SEBI issues Order in Insider Trading Case

The SEBI issued an Ad-Interim Ex-Parte Order in a case involving insider trading activities in shares of a company. The investigation revealed that insiders traded shares while in possession of unpublished price sensitive information, violating regulations. The order impounded the unlawful notional loss avoided by the insiders and directed freezing of their bank and demat accounts. The individuals were prohibited from disposing of assets until the impounded amounts were credited to an Escrow Account. They were required to provide an asset inventory and show cause why further directions, including disgorgement and market access prohibition, should not be issued.

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Issues Involved:
1. Insider Trading
2. Unlawful Notional Loss Avoided
3. Communication of Unpublished Price Sensitive Information (UPSI)
4. Code of Conduct Violations

Issue-wise Detailed Analysis:

1. Insider Trading:
The Securities and Exchange Board of India (SEBI) conducted an investigation into suspected insider trading activities in the shares of Tara Jewels Limited (TJL) during the period from October 01, 2017, to December 31, 2017. The investigation aimed to determine if certain entities had traded in TJL shares while in possession of unpublished price sensitive information (UPSI), in violation of SEBI Act, 1992, and SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). The investigation revealed that Rajeev Vasant Sheth, Aarti Sheth, and Divya Sheth, all insiders, traded shares of TJL while in possession of UPSI regarding the company's poor financial performance for the quarter ended September 30, 2017. This UPSI period was determined to be from October 02, 2017, to November 29, 2017. The investigation found that Rajeev Vasant Sheth sold 30,93,498 shares, Aarti Sheth sold her entire holding of 1,14,440 shares, and Divya Sheth sold her entire holding of 1,14,440 shares during the UPSI period, thereby indulging in insider trading to avoid future losses.

2. Unlawful Notional Loss Avoided:
The investigation observed that the quarterly financial results of TJL for the quarter ended September 30, 2017, were disclosed to the stock exchanges after trading hours on November 29, 2017. The unlawful notional loss avoided by the insiders was computed using the methodology: Unlawful loss avoided = [No. of shares sold while in possession of UPSI (A) x Weighted average sale price (B)] - [No. of shares sold while in possession of UPSI (A) x Closing price on the day of UPSI becoming public (C)]. The overall unlawful notional loss avoided by Rajeev Vasant Sheth, Aarti Sheth, and Divya Sheth was calculated to be Rs. 1,26,59,481.50, Rs. 2,09,930.40, and Rs. 9,62,060.70, respectively.

3. Communication of Unpublished Price Sensitive Information (UPSI):
Regulation 3(1) of the PIT Regulations prohibits insiders from communicating UPSI except for legitimate purposes. It was alleged that Rajeev Vasant Sheth communicated/provided/allowed access to UPSI to his daughters Aarti Sheth and Divya Sheth, who traded in TJL shares while in possession of UPSI. Thus, Rajeev Vasant Sheth was alleged to have violated Regulation 3(1) of the PIT Regulations.

4. Code of Conduct Violations:
The code of conduct for prevention of insider trading followed by TJL required all specified persons to not enter into an opposite transaction within six months following a prior transaction. The investigation found that Rajeev Vasant Sheth violated this code by selling 1,36,720 shares and purchasing 1,12,000 shares of TJL on October 10, 2017, thereby executing contra trades. Additionally, the code required specified persons to obtain pre-clearance for trades above a certain threshold. Rajeev Vasant Sheth, Aarti Sheth, and Divya Sheth did not obtain pre-clearance for their trades during the investigation period, violating Clause 6 of Schedule B read with Sub-Regulation (1) and (2) of Regulation 9 of the PIT Regulations.

Order:
The SEBI issued an Ad-Interim Ex-Parte Order to impound the alleged unlawful notional loss avoided by Rajeev Vasant Sheth, Aarti Sheth, and Divya Sheth. The amounts to be impounded were Rs. 1,26,59,481.50 for Rajeev Vasant Sheth, Rs. 2,09,930.40 for Aarti Sheth, and Rs. 9,62,060.70 for Divya Sheth. These amounts were to be credited to an interest-bearing Escrow Account in a Nationalized Bank, with a lien in favor of SEBI. The SEBI also directed banks and depositories to freeze the bank and demat accounts of the implicated individuals, except for the transfer of funds to the Escrow Account. The individuals were further directed not to dispose of or alienate any of their assets until the unlawful loss avoided was credited to the Escrow Account. They were also required to provide a full inventory of their assets within seven working days of the order. The SEBI called upon the individuals to show cause why suitable directions, including disgorgement of the unlawful loss avoided and prohibition from accessing the securities market, should not be issued against them. The order was to come into force immediately and remain in effect until further orders.

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