TaxTMI 
TaxTMI 
2018 (5) TMI 931
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....AOR, Mr. V.Giri, Sr. Adv., Mr. Ravichandra Hegde, Adv., Ms. Kriti Sansur, Adv., Mr. Ritunjay Gupta, Adv., Mr. Divyam Agarwal, AOR, Mr. N.K.Kaul, Sr. Adv., Mr. E.R.Kumar, Adv., Mr. D.P.Mohanty, Adv., Mr. Tanuj Agarwal, Adv., Ms. Raveena Rai, Adv., Mr. Sarthak Gaur, Adv., Ms. Pratyusha Priyadarshi, Adv., M/S. Parekh & Co., AOR, Mr. S.Udaya Kumar Sagar, Adv., Ms. Bina Madhavan, Adv., Mr. Krishna Kumar Singh, Adv., Ms. Swati Bhardwaj, Adv., Mr. Laxmi Shankar, Adv., M/S. Lawyer S Knit & Co, AOR, Ms. Supriya Juneja, AOR For the Respondent(s) : Mr. Pratap Venugopal, Adv., Ms. Surekha Raman, Adv., Mr. Anuj Sarma, Adv., Ms. Niharika, Adv., Ms. Kanika Kalaiyarasan, Adv., M/S. K J John And Co, AOR JUDGMENT R.F. NARIMAN, J. 1. The present appeals have their genesis in what is popularly known as the "Satyam scam". By a letter dated 7.1.2009, one B. Ramalinga Raju, former Chairman of Satyam Computer Services Limited (hereinafter referred to as "SCSL") sent a letter to various stock exchanges and the SEBI stating that the financial statements of SCSL had been grossly overstated and did not reflect the true and fair view of the financial position of SCSL. Civil Appeal No.16805 of 20....
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....er", having knowledge of UPSI, as a result of which he stood to gain by selling shares which he owned at an inflated value. The appellant replied to the show cause notice, taking detailed factual grounds as well as grounds in law, stating that he could not be said to be an "insider" as defined by the SEBI (Prohibition of Insider Trading Regulations), 1992 (hereinafter referred to as the "1992 Regulations"). By an order dated 10.9.2015, the Whole Time Member of the SEBI, after extracting relevant sections of the SEBI Act, 1992 and the relevant regulations referred to in the show cause notice, held that given Annexure 15 to the show cause notice, the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of B. Ramalinga Raju would also rope the appellant in. After referring to Regulations 2(c) and 2(e) of the 1992 Regulations, the Whole Time Member held that being a director of SCSL, the appellant was a "connected person" under Regulation 2(c) and, therefore, an "insider" under Regulation 2(e). The Whole Time Member went on to hold that the fact that the books of accounts of SCSL were fabricated and manipul....
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....linga Raju and his cohorts were responsible for the fraud, and that they actually duped the board of directors of SCSL, would make no difference as the appellant being an "insider" had sold shares of SCSL when in possession of UPSI and made profits in violation of the 1992 Regulations. It was held by the majority judgment of the Appellate Tribunal that given Annexure 15 to the show cause notice, the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of Ramalinga Raju would also rope the appellant in. However, the appellant was given relief to the extent that under the Explanation to Regulation 2(e) of the 1992 Regulations, the appellant could only be held liable for a period of six months beyond his resignation as a director i.e. upto July, 2003. A remand order, therefore, was made to assess the quantum of unlawful gains that the appellant had made upto July, 2003. 5. Shri K.V. Viswanathan, learned senior counsel appearing on behalf of the present appellant, has argued that the basis of the show cause notice is that the appellant as a promoter made illegal gains contrary to the 1992 Regulations. On....
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.... the company has to file, with the stock exchange, the shareholding pattern on a quarterly basis in a form which contains the promoters' holding. "Promoter" is defined in Regulation 2(1)(h)(i) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the "1997 Regulations"), which definition is incorporated in the Listing Agreement. This definition clearly shows that a promoter means a person who is in control of the company, directly or indirectly, whether as shareholder, director or otherwise. According to Shri Singh, the appellant, by virtue of being an executive director from 1993, was, therefore, clearly a promoter within the meaning of the aforesaid definition. He also referred to and relied upon Section 159 of the Companies Act, 1956, which requires certain particulars to be furnished by companies in their annual return. What is conspicuous by its absence is the fact that there is no requirement to disclose who the promoters of a company are. This has since been changed, for in the Companies Act, 2013, Section 92(1)(e) now requires disclosures in the annual return as to who the promoters of the company are. This being the cas....
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....d not have any real bearing on SEBI's penalty proceeding. 7. Having heard learned counsel on both sides, it is important to first set out the relevant statutory provisions. SEBI Act, 1992 "Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulati....
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....rading; xxx xxx xxx (e) "insider" means any person who, (i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information; xxx xxx xxx (h) "person is deemed to be a connected person", if such person- (i) is a company under the same management or group, or any subsidiary company thereof within the meaning of sub-section (1B) of section 370, or sub-section (11) of section 372, of the Companies Act, 1956 (1 of 1956) or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case may be; or (ii) is an intermediary as specified in section 12 of the Act, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation; (iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, port....
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.... "Prohibition on dealing, communicating or counselling on matters relating to insider trading. 3. No insider shall- (i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information;" 8. Similarly, the phrase "by virtue of such connection" contained in Regulation 2(e) was also deleted by the same amendment in 2002. The 1992 Regulations were repealed by the SEBI (Prohibition of Insider Trading) Regulations, 2015 (2015 Regulations). What is important to note is the change in the definition of "insider" with effect from 2015. Regulation 2(1) (g) of the 2015 Regulations reads as under: "Definitions. 2. (1) In these regulations, unless the context otherwise requires, the following words, expressions and derivations therefrom shall have the meanings assigned to them as under: (g) "insider" means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information;" 9. By Regulation 12 of the said regulations, the 1992 Regulations were repealed with an inbuilt Sec....
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.... information. 12.This brings us to the minority judgment of the Appellate Tribunal. First and foremost, this judgment correctly brings out the role of the expression "and" contained in Regulation 2(e)(i). The judgment also correctly appreciates the difference in language in Regulation 3 before and after it was amended in 2002, and contrasts the expression "on the basis of" with the expression "when in possession of". The minority judgment then goes on to refer and rely upon the SFIO's report, which found that the manipulation of financial statements was done by B. Ramalinga Raju and his cohorts, and was suppressed from the board of directors, which would include the appellant as a member of such board. In a significant paragraph, the minority holds: "97. If the fabrication of the financial results (which is the UPSI herein) was suppressed from the Board of Directors of Satyam, it will be difficult to hold that the Appellant was even in possession of UPSI, leave alone trading on the basis of UPSI. If the Appellant as a director had knowledge of the fabrication of the financial statements (which is UPSI herein), he must be held to have violated the PFUTP Regulations. Howe....
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....f the merger and subsequent cancellation of the merger between Satyam and the Maytas entities (promoted by Mr. Ramalinga Raju and his sons) e. The sale proceeds went to fund the Appellant's business requirement over a period of time. The Appellant adduced evidence to show the utilization of sale proceeds for genuine business requirements." 14.It was also found that by the year 2006, all the actual promoters disposed of their shareholding in SCSL because they were aware of the credit crunch faced by SCSL. The fact that the appellant continued to retain substantial shareholding in SCSL right till the end of 2008 clearly points to lack of possession of UPSI. Another important point is that the last transaction of sale of shares by the appellant on 22.12.2008, which was a substantial chunk of shares, was made by the appellant just like any other shareholder of SCSL. News had got out into the market that the merger proposal of SCSL with Maytas Infra Limited and Maytas Properties was not going ahead. The hysteria in the share market resulted in a steep drop in the price of shares of SCSL. The fact that the appellant disposed of a huge chunk of his shareholding on 22.12.2008 t....
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.... liable for criminal action. A Director, who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, will not be liable for an offence under Section 141 of the NI Act. In National Small Industries Corpn. [National Small Industries Corpn. Ltd. v. Harmeet Singh Paintal, (2010) 3 SCC 330 : (2010) 1 SCC (Civ) 677 : (2010) 2 SCC (Cri) 1113] this Court observed: (SCC p. 336, paras 13-14) "13. Section 141 is a penal provision creating vicarious liability, and which, as per settled law, must be strictly construed. It is therefore, not sufficient to make a bald cursory statement in a complaint that the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director. But the complaint should spell out as to how and in what manner Respondent 1 was in charge of or was responsible to the accused Company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability. 14. A company may have a number of Directors ....
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....n of trust for the express purpose of attending to details of management. If Mr. Cory was deceived by his own officers - and the theory of his being free from moral fraud assumes under the circumstances that he was - there appears to me to be no case against him at all. The provision made for bad debts, it is well said, was inadequate; but those who assured him that it was adequate were the very persons who were to attend to that part of the business; and so of the rest. If the state and condition of the bank were what was represented, then no one will say that the sum paid in dividends was excessive. (at pages 485-86) Per Lord Davey, it was held: "In this state of the evidence, my Lords, I ask whether the course of business at the board meetings, as described by the respondent, was a reasonable course to be pursued by the respondent and other directors, or whether the knowledge which might have been derived from a careful and comparative examination of the weekly states and quarterly returns from the different branches of the bank ought to be imputed to the respondent, or (alternatively) whether he was guilty of such neglect of his duty as a director as would ....
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....which is beyond the scope of the show-cause notice. We ourselves have gone through the show-cause notice and we are satisfied that the finding recorded by the Tribunal insofar as it relates to a "related person" is beyond the scope of show-cause notice and therefore, the same cannot be sustained and is accordingly set aside." To similar effect is the judgment in SACI Allied Products Ltd. v. CCE, (2005) 7 SCC 159 at 168-169: "15. The Appellate Tribunal, by the impugned order, has upheld the order of the respondent Collector, however, on a totally new and different basis which was never the case of the Department either in the show-cause notice or in the impugned order. The Appellate Tribunal, in the impugned order, has held as under: "All the wholesale dealers and all the wholesale buyers in the whole of the country would not be taken to form a single class of buyers. M/s SACI and SCIL were related persons. M/s SACI sold their goods in the State of U.P. through SCIL and no direct sales were effected by SACI in the State of U.P. Seen in the light of the Tribunal's decision in the case of Goramal Hari Ram Ltd., the prices at which SCIL were disposing of the goods ....
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.... the Appellate Tribunal by stating that as the appellant was an executive director from 1993 to 2000, he must be said to be a person who is in control as a director of the company and hence a promoter. Regulation 2(1)(h)(i) of the 1997 Regulations states: "2. Definitions (1) In these Regulations, unless the context otherwise requires- (h) "promoter" means- (i) the person or persons who are in control of the company, directly or indirectly, whether as a shareholder, director or otherwise;" "Control" is defined by Regulation 2(1)(c) of the 1997 Regulations as follows: "(c) "control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; Explanation. (i) Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management no....
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....ess of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and leveled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion." 21.We are of the view that from the mere fact that the appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, without more, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed. The fact that the appellant was to be continued as a director till replacement again does not take us anywhere. Shri Viswanathan has shown us that two other independent non-executive d....
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.... Jhansi Rani, who was the wife of B. Suryanarayana Raju, brother of B. Ramalinga Raju and B. Rama Raju. In that case also, shares had been sold prior to the occurrence of the UPSI and on the self-same ground, B. Jhansi Rani's appeal had been allowed by the majority judgment of the Appellate Tribunal with the minority concurring. The minority judgment further went on to state that 24,00,000 shares also, which were never sold but were merely returned to Chintalapati Srinivasa Raju, could not form the basis of any disgorgement order. We agree with the same. 26.The majority judgment then went on to rely upon Regulation 2(h)(ix). As is correctly pointed out by the minority judgment, Regulation 2(h)(ix) at the relevant time, prior to 20.2.2002, read as follows: "Definitions. 2. In these regulations, unless the context otherwise requires:- (h) "person is deemed to be a connected person", if such person- (ix) a concern, firm, trust, Hindu undivided family, company, association of persons wherein the relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) has more than 10 per cent of the holding or interest." 27.Obviously, the appell....
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....ector of SCSL and had lost her husband in the year 2001. She sold her shares in SCSL on 12th and 15th December, 2003 to three group companies, in an off market sale, as she needed money considering that she had to sustain herself as a widow. According to Shri Sundaram, though his client would be a relative of B. Ramalinga Raju and, therefore, a connected person, yet, it is obvious that the off market transactions made way back in the year 2003 at a price of around Rs. 340/- per share did not attract the 1992 Regulations as the price of these shares rose sharply only thereafter touching a figure of Rs. 966.80/- in the year ending of 2006. According to the learned senior counsel, there was no evidence whatsoever of any complicity of this lady with the fraud perpetrated by her son and his cohorts. He referred to the judgment of the Whole Time Member and to the majority judgment of the Appellate Tribunal holding that all that has been found against his client is that she is a close relative of B. Ramalinga Raju and by virtue of this close relationship, it, therefore, must be presumed that she had access to UPSI. Indeed, this is the basis of both the Whole Time Member's judgment as w....
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....in the fraud committed by their father; given the fact that they were expressly exonerated of the said fraud by the Appellate Tribunal; and given the fact that they were running independent businesses and were neither directors nor promoters of SCSL, and that they sold their shares for business purposes at a price much less than the peak price at which their father sold shares of SCSL in 2006, no case has been made against them. Consequently, their appeals also stand allowed and the Appellate Tribunal judgment is set aside in this behalf. CIVIL APPEAL NO.17997 OF 2017 32.Shri Mukul Rohatgi, learned senior counsel appearing on behalf of the appellant, states that his client was a company that was incorporated on 22.6.2006 as a private limited company. According to him, his company owned 6,28,83,317 shares of SCSL, which were pledged as security for obtaining a loan amount of Rs. 1258.88 crores. The said amount was borrowed to provide funds to 10 independent companies. Inasmuch as Rs. 1255 crores out of this sum have admittedly been repaid, partly through sale of the pledged shares, according to the learned senior counsel, this transaction of pledge cannot possibly drag his ....
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....ner of doubt that SRSR was a front entity established by Ramalinga Raju and Rama Raju for off loading their shareholding in Satyam when the market value of Satyam shares were higher on account of fictitious bank balances shown in the books of Satyam. Therefore, argument that SRSR was not an 'insider' and had not pledged the shares of Satyam when in possession of UPSI cannot be accepted. xxx xxx xxx l) In the result, decision of the WTM of SEBI that SRSR was an 'insider' under the PIT Regulations and that SRSR pledged and got the shares of Satyam belonging to Ramalinga Raju, Rama Raju and their spouses sold when in possession of UPSI and thus SRSR violated SEBI Act and the PIT Regulations cannot be faulted." 34.We agree with this finding of the majority judgment of the learned Appellate Tribunal and, therefore, dismiss this appeal. CIVIL APPEAL NO.17383 of 2017 35.Shri Luthra, learned senior counsel appearing on behalf of the appellant, brought to our notice that the said appellant was neither a director nor a promoter of SCSL. The shares that were owned by this appellant in SCSL were sold by him from 5.2.2001 to 18.11.2004. According to the learned senior....
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....ce in any other proceeding. Even though it is correct to state that this report was delivered on 13.4.2009, i.e. before the show cause notice was issued on 19.6.2009, the mere fact that this was not put against the appellant in the show cause notice cannot be any reason for us not to independently view the same. The appellant has not chosen to assail the findings contained in this report in a writ petition filed before the High Court. Under Section 246 of the Companies Act, 1956, this Court is empowered to look at the same as evidence of the opinion of the inspector concerned in relation to any matter contained in the report. By virtue of Section 246, therefore, it is possible for us to appreciate the role of the appellant in the so-called Satyam scam. This report points out the following: "4.7.39. Shri Suryanarayana Raju is the younger brother of Shri B. Ramalinga Raju, Chairman and elder brother of Shri B. Rama Raju, Managing Director of SCSL. He has been adding, abetting and facilitating pledge, transfer, sale and management of funds for Shri B. Ramalinga Raju and Shri B. Rama Raju. He has been independently managing the affairs of SRSRHPL. In their statement given on o....
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....i B. Teja Raju, Shri B. Rama Raju (Jr.), Smt. B. Jhansi Rani, M/s Maytas Infra Ltd. 4.7.43. From the statements of Shri B. Ramalinga Raju and Shri B. Rama Raju, Smt. Nandini Raju, Smt. Radha Raju and other family members, it is clear that Shri B. Suryanarayana Raju, was aiding, abetting and facilitating sale of shares of SCSL at manipulated price for and on behalf of promoters and others and thus actively connived in raising funds from the market. He followed the instructions of Shri B. Ramalinga Raju for pledging and sale of shares of SCSL by executing documents for the purpose of fund requirements of SCSL and was party to the criminal conspiracy for doing an illegal act of cheating of unsuspecting investors by selling shares at manipulated high price based on falsified financial statement of SCSL. xxx xxx xxx 4.7.47. Shri Suryanarayana Raju was a Power of Attorney holder on behalf of the core-promoters and other family members of the core-promoters for sale/pledge of their shares at manipulated prices. The agreement here for doing any legal act was in the form of Power of Attorney giving him all powers to deal with the shares in SRSRHPL, a company promo....