1. Appeal is taken up with the consent of parties for final disposal.
By consent of parties, common orders are passed.
2. The appellants being aggrieved by the order of the Adjudicating and Enquiry Officer of SEBI dated 22nd of January 2004 have preferred these appeals.
3. By the impugned order, the respondent has imposed a penalty of Rs.30 lakhs on the J.M. Capital Management Pvt. Ltd. (the second appellant herein) and a further sum of Rs.20 lakhs on the J.M. Mutual Fund (the first appellant herein). These penalties were imposed on the appellants for their failure to comply with section 15E and section 15D of SEBI Act.
4. Section 15E deals with failure to observe rules and regulations by the asset management company and section 15D deals with defaults in case of mutual funds.
5. As stated earlier, the first appellant is the mutual fund and the second appellant is the asset management company. Both the mutual fund as well as the asset management company have been imposed with a penalty of Rs. 50 lakhs in all. The gravement of the charge against the appellant was that the sponsors of the first appellant had suffered an order at the hands of SEBI for violating SEBI (Substantial Acquisition of shares and Takeover) Regulations, 1997 (hereinafter referred to as the Regulations). The sponsors were the JM Financial and Investment Consultancy Services Pvt. Ltd. (hereinafter referred to as the "sponsors"). The sponsors were visited with an order by SEBI for violating the Regulations and a penalty of Rs. 1,80,000/- was levied on the sponsors by SEBI by order dated 20.10.2000. The sponsors appealed to the Securities Appellate Tribunal and the Tribunal by its order dated 14.3.2001 confirmed SEBI's order and reduced the penalty from Rs.1,80,000 to Rs. 1 lakh. The order of the Tribunal became final on 14.3.2001. This piece of information was not incorporated in the offer document prepared by the appellants and vetted by SEBI.6. Subsequently, the appellants devised seven schemes which were proposed to be launched. The schemes were the JM G Sec Fund, the JM Short Term Fund, the JM Basic Fund, the JM High Income Fund, the JM Fixed Maturity Plan, the JM Sector Series and JM G Sec Marathon Series.
While devising the scheme the compliance officer of the appellant informed the sponsors that there was a duty cast on the sponsors of the mutual fund to make a relevant disclosure to the appellants. The letters of the compliance officer to the 2nd appellant dated 25.6.1999, 24.1.2000, 20.5.2002 and 22.5.2003 indicate that the appellants had informed sponsors to make all the relevant disclosures as required under Regulation 29 of the Mutual Fund Regulations.
7. It appears that the sponsors failed to make any mention with respect to the order passed against the sponsors by the Tribunal. It also appears from the records that the sponsors approved the above said scheme but did not inform the appellants about the order of SAT imposing a penalty on them in spite of letters written by the compliance officer of the appellants to the sponsors. After getting the approval of the sponsors on various aspects of the matter, the draft offer documents were filed with SEBI under Regulation 28 of the Mutual Fund Regulations. Curiously SEBI advised certain modifications in the offer documents but did notice the penalty imposed on sponsors. SEBI asked the appellants whether any cases were pending against the appellants and against the trustees. The appellants also stated in the offer document as follows: "The Fund further confirms that there is no other case where penalty was awarded by SEBI against the Sponsor of the Mutual Fund or any company associated with the Sponsor in any capacity, including the AMC, the Trustee Company or any of the Directors or key personnel of the AMC and the Trustee Company." 8. It is submitted by the learned senior counsel for the appellant that the respondent admittedly had, at all material times, knowledge of the said proceedings and penalties. The respondent, however, did not require the 2nd appellant to carry out any modification in the drafts Offer Documents filed by it with the respondent with respect to disclosure of the said proceedings and penalties. By failing to do so, the respondent itself failed to perform its duty to the investors in vetting the draft offer documents. It was stated that it would be inequitable indeed that the respondent, though failing to discharge its statutory obligation after accepting a substantive fee of Rs. 25,000/- for each offer document vetted by it, should be allowed to get off scott free whilst the respondent itself imposed a grossly disproportionate penalty on the appellants.
9. It was further submitted that whether the appellants were aware or not with regard to the penalty imposed by SEBI and confirmed by SAT, certainly SEBI was aware of the order of the Tribunal as against the sponsors and ought to have known just by the click on the website with regard to the penalty imposed by SEBI and confirmed by SAT, since it was SEBI that passed the order. Mr. Dwarkadas further stated that it cannot be forgotten that every offer document that is vetted by SEBI, SEBI accepts a fee of Rs.25,000/- as vetting charges for each scheme.
10. Mr. Jha, the learned senior counsel for the respondent in reply submitted that although the offer documents are vetted by SEBI they take no responsibility for the accuracy of the statements made in the offer document. It was stated that in each of the offer document approved by SEBI, there is disclaimer clause. The disclaimer clause reads as follows: "The particulars contained in the offer document have been prepared in accordance with the Securities & Exchange Board of India (Mutual Funds) Regulation 1996 as amended till date and filed with SEBI, and the units being offered for public subscription have not been approved or disapproved by SEBI nor has SEBI certified the accuracy or adequacy of the Offer Document." 11. The sum total of SEBI's case is that they are not responsible for the accuracy or adequacy of the offer document.
12. What is the role of SEBI while accepting a fee of Rs.25,000/- per scheme in vetting the offer document and not bringing it to the notice of the mutual fund or to the public that a certain penalty was imposed on the sponsors which was within the knowledge of SEBI. In other words, SEBI is the party that initiated the proceedings against the sponsors and imposed the penalty and further that SEBI was also a respondent before the Tribunal against the sponsors. Is there no element of due diligence in the interest of public investor on the part of SEBI while vetting the document with respect to affairs within its knowledge.
There is no pronouncement of any Court on the duties and liabilities of SEBI when SEBI takes a fee and vets a document and does not notice orders which SEBI itself has passed.
13. The judgement of the Supreme Court in the case of Morgan Stanley Mutual Fund reported in 1994 (4) SCC 225 is the nearest we can get to for an answer for the proposition. Morgan Stanley's case dealt with a mutual fund registered with SEBI. In this case, the draft scheme was approved by the Board of trustees. This was forwarded to SEBI for approval. The scheme was scrutinized and certain amendments were suggested. These amendments were incorporated by the fund. All the advertisement and publicity material were approved by SEBI in writing before publication as required by the Regulation. Pursuant to such approval the appellant commenced the advertising of the public issue.
Although the case related to whether a prospective investor would be a consumer within the meaning of Consumer Protection Act, 1986 certain observations were made by the Supreme Court on the duties of SEBI in approving a scheme notwithstanding the disclaimer. The Supreme Court pronounced on this aspect of the matter in the following words.
"It has to be carefully noted that the disclaimer clause required to be incorporated at the beginning of offering circular by SEBI while approving the scheme is a standard requirement and nothing peculiar to the present case. The object of this is to bring to the notice of the investors that they should take the firm decision on the basis of the disclosures made in the documents. It is meant for the investors' protection. In fact by such a course the SEBI informs the investors that they have approved the scheme but they did not recommend to the investors whether such investment is good or not and leave it to their discretion. In view of this, it will be clear that the allegations of respondents that the SEBI has not approved the other documents is totally baseless." 14. The words "approval by SEBI" is meant for investors' protection.
Mutual Funds in India are regulated by SEBI pursuant to the Securities & Exchange Board of India (Mutual Funds) Regulations, 1993. Under the said Regulations, all mutual funds in India as also the asset management companies and the custodians of the mutual funds assets are required to be registered with the SEBI. No mutual fund in India can approach the market with a scheme unless the scheme has been fully approved by SEBI, which is the sole authority for granting approval to such funds. The SEBI examines the scheme and suggests modifications, if any, and allows the scheme to be advertised and published.
15. We have carefully perused the order of the Tribunal dated 14.3.2001 passed against the sponsors. It is clear from the order that the regulator was the respondent before the Tribunal. The impugned order was also passed by the regulator. For two years, the respondent did not notice this order although it was a party to the order. It is only when the second appellant informed the regulator, the regulator woke up and issued a show cause notice after nearly 9 months. While we are not dealing with the conduct of the regulator in this appeal, it cannot be forgotten that the SEBI Act provides for the Board to protect the interest of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. (see preamble to the SEBI Act) 16. In such circumstances, it is surprising that the regulator did not notice the penalty imposed on the sponsors while being a party to it.
It took two years for the regulator to wake up only after the second appellant wrote to the regulator bringing it to the notice of the regulator about the penalty imposed on the sponsors. It also cannot be forgotten that the regulator receives a vetting fee of Rs.25000 for each document. The disclaimer contained in the Offer Document, in our view, cannot grant total immunity to the regulator. (See Morgan Stanley's case). As stated earlier, we are constrained to state this only because the regulator was very much a party before the Tribunal as a respondent in that case against the sponsors and it is the regulator that passed the impugned order which went on appeal to the Tribunal. It is about time the Regulator got its act together with respect to matters within its knowledge. Such a thing is not impossible with modern technology.
17. It appears to us that, on a careful reading of the judgement of the Supreme Court in Morgan Stanley's case, there ought to be an application of mind on the part of SEBI before an offer document or prospectus is vetted by SEBI for a fee. This we say notwithstanding the disclaimer made in the document. We also make it clear that the act of due diligence on the part of SEBI are only with respect to facts which are within the knowledge of SEBI, not otherwise.
18. With the advent of modern technology, it is easy to cull out information by SEBI that is required to be made public for the purpose of investor protection.
19. We shall leave this matter where it is and we shall say no more on this subject till we get a clear pronouncement from the Supreme Court on this aspect of the matter. We shall now revert back to the alleged lack of due diligence on the part of the appellants in not noticing the penalty that was imposed on the sponsors.
20. On the question of due diligence the learned Counsel for the appellant relied on an English judgment reported in [1983] 3 All ER 193. The Court pronounced that there is no rule of universal application on the exercise of reasonable diligence necessary. The matter related to the Plaintiff purchasing a drawing from, a reputable art gallery. Both the plaintiff and defendant thought that the drawing was the original by a famous 19th Century artist. It turned out to be a fake. In this context the Court in Peco Arts Inc v. Hazlitt Gallery Ltd [1983] 3 All ER 193 summarised the position in the following words: "Taking into account these authorities I conclude, first of all, that it is impossible to devise a meaning or construction to be put on those words which can be generally applied in all contexts because, as it seems to me, the precise meaning to be given to them must vary with the particular context in which they are to be applied. In the context to which I have to apply them, in my judgment, I conclude that reasonable diligence means not the doing of everything possible, not necessarily the using of any means at the plaintiff's disposal, not even necessarily the doing of anything at all, but that it means the doing of that which an ordinarily prudent buyer and possessor of a valuable work of art would do having regard to all the circumstances, including the circumstances of the purchase." 21. Reliance was also placed on an English judgment reported in 1 WLR 1487 Bibby Cheshire v. Golden Wonder Ltd. The Queen's Bench Division came to the conclusion that due diligence means taking all reasonable precaution and if such precaution was taken a person cannot be accused of lack of due diligence. Reliance was also placed on an English judgment reported in [1979] 1 All ER 118 Belmont Finance Corporation Ltd v. Williams Furniture Ltd and Ors. for the proposition of law and whether a person was aware or ought to have been aware which showed dishonest breach of trust. The Court held that in order to claim that a person was liable as constructive trustee it is necessary to plead and prove unequivocally that the person had knowledge of the breach of trust only then such person can be held to be vicariously liable .
Reliance was also placed on the judgment of this Tribunal in Samrat Holdings where the Tribunal held that if a person comes to know about the lapse and if that person himself brings it to the notice of the authority and if the belated report had neither resulted in gain to the appellant nor caused any loss to anybody there was no reason to disbelieve the appellant's version and imposition of penalty in such a case would not be justified. In other words the Tribunal held that if a person voluntarily on discovery of information which was not available to him earlier comes forward and rectify the mistake penalty would not be justified for violation of law.
22 . Heavy reliance was placed on the case of Cabot International Capital Corporation reported in 2004 (002) CLJ 0363 for the proposition that if the delay in reporting was bona fide and voluntary and unintentional the penalty imposed should not be justified.
23. Coming to the facts of the case, it was strenuously submitted by Mr. Janak Dwarkadas, the learned senior counsel for the appellants that it cannot be denied that the appellant did not make a disclosure in the offer document with respect to the penalty against the sponsors. The schemes that were launched by the appellants, it was submitted, did not admittedly contain the penalty imposed on the sponsors.
24. In August 2002, the appellants on their own enquiry came to know of the proceedings and the penalty imposed on the sponsors. Immediately on learning of the penalty imposed on the sponsors, the second appellant by its letter dated 29.8.2002 promptly wrote on its own volition to SEBI stating that the disclosures with respect to the penalty imposed on the sponsors had been inadvertently missed in the offer document filed with SEBI for the said scheme. It was also pointed out in the letter that this information was not disclosed by the sponsors and that was the only reason why this information did not find a place in the offer document. On the same day the second appellant took appropriate measures by issuing a communication addressed to all the unit holders informing the unit holders of the penalty imposed on the sponsors. An advertisement in the newspapers was also undertaken.
25. The letter of the second appellant dated 29.8.2002 addressed to SEBI indicates that the second appellant as soon he came to know of the matter got in touch with SEBI to take remedial steps. The relevant portion of the letter of the second appellant on getting the information about the penalty on the sponsors reads as follows.
"For your consideration: As reported above, we are in the process of extensive review of compliance process at our end and we shall complete the due diligence process in toto including that of obtaining all confirmations from our Sponsor, Co-sponsor and associate companies.
Compliance: We propose to immediately make appropriate disclosure in the existing offer document (through issuance of an addendum as additional insertion) of all the schemes of JM Mutual Fund with regard to the above matter in respect of our Sponsor.
In addition, we are in a process of sending the special communication to all our existing unit holders disclosing all the material facts. We also propose to issue an advertisement in the newspaper with regard to introduction of the addendum. The expenses likely to be incurred in sending communication to unit holders and publication of advertisement will not be charged to the Schemes and will be borne by the AMC. We assure you that all fresh offer documents will carry full disclosure of the above. We once again wish to reiterate that we are in the process of strengthening our compliance system and we would like to assure you that such kind of non-disclosure will not reoccur.
Submission: We hereby express our sincere apology for not disclosing the above in the offer document and request you to condone our lapse in this regard." 26. Curiously, a show cause notice dated 29.5.2003 after nine months was issued to the appellants but not to the sponsors which ultimately culminated in the impugned order which is under appeal. As soon as the letter dated 29.8.2002 was received no show cause notice was issued; it was issued only on 29.5.2003, nine months after the letter of apology.
27. The appellant submitted that the show cause notice dated 29.5.2003 is in respect of 7 schemes viz. JM G Sec Fund, JM Basic Fund, JM Short Term Fund, JM Sector Series, JM High Income Fund, JM G Sec Marathon Series and JM Fixed Maturity Plan. The offer documents of each of these said schemes were individually filed with the respondent under Regulation 28 of the said Regulations. It was further submitted that of the said 7 schemes, the JM G Sec Fund was filed with SEBI on 25th June, 1999 (and launched on 15.9.1999), well before even the show cause notice dated 14.8.2000 was issued to the sponsor pursuant to which penalties came to be eventually imposed upon the sponsor.
28. The remaining 6 schemes were filed with SEBI between September, 2000 and March, 2003. It was said that out of the 6 schemes only 3 schemes were eventually launched viz. the JM Short Term Fund, the JM Basic Fund and JM Fixed Maturity Plan.
29. Of the 3 schemes only 2 schemes viz. the JM Short Term and JM Basic Fund were eventually launched without making a disclosure in the offer documents of the penalties imposed on and proceedings against the sponsor.
30. The JM Fixed Maturity Plan was launched on 16.7.2003 with all necessary disclosures in the offer document.
31. It was vehemently argued by the learned counsel for the appellant that there was no application of mind by the respondent since JMG Securities Fund could not have been a subject matter of non disclosure since the fund was launched on 15.9.1999 even before the show cause notice dated 14.8.2000 was issued to the sponsors pursuant to which the penalties came to be imposed by SEBI. It was also submitted that only 2 schemes were eventually launched without the offer document disclosing the penalty.
32. It was further submitted that no penalty should be imposed on the unit holder and any penalty imposed on the mutual fund would ultimately have a bearing on the NAV and will be at the peril of the unit holder.
It was further submitted that SEBI usually does not impose any penalty on the fund in a mutual fund case since it will be a liability ultimately on the unit holders.
33. It was strenuously argued that the first appellant is a leading mutual fund in private sector in India with a AUM of Rs. 4300 crores.
It has a CRISIL rating of AAA. The appellants have won many prestigious awards and was recognized as the Best performing open ended liquid fund. It also won the award in the year 2002 as the Best mutual fund by the Moody's Investor Service for liquid/money market funds. The mutual fund was the Best performing mutual fund house for the five years ranked by the Standard and Poor. With these background of credentials, it was submitted that the appellants could never deliberately have withheld any information. In fact the remedial steps were taken on the very day that the appellants knew about the penalty on the sponsors.
This indicates that there was no lack of due diligence on the part of the appellants.
JM Capital Management Pvt. Ltd. has exercised due diligence while preparing the Offer Document and a Due Diligence Certificate, duly signed by the Compliance Officer of J.M. CAPITAL MANAGEMENT PRIVATE LIMITED has been submitted to SEBI on December 3, 2002, which reads as follows.
i. The draft Offer Document forwarded to SEBI is in accordance with the Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the guidelines and directives issued by SEBI from time to time.
ii. All legal requirements connected with the launching of the scheme as also the guidelines, instructions, etc. issued by the Government and any other competent authority in this behalf, have been duly complied with.
iii. The disclosures made in the Offer Document are true, fair and adequate to enable the investors to make a well-informed decision regarding investments in the proposed Scheme.
iv. All the intermediaries' names in the Offer Document are registered with SEBI and till date such registration is valid.
35. A closer perusal of the offer document would indicate that there is a column known as "Penalty and pending litigation." Just to illustrate that whatever information was within the knowledge of the appellants was brought out in the offer document, the learned senior counsel for the appellants relied on paragraph 14 of the offer document to indicate that an earlier penalty of Rs. 50,000 which was imposed on the second appellant finds a place in the offer document. This portion in the offer document reads as follows: "The Fund was awarded penalty by SEBI in the matter of delay in listing the units of JM Basic Fund. The details of adjudication proceedings initiated by SEBI and award of the penalty are as follows: JM Basic Fund, a fifteen-year close ended growth scheme with investments to be primarily in the petrochemicals sector in India.
It opened for subscription on 25th March 1997 and closed on 7th May 1997. Allotment was effected on 2nd June 1997. The units of the scheme were to be listed by 7th November, 1997. There was a delay in listing with the application for listing of units of JM Basic Fund being filed with the NSE on 27th November 1997 and listing effected on 8th December 1997.
SEBI had initiated adjudication proceedings against the Fund to conduct inquiry into any possible violation of SEBI Regulations, in respect of delay in the listing.
The Fund had submitted in its reply that the Scheme is exempt from mandatory listing requirement pursuant to proviso (a) or proviso (c) to Regulation 32 of the SEBI Regulation, since the Scheme provided for periodic repurchase facility and details of such repurchase facility have been disclosed in the prospectus.
Although in terms of the prospectus the facility of listing was provided as an additional measure for liquidity to the investors, the resultant delay in the listing has not hurt any investors in the Scheme, considering the fact that there has been no reported trades in these units during the succeeding five months period from the date of listing of the units. The inadvertent delay in listing of units of JM Basic Fund has in no way been beneficial or tantamount to nay gain or advantage whatsoever accrued to the Fund, J.M. CAPITAL MANAGEMENT PRIVATE LIMTIED and/or its sponsors. The Adjudicating Officer of SEBI while passing orders on the case held that the delay in listing the units of JM Basic Fund is in violation of Regulation 32. However, while imposing a penalty for the violation, the Adjudicating Officer in appreciation of the bona fide action of the Fund, who entirely of their own volition drew the attention of SEBI to the delay in listing the units on NSE, imposed a reduced penalty.
36. By this it was strenuously submitted that it could never have been the intention of the appellant not to submit any information within its knowledge. It was further submitted that during the enquiry by the respondent no statement was recorded from the sponsors to show that they had passed the information to the appellant before the offer document was placed before SEBI for vetting. It was further submitted that there cannot be a strict liability in these cases and the bona fide of the appellant should be taken into account while imposing any penalty. A voluntary disclosure to the unit holders is a mitigating factor while dealing with these matters. It was further submitted that the NAV after the disclosure had considerably increased and there was no depletion of the AUM after the disclosure to the unit holders with respect to penalty against the sponsors.
37. Mr. Subhash Jha, the learned senior counsel for the respondent submitted that there can be no due diligence that is required by SEBI since SEBI is not the appellant before the Tribunal. It was also submitted that it took almost two years for the appellants to "disclose" the omission. With regard to the increase in NAV and AUM these factors according to the learned counsel for the respondent are irrelevant since these are matters that are argued in hindsight.
38. The learned counsel for the respondent also relied on the judgement of the Supreme Court in (2002) 2 SCC 420. This judgment relates to an offence under Section 138 of the Negotiable Instruments Act where a fleabite sentence was given to the accused. The Supreme Court remanded the matter however observed if the cheque amount is paid in the trial court, the accused is entitled to seek the payment as the mitigating factor.
39. Reliance was also placed on the judgement of the Bombay High Court in the case of Sardar Dastoor School Trust reported in (2002) (Supp.2) B.C.R 496. The Bombay High Court dealt with a matter of production of documents under order 41 rule 27b of the CPC. The Court pronounced that for the purpose of establishing due diligence it is necessary for the purpose of satisfying the Court instead of taking appropriate steps the person could not produce such evidence. Reliance was also placed on a judgement of the Supreme Court reported in (2002) 7 SCC 702. This matter dealt with the limitation Act with respect to article 148 and 138. Article 134 enjoined on the mortgagee to recover possession against the third party within 12 years of the transfer becoming known to the plaintiff. In other words, the suit will have to be filed within 12 years of the knowledge of the transfer/possession to the third party. The Supreme Court pronounced that due diligence will have to be strictly construed because the plaintiff cannot be allowed to extend the period of limitation by merely claiming that he had no knowledge.
40. In our view no hard and fast rule or straightjacket method can be applied with regard to the principles of due diligence. Due diligence is nothing but a watchful caution and foresight as the circumstances of the particular case demands. (see P-Ramanathan Aiyar's Law Lexicon 1997 edition page 599) 41. The due diligence is an obligation to exercise reasonable care.
Black's Law Dictionary, 6th edition defines "Due Diligence" at page 457as follows: "Such a measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case." 42. A careful perusal of the impugned order indicates that there is no finding that the appellant had in fact knowledge of the penalty imposed on the sponsors. Although no such finding is given the adjudicating officer states that the contention of the appellant that he came to know about the penalty only on 27.8.2002 is "difficult to accept." A broad consensus has been reached that the first appellant (mutual fund) should not suffer any penalty since it will adversely affect the unit holders. It appears that the mutual funds are not usually visited with penalty for this reason. The only question is whether the second appellant is liable to pay any penalty.
43. There cannot be any dispute that while exercising the power to impose penalty there must be reasonableness and a penalty should never smack of arbitrariness. Section 15J of the SEBI Act has to be carefully considered while imposing penalty. Section 15J reads as follows: "15J. Factors to be taken into account by the adjudicating officer - While adjudging the quantum of penalty under 15-I, the adjudicating officer shall have due regard to the following factors namely :- (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; A perusal of section 15J would indicate that the Adjudicating Officer shall have due regard for the factors mentioned in sub-sections (a), (b) and (c) of section 15J before imposing a penalty. It must be shown that the guilty party would have (1) benefited from a disproportionate gain or taken unfair advantage which is quantifiable (2) the amount of loss caused to the investor as a result of default (3) repetitive nature of default.
44. The Parliament in its wisdom has stipulated three conditions which will have to be taken into account before a penalty is imposed. By applying these three conditions, the penalty imposed on the second appellant appears to be excessive. It cannot be denied that there was no disproportionate gain by the second appellant and that there was no loss caused to the investors. Of course on a perusal of the offer document, the second appellant has been earlier subject to a penalty of Rs. 50,000/- by SEBI on account of delay in the listing of the units with respect to JM Basic Fund, as being contrary to the Regulations.
45. However, the enquiry officer has clearly erred in not deleting JMG Mutual Fund which cannot be the subject matter of an enquiry since it was launched before the show cause notice was issued to the sponsors.
The fund was launched on 15.5.1999 while the show cause notice to the sponsors was issued on 14.8.2000.
46. The enquiry officer also erred that JM Basic Fund did not make the disclosure in the offer document of the penalty.
47. The enquiry officer also included in his order JM Fixed Maturity Plan. However, it has been brought out on evidence that JM Fixed Maturity Plan on 16.7.2003 had all necessary disclosure in the offer document.
48. We are ultimately left with only two schemes JM Short term and JM Basic Fund which were launched without the disclosure on the penalty on the sponsors.
49. We have no hesitation in concluding that if all these factors including the provision of 15J were considered the adjudicating officer would not have imposed a sky-high penalty of Rs. 50 lakhs. It has to be borne in mind that there was no proof forthcoming that the sponsor had passed on the information to the second appellant and the second appellant failed to disclose that information in spite of it. Equally it has to be understood that without a statement from the sponsors it is difficult to conclude that there was negligence on the part of the appellants.
50. However, it cannot be denied that SEBI knew about the penalties on the sponsors and did not raise this issue while approving the offer document. Equally the second appellant did not wait for a reply from the sponsors before submitting the offer document for vetting. There is nothing on record to show that the sponsors had given a firm reply one way or the other to the second appellant. To that extent it appears to us that there is an element of lack of due diligence. If only there were some material to show that the sponsors had written to the second appellant denying any such penalty then the second appellant would have been justified in stating that he has done everything possible which is required of a Compliance Officer. This not having been done, we feel that some kind of penalty is required to be imposed on the management of the fund namely the second appellant without hurting the unit holders of the fund namely first appellant.
51. The fact that not a single person exited from the units after disclosure can only be a strong mitigating factor and cannot absolve the second appellant of his responsibility to the unit holders.
52. It was also vehemently submitted by Mr. Janak Dwarkadas, the learned senior counsel for the appellant that the Regulator has not been consistent in its orders involving allegations of serious market offences.
53. It was pointed out that SEBI by an order dated 10.9.2004 had found ICICI Brokerage Services Ltd. not guilty of serious breaches and only a warning was given to ICICI Brokerage Services Ltd. A similar view was taken by SEBI in the case of Bakliwal Investment, a member of the NSE, where only a warning was given to Bakliwal Investment. It appears to us that although it is not relevant for the facts of this case, there is considerable force in the submission of the learned senior counsel for the appellants.
54. Consistency is a major hallmark of a good regulator. Pick and choose does not augur well for a healthy market.
55. We gave perused the order passed by the Regulator in ICICI Brokerage Services Ltd. It appears that there was some connection with Ketan Parekh. The said broker was a major seller of GTB on the NSE and BSE on 11.4.2000. The entire quantity of 1 crore shares of GTB was sold by the said broker on 11.4.2000 and was purchased by entities alleged to be associated with Ketan Parekh. The trade showed that the orders were placed simultaneously at the same price as per an alleged understanding. The enquiry officer recommended a penalty of suspension of registration for a period of 4 months for violating the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. The respondent overturned the recommendation of the enquiry officer and discharged the entity by order dated 10.9.2004. Similarly a lenient view was taken with respect to Bakliwal Investment.
56. We do not find fault with the regulator taking a lenient view if the object of the exercise is to rehabilitate the entity, but what frustrates the market sometimes is the inconsistency of the orders which are frequently placed before us in their submissions. We trust and hope that the regulator will be consistent in dealing with these matters in future otherwise it gives the impression of discrimination.
57. In circumstances where a person voluntarily comes forward and makes a disclosure stating that such disclosure was not made because of circumstances beyond his control, SEBI should be a little slow in issuing show cause notice without concrete proof that the entity deliberately withheld the information.
58. In the result, we hold that the impugned order passed against the first appellant JM Mutual Fund is set aside. We however modify the order passed against the second appellant and reduce the penalty from Rs. 30 lakhs to Rs. 5 lakhs. It is submitted by the learned counsel for the appellant that by virtue of the interim order, a sum of Rs. 3 lakh has been deposited. The balance amount of Rs. 2 lakh shall be deposited within four weeks from the receipt of the order.
59. The appeal filed by JM Mutual Fund (first appellant) 39/2004 is allowed. Appeal 39A/04 filed by the JM Capital Management Pvt. Ltd. (second appellant) is disposed of with the above modifications.