TaxTMI 
TaxTMI 
2010 (4) TMI 1034
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....ich 4,22,200 shares representing 5% of the total size of the issue were reserved for its employees. 98.5% of these shares were allotted to seven persons who, on the appellant's own showing, joined just before the opening of the public offer and left soon thereafter. The details of the allotment made to these persons including the duration of their employment is shown in the chart below:- Seven Persons No.of Shares Duration of 'Employment' (Months) Applied Allotted Mr. Kishore S. Jain 50,040 48,837 4+ Mr. Jayantilal R. Jain 48,000 46,846 5+ Mr. Shripal J. Shah 18,000 17,567 5+ Mr. Rajesh Prakashchandra Jain 22,020 21,490 5 Mr. Pravin Kumar Devichand Jain 48,000 46,846 5+ Mr. Dheeraj Jain 1,20,000 1,17,115 5+ Mr. Sanjay Jhabak 1,20,000 1,17,115 5+ Total 4,26,060 4,15,816 These allottees sold the shares within 3 days of their listing on the stock exchange(s) and made an unlawful gain of more than Rs. 2.31 crores. 2. The Securities and Exchange Board of India (for short the Board) on investigations....
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....rom allotment under the public issue. He further found that there was no credible evidence in the records of the company to show that the seven allottees were its genuine employees. Besides, there is also a finding by the whole time member that the seven allottees collectively made an unlawful gain of Rs. 2.31 crores by selling the shares in the market though there is no material on the record to indicate whether the appellant company also shared the ill-gotten gains. Accordingly, by his order dated November 10, 2009 the appellant has been restrained from accessing the securities market and from dealing in securities in any manner whatsoever for a period of 7 years. It is against this order that the present appeal has been filed. 3. We have heard the learned senior counsel on both sides and they have taken us through the records of the case including the impugned order. The fact that the appellant company came out with an IPO in December, 2006 and allotted, among others, 4,15,816 shares to the aforesaid seven persons referred to in the chart above is not disputed. What is asserted by the appellant in the memorandum of ....
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....letter written on March 27 2007 was a crude patch up operation by the appellant. There is yet another reason why we cannot hold the allottees to be the employees of the appellant. When we look at their background, they were already well settled in Mumbai for a long time carrying on their established textile business. We say so because they were high net worth individuals and their bank accounts show debit and credit entries running into crores of rupees. Each one of them had several demat accounts and this would show beyond doubt that they were seasoned market players. With this background, would any one leave Mumbai and go to Bangalore to take up a traveling job for a mere paltry salary ranging from Rs. 7,500/- to Rs. 25,000/- per month. The answer has to be in the negative. Interestingly, the applications by some of them for obtaining a job indicate that they were desperate in getting one. Some of them applied for "any office job" or "any suitable job". Again, it is the appellant's own case that each one of the allottees was in the employment from July/August 2006 to December 2006/early January 2007. Th....
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....Therefore, if the Board could not establish that the appellant had shared the spoils with the allottees does not mean that the latter were its employees. 5. Having failed to satisfy us that the allottees were the employees of the appellant company, Sh. Janak Dwarkadas, learned senior counsel then argued that the appellant is an artificial juristic person and it cannot be said to have a mind of its own and it could act only through living persons. He contends that guilty mind or a state of mind for committing fraud could be attributed to the company only if the act complained of was committed by a responsible officer of the company acting as its agent and having the ostensible authority to perform such acts so as to bind the company. In that event, argues the learned senior counsel, the state of mind of the responsible officer could be the mind of the corporate entity for which the latter could be penalized. In short, the learned senior counsel is pressing into service the theory of the "directing mind". The argument is that since the Board has failed to identify the 'directing mind" of the appellant c....
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....ed to attribute and impute criminal liability to a corporation. This is what has been held by the Supreme Court in Standard Chartered Bank and others vs. Directorate of Enforcement and others (2005) 4 SCC 530. This is also the ratio of the cases cited by the learned senior counsel for the appellant. 7. This theory can have no application to the facts of the present case where civil action has been taken against the appellant for the wrong that it has committed. There is no denying the fact that the present proceedings were initiated against the appellant company under Section 11B of the Act for imposing civil penalties and the enquiry that was conducted by the Board is of a civil nature. It is by now well settled that civil action could be taken against a delinquent even for a criminal act. It is trite law that proceedings initiated by the Board against a delinquent under the provisions of the Act are civil in nature and mens rea or criminal intent is not an essential element for imposing penalties for breach of civil obligations. A Division Bench of the Bombay High Court in SEBI vs. Cabot Inter....
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....cording to us, which are civil in nature, mens rea is not essential. On particular facts and 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. 31. .................................................. 32. 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 and Regulations." This judgment of the High Court and the observations referred to above have since been approved by the Supreme Court in Chairman, SEBI vs. Shriram Mutual Fund and another (2006)5 SCC 361 and this is what their Lordships have held: "In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulations is established and hence the intention of the parties committing such violation becomes wholly irrelevant. A breach....
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....f any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; (c) employ any device, scheme or artifice to defraud in connection with dealings in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d).................................................." A bare reading of Regulation 3(b) would make it clear that it does not import any concept of fraud at all and the words "any manipulative or deceptive device or contrivance" do not require any state of mind. As long as the device or contrivance is manipulative in itself, no further state of mind or intention is required. Regulation 3(c), on the other hand, imports the concept of fraud but fraud as defined in Regulation 2(1)(c) of the Regulations which is reproduced hereunder for facility of reference: "2. (1) In these regulations, unless the context otherwise requires,- (a) ............................................ ....
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....ud. In the circumstances, it was not necessary for the Board to allege and/or establish that the action in question of the appellant company was with a fraudulent intent. It is liable on the principle of strict liability. The conduct of the appellant in allotting shares to those who were not its employees squarely falls within the prohibition contained in Regulations 3(b) and 3(c) of the Regulations and no fault can be found with the findings recorded by the wholetime member in this regard. In this view of the matter, we are unable to agree with the learned senior counsel for the appellant that the definition of fraud requires any state of mind to commit the prohibited act. 10. Before concluding, we may dispose of two Misc. Applications no. 98 of 2009 and 11 of 2010. The first application was filed by the appellant company soon after the filing of the appeal whereas the other application was filed by three shareholders who wanted to intervene in the matter. As regards the application filed by the company, it is stated that the appellant has investments in various companies as a part of its investment portfolio and one ....