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.

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
1 1977 AIR 2279

2 2004 51 SCL 307 Bom

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

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....

3 Cabot int.

4 1989 AIR 1671

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.
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 Honble 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
5 [1998] INSC 335

6 2006-5-SCC-361

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
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
Shrirams 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
7 S.Bagavathy v. State of Tamil Nadu & another (2007 (1) LW 892).

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

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 Corporation 9 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
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 quasicriminal. 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.
9
[2004] 51 SCL 307

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 Honble 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 convention 10 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 defected 12

10
European convention, Article 6(1), 6(2)
11
International Covenant, Article 14(1), 14(2)

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 offence 15 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
12
Peoples union for civil Liberties v. Union of India, AIR 2004 SC 456
13
Brend v. wood
14
B. (a minor) v. Director of public Prosecutions, (2000) 1 ALL ER 833
15
B. (a minor) v. Director of public Prosecutions, (2000) 1 ALL ER 833
16
Gammon (Hongkong) LTD. V. Attorney-general of hongkong, (1984)2 All ER503
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.
The supreme court in the case of R.S Joshi v. Ajit Mills 18 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
Sweet v. parsley (1969) 1 ALL ER 347
18
AIR 1977 SC 2279
19
Director of enforcement v. MCTM corporation Pvt. Ltd. AIR 1996 SC 1100
20
1977 AIR 2279

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
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
21
2005 123 CompCas 841 Bom
22
2006 INDLAW SC 237

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 :

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

23
(1996) 2 SCC 471

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 quasicriminal. 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
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?
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)

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, SEBIs 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-ofcontext 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
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
27
Shriram case

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.