Securities Appellate Tribunal
Mr. Kunal Ashok Kashyap & Another vs Sebi on 20 January, 2025
IN THE SECURITIES APPELLATE TRIBUNAL AT
MUMBAI
DATED THIS THE 20TH DAY OF JANUARY, 2025
CORAM : Justice P. S. Dinesh Kumar, Presiding Officer
Ms. Meera Swarup, Technical Member
Dr. Dheeraj Bhatnagar, Technical Member
Appeal No. 542 of 2021
1. Mr. Kunal Ashok Kashyap
D-11, Epslon Layout,
Yemalur, Bangalore - 560 037.
2. Allegro Capital Pvt. Ltd.
No. 2, 9th Floor,
The Residency Road,
Bangalore - 560 025. .... Appellants
Mr. Pesi Modi, Senior Advocate with Mr. Abishek Venkataraman,
Ms. Kalpana, Ms. Smriti Singh, Mr. Khushil Shah, Advocates i/b
Zerick Dastur, Advocates for the Appellants.
And
Securities & Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. .... Respondent
2
Mr. Gaurav Joshi, Senior Advocate with Ms. Nidhi Singh, Ms.
Komal Shah, Ms. Deepti Mohan, Mr. Nishin Shrikhande, Mr. Harish
Ballani, Advocates i/b Vidhii Partners for the Respondent.
THIS APPEAL IS FILED UNDER SECTION 15T OF SEBI
ACT, 1992 TO SET ASIDE ORDER DATED JULY 8, 2021 (EX-
A) PASSED BY SEBI.
THIS APPEAL HAVING BEEN HEARD AND RESERVED
FOR ORDERS ON AUGUST 30, 2024, COMING ON FOR
PRONOUCEMENT OF ORDER THIS 20TH DAY OF
JANUARY 2025, THE TRIBUNAL MADE THE FOLLOWING:
ORDER
Per: Dr. Dheeraj Bhatnagar, Technical Member This appeal is directed against order dated July 8, 2021 passed by the WTM1 of SEBI2 charging the appellants for insider trading and restraining the appellants from dealing in the securities market and directing to disgorge an amount of Rs. 24,68,751/- and to pay penalties mentioned in the order.
2. Brief facts of the case are as under :-
1
WTM - Whole Time Member 2 Securities and Exchange Board of India 3 i. The appellant No. 1 is a CA, who is also the CMD and holds 99.98% equity in the appellant No. 2 company. The appellant No. 2 is into the business of providing financial services. Biocon3 (called as "company") is a prominent biopharmaceutical company engaged in research and manufacturing of pharma ingredients. iii. SEBI noted that Biocon had made an announcement on January 18, 2018 at 15:44 hrs. at BSE4 regarding its exclusive global collaboration with Sandoz on next- generation Bio-similars. Observing that certain persons had traded in the scrip of Biocon while in possession of UPSI5 relating to the above, SEBI carried out investigation for violation of PIT Regulations, 20156, during the period December 4, 2017 to January 18, 2018 ("Investigation Period").
iv. A common show cause notice dated August 3, 2020 was issued to both appellants. SEBI noted that the appellant No. 1 was in frequent communication with the officers of the company (including CEO and CFO). He was a 3 Biocon - M/s Biocon Ltd.4
BSE - Bombay Stock Exchange 5 UPSI - Unpublished Price Sensitive Information 6 PIT Regulations - SEBI (Prohibition of Insider Trading) Regulations, 2015 4 director in Mazumdar Shaw Medical Foundation, a not- for-profit entity of the promoters of Biocon. Further, it was noted that the appellant No. 2 was providing brokering services to the CMD and joint CMD of the Biocon Ltd.
v. Allegedly noticee No. 1 was providing consulting services to Biocon with regard to another deal of Biocon with CIMAB, a Cuban company, with regard to licensing of their product, a molecule namely, Itolizumab and its further sub-licensing to a US-based company M/s. Equilibrium Inc. during the period January 2017 to July 2017 and continued with the engagement subsequently for compliance with the conditions of subsequent clauses up to December 2017. During this consulting assignment, he was in regular connection with Mr. Arun Chandavarkar (CEO & Joint MD) and Mr. Siddharth Mittal, CFO, both of whom were directly involved in negotiations on the Sandoz deal as also in the CIMAB licensing deal. SEBI inferred that the appellant No. 1 being in frequent and regular communication with the senior officials of Biocon had direct knowledge of the UPSI. In view of this, SEBI 5 held appellant No. 1 as a 'connected person' under Regulation 2(1)(d)(i) of the PIT Regulations and thereby held him as 'insider' within the meaning of Regulation 2(1)(g)(i) of the PIT Regulations. Since, appellant No. 1 had 99.99% equity in the appellant No. 2, the latter being an artificial person, the appellant No. 2 was indirectly held through appellant No. 1 as a 'connected person'. vi. The SEBI also noted that within just four days before completion of the UPSI period, the appellant No. 1 purchased 4,000 shares of Biocon on January 18, 2018 whereas the appellant No. 2 purchased 50,000 shares of Biocon on January 15, 2018 and 35,000 shares on January 18, 2018. Based on the finding that the appellants were 'insiders', it was held by the learned WTM that the trading in the Biocon scrip during the UPSI period was based on the UPSI.
In view of this, the learned WTM has issued the following directions to the appellants :-
(a) An amount of Rs. 24,68,751/- on account of notional profit earned by the two appellants based on the closing price of Biocon as on January 19, 2018 i.e. Rs. 569.85/-, as 6 reduced by the purchase price held as wrongful gain, and appellants have been jointly and severally directed to disgorge the same.
(b) In addition, a penalty of Rs. 10 lakh each has been levied on both the appellants separately under Section 15G(i) of the SEBI Act, 19927.
(c) Lastly, both appellants have been restrained from dealing in the securities market for a period of one year from the date of the order.
Aggrieved by this order, appellants have filed this appeal.
3. Before us, Mr. Pesi Modi, learned senior advocate for the appellants and Mr. Gaurav Joshi, learned senior advocate for the respondent SEBI have made detailed submissions.
4. Mr. Pesi Modi submitted that even though the appellant was working in advisory capacity on CIMAB deal during January to July 2017, and continued till December 2017 for compliance with condition subsequent clauses, there is no evidence that he had access to the UPSI relating to the Biocon-Sandoz deal. He submitted that 7 SEBI Act - Securities & Exchange Board of India Act, 1992 7 Biocon has a robust Code of processes and procedures for disclosure of UPSI and UPSI is shared with only concerned employees of the company and certain designated persons on 'need to know' basis upon signing of a confidentiality undertaking / non-disclosure agreement. Since the appellant was not considered as a designated person qua the Biocon-Sandoz deal, no such agreement was signed with him. On the other hand, in respect of CIMAB licensing deal on July 3, 2017, an advisory agreement was got signed between Biocon and the appellant No. 1, which had confidentiality covenants. In view of this, it was submitted that since the company did not treat him as a designated person with whom UPSI could have been shared, he cannot be treated as a 'connected person'.
4.1 Secondly, rebutting the allegation that working on the CIMAB licensing deal with CEO and CFO of the company, who were also dealing with Sandoz deal, implies frequent communication of the appellants with KMPs and provides access to UPSI to the appellants, learned senior advocate argued that 'frequency of the communication' is not but 'purpose of communication' is relevant to reach to the finding whether appellants had access to UPSI or not. 8 4.2 Thirdly, regarding the argument that the appellant had frequent communication with KMPs, being a director in Shaw Mazumdar Medical Foundation and a CEO and MD of the appellant No. 2, which handled the trading accounts of Mrs. Kiran Majumdar Shaw, CMD as also of the Joint CMD and CEO, Mr. Modi submitted that the same only implies a tenuous connection, which does not necessarily imply that the appellants had access to UPSI. 4.3 Fourthly, it was submitted that there is no evidence that such communication may have resulted in sharing of UPSI as no evidence in the form of any phone calls or emails was brought on record and hence no channel of communication could be established. He submitted that Biocon has not been charged at all for alleged sharing of UPSI at their end. In this regard, the learned senior advocate relied upon the decisions in the case of Samir Arora vs. SEBI [(2004) SCC Online SAT 90] and Shruti Vora (Appeal Lodging No. 28 of 2020 decided on February 12, 2020), in which it was held that linkage with the source of UPSI need to be proved. Relying upon the decision of Hon'ble Supreme Court of India in the case of Balram Garg vs. SEBI [(2022) 9 SCC 425], it was submitted that SEBI was required to prove the flow of communication of UPSI and in the 9 absence thereof, the charge of having access to UPSI cannot be proved.
5. In response, the learned senior advocate for the SEBI, Mr. Gaurav Joshi submitted that it is an admitted position that the appellant No. 1 was not only connected with the Equillbrium transaction and CIMAB Licensing Deal, but was also an independent Director in Mazumdar Shaw Medical Foundation. He also provides broking services through appellant No. 2 to the promoters and the then CEO and Joint MD, Mr. Arun Chandavarkar, who had access to UPSI. This indicates that first appellant was in frequent communication with the promoters and KMPs of Biocon, who were directly involved in negotiations for the Sandoz deal and the CIMAB Licensing Deal, both.
5.1 Adverting to the trading behavior, Shri Joshi submitted that there was no trading by the first appellant in Biocon scrips after August 16, 2017 till January 18, 2018 for five months in pre-UPSI phase and he had purchased 1,32,500 shares as on August 16, 2017.
He pointed out that prior to buying 85,000 shares of Biocon during UPSI period, appellant No. 2 purchased only 14,500 shares till September 7, 2016. Similarly, the first appellant had executed 10 only 4 trades of Biocon in 2016 aggregating to 20,500 shares. However, once he started advising Biocon on the Equilibrium / CIMAB project, he bought 1,32,500 shares till August 16, 2017. Shri Joshi urged that the trading pattern of both the appellant clearly shows that they had bought a total number of Biocon shares equivalent to 60.54% on just two days during the UPSI period. He submitted that the Sandoz contract was published on January 18, 2018 after the trading time. The purchase of shares by the appellants during the UPSI period is as follows:
Trading during UPSI Period Appellant Date Gross Buy Quantity Gross Sell Quantity Kunal Ashok 18-01-2018 4,000 0 Kashyap Allegro Capital Pvt. 15-01-2018 50,000 0 Ltd.Allegro Capital Pvt. 18-01-2018 35,000 0
Ltd.
5.2 It was submitted that the combined buy trade value of the appellants in Biocon scrip in these two days during UPSI period was Rs. 4.80 crore, whereas the Gross buy value in other scrips during this period was only Rs. 21.39 lakh. Further, in contrast, between January 2016 and March 2018, both appellants had bought shares of IDFC for Rs. 1.23 crore only.11
5.3 He submitted that on the facts of the case, the decision of the Hon'ble Supreme Court in the case of Balram Garg (supra) is distinguishable, since in that case the appellants were treated as 'insiders' by alleging that they were 'connected person' within the meaning of Regulation 2(1)(d) of the PIT Regulations. It was argued that the learned WTM expressly rejected application of Regulation 2(1)(d) in this case and the charge was based on establishing that the appellants were 'insiders' within the meaning of Regulation 2(1)(g)(ii) of the PIT Regulations, being 'persons having access to UPSI', which was established on facts, on the following grounds:
(i) direct association of the Appellant No. 1 with the management/ KMPs of Biocon on account of consultancy services/ business relationship with Biocon in respect of the CIMAB Licensing Deal;
(ii) apparent close connection of Appellant No. 1 with the promoter and CEO and Joint Managing Director of Biocon through the Appellant No. 2, which provides broking services to them;
(iii) Appellant No. 1 is also a director on the board of charitable foundation of the promoters of Biocon;12
(iv) Admitted frequent communication of the Appellant No. 1 with the CEO and CFO of Biocon before and during the UPSI period, who were concurrently working on the Sandoz deal (being the UPSI in question).
5.4 The learned senior advocate also relied upon the decision of the Hon'ble Supreme Court in the case of SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368], which emphasizes the standard of proof of 'preponderance of probability' in arriving at an inferential conclusion from the proved and admitted facts so long as the same are reasonable and can be legitimately arrived at, on a consideration of totality of facts and material. This has not been disturbed in the Balram Garg (supra) case.
5.5 Mr. Joshi submitted that the Hon'ble Supreme Court, in the case of Chintalapati Srinivasa Raju vs. SEBI [(2018) 7 SCC 443] has affirmed the law laid down in the Kishore R. Ajmera (supra) case of drawing 'reasonable inferences on foundational facts'. He also drew our attention to the case of SEBI vs. Abhijit Rajan [2022 SCC Online 1241], which held that the test in such cases is that of 'preponderance of probabilities' by applying the process of inferential conclusion drawn on foundational facts. Further, reliance 13 was also placed on decisions of this Tribunal in the case of Utsav Pathak vs. SEBI, Navin Kumar Tayal & Anr. vs. SEBI and Ameen Khwaja & Ors. vs. SEBI, V. K. Kaul vs. SEBI drawing the same ratio.
6. We have carefully considered the rival submissions and the evidence on record. Based on the same, we frame the following questions for deciding the appeal:
A. Whether the noticees are 'insiders' in terms of Regulation 2(1)(g) of the PIT Regulations, being 'connected persons'? 6.1 Undoubtedly, the information in question pertaining to global collaboration of Biocon Ltd., a prominent Indian bio-pharmaceutical company with Sandoz, a division of Novartis, a multi-national pharma giant, had strong probability of materially affecting the price of the scrip when such information was to be made public. The evidence on record suggests that when this information became public on January 18, 2018, the market price of the scrip of Biocon reached 52 weeks' high on the next day, which was 5.6% higher than the preceding day. In view of this, undisputedly this information was 'UPSI' under Regulation 2(1)(n) of the PIT Regulations. Moreover, Biocon itself in terms of its Code of procedure and processes had 14 treated this information as UPSI. Having held thus, we need to decide whether the appellants were 'insiders' under the PIT Regulations.
6.2 In terms of Regulation 2(1)(d)(i) of the PIT Regulations, a "connected person" is defined as under : -
"any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access". (emphasis supplied) 6.3 We find that appellant No. 1 was closely associated with KMPs,8 of Biocon being the independent director in M/s. Mazumdar Shaw Medical Foundation, the not-for-profit arm of the promoters of Biocon Ltd. In addition, the wholly owned company M/s. Allegro Capital Advisors Ltd. (appellant No. 2), his share broking arm, was managing the trading accounts of Mrs. Kiran Mazumdar Shaw, CMD and also of Mr. Arun Chandawarkar (CEO and Joint MD). He 8 KMP - Key Managerial Person 15 evidently enjoyed the trust and confidence of the promoters of Biocon and KMPs including CEO and CFO. We find that the appellant No. 1 was also working in advisory capacity with Biocon on the CIMAB licensing deal from January to July, 2017 and thereafter December 2017. In view of this, undoubtedly he was in 'frequent communication' with KMPs and also in 'contractual relationship' with the company.
6.4 Both the CIMAB and Sandoz had cross-border collaborations for different products, the first one with the Cuban research company CIMAB and the second one with Sandoz-Novartis, ostensibly for 'business expansion' of the company. With regard to CIMAB licensing deal, Biocon had first established a joint venture company with CIMAB in 2004 and later in 2010 acquired the entire shareholding in the joint venture Biocon Biologicals Ltd. The Equilibrium deal had two related limbs i.e. (i) a licensing agreement with CIMAB (Cuba) for acquiring rights to carry out research / manufacturing of anti-CD6 monoclonal antibody molecule in its geography; and (ii) for sub-licensing the same to M/s. Equilibrium Inc. (USA) to allow the latter to use the license in its territory. 16 Simultaneously, Biocon was negotiating another deal with Sandoz, (a division of Novartis), for research and manufacturing of certain Bio-similar pharmaceuticals in the respective geography in terms of their agreement. Appellant was an advisor for the first deal and not for the second.
6.4.1 We also note that the appellant was bound by a confidentiality agreement signed on July 3, 2017 with regard to CIMAB-Biocon deal and yet carried out significant transactions in Biocon scrip till August 16, 2017. With respect to CIMAB deal, admittedly, the work on the deal started in January 2017 and continued till completion of Conditions subsequent clause till December 2017, though the confidentiality agreement was signed in July 2017, which places question on robustness of the code of Conduct followed by the company, an argument taken by the learned senior advocate for the appellant. It is also noteworthy that during January 2017 till August 16, 2017, the appellants made significant purchase of 1,32,500 shares of Biocon. The licensing deal with CIMAB / its sub-licensing to Equilibrium Inc., both are in the nature of 'business expansion' and hence information pertaining to it could also materially affect the price of the scrip, when made public. However, it is not a subject-matter of the dispute. 17 6.4.2 Generally cross-border agreements for mergers / acquisitions, licensing/sub-licensing in a company are by a dedicated, expert in- house team supported by professional advisors, having knowledge of valuation, pricing, cross-border laws, etc. In the best interests of the company, work on such deal is done in a confidential manner. When more than one such deal is in progress, the other deal team is reasonably expected to be the in-house support system, if any inputs / validation is needed. We note that the joint CMD and CEO and CFO of the company were closely associated with both the Sandoz and CIMAB deals and, therefore, their experience of one deal would be effectively used for the other deal. The appellant No. 1 was undisputedly in regular communication with both of them. Considering the overlapping of information and foundational facts needed for building of such deals, it cannot be ruled out that these M&A teams working in the same organization had no inkling of developments in other deals. There is rather a high probability that in contrast with the rest of the universe, one person upon whom, other than the designated persons for Sandoz deal, could be relied 18 upon for building Sandoz deal, was appellant No. 1 being an expert on cross-border collaboration.
6.4.3 We note that, the appellant No. 1 (through the appellant No.
2) was handling the trading account of Mrs. Kiran Mazumdar Shaw (CMD) herself and of Mr. Arun Chandawarkar, Joint CMD and CEO, which gives close access to them.
Undisputedly, the appellant No. 1 was in close association with KMP of Biocon and Mr. Arun Chandawarkar, CEO and joint MD of Biocon and CFO of Biocon Mr. Sidharth Mittal both were directly involved in the negotiations on the Biocon-Sandoz deal as also in CIMAB licensing deal. In view of this, appellant No. 1 was undoubtedly in frequent and regular communication with senior managerial persons of Biocon, who had direct knowledge of UPSI. Keeping in view this and considering the twin sensitive assignment being handled by the appellant No. 1 - (a) advising on CIMAB licensing deal, which allowed him frequent access to CEO and CFO during the year long deal period while these KMPs were also negotiating the Sandoz deal; and (b) handling trading accounts of the CMD and Joint CMD of the company, we hold that the 19 preponderance of probabilities test was correctly applied by the learned WTM.
6.4.4 In the light of above discussion, we hold that the appellant nos. 1 is a 'connected person' in terms of Regulation 2(1)(g)(i) of the PIT Regulations by having access to UPSI, and the appellant No. 2 is a 'connected person' in terms of Regulation 2(1)(d)(i) of the PIT Regulations.
B. Whether the trading behavior of the appellant's shows that they were in possession of UPSI ?
7. In terms of the PIT Regulations, if a person is held to be an 'insider', any trades made by him during the UPSI period are deemed to be on the basis of the knowledge of such UPSI. We note that the learned WTM has analyzed the trading behavior of the appellants during the pre-UPSI, UPSI and post-UPSI period and rightly held that the appellant may be reasonably held to be a 'connected person'. In our considered view, the fact that there was a spike in the trading of Biocon within four days of the said UPSI period suggests that such trades were made based on the knowledge of the UPSI. Considering this, we find no error in the finding recorded by the learned WTM that there was a strong 'preponderance of probability' that the trades 20 executed by the appellants in Biocon during the UPSI period, were guided by UPSI on account of appellants being 'insiders'. 7.1. We are also in agreement with the finding of the learned WTM of holding the appellants as 'connected persons' within the meaning of Regulation 2(1)(d)(i) of the PIT Regulations and not on the basis of 'possession of UPSI' under the Regulation 2(1)(g)(ii) of the PIT Regulation, which distinguishes ruling in case of Balram Garg (supra). In our considered view, in case of 'insider trading', the evidence cannot be direct but circumstantial, since evidence with respect to communication channel may not be on record. Often such sensitive information in case of 'connected persons' falling under 2(1)(d)(i), need not be necessarily through an email or a letter because, in the instant case, appellant was admittedly working closely with joint CMD & CEO and CFO on cross-border licensing deal and was in frequent communication with them for a long period of time, while they were simultaneously working on another cross- border deal (Sandoz-Biocon deal).
8. In view of the above, we pass the following :-
21
ORDER i. The appeal is dismissed.
ii. No costs.
Justice P. S. Dinesh Kumar Presiding Officer Ms. Meera Swarup Technical Member Dr. Dheeraj Bhatnagar Technical Member 20.01.2025 MRS Digitally signed by MRS PRAMILA PRAMILA Date: 2025.01.22 11:53:15 +05'30' PTM