2024 TaxPub(CL) 178 (SAT-Mum)

SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

Section 12A

Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control - Appeal against imposition of penalty - Non-possession of UPSI during trade in scrips of company - Applicability of minimum penalty under section 15G

SEBI found that managing director traded in scrips of the company during possession of unpublished price sensitive information (UPSI). Further, he also failed to make necessary disclosure in violation of PIT Regulations. Therefore, the SEBI imposed penalty of Rs. 17 lakh upon the managing director of the company. The managing director filed an appeal against the order, as no scrips were traded during possession of UPSI in violation of section 12A. Held: Evidence that has come shows that the managing director traded on 4-5-2016 on which date there was no UPSI in existence. Therefore the trade on 4-5-2016 was not on the basis of being in possession of a UPSI nor was it based on he being an insider. Thus the finding of the SEBI that the managing director had traded while in possession of UPSI on 4-5-2016 is patently erroneous. Therefore, imposition of minimum penalty under section 15G is not applicable. The managing director had failed to make necessary disclosure in violation of PIT Regulations, therefore, substantial justice will be done if a penalty of Rs. 5 lakh is imposed. Thus, the penalty of Rs. 17 lakh was reduced to Rs. 5 lakh.

REFERRED :

FAVOUR : Partly in favour of appellant

A.Y. :

IN THE SECURITIES APPELLATE TRIBUNAL, MUMBAI BENCH

TARUN AGARWALA, PRESIDING OFFICER & MEERA SWARUP, TECHNICAL MEMBER

Prakash C. Kanugo v. SEBI

Misc. Application Nos. 1638 & 1639 of 2022, Appeal Nos. 709 & 710 of 2022

6 November, 2023

Appellant by: Prakash Shah, Advocate and Meit Shah

Respondent by: Suraj Chaudhary, Advocate Nidhi Singh, Deepti Mohan, Nishin Shrikhande, Komal Shah, Harish Ballani, Hubab Sayyed and Nidhi Faganiya

1. There is a delay in the filing of the appeals. For the reasons stated in the applications, the delay is condoned. The applications are allowed.

2. Noticee Nos. 1, 3 and 4 have challenged the order of the Adjudicating Officer ('AO' for short) of the Securities and Exchange Board of India ('SEBI' for short) dated 29-7-2022 through two different appeals questioning the imposition of penalty. Noticee no.1 who is the Managing Director has been imposed a penalty of Rs. 17 lakh, noticee no. 3 which is the Company has been imposed a penalty of Rs. 1 lakh and noticee no. 4 who is the Compliance Officer has been imposed a penalty of Rs. 1 lakh.

3. The facts leading to the filing of the present appeal is, that the Show Cause Notice (SCN) alleged that noticee no. 1, being the Managing Director of Prakash Steelage Ltd. ('PSL' for short) noticee no. 3, was an insider and was in possession of Unpublished Price Sensitive Information ('UPSI' for short) relating to the financial results of PSL for the period ended 31-3-2016 and had transferred 25,00,000 shares of PSL to noticee no. 2. It was alleged that though the shares were transferred on 31-3-2016 the consideration was received only on 30-3-2017 and 11-4-2017 after a gap of almost one year. It was also alleged that noticee no. 1 failed to make necessary disclosures under Regulation 7(2)(a) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 ('PIT Regulations' for short). It was also alleged that noticee no. 3 also failed to make necessary disclosures to the Stock Exchange under Regulation 7(2)(b) of the PIT Regulations and that noticee no. 4 being the Company Secretary and Compliance Officer of the Company failed to discharge her responsibility as Compliance Officer. Accordingly, a Show Cause Notice, dated 5-4-2022 was issued to show cause as to why an enquiry should not be initiated and why a penalty should not be imposed.

4. The AO after considering the material evidence on record held that there was no delay in the initiation of the proceedings. The AO held that the investigation for insider trading involved a very complex and lengthy procedure and huge amount of transactions was required to be examined which required extra diligence and effort. It was also stated that the process of investigation in such cases are complex and involved collection of data, examining that data and appreciation of evidence which took time. It was further held that there is no limitation prescribed under SEBI Act, 1992 for initiating proceeding for violation of securities laws and therefore there is no delay in the initiation of the proceedings.

5. The AO found that the UPSI period was from 15-3-2016 to 30-5-2016. The financial results were being prepared and noticee no. 1, being the Managing Director was in possession of UPSI. The AO found that the noticee no. 1 is an insider under the PIT Regulations and that he had traded on 4-5-2016 transferring 25,00,000 shares to noticee no. 2 while in possession of UPSI and therefore violated section 12(A)(d) & (e) of the SEBI Act read with Regulation 4(1) and Regulation 7(2)(a) of the PIT Regulations. The AO found that the disclosure made by noticee no. 1 on 9-5-2016 to the Stock Exchange as well as to the Company under Regulation 31(1) and 31(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ('SAST Regulations' for short) was not applicable in as much as the disclosure was required to be made under Regulation 7(2)(a) of the PIT Regulations.

6. Similarly, the AO came to the conclusion that the Company, noticee no. 3 and the Compliance Officer, noticee no. 4 made wrong disclosures on 9-5-2016 under Regulation 31 of the SAST Regulations whereas they were required to be make the disclosure under Regulation 7(2)(a) of the PIT Regulations. The AO accordingly held that since there was violation of PIT Regulations and necessary disclosure had not been made and that the noticee no. 1 had traded while in possession of UPSI. The AO accordingly imposed penalties upon noticee nos. 1, 3 and 4.

7. We have heard Shri Prakash Shah, the learned counsel with Shri Meit Shah, Authorised Representative for the appellants and Shri Suraj Chaudhary, the learned counsel with Ms. Nidhi Singh, Ms. Deepti Mohan, Shri Nishin Shrikhande, Ms. Komal Shah, Shri Harish Ballani, Ms. Hubab Sayyed and Ms. Nidhi Faganiya, the learned counsel for the respondent.

8. The AO in paragraph 30 had referred the UPSI period from 15-4-2016 to 30-5-2016. How has he arrived at this period is not known. There is no discussion as to why the starting period of UPSI has been taken to be 15-4-2016. Presumably, the AO may have been influenced by the chronology of events relating to financial results for the quarter ended 31-3-2016 as depicted in the chart in paragraph 27 of the impugned order which states that finalization of accounts internally started from 15-4-2016 to 30-4-2016. In our view 15-4-2016 cannot be made the starting point of UPSI as there is nothing on record to indicate that UPSI came into existence on 15-4-2016. The chart in paragraph 27 only depicts that the finalization of the accounting started internally with effect from 15-4-2016. It does not show that UPSI came into existence on that day itself. Item no. 2 indicates that the statutory audit commenced from 3-5-2016. Even this does not indicate that UPSI came into existence on 3-5-2016. Item no. 3 of this chart indicates that the draft financial accounts was submitted to the management on 18-5-2016. In the absence of any other details, we are of the opinion that the price sensitive information, if any, with regard to the financial results came into existence for the first time on 18-5-2016 when the draft financial accounts was submitted to the management. We also notice that the AO in paragraph 30 has itself held that there is a strong presumption that the transfer of shares by noticee no. 1 on 4-5-2016 was made on the basis of UPSI. This clearly indicates that even the AO was not sure of the UPSI period.

9. The noticee no. 1, being the Managing Director was a Key Managerial Personnel (KMP) and therefore was an insider under Regulation 2(g) of the PIT Regulations. However, the evidence that has come shows that the noticee no. 1 traded on 4-5-2016 on which date there was no UPSI in existence. Therefore the trade on 4-5-2016 was not on the basis of being in possession of a UPSI nor was it based on he being an insider. Thus the finding of the AO that the noticee no. 1 had traded while in possession of UPSI on 4-5-2016 is patently erroneous.

10. According to the show cause notice, noticee no. 1 was required to make necessary disclosure of the transfer under Regulation 7(2)(a) of the PIT Regulations whereas the contention of the noticee no. 1 is, that he had only encumbered his shares to noticee no. 2 and necessary disclosure of encumbered shares was made under Regulation 31 of the SAST Regulations on 9-5-2016. It was stated that under Regulation 31(3) of the SAST Regulations the disclosure was required to be made within seven days which the noticee no. 1 had made within the stipulated period.

11. The arguments of the appellants appears to be attractive but we find that this submission cannot be accepted as we find that there is a Letter, dated 4-5-2016 issued by noticee no. 1 to noticee no. 2 intimating them that pursuant to the transfer of the shares noticee no. 2 becomes the absolute owner and that noticee no. 2 is free to sell the same. In view of this letter addressed to noticee no. 2 which is not disputed by noticee no. 1 we are of the view that noticee no. 1 had made wrong disclosure for vested reasons to the Company and to the Stock Exchange on 9-5-2016 whereas the said noticee was required to make the appropriate disclosure under Regulation 7(2)(a) of the PIT Regulations. Admittedly, no disclosure was made under Regulation 7(2)(a) of the PIT Regulations, even though a wrong disclosure was made under Regulation 31 of the SAST Regulations.

12. The Company made the disclosure under Regulation 31 on 9-5-2016 on the basis of the letter given by the Managing Director. Noticee no. 4 also made the necessary compliance. The finding that the Company and the Compliance Officer were required to go into the nitty-gritty of the said transaction undertaken by noticee no. 1 and therefore noticee no. 4 did not exercise due care in performing her duties is patently erroneous. When the Managing Director makes a disclosure to the Company, the Compliance Officer forwards the said disclosure to the Stock Exchange under the relevant Regulations. It is not necessary for the Company or the Compliance Officer to go into the correctness of the transaction and verify as to whether the transactions had actually been done or not. In our view no violation has been committed by the Company, noticee no. 3 and by the Compliance Officer, noticee no. 4.

13. Admittedly, for reasons best known, the noticee no. 1 made a wrong disclosure under Regulation 31 of the SAST Regulations whereas requisite disclosure was required to be made under Regulation 7(2)(a) of the PIT Regulations for which appropriate penalty could be imposed. The penalty for failure to furnish information is under section 15A(b) of the SEBI Act wherein the penalty from Rs. 1 lakh to a maximum of Rs. 1 crore could be imposed.

14. Since we have held that noticee no. 1 has not traded while in possession of UPSI the minimum penalty imposed under 15G is not applicable.

15. In view of the aforesaid, considering the false disclosure made by noticee no. 1 under Regulation 31 of the SAST Regulations instead of disclosing under Regulation 7(2)(a) of the PIT Regulations we are of the opinion that substantial justice would be done if a penalty of Rs. 5 lakh is imposed.

16. In view of the aforesaid the appeal of noticee no. 1 is partly allowed. The violation for non-disclosure of Regulation 7(2)(a) of the PIT Regulations is affirmed. The penalty of Rs. 17 lakh is reduced to Rs. 5 lakh. The order imposing penalty against the Company, noticee no. 3 and the Compliance Officer, noticee no. 4 are set aside. Their appeals are allowed with no order as costs.