Escorts Mutual Fund V Adjudicating Officer, SEBI 2002 SAT

Appellant- a mutual fund registered with SEBI.

Respondent Adjudicating Officer, after holding enquiry held the Appellant guilty of violating the provisions of
section 15A(a) of the Act, viewing that the Appellant had failed to submit its annual report for the year to SEBI
within the stipulated time and imposed a monetary penalty on the Appellant; [ violated the provisions of
regulation 56(1) and 57 of the Regulations and penalty, if considered necessary, was to be imposed in terms of
sections 15A (a) and (b) and section 15D(b) of the Act. ]

The said order is under challenge in the present appeal.

ISSUE: whether the Respondent's order imposing monetary penalty is justified in the attendant facts and
circumstances of the case.

contentions of the appellant:

i. that the imposition of penalty is untenable in the facts and circumstances of the case, as accepted by the
Adjudicating Officer himself

ii. that during the course of the annual audit of the funds accounts, the Appellant was faced with certain
difficulties with regard to the supplementary audit required by its statutory auditors. This was brought to
the notice of SEBI by the Appellant and extension of time for complying with the requirements of
regulations 56 and 57 was also sought, but SEBI did not respond to the said request.

iii. the last-minute requirement of supplementary audit was unexpected, resulting in short delay of just 26
days.

iv. that the Appellant was hopefully trying to comply with the requirement with in the time limit and only
when it was certain that it would not be possible, it sought short extension of time which the authorities
could have administratively granted in the genuine facts and circumstances of the case.

v. that there was no denial of information to the unit holders as unaudited accounts for the relevant period
were published within the prescribed time limit and a copy of the same was sent to SEBI, that the audited
accounts were only confirmatory in nature.

vi. that the Appellant was not ready to take any reservation or qualification on the quality of its accounting
work, which was very transparent and the accounting policies adopted were in tune with the Regulations
and as such it was left with no option but to go for supplementary audit, as required by the statutory
auditors.

vii. that no penalty could have been imposed as there has been no intentional or willful failure on the part of
the Appellant to comply with the provisions; section 15J of the Act doesn’t apply thus, no penalty.
 contentions of the respondent

i. that the Appellant is under statutory obligation to comply with the requirements of regulation 56 and 57
well within the time as any information furnished belatedly would not serve the very purpose

ii. that the Annual Report of a mutual fund is one of the important documents which is made available to the
unit holders, so as to enable them to take informed decisions regarding their investments in the units;
violation of disclosure standards is a breach of the unit holders right to accurate information.

iii. that since regulations 56(1) and 57 require the mutual funds to publish / mail / submit the annual report
within 6 months from the date of closure of the relevant accounting year, the Appellant was bound to
submit a copy of the annual report but the Appellant failed to finalize its accounts for publishing and
dispatching to the unit holders within the stipulated

iv. in the case of mutual funds strict action should follow for not making timely disclosures; taking lenient
view in any particular case would send wrong signals and in that event even those rule abiding mutual
funds would be tempted to take things easy to the detriment of the investors, that strict observance of the
regulations are essential for safeguarding the interest of the investors and the market, that any omission
cannot be overlooked in view of the larger public interest.

v. violation of regulation by the Appellant is indicative of its lack of due diligence warranting action and that
it is not necessary to take into consideration the factors provided in section 15J in each and every case
deserving imposition of monetary penalty.

vi. that there is no provision in the Regulations for granting such extensions and as per regulation 56 the
annual report has to be published "as soon as possible" on completion of the relevant accounting year.

vii. Section 15J does not state that penalty should not be imposed in the case of a proven failure. section 15I-
it is for the Adjudicating Officer to decide as to whether a particular failure deserve to be punished by
imposing monetary penalty. He has to take into consideration all the relevant factors and decide judicially.

FINDINGS:

 Audited annual report is a pre requisite. Requirement of regulations 56 and 57 cannot be fully complied
with in the absence of the audited annual report with the mutual fund. The requirement of audited annual
report is to ensure the authenticity of the material furnished therein. Thus, the Respondent's contentions
that Escorts could have requested the auditors to give an audit report with the comment that this does not
cover the supplementary audit, does not stand to reason.

 the Appellant has stated that its unaudited Balance Sheet and Revenue Accounts and a copy of the same
was also sent to SEBI without any delay, that there was no material variation in the information furnished
in the unaudited report compared to the material in the audited report. Thus, there was no deprivation of
material information from the unit holders, as such.

However, SEBI's version that the mutual fund could have published the Annual Report without a complete
audit report would not have met with the "investors right to complete and accurate information", required
 by SEBI itself. What is expected from the auditor is a full and accurate report and not a part report leaving
something to a future supplementary report. A qualified report as suggested by SEBI, would not only of
any use to the investor, but at the same it would have perhaps damaged the mutual funds credibility.
Therefore, the Appellant cannot be blamed for not choosing the said course of action.

 the Appellant has put forth convincing reason for the delay which the Adjudicating Officer has accepted;
he has absolved the Appellant from the charge of any intentional or willful default.

 compliance of regulation 56 is more significant compared with the requirement of forwarding the Annual
Report to SEBI under regulation 57. While regulation 57 enables SEBI to examine the activities of the
mutual fund with reference to the regulatory regime in position in the light of the information furnished in
the Annual Report, regulation 56 is meant to help the unit holders to take informed decision on their
investments based on the information made available to them.

 forwarding of the Annual Report to SEBI in terms of regulation 57 is not a measure for enlightening the
investors to take timely decision on their investments, it is meant to enable SEBI to take action for the
purpose of the enforcement of the regulations.

 the Adjudicating Officer has penalized the Appellant for not complying with the regulation 57 under
section 15A(a), the reason that investors have been put to loss is untenable in the light of the facts of the
case.

 The delay was neither willful nor intentional, but due to circumstances beyond Appellant’s control as the
supplementary audit requirement was the cause of delay. Audit report was delayed due to supplementary
audit. Supplementary audit decision was not that of the Appellant. It was at the behest of the statutory
auditors. Since the delay is attributable to the finalization of the audit report and that the Appellant had no
role in finalizing the audit report, it is difficult to hold the Appellant guilty of willful violation of the
regulations.

 Principle provided by the Hon'ble Supreme Court in Hindustan Steels Ltd. Vs. State of Orissa (1969) is
required to be followed while imposing penalty:

"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
bona fide belief that the offender is not liable to act in the manner prescribed by the statute."

 On a perusal of section 15I it could be seen that imposition of penalty is linked to the subjective
satisfaction of the Adjudicating Officer. It is left to the discretion of the Adjudicating Officer, depending on
the facts and circumstances of each case.
 "shall be liable to a penalty" in section 15A-

Supreme Court in Superintendent & Remembrancer of Legal Affairs to Govt. of West Bengal":

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".

 in Directorate of Enforcement Vs MCTM Corporation Supreme Court had held that:

Even though mens rea or guilty intention is not required to be established to attract penalty for the breach
of a "civil obligation" it is necessary to show that contravention was willful.

HELD-

the failure to comply with the requirements of regulations 56 and 57 promptly, was neither willful nor
intentional. It is evident from the adjudication order itself that substantive requirement of disclosure
envisaged in the regulation has been met with by the Appellant. The adjudicating officer did not penalize the
Appellant for the failure in complying with the requirements of regulation 56.

The decision of the Adjudicating Officer imposing monetary penalty on the Appellant is not tenable. Impugned
order set aside.

Relevant provisions:

R. 55, 56(1), 57, - Mutual Fund Regulations

Sections- 15 A (a) & (b), 15 J, 15 I, 15 D(b)- SEBI Act

Section 11 of the SEBI Act, 1992 (the Act)- registering and regulating the working of mutual funds, is one of the
functions assigned to SEBI.

SEBI is a statutory Board established under the Act to protect the interest of investors in securities and to
promote the development of and to regulate the Securities market.

The Regulations notified by SEBI provides for registering and regulating the activities of mutual funds. In terms
of section 15I of the Act, SEBI is empowered to appoint Adjudicating Officer for holding inquiry for the
purpose of adjudging under certain sections in the Act including section 15A.