Securities Appellate Tribunal
Mr. Rajendra Kumar Dabriwala vs Sebi on 5 July, 2021
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved:20.5.2021
Date of Decision:05.7.2021
Misc. Application No.88 of 2021
And
Appeal No.616 of 2019
Mr. Rajendra Kumar Dabriwala
10, Middleton Row, ...Appellant
Kolkata-700071.
Versus
Securities and Exchange Board of India
SEBI Bhavan,
Bandra-Kurla Complex,
Mumbai-400051. ...Respondent
Mr. Somasekhar Sundaresan, Advocate with Mr. Abishek
Venkataraman, Advocate i/b. Ms. Aayushi Sharma,
Advocate for the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Jitendra
Motwani, Mr. Abhiraj Arora, Mr. Karthik Narayan and
Ms. Rashi Dalmia, Advocates i/b. ELP for the
Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Justice M.T. Joshi, Judicial Member
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Per: Justice M.T. Joshi, Judicial Member
1.Aggrieved by the direction of the Adjudicating Officer („AO‟ for short) of respondent Securities and Exchange Board of India (hereinafter referred to as „SEBI‟) dated 31st July, 2019 for payment of penalty for violation of clause 1.2 and 3.2.1 of Code of Conduct as specified under Part A of Schedule I under Regulation 12(1) and 12(3) of Securities and Exchange Board of India (Prevention of Insider Trading) Regulations, 1992 (hereinafter referred to as „PIT Regulations‟) as well as Regulation 3(i) and 4 of the PIT Regulations and lastly clause 3.2-2 and 3.2-5 of Part A of the same Schedule I under Regulation 12(1) of the PIT Regulations the present appeal is preferred.
2. The appellant was directed to pay a penalty of Rs.4,00,000 for violation of Clause 1.2 and 3.2.1 of Code of Conduct as detailed supra under section 15HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as „SEBI Act‟). Further, for violation of Regulation 3(i) and 4 of PIT Regulations, 3 1992 and for violation clause 3.2-2 and 3.2-5 of Part A of the Schedule of the same regulations under section 15G and 15HB of the SEBI Act he was directed to pay a penalty of Rs.45 lakhs.
3. The appellant was one of the promoter and Managing Director of International Conveyors Ltd. (hereinafter referred to as the „Company‟) during the year 2009- 2010 i.e. during the relevant period.
4. On 29th June, 2009, the Company had announced audited financial result for the quarter as well as the year ended on March 31, 2009. Secondly, on June 30, 2009 the Company has declared a final dividend of Rs.2 per shares for the financial year 2008-09 subject to the approval of the shareholders in the next annual general meeting. During the investigation, respondent SEBI found that the trading window of the Company was closed from June 24, 2009 to June 30, 2009. As per the model Code of Conduct adopted by the Company the trading window however should have been closed till July 1, 2009 i.e. 24 hours after the 4 declaration of the financial results/dividend was made public. It was also found that the agenda of the board meeting was circulated on June 19, 2009 alongwith draft financial results. In the circumstances, in fact the trading window was required to be closed from June 19, 2009 in compliance with clause 3.2.1 of the Code of Conduct. In view of failure to close the trading window for this earlier period the appellant being the Managing Director was alleged to have failed to supervise the implementation of Code of Conduct. Further, as the trading window was opened 24 hours earlier than required as detailed supra it was also faulted by respondent SEBI.
Further, though the appellant had notice of the Board meeting vide notice dated June 18, 2009, he purchased the shares of the Company being well aware of the financial results to be declared which were positive in nature. It was found that the appellant was buying the shares of the Company right from 8th June, 2009 till 30th June, 2009 by. Out of these transactions, trade 5 from 18th June, 2009 to 30th June, 2009 made by him were found to have been made when in possession of unpublished price sensitive information i.e. the financial results as well as declaration of the dividend. The details of the same are as under:
Date Quantity Amount (Rs.)
Purchased
18/06/2009 230 40856.07
19/06/2009 90 16777.94
22/06/2009 150 29354.11
23/06/2009 465 95546.93
25/06/2009 196 44392.03
26/06/2009 505 120077.40
30/06/2009 5259 1336006.99
5. The appellant did not deny any of these facts except the fact that he traded when in possession of the unpublished price sensitive information. According to him in order to have creeping acquisition of permitted percentage of shares, he had issued standing instructions to the broker for purchase of the shares. Therefore, his broker went on to purchase the shares not only during the disputed period but even prior to it. He further submitted that in fact the purchase of the 6 shares prior to 18th June, 2009 are substantive and only in miniscule volumes shares as detailed supra were purchased by the broker as per the standing instructions issued by him earlier.
6. As regards the issue of non-closure of the trading window for the larger period as required under the Code of Conduct, he submitted that the Compliance Officer of the Company was responsible for the same as per the Code of Conduct and therefore the appellant cannot be blamed for the same.
7. Respondent SEBI, however, did not accept the said explanation and, therefore, the impugned order came to be passed.
8. Heard Mr. Somasekhar Sundaresan, Advocate assisted by Mr. Abishek Venkataraman, Advocate for the Appellant and Mr. Gaurav Joshi, Senior Advocate assisted by Mr. Jitendra Motwani, Mr. Abhiraj Arora, Mr. Karthik Narayan and Ms.Rashi Dalmia, Advocates for the Respondent.
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9. Mr. Somasekhar, the learned counsel for the appellant submitted that the appellant himself has not purchased 6,665 shares in the value of 16.42 lakhs , but those were purchased inadvertently by his broker on his behalf during the price sensitive information was unpublished, based on the standing instructions given by the appellant. While most of the trades were executed prior to the existence of the information period, miniscule trades occurred during the unpublished price sensitive information period. As the trades did not take place knowingly by the appellant but by his broker who was not aware of the unpublished price sensitive information, the order of the Adjudicating Officer cannot be sustained. It was urged that broker traded the shares and the said broker had no inside information and therefore no penalty could be issued.
10. As regards the non-closure of trading window for the disputed period he submitted that statutorily the role was assigned to the Compliance Officer as per the 8 Code of Conduct and, therefore the appellant could not have been faulted with.
11. Alternatively, Mr. Somsekhar submitted that the penalty imposed upon the appellant is excessive in view of the provisions of the SEBI Act as well as the decision of this Tribunal.
12. Regulation 3 of PIT Regulations, 1992 provides as under.
"Prohibition on dealing, communicating, or counselling on matters relating to insider trading.
Reg 3. No insider shall--
(i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or ............................................
(ii).........................."
13. On the basis of this provision, Mr.Somasekhar argued that the broker and not the appellant dealt in the securities of the Company. The broker had no knowledge of any unpublished price sensitive 9 information and, therefore, the appellant could not have been penalised by the respondent. He also submitted that on the basis of the standing instruction the broker went on to buy the securities and, therefore, merely because the appellant was in possession of the unpublished price sensitive information cannot be a ground for finding fault with the activities. To buttress his submission he relied on the decision of Miller vs. Pezzani, United States Court of appeal dated 15th September, 1994. In that case, the Directors, Officers etc of the Company therein were sued by the investors alleging fraud in issuing 80 millions of "junk bonds". The United States Supreme Court found that the bonds were not issued with an intention to deceive the investors but it was very well clarified about the fact that those bonds were high risk bonds. In the circumstances, finding no scienterin issuing the bonds sufficient to attract the liability, the investors claim was dismissed.
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14. In the present case, we are dealing with the case as to whether the appellant has dealt in the shares of the Company when in possession of the unpublished price sensitive information. There is no denial that the appellant was in possession of the said information and while having the possession of the same the shares were purchased. The only issue is as to whether the transactions entered by the broker on his behalf can be said to be the trading made not by himself but by the broker without the knowledge of unpublished price sensitive information. It is a common knowledge that a broker does not act on his own but on the basis of instructions from his client. The appellant claims that the broker has acted on the basis of standing instructions without knowledge that during the disputed period unpublished price sensitive information was in existence. This defence cannot be accepted. It was the appellant‟s duty to instruct the broker in this regard because the broker is nothing but an extension of the client. The argument is like 11 blaming only the hand of waving itself in the air when a punch occurs. The intention is a state of mind to be gathered from the act and it‟s result. The broker is the agent of the principal, namely, the appellant. The appellant, being the principal is bound by the acts of his agent, namely, the broker and therefore the appellant cannot escape the action committed by the broker. In the circumstances, the argument cannot be accepted.
The appellant also relied on the ratio of Chintalapati Srinivasa Raju vs. SEBI (2018) 7 SCC 443. In that case on facts the Supreme Court found that appellant Chintalapati was not aware of the unpublished price sensitive information though he was one of the Director of the Company and therefore he was absolved of the charge of trading while in possession of unpublished price sensitive information. In the present case however the appellant admittedly was the Managing Director of the Company having possession of unpublished price sensitive information while 12 dealing in the securities. Therefore, on facts the ratio of the same is not applicable.
Mr. Somasekhar relied on the ratio of Manoj Gaur vs. SEBI, Appeal No.64 of 2012 decided by this Tribunal on 3rd October, 2012; he submits that in that case this Tribunal found that trades were executed by the spouse of an insider in miniscule and, therefore, this Tribunal inferred that the trades were not motivated by unpublished price sensitive information. However in the present case we are dealing with the case of the person himself possessing price sensitive information. Therefore no inferential facts are needed to find as to whether the information was passed on to another who had eventually traded in the security.
15. Taking into consideration all the above facts in our view the impugned finding of the learned AO that the appellant has dealt in the security while in possession of unpublished price sensitive information needs no interference.
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16. As regards the violation of the Code of Conduct by non-closure of the trading window for a larger period as detailed supra we find that the arguments of the appellant, that only the Compliance Officer is liable, does not hold any water.
17. The Code of Conduct provides that the Compliance Officer shall report to the Chief Executive Officer, Managing Director etc. The Compliance Officer is responsible for implementation of the model Code of Conduct under the overall supervision of the Board of the Company. In the circumstances, the enforcement of the Code of Conduct including closure of the trading window is not the responsibility solely of the Compliance Officer. In this regard, the learned counsel for the respondent placed reliance on the decision of this Tribunal in the case of Piramal Enterprises Ltd. vs. SEBI decided on 15th May, 2019 and Chandra Mukherji vs. SEBI dated 30th November, 2016. Mere glance at the Code of Conduct would show that the Compliance Officer has to 14 implement the Code of Conduct under the overall supervision of the Board of the listed Company. The appellant who was the Managing Director as well as the CEO of the Company responsible for day to day affairs of the Company cannot therefore escape from the responsibility in this regard. Therefore on this ground also the appeal fails.
18. As regards the quantum of penalty, Mr.Somsekhar submitted that so far as the penalty for trading is concerned the figures were available with the learned AO to find out as to how much notional profit was earned by the appellant in dealing (Rs. 1,25,558 maximum) and therefore taking into consideration, the proportionate penalty could have been imposed on this count.
19. He further relied in the ratio of Snehlata R. Tiwari vs. SEBI appeal no.175 of 2020 decided by this Tribunal on 28th April, 2021 to submit that only disgorgement of the profit if any earned by the appellant could have been sufficient. 15
20. On the other hand, the learned counsel for the respondent submitted that the ratio of Ms. Snehlata Tiwari would not be applicable in the present case as the issue has been dealt with by the full Bench of this Tribunal in the case of Mr. Manmohan Shetty vs. SEBI, appeal no.132 of 2010decided on 27th May, 2011. He further submitted that in the present case the appellant is Managing Director as well as CEO while Ms. Snehlata Tiwari was only a designated officer who had inadvertently carried miniscule contra trade within a long period of six months and, therefore, the decision in the said case need not be required to be applied.
21. Having heard both the sides, in our view, the decision in the case of Ms. Snehlata Tiwari is distinguishable and would not be applicable in the present case. In the case of Ms. Snehlata Tiwari, the appellant therein was a designated employee of the Company. The Code of Conduct as framed under the PIT Regulation, 2015 requires that such designated 16 officer shall not enter into opposite transactions (contra trade) during a period of six months following prior transaction. She, however, carried contra trades inadvertently in the securities of the Company there only as regards 65 shares and earned a profit of Rs.348. A penalty of Rs.1 lakh was imposed upon her by the Adjudicating Officer under section 15 HB of the SEBI Act. In those circumstances, this Tribunal held that under Regulation 9 of SEBI PIT Regulations, 2015 a disgorgement of the profit could have been sufficient.
22. In the present case, however, we are dealing with a Managing Director cum CEO who had traded while in possession of unpublished price sensitive information. It was not a case of trading inadvertently. In the circumstances, the decision in the case of Ms. Snehlata Tiwari would not be applicable.
23. In the circumstances, the decision of learned AO to penalise the appellant under the provisions of Section 15HB of the SEBI Act, 1992 in this regard cannot be faulted with.
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24. Composite penalty of Rs. 45 lacs was imposed on the appellant by the AO for violation of Regulation 3(i) and 4 of the PIT Regulations as well as clause 3.2-1 and 3.2-5 of part A of Schedule I under Regulation 12(1) of the PIT Regulations, the learned AO exercised his power to impose penalty under Section 15G and 15HB of the SEBI Act.
25. Section 15G runs as under
"Penalty for insider trading.
15G.If any insider who,--
(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or
(ii) communicates any unpublished price-
sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
(iii) counsels, or procures for any other person to deal in any securities of anybody corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three 18 times the amount of profits made out of insider trading, whichever is higher."
26. Section 15HB of the SEBI Act provides as under:
"Penalty for contravention where no separate penalty has been provided.
15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees."
27. Taking into consideration the facts of the case, in our view, a minimum penalty of Rs.10 lacs under Section 15G and Rs.1 lakh under the provisions of Section 15 HB, totalling to Rs. 11 Lacs would be just and sufficient on this count.
28. The appellant was also directed by the AO to pay a penalty of Rs.4 lacs for violation of Clause 1.2 and 3.2.1 of Code of Conduct as detailed supra under section 15HB of the SEBI Act. In the circumstances, of the case that the appellant failed to supervise the 19 work of the compliance officer in our view a penalty of Rs.1 lac would be just and sufficient.
29. In the result the following order :-
30. The appeal is hereby partly allowed without any order as to costs. The appeal fails on merit. It is, however, partly allowed as regards the quantum of penalty.
31. The appellant is directed to pay penalty of Rs.11 lakhs for violation of Regulation 3(i) and 4 of the PIT Regulations, 1992 and for violation of 3.2-1 and 3.2-5 of part A of Schedule 1 of Regulation 12(1) of PIT Regulations, 1992.
32. The appellant is further directed to pay a penalty of Rs. 1 lakh under Section 15HB of the SEBI Act for violation of Clause 1.2 and 3.2.1 of Code of Conduct as detailed supra.
33. Misc. Application no.88 of 2021 is also accordingly disposed of.
34. The present matter was heard through video conference due to Covid-19 pandemic. At this stage it 20 is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, 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. Parties will act on production of a digitally signed copy sent by fax and/or email.
Justice Tarun Agarwala Presiding Officer Justice M.T. Joshi Judicial Member RAJALA 5.7.2021 KSHMI Digitally signed by RAJALAKSHMI H NAIR Date: 2021.07.08 13:18:46 +05'30' RHN H NAIR