Securities Appellate Tribunal
Mrs. Chandrakala vs Sebi on 31 January, 2012
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 209 of 2011
Date of Decision : 31.01.2012
Mrs. Chandrakala
962, Poonamallee Road, C-Block
BBC Purnima Apartments,
Chennai - 600 084. ...Appellant
Versus
The Adjudicating Officer,
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai - 400 051. ...Respondent
Mr. Vinay Chauhan, Advocate for the Appellant.
Dr. (Mrs.) Poornima Advani, Advocate with Mr. Ajay Khaire and Ms. Rachita Romani, Advocates for the Respondent.
CORAM : P.K. Malhotra, Member S.S.N. Moorthy, Member Per : P.K. Malhotra, Member Whether the appellant is guilty of 'insider trading' is the short question that arises for our consideration in this appeal filed under section 15T of the Securities and Exchange Board of India Act, 1992 (for short the Act) against the order dated August 30, 2011 passed by the adjudicating officer of the Securities and Exchange Board of India (the Board) holding the appellant guilty of violating regulations 3(i) and 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (the regulations) and imposing a monetary penalty of ` 8 lakhs on her.
2. Facts of the case, in brief, are that the Board conducted investigations into the rise in price and volume in the scrip of M/s. Rasi Electrodes Ltd. (the Company) 2 during the period from June 8, 2007 to July 20, 2007. The scrip of the company is listed on the Bombay Stock Exchange Ltd. It was noted that certain promoter entities had traded in the scrip during the investigation period. It was further noticed by the Board that the agenda for the board meeting to be held on June 30, 2007 was discussed internally between Mr. B Popatlal Kothari, chairman and managing director and Mr. G Mahavirchand Kochar, whole time director of the company. The agenda was finalized between June 19 to 21, 2007. The rate of dividend was finalized in the meeting held on June 30, 2007. The period of June 19 to 30, 2007 was considered as a period when the information about the financial results and dividend was unpublished price sensitive information. It was further noted by the Board that the agenda for the board meeting regarding bonus issue to be held on July 25, 2007 was discussed internally during the period July 15 to 17, 2007 and the agenda papers were circulated on July 17, 2007. The period July 15 to 17, 2007 was considered to be the period when information about the issue of bonus shares was unpublished price sensitive information. The Board analyzed the trading details of the company related entities who dealt in the scrip when the price sensitive information was unpublished and noticed the trading details as under:
S. Entities 19/6/2007-30/6/2007 1/7/2007-6/7/2007 No Client Name/ Buy Avg. Sell Avg. Net Buy Avg. Sell Avg. Net Sell Code Qty Buy Qty Sell Buy Qty Buy Qty Sell Qty Price Price Qty Price Price ( `) ( `) (``) (``) 1 Ranjana 17505 25.54 1000 30.35 16505 10349 32.15 - - (10349) Kothari (R2652) and (N123145) 2 Uttam Kumar 10060 26.02 - - 10060 - - 400 31.75 400 Kothari (U470) 3 Chandrakala 4065 26.38 6300 25.79 (2235) 3550 31.41 1611 32.63 (1939) (C999) and (K2SW47) 4 P. Kashyap 3700 25.25 - - 3700 - - - - -
Kothari (P0144) The details of the appellant's trading transactions were noted by the Board as under:
S. No Buy Date Buy Buy Avg. Sell Date Sell Sell Avg.
Qty Value Buy Qty Value Sell Price
Price
1 11/06/2007 60 1374 22.90
2 12/6/2007 1119 24768 22.12
3
3 15/6/2007 300 7503 25.01
4 20/6/2007 850 22474 26.44
5 21/6/2007 1300 33786 25.99
6 25/6/2007 1000 27250 27.25 25/6/2007 500 13550 27.10
7 26/6/2007 1100 29105 26.46
28/6/2007 900 22500 25.00 28/6/2007 3300 83550 25.32
8
9 29/6/2007 1315 35028 26.64 29/6/2007 100 2500 25.00
10
11 02/07/2007 1550 46198 29.81
12 03/07/2007 1400 45613 32.58
13 04/07/2007 200 6800 34.00
14 05/07/2007 200 6378 31.89
15 6/7/2007 600 19700 32.83 06/07/2007 1211 39383 32.52
16 07/07/2007 150 4908 32.72
13/7/2007 2000 86000 43
16/7/2007 150 6683 44.55 16/72007 2000 95000 47.5
17 17/7/2007 2000 97000 48.5 17/7/2007 4250 215450 50.69412
18 18/7/2007 5000 284500 56.90
19 19/7/2007 3600 221415 61.50 19/7/2007 9466 591830 62.52
20 20/7/2007 8000 494700 61.84 20/7/2007 1473 91031 61.80
Total 24484 1149329 46.94 30610 1506648 49.22
It was observed that the appellant is wife of Uttam Kumar Kothari who is the promoter of the company and is brother of B Popatlal Kothari, chairman and managing director and Ranjit Kumar Kothari, director of the company. Therefore, according to the Board, the appellant was deemed to be a connected person with the company and its directors who had access to unpublished price sensitive information and hence an insider. The appellant is alleged to have traded in the scrip of the company based on the unpublished price sensitive information relating to financial results, dividend and bonus issue. Hence, it was alleged that the appellant had violated regulation 3(i), (ii) and 4 of the regulations. A show cause notice dated March 11, 2011 was issued calling upon the appellant to show cause as to why an enquiry should not be held against her and penalty imposed for the alleged contravention of the regulations. The appellant denied the allegation. After considering the reply of the appellant and granting personal hearing, the adjudicating officer found the appellant guilty and, by the impugned order dated August 30, 2011, imposed penalty as stated above. Hence, this appeal.
3. We have heard the learned counsel for the parties who have taken us through the records. It was submitted by the learned counsel for the Board that the case is squarely covered by the earlier order of this Tribunal in the case of Ranjana R Kothari (Appeal no.125 of 2011, decided on August 26, 2011) where the Tribunal has upheld 4 the order of adjudicating officer of the Board against other three related entities holding them guilty of the charge of insider trading. The appellant is the wife of Uttam Kumar Kothari who is the brother of B Popatlal Kothari, chairman and managing director of the company and Ranjit Kumar Kothari, director of the company. She also stays at the same address as that of her husband and of the chairman and managing director of the company. As such, she is deemed to be a connected person with the company and its directors and had access to unpublished price sensitive information. Since she has traded while in possession of unpublished price sensitive information the order of the adjudicating officer needs to be upheld. On the other hand, learned counsel for the appellant argued that the case of the appellant stands on an entirely different footing and is not covered by the earlier order of the Tribunal referred to above. In support of this contention, learned counsel for the appellant submitted that Mr. Uttam Kumar Kothari, husband of appellant had relinquished the interest in the company as promoter as early as 31st March, 2005. This is evident from the note below the intimation of details of the shareholders to the stock exchanges furnished in terms of regulation 8(3) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Since Mr. Uttam Kumar Kothari, brother of the chairman and managing director of the company and husband of the appellant, ceased to be promoter of the company in 2005, he was only a shareholder of the company and had no information about the day to day working of the company. Therefore, his wife, the appellant before us, cannot be said to be a person "deemed to be a connected person". Regarding residential address of her husband and chairman and managing director of the company, it was submitted that the address of the appellant is different from that of the chairman and managing director of the company. They stay in different apartments constructed on the same plot which has been mistaken as same address. It was further submitted that the appellant's trades were independent of the corporate announcements and were never induced / driven by the said corporate announcement. The appellant was trading in the ordinary course according to her own commercial wisdom prior to the corporate announcements, during the said corporate announcements and post corporate announcements. The appellant had not only 5 bought the shares but had also sold the shares which belies the allegation that she was acting on the basis of unpublished price sensitive information.
4. With a view to appreciate the rival contentions, it is necessary to refer to the relevant provisions of the regulations which have a bearing on the allegation against the appellant and these provisions are reproduced hereunder for facility of reference:
"2(c) "connected person" means any person who--
(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956), of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act; or
(ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.
Explanation :--For the purpose of clause (c), the words "connected person" shall mean any person who is a connected person six months prior to an act of insider trading;
(e) "insider" means any person who,
(i) is or was connected with the company or is deemed
to have been connected with the company and is
reasonably expected to have access to unpublished price sensitive information in respect of securities of company, or
(ii) has received or has had access to such unpublished price sensitive information ;
(h) "person is deemed to be a connected person", if such person--
(i) is a company under the same management or group, or any subsidiary company thereof within the meaning of sub-section (1B) of section 370, or sub-
section (11) of section 372, of the Companies Act, 1956 (1 of 1956), or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case may be;
(ii) is an intermediary as specified in section 12 of the Act, Investment company, Trustee Company, Asset Management Company or an employee or director 6 thereof or an official of a stock exchange or of clearing house or corporation;
(iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or, is member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who has a fiduciary relationship with the company;
(iv) is a Member of the Board of Directors, or an employee, of a public financial institution as defined in section 4A of the Companies Act, 1956;
(v) is an official or an employee of a Self-regulatory Organisation recognised or authorised by the Board of a regulatory body;
(vi) is a relative of any of the aforementioned persons;
(vii) is a banker of the company.
(viii) relatives of the connected person; or
(ix) is a concern, firm, trust, Hindu undivided family, company or association of persons wherein any of the connected persons mentioned in sub-clause (i) of clause (c), of this regulation or any of the persons mentioned in sub-clause (vi), (vii) or (viii) of this clause have more than 10 per cent of the holding or interest;
(ha) "price sensitive information" means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.
Explanation.--The following shall be deemed to be price sensitive information :--
(i) periodical financial results of the company;
(ii) intended declaration of dividends (both interim and final);
(iii) issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects.
(v) amalgamation, mergers or takeovers;
(vi) disposal of the whole or substantial part of the
undertaking; and
(vii) significant changes in policies, plans or operations of the company;7
(k) "unpublished" means information which is not published by the company or its agents and is not specific in nature.
Explanation.--Speculative reports in print or electronic media shall not be considered as published information.
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) communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities :
Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law.
4. Any insider who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of insider trading."
5. It will be seen that regulation 3, among others, prohibits an insider, either on his own behalf or on behalf of any other person, from dealing in securities of a company listed on any stock exchange when he is in possession of any unpublished price sensitive information and any person who deals in securities in contravention of regulation 3 is said to be guilty of insider trading.
6. In the case before us, the learned counsel for the appellant has not disputed that the appellant can be treated to be a person deemed to be connected person within the meaning of regulation 2(h) of the regulations and also that the information with regard to declaration of financial results, dividend and bonus was price sensitive information. However, he vehemently argued that to prove the charge under regulation 3, it must be brought on record that the appellant traded on the basis of unpublished price sensitive information. According to the learned counsel for the appellant, there is no material whatsoever brought on record by the adjudicating officer to show that the appellant traded on the basis of price sensitive information. 8
7. We have given our thoughtful consideration to the provisions of the regulations and to the facts of the case and are inclined to agree with learned counsel for the appellant that his case stands on a different footing as compared to the three cases disposed of by this Tribunal in the case of Ranjana R Kothari, referred to above and that the appellant has not traded on the basis of unpublished price sensitive information. The prohibition contained in regulation 3 of the regulations apply only when an insider trades or deals in securities on the basis of any unpublished price sensitive information and not otherwise. It means that the trades executed should be motivated by the information in the possession of the insider. If an insider trades or deals in securities of a listed company, it may be presumed that he / she traded on the basis of unpublished price sensitive information in his / her possession unless contrary to the same is established. The burden of proving a situation contrary to the presumption mentioned above lies on the insider. If an insider shows that he / she did not trade on the basis of unpublished price sensitive information and that he / she traded on some other basis, he / she cannot be said to have violated the provisions of regulation 3 of the regulations. Going by the facts of the present case, we are of the view that appellant in the present case has placed sufficient material on record to show that she has not traded on the basis of unpublished price sensitive information. It is a matter of record that in April, 2005, disclosure was made by the company to the stock exchange that due to family arrangement Uttam Kumar Kothari, husband of the appellant, has relinquished his interest in the company as promoter. It is also a matter of record that the appellant used to trade regularly in the shares of the company and her trades were genuine transactions carried out by her in the normal course of business. We are also inclined to accept the argument of the learned counsel for the appellant that where an entity is privy to unpublished price sensitive information it will tend to purchase shares and not sell the shares prior to the unpublished price sensitive information becoming public if the information is positive. In this case declaration of financial results, dividend and bonus were positive information but the appellant not only bought but also sold the shares not only during the period when the price sensitive information was unpublished but also prior to and after the information 9 becoming public. A person who is in possession of unpublished price sensitive information which, on becoming public is likely to cause a positive impact on the price of the scrip, would only buy shares and would not sell the shares before the unpublished price sensitive information becomes public and would immediately offload the shares post the information becoming public. This is not so in the case under consideration. The trading pattern of the appellant, as shown in the chart above, does not lead to the conclusion that the appellant's trades were induced by the unpublished price sensitive information. We are not inclined to agree with the learned counsel for the respondent that appellant's case is covered by the earlier decision of this Tribunal in the case of Ranjana R Kothari, referred to above. In that case, the learned authorized representative of the appellant admitted that charge of insider trading stood established against the appellant. Further, appellants in that appeal only purchased the shares while in possession of unpublished price sensitive information and there was no trading by them prior to or after the information becoming public. In the case in hand the charge of trading on the basis of unpublished price sensitive information has not only been denied by the appellant, it has also been able to demonstrate through her trading pattern that the trading was not based on the unpublished price sensitive information. We, therefore, cannot uphold the impugned order.
In the result, the appeal is allowed and impugned order set aside with no order as to costs.
Sd/-
P.K. Malhotra Member Sd/-
S.S.N. Moorthy Member 31.01.2012 Prepared and compared by:
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