside. No costs.

K.K.T. Appeals allowed.