Securities and Exchange Board of India (SEBI): Prasanta Mahapatra, Adjudicating Officer, while imposing a penalty of ₹6,00,000/- on Capital First Ltd. (Noticee), and being in consonance with the Supreme Court, held, mens rea is not an essential element for imposing penalty under Chapter VI A of the SEBI Act as it would frustrate the entire purpose and the object.
In the pertinent matter SEBI conducted investigation in the scrip of Deccan Chronicle Holdings Ltd. (DCHL) to check for fraudulent pledging of shares and disclosures. Further, Noticee, Future Capital Holdings Ltd (FCHL)( also Capital First Ltd.) had disclosed to the stock exchange that the promoters of DCHL had pledged shares to it as part of collateral encumbrance created in consideration of borrowings of DCHL. During investigation, it was found that no such pledge was created by the promoters, Therefore, it was alleged that the disclosure made by FCHL under Regulations 29(1) and 31(1) of SEBI (SAST) Regulations on July 27, 2012 to the stock exchange was deliberate knowing it to be false. And that the Noticee had made misleading / incorrect disclosure to stock exchange with respect to the shares pledge to FCHL and thereby alleged to have violated the provisions of Regulations 3(a), (b), (c) and (d), 4(1), 4(2) (f), (k) and (r) of SEBI (PFUTP) Regulations.
The Tribunal while holding the Noticee liable for the violations, first cleared the two judgments of the Supreme Court cited by the Noticee, which it believed were in its favour. The Tribunal stated, after having perused the Order of the Supreme Court in Bharjatiya Steel Industries V. Commissioner, Sales Tax, UP (2008) and Chairman, SEBI Vs. Shriram Mutual Fund (2006 SC),
“It, thus, becomes clear from the above that the Supreme Court in Bharjatiya Steel Industries vs. Commissioner, Sales Tax cited Chairman, SEBI vs. Shriram Mutual Fund, not to overrule it, but to show that the necessity to prove mens rea depends on the wording on the Statute, and whether it allows discretion. Hence, after perusing both the Orders of the Supreme Court, it is clear that the later judgment in Bharjatiya Steel Industries vs. Commissioner, Sales Tax, does not overrule the former judgment in Chairman, SEBI Vs. Shriram Mutual Fund”.
And further held that,
“I am of the view that mens rea is not an essential element for imposing penalty under Chapter VI A of the SEBI Act. The Supreme Court has unambiguously stated that imputing mens rea into the provisions of Chapter VIA 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”.
Therefore it held that the Noticee had failed to make the requisite disclosures under Regulation 29(1) read with Regulation 29(3) and 29(4) of SEBI (SAST) Regulations, 2011, the Noticee is liable for monetary penalty under Section 15A(b) of SEBI Act. However, it even exonerated the Noticee from the charge of indulging in fraudulent and unfair trade practices in securities as it did not stand established.[Decaan Chronicle Holdings Ltd., PM/NR/2021-22/13081, decided on 25-08-2021]
Agatha Shukla, Editorial Assistant has reported this brief.