1. The present appeal is directed against the order dated 24.5.2002 made by Respondent No. 2 (the adjudicating officer) imposing a monetary penalty of one lakh fifty thousand rupees on the Appellants, holding them guilty of violating regulation 7 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations).
2. The factual position, to the extent relevant to the case, as could be gathered Mauritius Offshore Business Activities Authority. The Appellants trade in shares on the secondary market through the approved market intermediaries and reports such transactions to the Authorised dealer through whom the Account under the Protfolio Investment Scheme (PIS) is operated.
3. Global Trust Bank Ltd. (GTB) is a public limited company registered in India. Its shares are listed on some of the stock exchanges in India including Bombay Stock Exchange and National Stock Exchange. On 13.2.2001, Appellant No. 1 (Far East) acquired 10 lacs shares, out of the total of 12,13,59,000 equity shares comprissing the paid up capital of GTB. This resulted in Far East's holding in GTB increasing to 5.11%. Far East was already holding 52,00,000 shares in GTB on 13.2.2001 Appellant No. 2 (European Investments) was holding 52,30,000 shares representing 4.30% of the paid up capital of GTB on 13.2.2001 The combined holding of these two companies on 13.2.2001 was 1,14,30,000 shares, which accounted for 9.42% of the paid up capital of GTB. Respondent No. 1 viewed that the Appellants were acting in concert. In that view of the matter the Respondent felt that the Appellants were required to comply with the disclosure requirements as per regulation 7. Regulation 7 of the Takeover Regulations requires the acquirer acquiring more than five percent shares in a listed company to disclose the aggregate of his holding to the concerned company within four working days of the acquisition.
4. In the said context Respondent No. 1 decided to refer the matter for adjudication and for the purpose appointed Respondent No. 2 as the adjudicating officer. The adjudicating officer issued notice to the Appellants asking them to show cause as to why monetary penalty as provided in section 15A(b) of the Securities and Exchange Board of India Act, 1992 (the Act) should not be imposed on them. Act, vide his order dated 24..5.2002 The challenge in the present appeal is to the adjudicating officer's said order imposing monetary penalty.
5. Shri D.J Khambatta, learned Counsel appearing for the Appellants submitted that the Appellants did not violate the provisions of regulation 7 so as to warrant imposition of penalty by the adjudicating officer. He submitted that the Appellants are OCBs, that they are two distinct companies owned by entirely different persons, that the finding in the order is totally baseless that the Appellants were not acting in concert. He submitted that the adjudicatimg officer has come to the conclusion that the Appellants were acting in concert on the following basis — (a) common shareholding of Seesaram and Sachidanand in the Appellants, (b) both the Appellants have been set up and manged by PCL, (c) buy and sell orders for both the Appellants are placed by the same person viz. Seesaram (d) the Appellants have common registered office address and common address in India (e) that the same borker viz. Claridges Investments purchased the target company's shares for the Appellants on 12 and 13 February, 2001 (f) and the pattern of transactions is similar, but the Respondent has ignored the ground reality as to how OCBs are operating in India.
6. Shri Khambatta submitted that the two Appellants are not owned by one and the same set of persons or group, that the beneficial shareholders in both the companies are totally unrelated persons. He submitted that Far East was incorporated on 28 July, 1997 and European Investments on 15 June, 1998 under the provisions of the Companies Act, 1984 of Maurtius then in force, that under section 9 and section 24 of the said Act, a minimum of 2 shareholders were required to incorporate any company. The Companies Act, 2001 of Mauritius came into force Appellants, Messers Sacheedanand Veersamy, (Senior Attorney) and Ben Locknat Daby Seesaram, C.B.E (a Barrister of over 30 years standing), both Directors of PCL a Management Company duly licensed under the then MOBAA Act (now the Financial Services Development Act, 2001) to offer offshore services, subsribed to the Memorandum and Articles of Association of each of the Appellant companies and held one share each in each of the Appellants. Messrs Sacheedanand Veersamy, and Ben Locknat Daby Seesaram, also similarly hold subscriber shares in several companies, as part of the service offered by PCL.
7. Learned Counsel submitted that the share capital of Far East is USD 500,000. Of this US$10 is the paid up share capital of Far East representing 10 shares with a par value of US$ 1 each, that in respect to the said Appellant, Messrs Sacheedanand Veersamy, Senior Attorney and Ben Locknat Daby Seesaram, each subscribed to 1 share on incorporation, and Mr. Surinder Singh Bhalla was issued and allotted the balance 8 shares on 4 September, 1998. Shri Khamabatta submitted that the share capital of European Investment is USD 500,000. Of this US$10 is the paid up share capital of European Investments representing 10 shares with a par value of US$ 1 each. 2 shares (one each) are held by Messrs Sacheedanand Veersamy, Senior Attorney and Ben Locknat Daby Seesaram, i.e those allotted on initial subscription and Mr. Harishchandra Jethalal Premjee was issued and allotted the balance 8 shares on 27 October, 1999. Learned Counsel submitted that the payment of the subscriber shares by Messrs Sacheedanand Veersamy, Senior Attorney and Ben Locknat Daby Seesaram, was included in the cost of the initial fees for incorporation of the respective Companies which were paid to the Management Company, PCL. by the beneficial owners of Far East and European Investments, respectively. Hence, Messrs Sacheedanand Veersamy, Senior incorporation under Mauritian law.) He submitted that in respect of Far East and European Investment, Messrs Sacheedanand Veersamy, and Ben Locknat Daby Seesaram, transferred their respective shareholding therein on 10 July, 2001 and 26 July, 2001 respectively to PCL Management Services (Mauritius) Ltd., a company set up under the Companies Act, 1984 for the exclusive purpose of holding shares of various companies as nominees of their respective beneficial owners, as so authorised under the Mauritius Companies Act. PCL Management Services (Mauritius) Ltd. therefore holds 20% shareholding in the Appellant Companies since it holds two out of ten issued shares of each of the Appellant Companies. The remaining 8 shares of each of the Appellant Companies are held by their respective majority shareholders, Mr. Bhalla and Mr. Premjee. Mr. Bhalla and Mr. Premjee who are in fact the beneficial owners of their respective Companies and are not connected or related to each other. He submitted that the owners of these companies stay in different countries that Shri Premjee is from Switzerland and Shri Bhalla is from United Arab Emirates. They are independent and distinct clients of PCL Management Services (Mauritius) Ltd. He submitted that the shares held by PCL Management Services (Mauritius) Ltd. in the Appellants are held as nominees in trust for the said majority shareholders who are the beneficial owners of 100% shares in each of the Appellants. The shares held by PCL Management Services (Mauritius) Ltd. are held as nominees for the said beneficial owners and are voted on and under instructions from the beneficial owner or his duly authorised representative. Mr. Bhalla is the beneficial owner of the entire share capital of Far East and Mr. Premjee is the beneficial owner of the entire share capital of European Investments.
8. Learned Counsel submitted that since it is the policy of the Income Tax also a policy of the said company to appoint the same Accountant for the offshorecompanies including the Appellants to act on their behalf in Mumbai. He submitted that since both the companies are managed by one and the same management company i.e PCL, the office premises address from which they were operating had to be common, that it was the management company and not the Appellants who were directly dealing with the brokers in India and the PCL being the management company, it was choosing brokers etc. and the reason for engaging the same broker and similarity in the pattern of arrangements is because of the involvement of PCL as the manager. Shri Khambatta reiterated that the presence of PCL as a common factor in manging the Appellants' offshore activities should not on any account be considered to view that both the Appellants were acting in concert. Shri Khambatta submitted that the adjudicating officer has simply relied on the presence of PCL on the scene and without realising its role found commonality in matters referred to by him in para VI of his order to come to the conclusion that the Appellants acted in concert and accordingly combined the holding of both the Appellants in GTB and found the so added up holding accounting for 9.42% of the GTB's capital and in that context held that since the combined percentage holding was more than the 5% bench mark provided in regulation 7, disclosure as per regulation 7 was required to be made. He submitted that in the light of the facts of the case it is clear that both the Appellants are distinct and independent entitities and they had no common intention to acquire the shares of GTB so as to bring them under the definition of “persons acting in concert” in regulation 2(1)(e). Learned Counsel referred to the definition of the expression ‘person acting in concert’ provided in regulation 2(1)(e) He submitted that though the Appellants had explained to the Respondent the factual position and rebutted the presumption that the Appellants were acting in concert with each other, the Respondent has not 35 SCL 230 (BOM) that before one “can be said to be acting in concert with the acquirer, it must be shown that he shares with the acquirer a common objective or purpose for substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding and directly or indirectly co-operates with the acquirer or agrees with him to acquire shares or voting rights in the target company or control over the target company”. Shri Khambatta submitted that there was no such common objective or purpose for which the shares were acquired by the Appellants, that the shares were purchased under the PIS He also referred to the Hon'ble Court's observation on the scope of regulation 2(1)(e) in the same judgement — “Regulation 2(1)(e) (2) also makes this clear. The persons named therein are deemed to be persons acting in concert with other persons in the same category unless the contrary is established. It therefore follows that even though there is a presumption that the persons discribed therein may be deemed to be persons acting in concert with the acquirer, the presumption is rebuttable and, therefore, in each case, the facts have to be examinecd to reach a conclusion as to whether a person is or is not acting in concert with the acquirer for the purpose of substantial acquisition of shares or voting rights or gaining control over the target company.” According to the learned Counsel European Investments, was holding only 52,30,000 shares, which worked out to 4.30% of the share capital of GTB and the said holding was within the 5% limit specified in regulation 7 of the Takeover Regulations and at no time did its holding exceed the said limit. Shri Khambatta submitted, as far as Far East is concerned, with the acquisition of 10 lacs shares of GTB on 13.2.2001 its holding in the said company increased by 0.11%, that the Appellant was unaware of the said marginal increase at that point of time and it was on 7.3.2001 the GTB Custodian informed it of the said excess holding and immediately on the next day itself i.e on 8.3.2001, two lacs shares were sold so as adjudicating officer has not come to the conclusion that the said Appellant had acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. In this context learned Counsel referred to the decision of the Hon'ble Supreme Court in Hindustan Steel Ltd. v. State Of Orissa†. ((1969) 2 SCC 627 : AIR 1970 SC 253) Akbar Badrudin Jiwani v. Collector, Customs ((1990) 2 SCC 203 : AIR 1990 SC 1579), this Tribunal's order in Chandarakant Gandhi Stock Broker P. Ltd. v. SEBI (2000) 25 SCL 1 (Sat), Cabbot Corporation v. Adjudicating Officer (2001) 29 SCL 399 (Sat) and Samrat Holdings Ltd. v. SEBI (2001) 29 SCL 417 (Sat) to establish that penalty is not imposable for failure in complying with the reporting requirements under section 15A of the Act per se.
9. He submitted that even in Director of Enforcement v. NCTM Corporation P. Ltd. (1996) 2 SCC 471) relied on by the Respondents the Hon'ble Supreme Court had held that for imposing penalty, “wilful intention” by the party has to be established, that in the instant case it is not a charge that the Appellant had wilfully contravened regulation 7 or for that there is no evidence at all on record to show that the Appellant had acted wilfully, that on the contrary the evidence shows that the violation of regulation 7 consequential to increasing in the holding by just 0.11% was a bonafide error and the same was made good immediately on bringing the same to the Appellant's notice. Neither the Appellant has gained anything nor the investors have lost anything as a result of the said technical failure.
10. Shri Khambatta submitted that the adjudicating officer, has imposed the penalty on the basis of certain wrong assumptions that the Appellants have violated regulation 7, as he has viewed that “the Appellants by acting in concert acquired “9.42%” shares which is far exceeding 5%”, that the penalty has been imposed Hon'ble Securities Appellate Tribunal. I find from the facts that the acquisition in question was for the purpose of retaining their control in the target company and also to ensure that these shares do not fall into undesirable hands. Therefore, the case of Hindustan Steel as well as other cases relied on by them is of no relevance.” Learned Counsel submitted that the finding that the Appellant had acquired shares to retain control is totally baseless that there is nothing to show that GTB is owned or controlled by the Appellants, and the Respondent has not produced any evidence to the effect that the Appellants are controling GTB, that in the absence of any control of GTB with the Appellants, the question of retaining control by them does not arise, that further the fact that Far East sold 2 lacs shares on 8.3.2001 on knowing from GTB on 7.3.2001 that its holding in GTB had crossed by 0.11% itself demolishes the Respondent's theory that the acquisition was made to retain control and as such deserved harsh treatment.
11. Shri Khambatta referred to this Tribunal's decision in the case of Kensignton Investments Ltd. v. SEBI (Appeal No. 27/2002 and 28/2002) (2002) 40 SCL 170) and submitted that the facts and circumstances of the present case are substantially identical to the facts and circumstances in the said case, and the view held by the Tribunal therein is squarely applicable to the present case.
12. Learned Counsel submitted that in the light of the facts of the case and judicial pronouncements cited by him, this is not a case where imposition of penalty is justified and that the order need therefore be set aside.
13. Shri J. Ranganayakulu, Learned Representative of the Respondent submitted that the Appellants have not disputed the fact that Far East had acquired 0.11% Far East and their holding on that account having reached 9.42% in GTB, was required to comply with the disclosure requirements of regulation 7 and the said regulation reached Far East also as it was acting in concert with European Investments. Learned Representative submitted that the date of purchase and sale of shares by the Appellants is also not in dispute. He referred to regulation 7 and submitted that the “acquirer”, as per the said regulation is required to disclose his shareholding to the target company on exceeding the 5% limit prescribed in the regulation within 4 days of the acquisition resulting in such increase. According to the learned Representative this requirement was not complied with by the Appellants and consequently, they, for the failure to make the disclosure, were liable to the penalty provided in section 15A(b) of the Act. He referred to the provisions of section 15A(b) of the Act and submitted that in the light of the admitted fact of failure to make disclosure of their holdings to the Target Company by the Appellants, the penal provision attracted and the adjudicating officer has rightly imposed the penalty. Shri Ranganayakulu reiterated the object of the disclosure provision made in regulation as stated by the adjudicating officer in the impugned order.
14. Shri Ranganayakulu submitted that the adjudicating officer in his order has concluded that the Appelants were acting in concert, that Shri Khambatta's contention that the adjudicating officer has not taken cognizance of the rebuttal made by the Appellants is baseless. He referred to the following observation made by the adjudicating officer in the order that: “I find that FIL vide its letter dated 10.12.01 has admitted that purchase of 10,00,000 shares of GTB by FIL on 13.2.2001 resulted in FIL exceeding 5% limit by 0.11%. This was stated to be done inadvertently. FIL subsequently sold 2,00,000 shares on 8.3.2001 which brought its relevant to refer to the definition of person acting in concert and the relevant fact in order to ascertain whether FIL and EIL were acting in concert in terms of the regulation.
15. As per regulation 2(e) (Substantial Acquisition & Takeover) Regulations 1997, “People Acting in Concert” comprises:
(1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company,
(2) The following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established:
(i) a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;
(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company;
(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;
(3) Any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less FIL along with PCL Management. As regards EIL it has been stated that H.J Premjee is the main shareholder of EIL alongwith PCL.
16. However, it is observed that in case of both European Investments Limited (EIL) and Far East Investments Limited (FIL), Mr. Ben Locknat Daby Seesaram is the director and he is also a shareholder of both the companies. It has been stated that EIL and FIL are among the offshore companies which have been setup and managed by PCL which is also a nominee shareholder of both the companies. The Indian authorised representative of both the OCBs has stated that Mr. Seesaram used to place purchase as well as sell orders for both the OCBs and that he (authorised representative) was not aware of the investments of both the OCBs.
17. Apart from Mr. Seesaram, Mr. Sachidanand Veeraswamy is also a shareholder in both the OCBs. Mr. Seesaram and Mr. Sachidanand together have 20% stake in each of these two OCBs.
18. It was mentioned in the Show Cause Notice that from the demat statement as on February 23, 2001, it was observed that European Investment and Far East Investments together had acauired 1,14,30,000 shares of Global Trust Bank. It was also observed that out of 1,14,30,000 shares (9.42% of the paid up equity capital of Global Trust Bank) acquired by European and Far East Investments, on February 12, 2001 European had purchased 5,00,000 shares and Far East had acquired 40,00,000 shares. Again on February 13, 2001, European Investments had acquired 40,00,000 shares and Far East had acquired 10,00,000 shares. This shows that on February 12 & 13, 2001 European Investments and Far East Investments together had acquired 95,00,000 shares out of the total 1,14,30,000 shares acquired by them. For all these purchase transactions Claridges Investment and Finance Limited was the broker
iii) Buy & sell orders for both the OCBs are placed by the same person, viz. Seesaram.
iv) Common registered address of both EIL and FIL.
v) Common Indian address of both EIL and FIL
vi) Same broker Claridges Investments for EIL and FIL purchased these shares on 12 and 13 February, 2001.
vii) Similar pattern of transactions.
19. From the above, FIL and EIL can be said to be persons acting in concert in respect of acquisition of shares of GTB in terms of the Takeover Regulation referred to above and therefore I conclude accordingly.”
20. With reference to the question of imposition of penalty, Shri Ranganayakulu submitted that compliance of regulation 7 is not a mere technical formality as has been explained in the impugned order, that failure to make the disclosure therein has a bearing on the investor protection, that the Appellants can not be unaware of the legal provisions attendant on the purchase and sale of securities on the secondary market and inspite of such knowledge having not complied with the disclosure requirement of regulation 7 can not be considered as a mere technical failure to be condoned without imposing penalty. He submitted that intention is not an ingredient of the offence and penalty as prescribed in Section 15A of the Act. In this context he referred to the Hon'ble Supreme Court's decision in Director of Enforcement (supra) and submitted that it is not necessary to establish mensrea for imposing monetary penalties in adjudication proceedings.
21. Learned Representative submitted that the excess holding of 0.11% was not voluntarily disposed of by the Appellants, but they knew that they cannot hold more stand to reason to say that they were unaware of the legal requirements of disclosure provided in regulation 7.
22. Shri Ranganayakulu referred to this Tribunal's decision in Kensington (appeal no. 31/2002) and submitted that in the said case the Tribunal had upheld the Respondent's order imposing monetary penalty against the said Kensington for its failure to make disclosure under regulation 7 and submitted that in this case also the penalty imposed by the adjudicating officer be upheld. He submitted that the quantum of penalty has been arrived at by the adjudicating officer taking into consideration the factors under section 15J and that he has recorded this in the order.
23. Shri Ranganayakulu submitted that the adjudicating officer has dealt with the Hindustan Steel case in the order, that so far as the decisions in Chandrakant Gandhi, Cabbot International and Samrat Holdings, relied on by the Appellants are concerned, the same are not apaplicable to the instant case because of the distinguishable features.
24. It is seen from the impugned order that both the Appellants are OCBs incorporated as companies under the Companies Act of Mauritius operating in India through a common management company i.e PCL. These two Appellants are engaged in portfolio investments, subject to the restrictions imposed by the Reserve Bank of India. One of such restrictions, I am told is the investment cap of 5% i.e an OCB is not allowed to invest more than 5% in the paid up capital of an Indian company. It is on record that the entire beneficial interest in these two companies is held by distinct persons. This fact remains undisputed. SEBI has not brought any evidence on record to show that the beneficial owners of the two companies are in directors of the Appellants etc. by itself does not prove that they are connected or group companies in reality to be considered as persons acting in concert, especially in the light of the rebuttal made by the Appellants. The reasoning given by the adjudicating officer that both the Appellants were acting in concert, in the light of the facts specific to the case, does not support his conclusions. He has in para VI of the order stated that “It was mentioned in the Show Cause Notice that from the demat statement as on February 23, 2001, it was observed that European Investment and Far East Investments together had acquired 1,14,30,000 shares of Global Trust Bank. It was also observed that out of 1,14,30,000 shares (9.42% of the paid up equity capital of Global Trust Bank) acquired by European and Far East Investments, on February 12, 2001 European had purchased 5,00,000 shares and Far East had acquired 40,00,000 shares. Agion on February 13, 2001, European Investments had acquired 40,00,000 shares and Far East had acquired 10,00,000 shares. This shows that on February 12 & 13, 2001 European Investments and Far East Investments together had acquired 95,00,000 shares out of the total 1,14,30,000 shares acquired by them. For all these purchase transactions Claridges Investment and Finance Limited was the broker for boths the OCBs.
25. In view of the facts such as:
viii) Common shareholding of Seesaram and Sachidanand in EIL and FIL
ix) Both the companies have been setup and managed by PCL.
x) Buy & sell oroders for both the OCBs are placed by the same person, viz. Seesaram.
xi) Common registered address of both EIL and FIL.
xii) Common Indian address of both EIL and FIL
xiii) Same brother Claridges Investments for EIL and Fil purchased these shares on 12 and 13 February, 2001.
26. The Appellants' Counsel has demolished the adjudicating officer's view that the Appellants are persons acting in concert with convincing argument, which I have recorded in the earlier part of the order. In my view there is no evidence to show that both the Appellants were acting in concert. The shareholding in GTB by the Appellants has to be seen in the context that they had not acquired the shares by acting in concert for the reasons stated above. In that view of the matter the percentage holding of European Investments being only 4.30% of GTB's capital and hence below the 5% bench mark provided in regulation 7, the said Appellant was not required to make disclosure under regulation 7 and as such there was no failure on its part in this regard and section 15A(b) did not attract. Therefore, there is no justification for imposing penalty on the said Appellant.
27. As far as Far East is concerned it is on record that it was holding 0.11% in excess over the bench mark holding of 5% from 13.2.2001 to 7.3.2001 In this connection it is to be noted that the excess holding was just 0.11%, that too for a period of about 3 weeks, that according to the Appellant immediately on receipt of information from GTB of the fact that it was holding 0.11% in excess, the next day it disposed of 2 lakhs shares. In this context it is noticed that the adjudicating officer in his order had observed the importance of disclosure under regulation 7 as follows:
“The provisions of regulation 7 of the Takeover Regulations, 1997 have been enacted with an objective to ensure transparency in the transaction and assist regulatory bodies to effectively monitor such transactions to safeguard the interests of the ainvestors/existing shareholders of the company or for defence mechanism and providing the shareholder an opportunity to exit at that stage, in case of a change in shareholding pattern or control over their company where it is not to the satisifaction of a shareholder.
their perceptions as to whether the consolidation by one group or exit of the other group or a leading financial institution would be in the interests of the company or detrimental to the interests of the company as a whole.
The information as specified in regulation 7 is, nevertheless, a crucial document which enables the stock exchange to effectively perform its regulatory function being a self-regulatory organisation and to ensure compliance of the said Regulations. The report/information will enable the stock exchange to protect the interests of investors and disseminating the informtion received from the company through acquirer which enables the investors to take timely well-informed decision relating to their investment or disinvestment.
As per regulation 7 an acquirer who acquires shares or voting rights which taken together have not been held by him would entitle him to 5% or more of the voting rights shall disclose the aggregate of his shareholding or voting rights to the company. In this case the noticees acting in concert have acquired 9.42% of shares which is far exceeding 5% and therefore required to make disclosure to the GTB in terms of regulation 7(1). I find that no such disclosure was made by the noticees to the target company. I therefore hold the noticees guilty of violation of regulation 7(1)”.
28. In the light of the object of regulation 7 as stated by the adjudicating officer it is difficult to hold that the said objective was defeated by Far East by holding 0.11% shares for a period of 3 weeks under the PIS.
29. On a perusal of the observation made by the Adjudicating officer it is clear that he was concerned mainly because of the 9.42% holding of shares which is far exceeding 5% provided in regulation 7 and in that context he held the Appellants Far East by holding 0.11%, the adjudicating officer has recorded that the “Findings as given in show cause notice dated 12.11.2001 shows that FIL (Far East) and EIL (European Investments) acted in concert”. He passed the order on the belief that the persons had acted in concert is further strengthened from his observation that “the finding shows that as on 12 & 13 February 2001 EIL and FIL acquired 52,30,000 shares and 62,00,000 shares of Global Trust Bank respectively. The combined holding of these two entities were 1,14,30,000 shares which was 9.42% of the paid up equity shares of Global Trust Bank Ltd. I have come to the finding that EIL and FIL were acting in concert.
30. Therefore, in view of the above I impose on EIL and FIL a penalty of Rs. One lakh fifty thousand for violation of regulation 7………..They are liable to pay the above penalty jointly or severally.” Thus it is clear that what weighed in the mind of the adjudicating officer was the Appellants' holding 9.42% (i.e 4.42% in excess of the prescribed limit)in GTB's capital for the purpose of imposition of penalty and not the insignificant excess holding of 0.11% by Far East.
31. It is seen from the order that the adjudicating officer had attributed the motive for holding the shares by the Aappellants. He has stated in the order that “I find from the facts that the acquisition in question was for the purpose of retaining their control in the target company and also to ensure that these shares do not fall into undesirable hands. Therefore the case of Hindustan Steel as well as other cases relied on by them is of no assistance.” I have perused the show cause notice dated 12.11.2001 issued by the adjudiciating officer to the Appellants. There is no reference therein to the motive of acquisition as stated by the adjudicating officer in his order. I have also perused his order. But I do not find anywhere in the order anything to show that the Appellants were in control of GTB and they were holding 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 statutoruy obligation is the result of a quasi-crminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in definace 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. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the company was not a dealer.”
32. Even if it is assumed that the Far East was guilty of failure to disclose its holding on acquiring 0.11% shares in GTB for a period of 3 weeks, still in my view taking into consideration the facts of the case and the authorities cited by both sides, it is difficult to hold that the said failure warranted imposition of penalty. There is nothing on record to show that the Appellants “had acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation”. The failure to disclose the excess holding of 0.11% lasting over a period of 3 weeks in my view has in no way defeated the purpose of regulation 7 as stated by the adjudicating officer in the impugned order.
33. OCB's investing in the shares under the PIS are not raiders to acquire companies in Respondent's contention that the excess holding of 0.11% was disposed of to be in tune with the restrictions in vogue imposed by RBI has been noted. If the Appellant was so concerned about compliance of RBI directions, obviously it would not have intentionally crossed the 5% bench mark stipulated by RBI. Learned Representative had also referred to the legally qualified people in the management of the company and had submitted that the Appellants were therefore not unaware of the regulatory position. But it is to be noted that the Appellants had not claimed that the shareholding was on account of ignorance of the regulation. Their submission is that it was a high speed transaction and in the process they missed the slight overholding. Kensington's case referred to by Shri Ranganayakulu has no application to the facts of the case, as it was a case of holding excess shares for a long time.
34. This Tribunal had in fact dealt with in detail the question of imposition of monetary penalty under chapter VIA of the Act in several of its decisions, in particular in Cabbot International and Samrat Holdings. In Samrat Holding this Tribunal had held:
“In the case of Cabot International Capital Corporation v. Adjudicating Officer, SEBI (Appeal No. 24/2000 decided on 25.1.2001) this Tribunal considered the scope of section 15I and 15J 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 15J. “The Adjudicating Officer shall have due regard 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 back ground of the said case leading to the above observation by the Court is as follows:
“In proceedings for assessment of tax under the Orissa Sales Tax Act, 1947, the Sales Tax Officer held that the Company was a dealer in building material, and had sold the material to contractors and was on that account the tax authorities and held that the Company was liable to pay tax on its turnover from bricks and cement and steel supplied to the contractors. The Tribunal however substantially reduced the penalty imposed upon the company”.
35. The observation of the Court cited above was in answer to the question “whether the Tribunal is right in holding that the penalties under section 12(5) of the Act (Orissa Sales Tax Act, 1947) had been rightly levied?”
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 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 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.
36. For the reason stated above, I am of the view that the imposition of penalty of one lakh fifty thousand rupees on the Appellants is not justified and the impugned order cannot be sustained.
37. Appeal allowed.