2020 (8) TMI 83 - Board - SEBI

Violation of Trading Code: Penalty Imposed for Insider Trading Breach

The Adjudicating Officer found that the Noticee violated Clause 4 of the Minimum Standards for Code of Conduct to Regulate, Monitor, and Report Trading by ... Unpublished price sensitive information - trading window closure - compliance officer duty to administer the code of conduct - Clause 4 of Schedule B to the PIT Regulations, 2015 - Regulation 9(1) of the PIT Regulations, 2015 - materiality test for unpublished price sensitive information - penalty under Section 15HB of the SEBI ActCompliance officer duty to administer the code of conduct - trading window closure - Clause 4 of Schedule B to the PIT Regulations, 2015 - unpublished price sensitive information - materiality test for unpublished price sensitive information - Whether the Noticee violated Clause 4 of Schedule B read with Regulation 9(1) of the PIT Regulations, 2015 by failing to close the trading window when UPSI existed - HELD THAT: - The Adjudicating Officer found that the Noticee was the Company Secretary and Compliance Officer during the investigation period and thus had the statutory duty to administer the code of conduct including closure of the trading window. The disclosure made on April 05, 2017 about the acquisition by a subsidiary was within the ambit of unpublished price sensitive information because it related to a corporate acquisition which the announcement itself indicated would help grow the company's fixed income advisory business. The AO applied the guiding principle in the Note to Regulation 2(1)(n) - whether the information, if published, is likely to materially affect the price - and observed a price spike on the next trading day, supporting price sensitivity. A perusal of the Term Sheet showed that major terms (including consideration and payment mechanism) were already specified and Clause 11 indicated binding intent; accordingly the AO held that the UPSI crystallised on signing of the Term Sheet and thus existed during the period alleged. Independently, since the Noticee admitted that the trading window was not closed and the responsibility to do so rested on him, the AO concluded that the Noticee failed to close the trading window when required under Clause 4 of Schedule B read with Regulation 9(1). The AO also rejected contentions that the transaction was immaterial or merely a technical/ordinary-course activity, finding that the announcement did not disclose ancillary financial parameters that the Noticee later relied upon and that the form and substance indicated a corporate acquisition with potential price impact. [Paras 21, 24, 28, 30, 31]The Noticee violated Clause 4 of Schedule B read with Regulation 9(1) of the PIT Regulations, 2015 by failing to close the trading window when UPSI existed.Penalty under Section 15HB of the SEBI Act - factors under Section 15J and Rule 5 of the Adjudication Rules - repetitive nature of default - Whether the Noticee is liable to penalty and the quantum of penalty - HELD THAT: - Having found a contravention of the PIT Regulations, the AO held that the Noticee is liable under Section 15HB of the SEBI Act. In assessing quantum, the AO considered the statutory factors in Section 15J and Rule 5 - disproportionate gain/unfair advantage, loss to investors, and repetition. The investigation did not quantify gain or investor loss and no trading by designated persons during the UPSI period was recorded, but the AO relied on the Noticee's disclosed practice of selectively closing the trading window and evidence that the Noticee had not regularly closed the window for event-based disclosures. The AO found this practice amounted to repeated non-compliance and rejected the submission that the breach was merely technical. Having weighed the mitigating and aggravating aspects, the AO imposed a monetary penalty deemed commensurate with the lapse. [Paras 33, 34, 41, 42, 45]Penalty of Rs. 5,00,000 is imposed on the Noticee under Section 15HB of the SEBI Act.Final Conclusion: The Adjudicating Officer held that the Noticee, as Compliance Officer, failed to close the trading window despite the existence of unpublished price sensitive information relating to a subsidiary's acquisition; the contravention of Clause 4 of Schedule B read with Regulation 9(1) of the PIT Regulations, 2015 was established and a penalty of Rs. 5,00,000 under Section 15HB of the SEBI Act was imposed. Issues Involved:1. Whether the Noticee violated Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of PIT Regulations, 2015.2. Whether the Noticee is liable for penalty and the quantum of such penalty.Issue-wise Detailed Analysis:1. Violation of Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of PIT Regulations, 2015:Facts and Allegations:The Securities and Exchange Board of India (SEBI) conducted an investigation into the dealings in the scrip of Edelweiss Financial Services Ltd. (EFSL) for the period from January 25, 2017, to April 05, 2017. It was observed that Ecap Equities Limited, a wholly-owned subsidiary of EFSL, acquired Alternative Investment Market Advisors Private Limited (AIMIN) on April 05, 2017, which was considered price-sensitive information (UPSI). The Noticee, who was the compliance officer and company secretary of EFSL, failed to close the trading window during the period of UPSI, thus allegedly violating Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of PIT Regulations, 2015.Noticee's Defense:The Noticee contended that the acquisition of AIMIN was not price-sensitive information, citing the gross income and net worth of EFSL, which made the acquisition insignificant. The Noticee also argued that the reliance on a newspaper article to determine the UPSI period was misplaced and that the final decision to acquire AIMIN was only made at the time of signing the Share Purchase Agreement (SPA) on April 05, 2017. Furthermore, the Noticee argued that the acquisition was a routine business activity and did not materially affect the price of EFSL's securities.Adjudicating Officer's Findings:The Adjudicating Officer found that the acquisition announcement was indeed price-sensitive information, as it was likely to materially affect the price of EFSL's securities. The Officer noted that the Term Sheet signed on January 25, 2017, indicated a concrete intention to acquire AIMIN, making it UPSI from that date. The Officer also observed that the Noticee had a duty to close the trading window during the UPSI period, which the Noticee failed to do. The Officer concluded that the Noticee violated Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of PIT Regulations, 2015.2. Liability for Penalty and Quantum of Penalty:Noticee's Arguments:The Noticee argued that there was no disproportionate gain or unfair advantage made as a result of the default, no loss caused to investors, and no repetitive nature of the default. The Noticee cited the decision of the Hon'ble Supreme Court in the matter of Siddharth Chaturvedi vs SEBI, arguing that no penalty should be imposed for a technical default where the parameters of Section 15J are satisfied.Adjudicating Officer's Findings:The Officer noted that the investigation report did not quantify any profit made or loss caused to investors due to the violation. However, the Officer found that the Noticee had a pattern of not closing the trading window for various corporate announcements, indicating a repetitive nature of the default. The Officer emphasized the importance of compliance officers in ensuring adherence to regulatory standards and maintaining market integrity.Conclusion:The Adjudicating Officer concluded that the Noticee's failure to close the trading window during the UPSI period constituted a violation of the relevant regulations. Considering the repetitive nature of the default and the role of the compliance officer, the Officer imposed a penalty of Rs. 5,00,000 on the Noticee under Section 15HB of the SEBI Act. The Noticee was directed to remit the penalty within 45 days, failing which recovery proceedings would be initiated.