The classical view that '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.

A seven Judge Bench of the Honourable Supreme Court in R S Joshi, STO v. Ajit Mills Ltd. 1

held that it is not necessary that penalty should be confined only to willful acts of omission and

commission in contravention of the provisions of the enactment. For proper enforcement of

provisions of Law, it is common knowledge that absolute liability is imposed and the acts

without mens rea are made punishable. In para 19 of the Judgement, the Honourable Apex Court

observed as under:

“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 must be rejected. The classical view that no mens rea,

no crime has long ago been eroded especially regarding economic crimes.”

5.8 In view of the above observations of the apex court, what is to be seen in such a situation is

whether there is a factum of breach of the Regulations and not the mental element of the

violating party. In the case of SEBI v. Cabot International Capital Corporation2 , the following

was observed. The SEBI Act and the Regulations, are intended to regulate the security market

and the related aspects, the imposition of penalty, in the given facts and circumstances of the

case, cannot be tested on the ground of "no mens rea, no penalty". For breaches of provisions of

SEBI Act and Regulations, according to us, which are civil in nature, mens rea is not essential.

 There is a presumption that mens rea is an essential ingredient of a statutory offence; but this

may be rebutted by express words of a Statute creating the offence or by necessary implications.

But the mere fact that the object of a statute is to promote welfare activities or to eradicate grave

social evils is in itself not decisive of the question whether the element of guilty mind is

excluded from the ingredients of the offence.... The nature of mens rea that will be implied in a

statute creating an offence depends upon the object of the Act and the provisions thereof. 3

1 1977 AIR 22792 2004 51 SCL 307 Bom3 Cabot int.

The judgment of the Supreme Court, in Gujarat Travancore Agency v. CTT.4 deals with Section

271(1)(a) of the Income-tax Act. The Apex Court, while dealing with the issue about imposition

of penalty for late filing of Return held that proof of mens rea is not necessary for the same. The

Supreme Court observed as under :

“There can be no dispute that having regard to the provisions of Section 276C, which speaks of

willful failure on the part of the defaulter and taking into consideration the nature of the penalty,

which is punitive, no sentence can be imposed under the provision unless the element of metis

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

assumption that society suffers injury by the act or omission of the defaulter and that a deterrent

must be imposed to discourage the repelition of the offence. In the case of a proceeding under

Section 271(1)(a), however, it seems that the intention of the Legislature is to emphasize the fact

of loss of revenue and to provide a remedy for such loss, although no doubt an element of

coercion is present in the penalty. In this connection, the terms in which the penalty fails 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. 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....”

Union of India v. Mustafa and Najibai Trading Co.5 : “This was a case under Sections

30 & 111 of the Customs Act, 1962 whereby, imposition of the penalty by the fact finding

authority was upheld as the discretion was used within the framework of the law. It was observed

that in the matter of confiscation of goods under Section 111(d) of the Act, intention had, no

bearing. Requirement was that the goods had been imported or attempted to be imported or

brought within the Indian Customs Waters contrary to the prohibition imposed by or under the

Act or any other law for the time being in force. Mens rea was not essential for invoking the

power of confiscation of the goods under Section 111 of the Act.

4 1989 AIR 16715 [1998] INSC 335

Therefore, for respective default or failure, penalty is provided under the Act. The scheme of the

SEBI Act of imposing monetary penalty is very clear. 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 SEBI Act deals with the criminal offences

under the Act and its punishment.

The adjudication for imposing penalty by the Adjudicating Officer, after due inquiry, is neither a

criminal nor a quasi-criminal proceedings. The penalty leviable under this Chapter or under these

sections, is penalty in cases of default or failure of statutory obligation or in other words breach

of civil obligation. The provisions and scheme of penalty under SEBI Act and the Regulations,

there is no element of any criminal offence or punishment as contemplated under criminal

proceedings. Therefore, there is no question of proof or any mens rea by the Appellants and it is

not essential element for imposing penalty under SEBI Act and the Regulations.”

HC has relied on the Hon’ble Supreme Court ruling in the case of Chairman, SEBI v. Shriram

Mutual Fund6 wherein in was held that unless the language of the provision intends the need to

establish mens rea, proof of non-compliance with the statute is generally sufficient to impose

penalty.

“A rule of strict liability or absolute liability should be imposed without insisting mens rea to

deal with such socio economic crimes.”7

“Mens rea is not an essential ingredient for contravention of the provisions of the civil Act.

Unless the language of 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 and it is

wholly unnecessary to ascertain whether such a violation was intentional or not. The breach of

civil obligation which attracts a penalty under the provisions of an Act would immediately attract

6 2006-5-SCC-3617 S.Bagavathy v. State of Tamil Nadu & another (2007 (1) LW 892).

the levy of penalty irrespective of the fact whether the contravention was made by the defaulter

with any guilty intention or not.8

Penalty is mandatory because Supreme Court says so, SEBI consistently and incorrectly

holds

Almost each and every SEBI order levying penalty relies on a Supreme Court decision in

Shriram’s case (SEBI vs. Shri Ram Mutual Fund (2006) 68 SCL 216). The reliance is for, it is

submitted, an incorrect justification that since there is a violation, then penalty has to follow. Not

only is mens rea(guilty intent) irrelevant, it is stated, but the penalty has to mandatorily follow

any violation. Further, mitigating factors are irrelevant. In short, it is put forth, in the name and

finality of a Supreme Court decision, that in case of proceedings for levy of penalty, penalty is

mandatory and the Adjudicating Officer has no discretion in the matter. 

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 International Capital Corporation9 while dealing with the

provisions of the Act took the same view when it made the following observations: “Thus, the

following extracted principles are summarized.

(A) Mens rea is an essential or sine qua non for criminal offence. (B) Strait jacket formula of

mens rea cannot be blindly followed in each and every case. Scheme of particular statute

8 Chairman, SEBI v. Shriram Mutual Fund ((2006) 5 SCC 361).

9 [2004] 51 SCL 307

may be diluted in a given case. (C) If, from the scheme, object and words used in the

statute, it appears that the proceedings for imposition of the penalty are adjudicatory in

nature, in contradistinction 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 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. (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 same act. (F) Even the administrative authority empowered by the Act to

adjudicate have to act judicially and follow the principles of natural justice, to the extent

applicable. (G) Though looking to the provisions of the statute, the delinquency of the

defaulter may itself expose him to the penalty provision yet despite, that in the statute

minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable

reasons like the default occurred due to bona fide belief that he was not liable to act in

the manner prescribed by the statute or there was too technical or venial breach, etc.

The SEBI Act and the Regulations, are intended to regulate the Security Market and the

related aspects, the imposition of penalty, in the given, facts and circumstances of the

case, cannot be tested on the ground of “no mens rea, no penalty”. For breaches of

provisions of SEBI Act and Regulations, 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.

In support of his contention he cited Director of Enforcement v. MCTM Corporation P. Ltd

(1996) 2 SCC 471 where in the Hon’ble Supreme Court had, with reference to imposition

monetary penalty in adjudication proceedings under the FERA, stated “Unlike in 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 offence with which

he is charged before recording his conviction, the obligation on the part of the Directorate of

Enforcement, in case of contravention of the provisions of section 10 of FERA, would be

discharged where it is shown that the blame worthy conduct of the delinquent had been

established by wilful contravention by him of the provisions of section 10 of FERA 1947. It is

the delinquency of the defaulter itself which establishes his blameworthy conduct .......”.

Offences of strict liability do not violate the principle of fair procedure and the principle that everyone charged shall be presumed to be innocent until proved guilty according to law, which are guaranteed under international convention10 and covenant11 relating to human rights and are also implicit in Article 21 of the constitution.

Mens rea could be excluded from a statute only where it is absolutely clear that implementation of the object of the statute would otherwise be defected12

“it is of utmost importance for the protection of the liberty of the subject that a court should always bear in mind that unless a statute either clearly or by necessary implication rules out mens rea as a constituent part of a crime a defendant should not be found guilty of an offence against the criminal law unless he has got a guilty mind.”13

It has also been said that the presumption of existence of mens rea is “a presumption of legality” will supplement the text.14 Necessary implication in this context “connotes an implication which is compellingly clear. Such an implication may be found in the language used, the mischief sought to be prevented and any other circumstances which may assist in determining what intention is properly to be attributed to parliament when creating the offence15 The only situation in which the presumption can be displaced is where the statute is concerned with an issue of social concern and it is further shown that creation of strict liability will be effective to promote the objects of the statute by encouraging greater vigilance to prevent the commission of the prohibited act.16

It may also be seen whether in a case of truly criminal offence public interest really requires that an innocent person should be prevented from proving his innocence in order that fewer guilty men escape.17

It was pointed out that the act was designed to safeguard and conserve foregin exchange essential to the economic life of a developing country; that it dealt with a grave social evil; and that its purpose would be defeated if any further mental state were to be read as an essential element of the crime punishable under the act.

10 European convention, Article 6(1), 6(2)11 International Covenant, Article 14(1), 14(2)12 Peoples union for civil Liberties v. Union of India, AIR 2004 SC 45613 Brend v. wood 14 B. (a minor) v. Director of public Prosecutions, (2000) 1 ALL ER 83315 B. (a minor) v. Director of public Prosecutions, (2000) 1 ALL ER 83316 Gammon (Hongkong) LTD. V. Attorney-general of hongkong, (1984)2 All ER50317 Sweet v. parsley (1969) 1 ALL ER 347

The supreme court in the case of R.S Joshi v. Ajit Mills18 held that “no mens rea no crime had no application to economic offences”

“penalty imposable under an Act for civil obligation by an adjudicatory proceeding which is not criminal in nature does not attract the rule of mens rea is essential before a penalty could be imposed.19 It has already been seen that even economic offences do not raise the presumption of mens rea.

For proper enforcement of provisions of Law, it is common knowledge that absolute liability is

imposed and the acts without mens rea are made punishable. In para 19 of the Judgement, the

Honourable Apex Court observed as under: A seven Judge Bench of the Honourable Supreme

Court in R S Joshi, STO v. Ajit Mills Ltd20 held that “it is not necessary that penalty should be

confined only to willful acts of omission and commission in contravention of the provisions of

the enactment. 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 must be rejected. The classical

view that no mens rea, no crime has long ago been eroded especially regarding economic crimes.

In view of the above observations of the apex court, what is to be seen in such a situation is

whether there is a factum of breach of the Regulations and not the mental element of the

violating party. In the case of SEBI v. Cabot International Capital Corporation21, the Honble

High Court of Bombay, the following was observed. The SEBI Act and the Regulations, are

intended to regulate the security market and the related aspects, the imposition of penalty, in the

given facts and circumstances of the case, cannot be tested on the ground of "no mens rea, no

penalty". For breaches of provisions of SEBI Act and Regulations, according to us, which are

civil in nature, mens rea is not essential.

This view was reiterated by the Supreme Court in its judgment in the case of SEBI v. Shriram

Mutual Fund and Another22.

Shri Desai's argument that in the absence of any evidence of mens era, penalty cannot be

18 AIR 1977 SC 227919 Director of enforcement v. MCTM corporation Pvt. Ltd. AIR 1996 SC 110020 1977 AIR 227921 2005 123 CompCas 841 Bom22 2006 INDLAW SC 237

imposed is also of no force in view of the provisions of the Act governing adjudicating and

imposition of penalty. Where mens rea is not at all necessary, such a measure is resorted to in

public interest and such laws of strict liability are justified and cannot be said to be

unreasonable"

Such an exclusion can be construed from the legislative intent clearly discernable from the

concerned statutory provision. The observation made by Dean Roscoe Pound in "the spirit of

common law" is wroth remembering in this context. According to him certain statutes are not

meant to punish the vicious will but to put pressure on the thoughtless and efficient do their

whole duty. On a perusal of the penal provisions under various section of Chapter VI including

the provisions of Section 151, irresistible conclusion is that mens rea is not necessary to be

established to impose monetary penalty. 

Another Supreme Court decision in Director of Enforcement v. MCTM Corporation P. Ltd.23

supports the view that for the breach of a civil obligation which attracts penalty as a result of

adjudication, no proof of the existence of mens rea is required, that only "blame worthy conduct"

is required to be established. 

 

Section 15-J provides various factors which are to be taken into consideration while adjudging

the question of penalty under Section 15-l 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 by the Adjudicating Officer in

determining the quantum of liability to be imposed on the defaulter.Sections 15A to 15H and

15HA 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

the Regulations.  Default or failure, as contemplated under the Act includes :

 

23 (1996) 2 SCC 471

15A  Failure to furnish information, return  15B  Failure to enter into agreement with clients

15C  Failure to redress investors' grievances 15D  Default in case of mutual funds

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

15F  Default in case of stock brokers

15G  For insider trading

15H  Non-disclosure of acquisition of shares and takeovers

15HA  Fradulent and unfair trade practices

15HB  Penalty, if not separately provided

 

    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 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.  The

decisions of Shriram24 and Swedish Match25 have settled the law by holding that establishing of

mens rea by SEBI is not an absolute pre-condition for levy of penalty.

However, this is what the Supreme Court has said and nothing further, if one reads the decisions

as a whole, reads the same into context and reads the qualifying and incidental statements.

In that case26, Shriram Mutual Fund was alleged to have repeatedly exceeded the trading limits

24 The Chairman, Sebi vs Shriram Mutual Fund & Anr , [2006] 68 SCL 216(SC)25 (122 Comp. Cas. 83 (SC) (2004)26 The Chairman, Sebi vs Shriram Mutual Fund & Anr, [2006] 68 SCL 216(SC)

placed on mutual funds for dealings through associated brokers. Penalties were levied on the

mutual fund and the matter went finally to the Supreme Court. The Supreme Court observed that

this violation was conclusively established. The question then was, when such violation is

conclusively established, does “imposition of penalty becomes a sine qua non of the violation”?

The Supreme Court described the scheme of the Act and particularly the framework for levy of

penalty. It pointed out that various factors were specifically laid down as relevant for

consideration for determination of the quantum of penalty, “The legislature in its wisdom had not

included mens rea or deliberate or wilful nature of default as a factor to be considered by the

Adjudicating Officer in determining the quantum of liability to be imposed on the defaulter”.

14. It also pointed out that the provisions that relating to penalty contained in sections 15A to

15H, etc. of the SEBI Act, 1992 provide that the violator “shall be liable” to penalty and

therefore, it held that penalty is mandatory. Incidentally, it was not brought before the Court that

section 15I which provides for levy of penalty by the Adjudicating Officer specifically uses the

words “he may impose such penalty” as he deems fit.

15. It further held that the provisions relating to penalty under the aforesaid sections were

“neither criminal nor quasi-criminal” and were actually breaches of civil obligations. Thus, it

held that “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.”. This

matter is perhaps well settled now.

16. The issue, however, is not whether mens rea has to be proved by SEBI or not. The issue is

whether mens rea is wholly irrelevant as is claimed. Or that even absence of mens rea is

irrelevant. Or that mens rea does not appear into the picture at all.

it that the only thing the Supreme Court has laid down is that there is no onus on SEBI to prove

mens rea and therefore violation is sufficient by itself to attract penalty. However, mens rea is

certainly a factor to determine the quantum of penalty, when the penalty provided is within a

range of amount. Further, I would even submit that absence of mens rea and other mitigating

factors could actually mean that SEBI should use its discretion not to levy any penalty at all.

This Division Bench felt that correct position in law in this regard is laid down in the judgment

of the Apex Court in the case of Chairman, SEBI’s case [(2006) 5 SCC 361], wherein it is held

that such penalty provisions are for breach of civil obligation and hence mens rea is not an

essential ingredient of such provisions. In short, it is held that willful concealment is not essential

for attracting such civil liabilities of penalty.

Mens rea:

In this context it is to be noted that Chairman holding the Appellant guilty of indulging in price

manipulation has stated that "creation of false market and price manipulation is a very serious

offence". Evidence merely probabalising and endeavouring to prove the fact on the basis of

preponderance of probability is not sufficient to establish such a serious offence of market

manipulation. When such a serious offence is investigated and the charge is established , the fall

out of the same is multifarious . The impact of such an adverse finding is wide especially in the

case of a large public company having large number of investors. The stigma sticks and it also

hurts, not the company alone, but its shareholders as well. "Not all the King's horses and all the

King's men" can ever salvage the situation. Mere conjunctures and surmises are not adequate to

hold a person guilty of such a serious offence. The extent of proof required to hold the delinquent

guilty has been explained by the Hon'ble Supreme Court in Bank of India v. Degala Surya

Narayana (AIR 1999 SC 2407) . The Court held: " strict rules of evidence are not applicable to

departmental enquiry proceedings. The only requirement of law is that the allegation against the

delinquent officer must be established by such evidence acting upon which a reasonable person

acting reasonably and objectively may arrive at a finding upholding the gravament of the charges

against the delinquent officer. Mere conjuncture or surmise cannot sustain the finding of guilt

even in departmental enquiry proceeding.(emphasis supplied) In M.S.Bindra v. Union of India,

(1998) 7 SCC 310 the Court had while deciding an appeal against the removal of an officer from

service on doubtful integrity held that " mere possibility is hardly sufficient to assume that it

would have happened". In Nandakishore Prasad v. State of Bihar (1978) 3 SCC 366, the Court

while considering the appeal against the removal of an employee from service based on the

findings of a departmental enquiry viewed that " Before dealing with the contentions canvassed,

we may remind ourselves of the principles in point crystalised by judicial decisions. The first of

these principles is that disciplinary proceedings before a domestic tribunal are of a quasi judicial

character; therefore, the minimum requirement of the rules of natural justice is that tribunal

should arrive at its conclusion on the basis of some evidence, i.e. evidential material which with

some degree of definiteness points to the guilt of the delinquent in respect of the charges against

him. Suspicion cannot be allowed to take the place of proof even in domestic inquiries. As

pointed out by this Court in Union of India v. H.C.Geol (AIR 1964 SC 364) 'the principle that in

punishing the guilty scrupulous care must be taken to see that the innocent are not punished,

applies as much to regular criminal trials as to disciplinary inquiries held under the statutory

rules'.(emphasis supplied).

209. In the context of a disciplinary action against an advocate, the Hon'ble Court had held that "

disciplinary authority empowered to conduct the inquiry and to inflict the punishment on behalf

of the body, in forming an opinion must be guided by the doctrine of benefit and is under an

obligation to record a finding of guilt only upon being satisfied beyond reasonable doubt. It

would be impermissible to reach a conclusion on the basis of preponderance of evidence or on

the basis of surmise, conjuncture or suspicion. It will also be essential to consider the dimension

regarding mens rea .

http://indiankanoon.org/doc/1920414/

The participation need not necessarily be direct, it can be indirect as well. In this context the

observation made by the US Court in Hynes case (supra) relied by Shri Sundaram gives strength

to the belief that deceit or fraud are components of market manipulation. The Court had observed

:

"It is sufficient for the person to engage in a course of business which operates as a fraud or

deceit as to the nature of the market for the security to face the charge of manipulation."

The Court had also observed that:

"proof of manipulation is generally not based on single activity, but rather on a course of conduct

showing an intentional interference with the normal functioning of the market for a security.

Indeed manipulation is usually the result of acts, practices and course of conduct that deceive the

market place...."

75. The above observations were made by the Administrative Judge while considering whether a

transaction could be considered as a manipulative practice in violation of Section 10(b) of the

Securities Commission Act of USA. I think that on a perusal of the provisions of regulation 4(a),

the observations made by the Judge are in equal force applicable to the said regulation.

76. Prohibition in regulation 4(d) is on entering into transactions for a purchase or sale of any

securities not intended to effect transfer of beneficial ownership but intended only as a device to

distort the market price of securities. In other words the regulation covers speculative trading.

Under regulation 4(d) it is not necessary that the action should result in inducing others to

purchase or sell the securities as in the case of regulation 4(a). It has to be noted that in both the

clauses, the intention of the party is relevant. Therefore an element of mens rea is also involved.

Referring to Sections 15-I and 15J of the SEBI Act, read with the judicial opinions of the

Hon'blc Supreme Court made their propositions as under. Those darted contributions and

propositions are based on extract of Apex Court's decisions, as useful and relevant, reproduced as

under :

"A. It is well settled that:

(a) liability to pay a 'penalty' does not arise merely upon proof of default/failure.

(b) 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 act

deliberately in defiance of law, or was guilty of contumacious conduct or dishonest, or acted in

conscious disregard of its obligations.

(c) The authority will be justified in refusing to impose a penalty when there is a technical or

penal breach of the provisions or where the breach flows from a bona fide belief that the offender

is not liable to act in the manner prescribed by the Statute.

(d) The word penalty is a word of wide significance. Sometimes it means recovery of an amount

as penal measure even in a civil proceeding. An exaction which is not of a compensatory

character is also termed as a penalty even though it is not being recovered pursuant to an order

finding the person concerned guilty of a crime.

(e) A penalty imposed by the sales tax authorities is only a civil liability though penal in

character.

(f) A provision for levy of penalty for failure to comply with a statutory/civil obligation is penal

in the sense that its consequences are intended to be an effective deterrent.

(g) Once default is established deliberation may be inferred if there is no reasonable explanation

forthcoming from the assessee.

B. It has been contended therefore, that settled principle of mens rea is a must before proposing a

penalty in question. This general principle is not altered or affected by the decision in Director of

Enforcement v. MCTM .

 Senior Counsel Mr. Janak Dwarkadas for the respondents in other appeal supported the

arguments of Senior Counsel Mr. Aspi Chinoy and in addition to that, he referred to the

Judgment of this Court in Appeal No. 2 of 2001, dated 5th December, 2003 (supra), Nathulal v.

State of MP (3 Judges) and Cannon (Hongkong) v. Attorney General of Hongkong 1984 (2) AH.

ER 503 (PC). He further submitted that non-compliance of the order of the Adjudicating Officer

results into offence under Section 24 of the SEBI Act. Therefore, existence of mens rea is

necessary.

 It also observed that “the respondents have wilfully violated statutory provisions with impunity

and hence the imposition of penalty was fully justified”. In other words, far from holding that

intention or mens rea is irrelevant, it has actually given weight to the fact that the violation was

willful and this factor made the levy of penalty justified.

22. The Supreme Court further observed, “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.”. In other words, while, to begin with, there was no onus on SEBI to

establish mens rea as a pre-condition to levy penalty, it itself gave full weight to the fact that the

violation was a conscious one, that the mutual fund was aware that they were acting in violation

and, finally, the mutual fund itself admitted that they were so conscious and aware. Thus, mens

rea was given its full and due weight. In the face of such words, it cannot be contended that mens

rea is irrelevant.27

he summary and essence of the case – which strangely none of the SEBI decisions ever cite – is

beautifully and succinctly laid down in the following observation – “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.”.

 It is in the above light, then, the words of the Supreme Court cited at the start of this article need

to be considered. To repeat, the Supreme Court observed, “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.”. Thus, it is only for deciding the question whether

penalty is to be levied or not that the intention is wholly irrelevant. However, for determining the

quantum of penalty – from Re 1 to Rs. 25 crores – indeed for even waiving the penalty –

intention and mens rea are very much relevant. Indeed, the Supreme Court itself in this very

decision, repeatedly relied on the intention and mens rea.

o conclude, the Supreme Court has not made job of penalty very easy such that SEBI needs only

to establish the default and thereby automatically levy the maximum or even a stiff penalty.

Adjudication proceedings are not a formality – at least not in the manner which the out-of-

context cited statements of the Supreme Court may imply. Far from ignoring the intentions of

parties, these are to be given due consideration. If very high penalties are to be levied, even mens

rea or other serious aspects of the case may have to be established. It will of course also have to

consider other factors such as disproportionate gain, loss caused to investors and repetitive nature

27 Shriram case

of the default as mandated by Section 15J. It will have to consider mitigating factors. Of course,

all these will have to be put forth by the party – obviously SEBI may not go out of its way to

help the party. And, in the right and special facts, SEBI will even have to exercise its judicious

discretion to waive the penalty.

33. In other words, the presumption that has been struck down is “no mens rea, no penalty”. But,

there is no new rule that “violation = maximum penalty”.