Securities Appellate Tribunal
Ms. Pallavi Navinchandra Mehta & Ors. vs Sebi on 6 February, 2023
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on : 18.01.2023
Date of Decision : 06.02.2023
Appeal No. 606 of 2021
1.Ms. Pallavi Navinchandra Mehta 1002, Avarsekar Heights, Dr. AB Road, Worli Naka, Mumbai - 400 018.
2. Ms. Shefali Bhupendra Mehta Alankar Building, Flat No. 3, Walkeshwar, Mumbai - 400 006.
3. Shri Bhavesh R Thakkar 2602, Building No. 1, Sumer Trinity, Prabhadevi, Mumbai - 400 025.
4. Shri Navin Mansukhlal Mehta 1002, Avarsekar Heights, Dr. AB Road, Worli Naka, Mumbai - 400 018.
5. Shri Abhishek Mehta Alankar Building, Flat No. 3, Walkeshwar, Mumbai - 400 006.
6. Ms. Priyanka Thakkar 2602, Building No. 1, Sumer Trinity, Prabhadevi, Mumbai - 400 025. ...Appellants Versus Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent 2 Mr. Abhishek Venkataraman, Advocate with Mr. Viswajit P. Deb, Mateena Patca and Ms. Ashmita Poojary i/b Adv. Burzin Somandy for the Appellant.
Mr. Mustafa Doctor, Senior Advocate with Mr. Manish Chhangani, Ms. Samreen Fatima, and Mr. Sumit Yadav, Advocates i/b. The Law Point for the Respondent.
AND Appeal No. 520 of 2022
1. Ms. Pallavi Navinchandra Mehta 1002, Avarsekar Heights, Dr. AB Road, Worli Naka, Mumbai - 400 018.
2. Ms. Shefali Bhupendra Mehta Alankar Building, Flat No. 3, Walkeshwar, Mumbai - 400 006.
3. Shri Bhavesh R Thakkar 2602, Building No. 1, Sumer Trinity, Prabhadevi, Mumbai - 400 025.
4. Shri Navin Mansukhlal Mehta 1002, Avarsekar Heights, Dr. AB Road, Worli Naka, Mumbai - 400 018.
5. Shri Abhishek Mehta Alankar Building, Flat No. 3, Walkeshwar, Mumbai - 400 006.
6. Ms. Priyanka Thakkar 2602, Building No. 1, Sumer Trinity, Prabhadevi, Mumbai - 400 025. ...Appellants Versus 3 Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent Mr. Abhishek Venkataraman, Advocate with Mr. Viswajit P. Deb, Mateena Patca and Ms. Ashmita Poojary i/b Adv. Burzin Somandy for the Appellant.
Mr. Mustafa Doctor, Senior Advocate with Mr. Manish Chhangani, Ms. Samreen Fatima, and Mr. Sumit Yadav, Advocates i/b. The Law Point for the Respondent. CORAM : Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member Per : Justice Tarun Agarwala, Presiding Officer
1. Two appeals have been filed against a common issue and are being taken up together. The appellants have challenged the order dated March 30, 2021 passed by the Whole Time Member („WTM‟ for short) of the Securities and Exchange Board of India („SEBI‟ for short) in Appeal no. 606 of 2021 wherein the appellant has been found to have engaged in insider trading in contravention of Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 („PIT Regulations‟ for short) and consequently Appellant nos. 1, 2 and 3 who were Noticee nos. 1, 2 and 3 before the WTM have been directed do disgorge 4 a sum of Rs. 77,23,637.07 along with interest. Further, Appellant nos. 1, 2, and 3 have been restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly for a period of 6 months and further were restrained from buying, selling or dealing in the securities of ADF Foods Limited, directly or indirectly for a period of 1 year. Further, Appellant nos. 4, 5 and 6 who were Noticee nos. 4, 5 and 6 before the WTM were also restrained from accessing the securities market for a period of 3 months.
Similarly, the appellants have challenged the order dated June 23, 2022 passed by the Adjudicating Officer („AO‟ for short) of the SEBI in Appeal no. 520 of 2022 wherein a penalty of Rs. 40 lakh has been imposed upon the appellants to be paid jointly and severally for violating the PIT Regulations.
2. The facts leading to the filing of the present appeal is, that ADF Foods Limited made a public announcement on the Stock Exchange on May 23, 2016 that a meeting of the board of directors would be convened on May 27, 2016 to consider recommending a dividend for the financial year ending March 2016 or buy-back of the equity shares of the Company or a combination thereof. On May 27, 2016 the board of directors 5 deferred the proposal of dividend or buy-back proposal till the next meeting of the board of directors. Eventually the board of directors met on July 27, 2016 and approved a buy-back of equity shares of the Company not exceeding Rs. 125/- per equity shares of Rs. 10/- each for an aggregate amount not exceeding Rs. 18 crore. This resolution of the board was duly announced on the Stock Exchange on July 27, 2016.
3. Based on the aforesaid corporate announcement there was a jump in the trading in the scrips of the Company and accordingly an investigation was conducted by SEBI which led to the passing of an ex parte ad interim order dated February 22, 2019 directing impounding of Rs. 77,23,637.73 plus interest till that date amounting to Rs. 25,39,532.08 and consequently impounded a total amount of Rs. 1,02,63,169.81. This amount is still being in an escrow account.
4. Subsequently, a show cause notice was issued alleging that Noticee no. 3 / Appellant no. 3, Bhavesh R Thakkar was a director at the relevant moment of time in the Company and Appellant no. 1 / Noticee no. 1 was the mother-in-law, Noticee no. 2 / Appellant no. 2 was the sister-in-law, Noticee no. 4 / Appellant no. 4 was the father-in-law, Noticee no. 5 / Appellant no. 5 was the son of Noticee no. 2 and Appellant no. 6 was the 6 wife of Noticee no. 3. It was alleged that Shri Bhavesh R. Thakkar, Appellant no. 3 who was not only a promoter but also an executive director was in possession of unpublished price sensitive information (UPSI) pertaining to proposed range of buy-back of shares between Rs. 10 to 15 crore which came into existence on May 25, 2016 and was published on July 27, 2016 and therefore the UPSI period was from May 21, 2016 to July 27, 2016. It was alleged that Appellant no. 1 and Appellant no. 2 traded in the shares of the Company during UPSI period on the basis of price sensitive information communicated to them by Appellant no. 3 through his wife Appellant no. 6. It was also alleged that Appellant nos. 1 and 2 traded on the basis of the funds transferred by Appellant no. 3 through his wife Appellant no. 6. It was also alleged that Appellant no. 1 had authorized Appellant no. 4 and Appellant no. 2 authorized Appellant no. 5 to trade on their behalf. The allegations against the appellants in the show cause notice are summarized as under:-
(i) The issue pertaining to the proposed range (INR 10 -
15 Crore) of buyback of shares was known only to the insiders and was not publicly available. The said piece of information was UPSI and it remained out of the public knowledge during the period 7 commencing from May 21, 2016 (the day it was first discussed) to July 27, 2016 at 03:24 PM (when it was disclosed), making the aforesaid period as UPSI period;
(ii) The Noticee nos. 1, 2, 4 and 5, being insiders, have engaged in trading in the scrip of ADF during the aforesaid UPSI period and therefore have indulged in insider trading. The said acts of the Noticees are in violation of Section 12A (d) & (e) of SEBI Act, 1992 and regulation 4(1) of the PIT Regulations; and
(iii) Noticee no. 3 has allegedly communicated the UPSI to his connected entities including Noticee nos. 1 and
2. Further, the Noticee no. 3 has provided funds to the Noticee nos. 1 and 2 for trading in the scrip of ADF during the said UPSI period, and such fund transfers have been executed via bank accounts of the Noticee no. 6 , wife of the Noticee no. 3 . The said acts of the Noticee no. 3 are in violation of Section 12A (d) & (e) of SEBI Act, 1992 read with regulations 3(1) & 4(1) of the PIT Regulations. Further, the acts by the Noticee no. 6 in allowing her bank account to be used as a conduit to facilitate the 8 transfer of funds to the accounts of the Noticee nos. 1 & 2 are alleged to be in violation of Section 12A
(d) of SEBI Act, 1992 and regulation 4(1) of the PIT Regulations.
5. The WTM after considering the replies and material evidence on record came to a conclusion that the announcement of buy-back of shares was UPSI and that the range of buy-back of shares was also UPSI. The WTM further found that UPSI period was from May 21, 2016 to July 27, 2016 when the idea of buy-back the shares was first mooted which information was within the knowledge of Appellant no. 3. The WTM further found that Appellant nos. 1 and 2 had traded on June 3, 2016 and May 23, 2016 respectively during the UPSI period. The WTM further, thus, concluded that the trades executed by the appellants were violative of the PIT Regulations and accordingly directions for disgorgement and debarment was issued.
6. Similarly, the AO also came to a similar conclusion in its order and imposed a penalty of Rs. 40 lakh.
7. We have heard Shri Abhishek Venkataraman, the learned counsel assisted by Mr. Viswajit P. Deb, Mateena Patca and 9 Ms. Ashmita Poojary and Burzin Somandy for the Appellants and Shri Mustafa Doctor, the learned senior counsel assisted by Shri Manish Chhangani, Ms. Samreen Fatima and Shri Sumit Yadav for the Respondent.
8. The contention of the appellant is, that the proposed range of buy-back was not an UPSI since the proposed range was not crystallized and therefore such information cannot be termed as an UPSI. In support of his submission the learned counsel for the appellants placed reliance upon a decision in Securities and Exchange Board of India vs Abhijit Rajan, 2022 SCC OnLine SC 1241. It was contended that the idea to undertake buy-back of shares was first discussed on May 21, 2016 with the merchant banker but no reference of the range of buy-back was discussed and only the pros and cons of undertaking a buy-back either by way of a tender offer or through the open market was discussed. Thus, the starting point of May 21, 2016 could not be treated as a starting point of UPSI period. Further, in the agenda papers that were circulated to the board of directors on May 23, 2016 a proposed range of buy-back between Rs. 10 crore to Rs. 15 crore were stated but the draft resolution that was required to be passed by the board of directors with regard to the range of buy-back was left blank which clearly indicated 10 that the range of buy-back was not certain and was a matter for deliberation by the board of directors which was only discussed and finalized on July 27, 2016. It was urged that the range of buy-back only came into existence on July 27, 2016 and prior to that appellants especially Appellant no. 3 had no prior information of the range of buy-back.
9. It was also urged that the range of buy-back was only tentative in nature for which it cannot be termed as an UPSI. It was finalized and which ultimately announced on July 27, 2016. In this regard it was also urged that information which is speculative, uncertain or contingent in nature cannot be regarded as an UPSI. In support of his submissions placed reliance in Samir C. Arora vs SEBI (Appeal no. 83 of 2004 decided by this Tribunal on October 15, 2004).
10. In this regard Regulation 2(1)(n) of the PIT Regulations defines „unpublished price sensitive information‟ as under:-
―2(1)(n) ―unpublished price sensitive information"
means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: -11
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
(v) changes in key managerial personnel; and
(vi) material events in accordance with the listing agreement.
NOTE: It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information.‖
11. Admittedly, Shri Bhavesh R Thakkar, Appellant no. 3 was an insider in terms of Regulation 2(1)(g) on which there is no dispute. The buy-back was first mooted and discussed on May 21, 2016 and Appellant no. 3 was privy to this price sensitive information. The issue of buy-back of shares was disclosed to the Stock Exchange on May 23, 2016 which came into public domain and therefore it was no longer an UPSI but the trades 12 were executed by Appellant no. 2 on May 23, 2016 prior to the announcement on the Stock Exchange platform on May 23, 2016 itself. Thus, the trades executed by Appellant no. 2 on May 23, 2016 were traded during UPSI period.
12. Regulation 2(1)(n) defines "unpublished price sensitive information" to mean any information which is not generally available and which upon becoming generally available, is likely to materially affect the price of the securities and which also includes change in the capital structure.
13. In our opinion, consideration of buy-back of shares on May 21, 2016 was a price sensitive information and certainly UPSI which materially affects the price of the securities and which has a bearing on the change in the capital structure.
14. Therefore, the trades executed by Appellant no. 2 prior to the announcement of the buy-back of shares on May 23, 2016 was on the basis of unpublished price sensitive information and such trading when in possession of UPSI was violative of Regulation 4.
15. Similarly, the range of buy-back of shares in our opinion is also material information which is likely to affect the price of 13 the securities and consequently unpublished price sensitive information. The range of proposed buy-back results in the change of capital structure of the Company and thus, would be covered under the definition clause of UPSI as defined under Regulation 2(1)(n).
16. The contention that the proposed range of buy-back of shares was only a proposal and was speculative or it was uncertain or that it was not crystallized is wholly erroneous. The crystallization was with the regard to the buy-back of shares. The range of buy-back of shares materially affects ultimate change in the capital structure of the Company. This was material information which remained unpublished and such unpublished information was price sensitive information. Reliance on the decision of the Supreme Court in Abhijit Rajan (supra) and of this Tribunal in Samir C. Arora (supra) is misplaced and has no bearing in the facts of the present case.
17. It was urged that the proposal for buy-back of the shares was already disclosed to the Stock Exchange on June 23, 2016 and therefore it was no longer an UPSI and therefore the range of buy-back of shares was immaterial and was no longer an UPSI. This submission is patently erroneous for the reasons that the range of buy-back of shares was a material information 14 which was also required to be disclosed but since the same was not disclosed it was an UPSI as per Regulation 2(1)(n).
18. It was lastly urged that range of buy-back of shares was also in the public domain as per Section 68(2) of the Companies Act, 2013 which requires the Company to buy-back upto 10% of its paid up capital and the free reserves. Further, the section provides that buy-back of shares between 10% to 25% can be done only after taking approval from the shareholders of the Company. It was, thus, urged that the range of buy-back of shares from 1% to 10% as per Section 68(2) of the Companies Act was known and therefore was no price sensitive information far less an UPSI. For facility, Section 68 of the Companies Act is extracted here under:-
―68. Power of company to purchase its own securities. -
(1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-
section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of--
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities:
Provided that no buy-back of any kind of shares or other specified securities shall be made out of 15 the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
(2) No company shall purchase its own shares or other specified securities under sub-
section (1), unless--
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company authorising the buy-back:
Provided that nothing contained in this clause shall apply to a case where--
(i) the buy-back is, ten per cent. or less of the total paid-up equity capital and free reserves of the company;
and
(ii) such buy-back has been authorised by the Board by means of a resolution passed at its meeting;
(c) the buy-back is twenty-five per cent. or less of the aggregate of paid-up capital and free reserves of the company....‖ (emphasis supplied)
19. The aforesaid provision clearly indicates that the Company has a right to purchase its own shares out of its free reserves subject to certain conditions. The proviso further stipulates that the board of directors is authorized to buy-back upto 10% of its shares from the total paid up capital and free 16 reserves of the Company and beyond 10% a special resolution is to be passed by the shareholders of the Company.
20. The argument appears to be attractive but on a closer scrutiny we find that even though the board of directors are authorized to buy-back the shares of the Company from its free reserves nonetheless the range of buy-back of shares affects the capital structure of the Company and any change in the capital structure whether it is 1% or 5% or 10% or even beyond 10% is a material information and is an UPSI under Regulation 2(1)(n) of the PIT Regulations and therefore the contention that the range of buy-back of shares was in the public domain is incorrect in as much as the percentage of buy-back of shares was not known and was an UPSI only known to a few which included Appellant no. 3. Thus, the contention raised under Section 68(2) of the Companies Act is patently erroneous.
21. The contention that range of buy-back of shares was not known and that range only was announced on July 27, 2016 and consequently there was no UPSI, in our opinion, is totally erroneous in as much as the discussion on the buy-back of shares and its range had started on May 21, 2016 and the Appellant no. 3 knew that the range would be anywhere between 1 % to 10%.
17
22. It was last urged that when the buy-back of shares announced on May 23, 2016 there was immediate impact on the price on the Stock Exchange platform and such price impact has not been taken into consideration. In our opinion, insider trading while in possession of an UPSI has no relationship with the ultimate price impact. In ICICI Bank Limited vs SEBI (Appeal no. 583 of 2019 decided on July 8, 2020) the Tribunal held:-
―Therefore, the finding to this effect in the impugned order cannot be faulted, irrespective of whether post- facto share prices were in fact affected or not, and whether such an analysis has been done or not. What is relevant for disclosure is the materiality and the ex- ante possibility of impacting prices of the securities, which may not come true ex-post due to several other factors affecting the company concerned or/and the securities market in general.‖
23. We also find that Appellant no. 3 transferred the funds to his wife Appellant no. 6 who, in turn, transferred it to Appellant nos. 1 and 2. Further, the finding that appellants also traded on behalf of one of the appellant leads to an irresistible conclusion that appellant had intent to trade while in possession of insider information.
24. In view of the aforesaid, we do not find any error in the order passed by the WTM or in the computation of the amount of disgorgement or in the computation of the penalty awarded 18 by the AO. Both the appeals fail and are dismissed with no order as to costs.
25. This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.
Justice Tarun Agarwala Presiding Officer Ms. Meera Swarup Technical Member 06.02.2023 Digitally signed by MADHUKAR MADHUKAR SHAMRAO BHALBAR msb SHAMRAO BHALBAR Date: 2023.02.07 11:37:51 +05'30'