Securities Appellate Tribunal
Avadhoot L. Shilotri vs Securities And Exchange Board Of India on 21 May, 2004
ORDER
Kumar Rajaratnam, J. (Presiding Officer)
1. Appeal is taken up for disposal with consent of both parties.
2. Avadhoot Shilotri is the appellant in this appeal (hereinafter referred to as the "appellant"). The appellant challenges the order passed by the respondent Securities & Exchange Board of India dated 2.1.2004.
3. The operative portion of the order passed by the respondent reads as follows:-
"In view of the above, in the interests of investors and in order to protect the integrity of the securities market it is imperative to prohibit Shri A.L. Shilotri from dealing in securities for a particular period. Therefore, in exercise of the powers conferred on me vide Section 19, 11(4) (b) and 11B of the SEBI Act and Regulation 11 of the SEBI (Insider Trading) Regulations, 1992, I hereby direct that Shri A.L. Shilotri shall dissociate himself from the securities market and that he shall not deal in securities henceforth for a period of 6 months."
4. The facts very briefly are as follows. The appellant was the President and Chief Executive officer of Nishkalp Investment and Trading Co. (hereinafter referred to as "Nishkalp"). Nishkalp was wholly owned by Tata Finance Ltd. (hereinafter referred to as "TFL"). The period relates to 6.2.2001 to 20.7.2001. Prior to this the appellant was the Vice-President (Investment) of TFL, which is listed in the Stock Exchange, Mumbai.
5. The respondent ordered a preliminary investigation on 28.8.2001into certain alleged manipulation and inside trading in the shares of TFL by one Talaulicar. Talaulicar was the Chairman of the Nishkalp. He was also a director of TFL.
6. The preliminary investigation by SEBI revealed that Talaulicar and his family members received a sum of Rs. 69 lakhs from the brokers JIP Investments and the sub-brokers JHP Securities Pvt. Ltd. on 31.3.2001. Talaulicar in return handed over 1 lakh shares of TFL on 4.4.2001 to JIP. Obviously, this amount was the consideration for the sale of the shares at the rate of Rs. 69 per shares.
7. This transaction according to SEBI involved insider trading by Talaulicar and the managing director of Nishkalp, Dilip S. Pendse of TFL in concert with the appellant.
8. The background appears to be that TFL had presented a rosy picture and had decided to come out with a rights issue in January 2001. This was confirmed by a resolution of TFL dated 29.1.2001. Talaulicar was also a director of TFL and was present at the meeting.
9. On 31.3.2001 people inside the management of Nishkalp knew that Nishkalp had incurred an enormous loss of Rs.79.37 crores. This information was available to the insiders such as Talaulicar, Pendse and the appellant on 31.3.2001. This loss on the part of Nishkalp would have adversely affected the profits of TFL.
10. It is common ground that on 30.4.2001 TFL discloses to the public and shareholders that there was substantial erosion in the value of the stocks held by it. More particularly Nishkalp had made an enormous loss of Rs.79.37 crores as on 31.3.2001. 31.3.2001 is the crucial date when inside information was available that Nishkalp had incurred a loss of Rs.79.37 crores. On 30.4.2001, it became public. Therefore any transaction between 31.3.2001 and before 30.4.2001 would be an attempt to take advantage of the sensitive information available to Nishkalp and TFL and if that results in the offloading of the shares by an insider, that would be in violation of the Regulations. Therefore it is necessary to remember three dates:
1. January 2001, when a bright picture was presented to the public about Nishkalp and TFL;
2. 31.3.2001, when inside information was available that Nishkalp had made an enormous loss; and
3. 30.4.2001, when the knowledge of loss became known to the public.
Therefore any transaction by an insider from 31.3.2001 till 30.4.2001 would be in violation of the Regulations.
11. It is curious to note that on 31.3.2001 it is the shares of Talaulicar which were sought to be offloaded as Mr. Talaulicar and Pendse and the appellant would have known that at 30.3.2001 there would have been a substantial reduction in the value of the shares. The appellant was the President and the Chief Executive officer of the Nishkalp at the relevant time. Prior to that the appellant was the Vice President (Investment) in TFL. Therefore, the appellant was admittedly an insider and by no stretch of imagination can it be stated that he was not an insider.
12. The next question that arises for consideration is, did the appellant act in concert with the other two members namely Talaulicar and Pendse. Regulation 2(e) of the Insider Trader Regulation as it then was reads as follows.
"an "insider" means any person who is or was connected with the company or is deemed to have been connected company and who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company, or, who has received or has had access to such unpublished price sensitive information."
13. We have to determine whether the appellant on the basis of the materials placed before us had access to unpublished price sensitive information in respect of securities of the company and by such information did the appellant collaborate with Talaulicar to get rid of the shares of TFL. These transactions obviously were before 30.4.2001 and till such time all 3 of them are insiders if they trade in the shares of TFL. We shall now deal with the role played by the appellant in his capacity as Chief Executive officer of the Nishkalp. The Nishkalp took extra ordinary step on 31.3.2001 to pay sum of Rs. 70 lakhs to the broker JHP knowing very well that on that very day Nishkalp had showed a loss of nearly Rs.79.37 crores. This transaction, as stated earlier, was on 30.4.2001. Therefore except Talaulicar, Pendse and the appellant, no other person would have known about erosion of profits of Nishkalp and TFL and on that very day, viz., 31.3.01, if shareof TFL is sold, there cannot be a better example of inside trading. The voucher in support of the appellant showed that the amount was paid as adhoc margin. The very next day this very sum of Rs. 69 lakhs was transfer from the account the broker JHP and sub-broker JIP. Still curiously, the books of accounts of the sub-broker namely JIP showed a payment of 69 lakhs to Talaulicar and his family. The payment of Rs. 70 lakhs was made by the Nishkalp to the broker on 30.3.2001. The amount of Rs. 69 lakhs was actually transferred to the sub-broker only on 31.3.2001. The books of the sub-broker shows that the payment has already been paid to Talaulicar and family on 30.3.2001. The payments reads as follows.
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Name Amount (in Rs.) ------------------------------------------ J.E. Talaulicar 24,15,000/- Aparna Talaulicar 15,52,000/- Sandeep Talaulicar 6,90,000/- Anant Talaulicar 6,90,000/- Usha Talaulicar 15,52,000/- Total 69,00,000/- ------------------------------------------
14. The payments were made in the form of 5 cheques which were banked by Talaulicar. Just 10 days before this transaction on 30.3.2001, the board of directors of TFL had shown a rosy picture. On 30.4.01 it was revealed that Nishkalp had made an enormous loss of Rs. 79.37 crores as on 31.3.2001. The sensitive information that this would affect the price of shares was available only to 3 persons namely Talaulicar, Pendse and the appellant. What was the role played by the appellant in offloading the shares? The role played by the appellant was that he along with Mr. Pendse had paid a sum of Rs. 70 lakhs to JHP Securities. The signature of the appellant has been admitted in the voucher. This very payment can be traced admittedly to the shares purchased for Talaulicar and his family members.
15. Mr. Divetre, learned counsel for the appellant tried to get over this aspect of the matter by submitting that the said payment to the broker by the Nishkalp which has the signature of the appellant was a routine nature and was a payment of adhoc margin. It was further submitted that the voucher of 30.3.2001 was prepared and submitted by the accounts department and the same was signed by the accounts department and by Pendse. The learned counsel also submitted that the investment in the equity investment division were the responsibility of one Karyekar who used to report to Ramanujam. The learned senior counsel for the appellant tried to get over the role of his client by submitting that it was only a matter of convenience so as to comply with the signature requirements since Ramanujam has his office in Andheri. It was further submitted that the appellant was never involved in day today operations. There was nothing unusual about Rs. 70 lakhs paid to the broker since it was an advance margin. It was further submitted that the Board of Directors of the Nishkalp had approved further investment up to Rs. 20 crore to be made by the broker on behalf of Nishkalp.
16. Can this Rs. 70 lakhs minus 1 lakh, in all 69 lakhs paid by Nishkalp be traced to this particular voucher. The answer is yes. It was signed by the appellant as the CEO of the Nishkalp and if ultimately this money goes into the pocket of Talaulicar in connection with the sale of the shares of TFL, then certainly it can be said that the appellant has played a role in this transaction. As far as the sensitive information is concerned, the appellant along with the 2 others were certainly in the knowledge that Nishkalp was doing badly and the shares of TFL is likely also not do well. The rosy picture that was given about TFL was obviously not the true picture since sensitive information about the health of Nishkalp was certainly within the knowledge of the appellant and to no one else. The appellant cannot escape the liability by saying that he had no knowledge that Nishkalp was doing badly and consequently TFL would also not do so well. The financial health of Nishkalp was in a bad shape and was very much within the knowledge of the appellant who was the chief executive. The appellant obviously knew that the losses made by Nishkalp would ultimately be reflected in the losses to be incurred by TFL . The appellant was privy to this information. If that be so, the appellant had helped Talaulicar with the help of Pendse to transfer a sum of Rs. 70 lakhs to the broker which in turn was identified as the consideration for sale of 1 lakh shares by Talaulicar of TFL. It is possible to argue that the role of Talaulicar and Pendse was direct in the transaction and the appellant only signed the voucher without any knowledge. The appellant cannot escape his responsibility in helping Talaulicar by transferring the huge sum of money to the broker which ultimately ended in the pocket of Talaulicar. No prudent businessman especially an experienced chief executive manager would mechanically initial voucher as adhoc margin without verifying the exact nature of the transaction. It is also admitted prior to being CEO of Nishkalp, the appellant was also associated with TFL. It was submitted by Mr. Devitre that at best the appellant could be held responsible for lack of due diligence before signing the voucher and there was no concert of mind to help Talaulicar.
17. This submission is attractive at first blush but the fact of the matter remains that this voucher in which the appellant signed can be traced to the direct sale of the shares of TFL and ultimately the consideration fell in the lap of Talaulicar. We are of the view that a person who holds such a high post could not have missed out the fact that this money was meant for Talaulicar for dumping the shares of TFL before the value of the shares came down. Obviously, from the sequence of events, the appellant had wanted to help Talaulicar to enable him to encash the shares knowing well that there was likely to be a fall in the value of the shares otherwise what was the need for the appellant to have signed the voucher for Rs. 70 lakhs and the entire amount minus 1 lakh was used for making payment to Talaulicar for sale of the shares of TFL.
18. The appellant in his own grounds of appeal admits that he was the President and CEO of Nishkalp and was involved in the identification and recognition of stock to be invested by Nishkalp. He however states that these investments were approved by the Board of Directors of Nishkalp or the investment committee. If that be so, the appellant cannot escape liability as CEO for the sum of Rs. 70 lakhs which went into the pocket of Talaulicar. We are not able understand how the appellant could not have known that this huge sum of money was meant for Talaulicar and not for investment in accordance with the parameters approved by the Board or the investment committee. It is not the investment committee or the Board that recommended that this money of Rs. 70 lakhs belonging to Nishkalp be used for the sale of Talaulicar share in TFL.
19. The explanation that Talaulicar wanted to take a loan and Pendse had suggested otherwise is a self serving statement which does not advance the case of the appellant. The appellant being the President and CEO cannot wash away his hands by saying that 70 lakhs given by Nishkalp and his endorsement was a routine nature and was meant for adhoc margin, when the appellant himself admits in his appeal grounds that he was responsible for the investment function of the equity investment division of Nishkalp. There is no doubt that the appellant was in grave error in putting an amount of Rs. 70 lakhs in the hands of the broker and the sub-broker. Why this was done now becomes clear since the appellant wanted to help Talaulicar to disinvest his holding in TFL. The appellant knew the bad state in which Nishkalp was and such sensitive information was not available with the general public at the relevant time. Accordingly, we have no hesitation in holding that the appellant was guilty in counselling Talaulicar and Pendse about the sensitive information within his knowledge about the state of affairs of Nishkalp which was a wholly owned subsidiary of TFL. If Nishkalp had made a huge loss which was obviously within the knowledge of the appellant, that would be reflected in the value of the stock of TFL and by no stretch of imagination can it be said that the appellant being the President of Nishkalp did not know about the sorry state of affairs of Nishkalp; if that was so, and if this voucher of Rs. 70 lakhs can ultimately be traced, as has been done for the sale of TFL, then the appellant is undoubtedly liable for the misconduct of inside trading.
20. It is further submitted by the counsel for the appellant that there was some over payment by the brokers and it was at the instance of the appellant that the appellant repaid whatever was paid in excess and therefore the appellant is innocent. We are unable to persuade ourselves to accept this proposition of law. There may be various reasons why the appellant requested Talaulicar to repay the excess amount and it is irrelevant for the purpose of this case.
21. It is brought to our notice by the counsel for the appellant that Mr. Pendse , was mainly responsible for the payment and was the arch villain in this transaction. He received a ban of only six months from market. Therefore it was submitted that it would be unfair to treat the appellant on the same footing. In this appeal, we are not concerned with the penalty imposed on Pendse. However it cannot be ruled out that the appellant acted only under pressure from Pendse and Talaulicar but with knowledge.
22. Counsel for the respondent also fairly agrees that there has been no pecuniary gain by the appellant.
23. The appellant submits that he has already been dismissed from service and is struggling to earn a living on account of difficulties faced by him.
24. In the facts and circumstances of the case, while upholding the punishment, we reduce the period from 6 months to 3 months. With this modification, the appeal is disposed of accordingly.
25. No order as to costs.