2020 (9) TMI 1170 - Board - SEBI

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 ... Insider trading - Insiders and Connected Persons - Unpublished price sensitive information - Period of existence of the UPSI - loss incurred by the Company and a substantially fall in the net sales - HELD THAT:- Investigation has clearly brought out the trades done by the Noticees, who were insiders and also promoters of the Company, while in possession of the UPSI to the detriment of the public shareholders of the Company. The said promoters had virtually offloaded their entire unencumbered holding in the Company during this period. Given that the facts clearly make out a prima facie case of insider trading by the promoters of the Company, is of the considered view that the Non-interference by the Regulator at this stage would result in irreparable injury to interests of the securities market and the investors. Section 11(4) of the SEBI Act casts an obligation on the Board, in appropriate cases, to impound and retain the proceeds of securities in respect of such transactions either pending investigation nor upon completion of such investigation. The facts in this case compels me to take urgent steps to impound and retain the proceeds of the notional loss avoided allegedly by the aforementioned insiders by invoking the powers under Section 11(4)(d) of the SEBI Act. Considering the facts and circumstances of the case, the balance of convenience lies in favour of SEBI. Accordingly, as an interim measure, an Ad–Interim Ex–Parte Order for impounding such alleged unlawful notional loss avoided under Section 11(1) read with 11(4)(d) and 11B(1) of the SEBI Act read with Regulation 10 of the PIT Regulations needs to be issued against Rajeev Vasant Sheth, Aarti Sheth and Divya Sheth. Individual amount of unlawful loss avoided is to be credited to an interest bearing Escrow Account [“Escrow Account in Compliance with SEBI Order dated September 04, 2020 – A/c (in the name of the respective person)”] created specifically for the purpose in a Nationalized Bank. The Escrow Account(s) shall create a lien in favour of SEBI and the monies kept therein shall not be released without permission from SEBI. Banks are directed that no debits shall be made, without permission of SEBI, in respect of the bank accounts held jointly or severally by the persons mentioned under Table-11, except for the purposes of transfer of funds to the Escrow Account. Further, the Depositories are also directed that no debit shall be made, without permission of SEBI, in respect of the demat accounts held by the aforesaid persons. However, credits, if any, into the accounts maybe allowed. Banks and the Depositories are directed to ensure that all the aforesaid directions are strictly enforced. Further, debits may also be allowed for amounts available in the account in excess of the amount to be impounded. Banks are allowed to debit the accounts for the purpose of complying with this Order. The persons mentioned under Table-11 are directed not to dispose of or alienate any of their assets/properties/securities, till such time the individual amount of unlawful loss avoided is credited to an Escrow Account except with the prior permission of SEBI. Further, on production of proof by the persons mentioned under Table-11 that the individual amount of unlawful loss avoided has been deposited in the Escrow Account, SEBI shall communicate to the Banks and Depositories to defreeze their respective accounts. The persons mentioned under Table-11 are further directed to provide a full inventory of all their assets whether movable or immovable, or any interest or investment or charge in any of such assets, including property, details of all their bank accounts, demat accounts, holdings of shares/securities if held in physical form and mutual fund investments and details of companies in which they hold substantial or controlling interest immediately but not later than 7 working days of this Order. Observations/findings contained in this Order are made on the basis of the Investigation conducted by SEBI in the matter. The findings in this order may be treated as allegations against the respective persons mentioned in Table-11 above for the purpose of show cause against them. Accordingly, the persons mentioned under Table-11 above are advised to show cause as to why suitable directions, including the following, should not be issued/imposed against them under Sections 11(1), 11(4)(d) and 11B(1) of the SEBI Act for the alleged violations of the provisions of Sections 12A(d) & (e) of the SEBI Act and Regulations 4(1) of the PIT Regulations: a) Directing them to disgorge an amount equivalent to the unlawful loss avoided on account of insider trading in the shares of TJL along with interest; b) Directing them to refrain from accessing the securities market and prohibiting them from buying, selling or otherwise dealing in securities for an appropriate period. The persons mentioned under Table-11 are also called upon to show cause as to why appropriate directions for imposing penalty under section 11B(2) and 11(4A) read with Section15G and 15HB of the SEBI Act should not be issued against them for the alleged violations of the aforementioned provisions of SEBI Act and the PIT Regulations. The persons mentioned under Table-11 may file their replies to SEBI within 30 days from the date of receipt of this Order. They may also indicate in their replies whether they wish to avail an opportunity of personal hearing in the matter.This Order shall come into force with immediate effect and shall be in force till further Orders. Issues Involved:1. Insider Trading2. Unlawful Notional Loss Avoided3. Communication of Unpublished Price Sensitive Information (UPSI)4. Code of Conduct ViolationsIssue-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.