TaxTMI 
TaxTMI 
2017 (8) TMI 1495
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....ate, Advocates i/b Visesha Law Services, Mr. Prasad Dakephalkar, Senior Advocate with Mr. L. S. Shetty, Mr. U. R. Naik, Ms. N. L. Shetty and Mr. M. M. Nair, Advocates i/b L. S. Shetty & Associates, Mr. Kevic Setalvad, Senior Advocate with Mr. Sumeet Patni, Mr. KRCV Seshachalam, Mr. A. Rama Rao, Ms. Sabeena Mahadik, Mr. Pankaj Uttaradhi and Mr. Sagar Hate, Advocates i/b Visesha Law Services for the Appellant. Mr. Fredun DeVitre, Senior Advocate with Dr. Mrs. Poornima Advani, Mr. Pulkit Sukhramani, Mr. Siddha Pamecha and Ms. Vidhi Jhawar, Advocates i/b The Law Point for the Respondent. Majority View J.P. Devadhar (Dr. C.K.G. Nair, Member-II Concurring) 1. Appellants in all these appeals are aggrieved by the common order passed by the Whole Time Member ("WTM" for short) of Securities and Exchange Board of India ("SEBI" for short) on September 10, 2015. By the said order, the WTM of SEBI has restrained the appellants from accessing the securities market and prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly being associated with the securities market in any manner whatsoever for a period of 7 years. Further, the WTM of SEBI....
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....he appellants pledged/ sold shares of Satyam when in possession of UPSI, and therefore the appellants are guilty of violating SEBI Act and the PIT Regulations. b) Assuming that the appellants had violated SEBI Act and the PIT Regulations, whether the WTM of SEBI is justified in uniformly restraining the appellants from accessing the securities market for 7 years and whether, the quantum of unlawful gain directed to be disgorged by each appellant jointly and severally with Mr. B. Ramalinga Raju and Mr. Rama Raju with interest at the rate of 12% per annum from 07.01.2009 till payment, is in accordance with law. 5. Uncontroverted facts set out in the impugned order based on which the impugned directions have been issued against each appellant may be summarized as follows:- a) The relation/ connection of the appellants with the Chairman and Managing Director of Satyam is set out in para 7 of the impugned order as follows:- Sl. no. Name Relation/connection 1. Mr. B. Ramalinga Raju Chairman, Satyam Computers 2. Mr. B. Rama Raju Managing Director, Satyam Computers and brother of Mr. B Ramalinga Raju and Mr. B Suryanarayana Raju 3. Mr. ....
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.... July 15, 2014 the WTM of SEBI disposed of the show cause notices issued to Mr. B. Ramalinga Raju, Mr. B. Rama Raju, Mr. V. Srinivas, Mr. G Ramakrishna and Mr. V. S. Prabhakara Gupta, by holding that they are guilty of violating SEBI Act, PFUTP Regulations & PIT Regulations, 1992. By the said order Mr. Ramalinga Raju & Mr. B. Rama Raju were, inter alia, directed to disgorge unlawful gain of Rs. 543.93 crore made on sale of Satyam shares (which included the sale of Satyam shares by the appellants) and disgorge unlawful gain of Rs. 1258.88 crore made by pledging the Satyam shares through SRSR Holdings Private Limited. g) Challenging the order passed by the WTM of SEBI dated July 15, 2014 Mr. B. Ramalinga Raju & Mr. B. Rama Raju filed appeals before this Tribunal. By order dated May 12, 2017, this Tribunal inter alia upheld the decision of SEBI that Mr. B. Ramalinga Raju & Mr. B. Rama Raju had violated the SEBI Act, PFUTP Regulations & PIT Regulations, 1992 and that they were instrumental in manipulating the books of Satyam during the period from 2001 to 2008. However, the direction given by the WTM of SEBI to Mr. B. Ramalinga Raju & Mr. B. Rama Raju to disgorge the unlawful ....
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....ldings Pvt. Ltd Rs.82,49,37,875 9. Maytas India Limited (now known as IL & FS Engineering and Construction Company Limited) Rs.59,16,49,091 Grand Total Rs.543,93,25,874 Thus, by order dated 15.07.2014 the WTM of SEBI has held that the aforesaid unlawful gain of Rs. 543.93 crore arising on sale of Satyam shares by various entities set out above shall be disgorged by Ramalinga Raju and Rama Raju. However, by the impugned order, very same WTM of SEBI has held that the unlawful gain of Rs. 543.93 crore made by the entities set out therein shall be disgorged by the respective entity jointly and severely with B. Ramalinga Raju & B. Rama Raju. j) Challenging the order passed by the WTM of SEBI on 10.09.2015 appellants have filed above appeals before this Tribunal. 6. Before dealing with the rival contentions, we deem it proper to quote relevant provisions (as they stood at the material time) contained in the PIT Regulations, 1992 and the Companies Act, 1956 which read thus:- "Definitions. 2. In these regulations, unless the context otherwise requires :- (a) ... (b) ... (c) "connected pe....
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....unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities: Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law." Companies Act, 1956 "Section 6. A person shall be deemed to be a relative of another if, and only if,- (a) they are member of a Hindu undivided family; or (b) they are husband or wife; or (c) the one is related to the other in the manner indicated in Schedule IA." "Section 307 (10) For the purposes of this section- (a) any person in accordance with whose directions or instructions the Board of directors of a company is accustomed to act, shall be deemed to be a director of the company; and (b) a director of a company shall be deemed to hold, or to have an interest or a right in or over, any shares or debentures, if a body corporate other than the company holds them or has that interest or right in or over them, and either- (i) that body corporate or its Board of directors i....
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....loan amounting to Rs. 1258.88 crore. The said amount was borrowed to provide funds to 10 private limited companies which were owned by Raju family. f) In the impugned order (para 33) the WTM of SEBI has recorded a finding that SRSR was under the same management or group and therefore SRSR was a 'deemed to be a connected person' defined under regulation 2(h)(i) of the PIT Regulations. It is not in dispute that Ramalinga Raju and Rama Raju (Chairman & Managing Director respectively of Satyam) were also the directors of SRSR and in fact entire shareholding in SRSR were held by Ramalinga Raju, Rama Raju and his family members. In these circumstances, decision of the WTM that SRSR was a company under the same management or group covered under the expression 'deemed to be connected person' defined under regulation 2(h)(i) of the PIT Regulations cannot be faulted. g) It is not in dispute that Ramalinga Raju and Rama Raju as Chairman and Managing Director of Satyam were 'connected person' under regulation 2(c) (i) of the PIT Regulations. Admittedly, Ramalinga Raju and Rama Raju individually held more than 10% interest in SRSR and therefore, as per regulation 2(h)(ix) of t....
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....t any merit. Expression 'dealing in securities' as defined under regulation 2(d) of the PIT Regulations is not restricted to any particular type of dealing but is wide enough to cover all types of dealing in securities including the activity of pledging the securities. Although pledging of securities is not per se illegal under the PIT Regulations, regulation 3 of the PIT Regulations prohibits an 'insider' from pledging the securities when in possession of UPSI. Thus, the prohibition contained in the PIT Regulations do not apply to bonafide pledge of securities, but apply only to pledge of securities by an insider when in possession of UPSI. In the present case, shares of Satyam were transferred by Ramalinga Raju, Rama Raju and their wives to SRSR a company owned by Ramalinga Raju, Rama Raju and their family members while in possession of UPSI. Moreover, before transferring the shares of Satyam, Ramalinga Raju and Rama Raju became Directors of SRSR and thereafter on transfer of shares, SRSR pledged those shares for obtaining loan to the entities owned by Ramalinga Raju and his family members. In these circumstances, decision of the WTM of SEBI that acquisition and pledge of Satyam ....
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....areholding of CSR in Satyam rose within a period of one year from 8,00,000 shares to 76,50,000 shares. c) On 20.01.2000 CHPL was incorporated by CSR and during the course of arguments counsel for CSR fairly stated that CSR and his wife held 50% shares each in CHPL and that they were the only two Directors of CHPL. CSR transferred some shares of Satyam to CHPL and some shares of Satyam to Anjiraju. Thereafter, CHPL retained some shares of Satyam and returned balance shares of Satyam to CSR. d) From 1993 till August 2000, CSR continued as Executive Director of Satyam. In August 2000 CSR disclosed to the public that he was relinquishing his position as Executive Director of Satyam in order to focus on his independent venture capital business. However, the Board of Satyam requested CSR to continue as a non-executive director until a suitable replacement was found. Accordingly, from August 2000, CSR continued as the non-executive director till 23.01.2003 when the Board of Satyam accepted his resignation. e) It is not in dispute that CSR sold 65,55,152 shares of Satyam between 22.02.2001 to 15.12.2008, CHPL sold 8,00,000 shares of Satyam between 04.01.2001 to 1....
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....losures filed by Satyam from time to time with the stock exchanges, (para 44 of the impugned order) wherein, CSR has been shown as promoter of Satyam till 2008. The internet news report was in fact relied only to establish the relationship between CSR and Ramalinga Raju. b) Extensive arguments were advanced by counsel on both sides on the question as to whether CSR/Chintalapati group could be considered as promoters of Satyam on the basis of the declarations made by Satyam in their periodic filings before the stock exchanges. In our opinion, correctness of the impugned order can be decided without going into the controversy as to whether CSR/ Chintalapati group were promoters or not. Accordingly, without going into the controversy as to whether Chintalapati group were promoters of Satyam or not, we proceed to consider the question, as to whether the WTM of SEBI on the basis of other material on record is justified in holding that CSR/ Chintalapati group were insiders and that they had sold shares of Satyam when in possession of UPSI. c) Expression 'insider' is defined under regulation 2(e) of the PIT Regulations to mean any person who is or was connected with the ....
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....ns. Apart from the above, CSR who is a connected person with Satyam under regulation 2(c) (i) of the PIT Regulations admittedly held more than 10% of the shareholding or interest in CHPL and therefore, even under regulation 2(h)(ix) of the PIT Regulations, CHPL was liable to be considered as a 'deemed to be connected person'. Although, the impugned order does not consider CHPL to be a deemed connected person under regulation 2(h)(ix) of the PIT Regulations, uncontroverted facts on record conclusively establish that CHPL was a deemed to be connected person under regulation 2(h)(ix) of the PIT Regulations. Thus, CSR as a connected person and CHPL as a deemed to be a connected person managed by CSR and his wife were reasonably expected to have access to UPSI. e) Similarly, Anjiraju being father of CSR was a deemed connected person under regulation 2(h)(viii) read with regulation 2(h)(i) of the PIT Regulations and Section 6 of the Companies Act, 1956. Thus, CSR. CHPL and Anjiraju as connected person/ deemed connected person were reasonably expected to have access to UPSI and hence CSR CHPL and Anjiraju were insiders under regulation 2(e) of the PIT Regulations. f) Und....
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....g the years 2001-2008 and it is seen that in the year 2001 & 2002 the inflated bank balances in the deposit account and current account of Satyam with the Bank of Baroda, New York Branch was to the tune of Rs. 120.29 crore and Rs. 995.01 crore respectively. Since CSR was involved in business development, diversification plans and advise on new ventures of Satyam during the year 2001 and 2002, inference drawn by the WTM of SEBI that CSR was reasonably expected to have access to the fictitious bank balances shown in the books of Satyam during the period 2001-2002 cannot be faulted. In other words, it is impossible to believe that business development, diversification plans and advise on new ventures could be given by CSR to Satyam without being aware that the bank balances shown in the books of Satyam during the years 2001- 2002 were fictitious. j) It is relevant to note that during the year 2001 & 2002, while Satyam recorded fictitious bank balances to the tune of Rs. 120.29 crore and Rs. 995.01 crore respectively, Chintalapati group resorted to selling shares of Satyam from time to time. As per the records, 71.05% shares of Satyam held by Chintalapati group were sold by Oc....
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.... notice alleges that Chintalapati group as promoters of Satyam were reasonably expected to be privy to UPSI, in the impugned order it is held for the first time that CSR was related to Ramalinga Raju and was closely connected with Satyam and therefore it is reasonable to believe that Chintalapati group was privy to UPSI. Thus, it is submitted that the impugned decision which travels beyond the show cause notice is liable to be quashed and set aside as having been passed without jurisdiction. m) We see no merit in the above argument. In the annexures to the show cause notice issued to CSR/ Chintalapati group it was specifically stated that CSR was the Executive Director of Satyam up to 31.08.2000 and Non- Executive Director of Satyam from 01.09.2000 to 23.01.2003. It was also specifically stated in the annexure to the show cause notice that CSR and Ramalinga Raju were cobrothers. Thus, the show cause notice not only alleged that Chintalapati group violated PIT Regulations on account of their being promoters but also on account of CSR being a Director of Satyam and Co-brother of Ramalinga Raju. Therefore, even if Chintalapati group were not promoters of Satyam, it was open t....
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....to the above effect inserted in the PIT Regulations with effect from 20.02.2002 in our opinion, the WTM of SEBI was not justified in initiating action beyond the period of six months stipulated in the Explanation to regulation 2(c) of the PIT Regulations. p) Counsel for SEBI, however, submitted that subscribing to the above view would defeat the purpose with which the law was enacted, because in all such cases no action could be taken against any person/ entity who had indulged in insider trading, after six months of his ceasing to be a connected person. It is submitted by counsel for SEBI that the term "was connected with the company" under regulation 2(e) would mean that a person would continue to be a connected person until the unpublished information which is price sensitive, becomes known to the investors/ gets published. It is further submitted that the period of six months included in the Explanation is meant to cover routine cases where it is not expected that the information would be held as unpublished for a period more than six months. However, it is submitted that in the rarest of rare cases as the present one, where the unpublished price sensitive information ....
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....sider trading up to six months and to extend the same beyond the period of six months would amount to violating the clear mandate contained in the newly inserted Explanation. Since the language used in the Explanation to regulation 2(c) is clear and unambiguous, it would be improper to give an extended meaning to the words used in the Explanation to regulation 2(c) of the PIT Regulations. Reliance placed by the counsel for SEBI on the Apex Court decision in case of Ajay Kumar Agarwal (supra) is misplaced. In that case while considering the question as to whether Section 11B of SEBI Act can be applied retrospectively or not, the Apex Court held that while interpreting the provisions of a social welfare legislation the purpose of enacting the law must be taken into consideration. In the present case, Explanation to regulation 2(c) specifically introduces with effect from 20.02.2002 bar of 'six months' and to ignore that bar would mean violating the mandate of law. Therefore, the decision of the Apex Court in case of Ajay Kumar Agarwal (supra) would not be applicable to the facts of present case. s) Argument that SEBI could not proceed against Anjiraju on account of his death....
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....i sold the shares of Satyam on 22.01.2001 and on 05.02.2001. 14. Similarly, in para 65 of the impugned order it is held that Jhansi Rani sold shares of Satyam 'when in possession' of UPSI and therefore she has violated regulation 3 of the PIT Regulation. It is relevant to note that Jhansi Rani sold the shares of Satyam prior to the amendment of regulation 3 on 20.02.2002. On the date on which Jhansi Rani sold the shares of Satyam, the prohibition under regulation 3 was that no 'insider' shall trade in the shares of the company 'on the basis' of UPSI. The words 'on the basis' was substituted by the words 'when in possession' with effect from 20.02.2002. Thus, sales effected by Jhansi Rani could be said to be violative of regulation 3, only by establishing that she had sold the shares of Satyam not only when in possession of UPSI but also on the basis of UPSI. As there is no finding recorded in the impugned order that Jhansi Rani sold shares of Satyam on the basis of UPSI, impugned order passed against Jhansi Rani cannot be sustained. 15. Apart from the above, it is held in the impugned order that the UPSI existed between January 2001 to December 2008, however, the exact date o....
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.... 458 of 2015) B. Teja Raju (Appeal No. 459 of 2015) B. Rama Raju (Jr.) (Appeal No. 460 of 2015) B. Suryanarayana Raju (Appeal No. 461 of 2015) 18. It is not in dispute that the appellants in all these appeals are family members of Ramalinga Raju and Rama Raju and are covered under the Expression 'deemed to be connected person' as defined under regulations 2(h) of the PIT Regulations. However, Mr. Mohan Parasaran, Mr. J. J. Bhatt, Mr. Dhakephalkar, learned Senior Advocates and Mr. Andhyarujina learned Advocate appearing on behalf of their respective clients have argued that the WTM of SEBI is not justified in holding that the appellants had sold the shares of Satyam when in possession of UPSI. 19. We see no merit in the above contentions for the following reasons:- a) B. Appalanarasamma (Mother of Ramalinga Raju & Rama Raju) was a shareholder and/ or Director of more than 10 companies which were all floated by Ramalinga Raju, Rama Raju and their family members. B. Teja Raju (Son of Ramalinga Raju) was a shareholder and/ or Director of 50 companies which were floated by Ramalinga Raju, Rama Raju and their family members. B. Rama Raju (Jr.) (S....
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....was a promising and rising company. In such a case, ordinarily the appellants who were closely associated with Ramalinga Raju and Rama Raju would have resorted to consolidating their shareholding in Satyam. However, strangely, not only Ramalinga Raju & Rama Raju, but also all their family members including all the appellants herein who were deemed to be connected persons have resorted to selling the shares of Satyam during the years 2001-2008. It is relevant to note that the appellants not merely sold the shares of Satyam but virtually liquidated their shareholding in Satyam during the period from 2001 to 2008 and during the said period the investors were made to believe that Satyam is achieving greater heights year after year. None of the appellants have placed any material on record to suggest there were compelling reasons or circumstances which compelled them to liquidate their shareholding in Satyam during the period from 2001 to 2008. It is equally strange that during the entire period of eight years (2001 to 2008) none of the appellants at any point of time deemed it fit to acquire the shares of Satyam which was the flag ship company of Raju family and was supposed to be fina....
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....can be no dispute that the role played by SRSR, Chintalapati group and other appellants in facilitating and liquidating the shares of Satyam when in possession of UPSI differ substantially. In such a case, without considering the merits of each case the WTM of SEBI could not have imposed uniform restraint order against all the appellants. 21. Apart from the above, having held in his order dated 15.07.2014 that the gains arising on sale/ pledge of Satyam shares by the appellants were the unlawful gains made by Ramalinga Raju and Rama Raju, and having directed them to disgorge the said unlawful gain, the WTM could not have held in the impugned order that the very same gains were the unlawful gains made by the appellants and direct each appellant to disgorge that unlawful gain jointly and severally with Ramalinga Raju and Rama Raju. Thus, the order passed by the WTM of SEBI in case of Ramalinga Raju and Rama Ramu on 15.07.2014 and the impugned order passed against the appellants on 10.09.2015 are mutually contradictory because in one order it is held that the unlawful gains specified therein are made by Ramalinga Raju and Rama Raju and in another order it is held that the said gain....
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.... appellants and the quantum of unlawful gain determined against each appellant and the direction to disgorge the same jointly and severally with Ramalinga Raju & Rama Raju are quashed and set aside and restored to the file of the WTM of SEBI for fresh decision on merits and in accordance with law as expeditiously as possible and preferably within a period of four months from today. Till fresh order is passed by the WTM of SEBI on the aforesaid issues, the appellants shall not deal in securities or access the securities market in any manner whatsoever. d) Appeal No. 462 of 2015 filed by B. Jhansi Rani is allowed and directions issued against her in the impugned order are quashed and set aside. 24. All the Appeals are disposed of in the aforesaid terms with no order as to costs. In view of the disposal of the Appeals, Misc. Application No. 87 of 2017 in Appeal No. 452 of 2015 does not survive and the same is disposed of accordingly. 25. I have gone through the majority view written by the Learned Presiding Officer and concurred by my brother Dr. C.K.G. Nair. By the majority judgment, the impugned order dated September 10, 2015 has been quashed in respect of all the nin....
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....timately to be refunded to public shareholders who lost their hard earned money due to the colossal fraud. 29. Restoration to the file of WTM of SEBI has been done after quashing and setting aside the impugned order by which these entities have been directed to disgorge various amounts, detailed below, on the ground that the cost of acquisition/intrinsic value of shares was not taken into account by SEBI while making the disgorgement and imposing a ban of seven years on entering the market on each entity. Sl.No. Appeal No. Name of Appellant No. of share sold Shares sold for(Unlawful gain)/amount to be disgorged. Cost of acquisition of shares 1. 458/2015 Ms.B.Appalanarasamma 2,25,500 8,00,43,125/- Not known 2. 459/2015 Mr. B. Teja Raju 9,42,250 49,31,43,762/- Gift from Grandfather 3. 460/2015 Mr. B. Rama Raju (Jr.) 9,34,250 46,00,17,218 Gift from Grandfather 4. 461/2015 Mr. B. Suryanarayana Raju 27.89 lacs approx. 89,71,70,765 Not known 5 463/2015 SRSR Holdings Pvt. Ltd. 1258.88 Crore Company floated as a front by Mr. B. Ramalinga Raju & his relatives. ....
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....Bureau of Intelligence ("CBI"), the Enforcement Directorate ("ED"), the Reserve Bank of India ("RBI") and the Income Tax Department ("IT"). The underlining objective in forming MDIT, as reflected at page 35 of the SFIO Report, seems to be to avoid inconsistencies among the aforementioned agencies while investigating the same set of facts which led to the Satyam scam in the first place. 32. SEBI also undertook its investigation and initiated action against the five main architects of the scam and initially three Show Cause Notices ("SCNs") were issued to five architects of the scam, namely, Mr. B. Ramalinga Raju, Mr. B. Rama Raju, Mr. Vadlamani Srinivasa, Mr. G. Ramakrishna and Mr. V. S. Prabhakar Gupta, between March 09, 2009 to March 22, 2010. Later on, as an after-thought, a common SCN dated June 19, 2009 as well as another SCN dated September 15, 2009, were also issued by SEBI to ten entities, including nine in hand, mainly on the ground that they were relatives of Mr. B. Ramalinga Raju and/or promoters of Satyam and its connected companies. The case of Mr. B. Ramalinga Raju and four others has been separately considered and by order dated 12.05.2017, the cases of five said a....
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....annot be remedied by way of deciding an Appeal. It cannot be denied that remanding a matter, sets it back many months or even years in some cases and prevents the matter from reaching judicial finality, which is extremely disheartening in a country like India with a very serious issue of a vast backlog of cases. Of course, it goes without saying that in cases where remand is the only appropriate remedy, the matter must be remanded to the lower authority. However, in my opinion, remand should be treated as the last resort, left to cure inconsistencies over which the Appellate authority has no discernible purview. In all situations where the deficiency or inconsistency can be done away with by the intervention of the Appellate authority, the authority should go ahead and do so, unless there exists a very strong and cogent reason for it to abstain. It is of paramount importance that matters be allowed to reach judicial finality at the earliest to help the wheels of justice move at a faster pace. 36. The old maxim 'interest Republicae ut sit finis litium' clearly says that it is for the public good that there be an end of litigation after a long lapse of time. It is therefore necess....
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.... and Late Shri Anjiraju Chintalapati (Appeal 451/2015, 452/2015 and 453/2015), require a careful examination of the relevant PIT Regulations and jurisprudence in respect thereof. At the outset, I would like to first reproduce the relevant PIT regulations herein below: PIT Regulations of 1992 2 (c) "connected person" means any person who - (i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956), of a company, or is deemed to be a director of that company by virtue of subclause (10) of section 307 of that Act or (ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company [whether temporary or permanent] and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company: [Explanation :-For the purpose of clause (c), the words "connected person" shall [mean] any person who is a connected person six months prior to an act of insider trading;]" "2(e) "insider" means any person who, (i) is or was connected with the comp....
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.... following shall be deemed to be price sensitive information :- (i) periodical financial results of the company; (ii) intended declaration of dividends (both interim and final); (iii) issue of securities or buy-back of securities; (iv) any major expansion plans or execution of new projects. (v) amalgamation, mergers or takeovers; (vi) disposal of the whole or substantial part of the undertaking; (vii) and significant changes in policies, plans or operations of the company; 2(i) "relative" means a person, as defined in section 6 of the Companies Act, 1956 (1 of 1956); "2(k) "unpublished" means information which is not published by the company or its agents and is not specific in nature. Explanation.-Speculative reports in print or electronic media shall not be considered as published information." 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 anyunpublished ....
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....ive information; or (ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or (iii) counsels or procures for any other person to deal in any securities of anybody corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. 41. In applying these PIT Regulations, the following questions arise for the disposal of the case. a. What is the scope of Regulation 3 under PIT Regulation, 1992? What is the impact of the 2002 Amendment to Regulation 3? b. What is the meaning of an "Insider" under the PIT Regulations, 1992? What is the impact of the 2002 Amendment to Regulation 3? c. What is the UPSI in this case and when did UPSI come into existence? d. Are findings of SFIO Report admissible in adjudicating a violation under the PIT Regulations? e. Are CBI charge she....
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.... check insider trading. 45. On a perusal of the PIT Regulations of 1992, it appears that the objective with which they were framed was primarily to ensure that the damaging consequences of insider trading could be kept at bay in the Indian securities market as the phenomenon of insider-trading leads to baseless speculation in the market and due to artificial price-hike of the shares of the company in question, gullible investors are tempted to invest or deal in those shares with a view to making profits. 46. Further, Regulation 3 serves a purpose which is two-fold inasmuch as on one hand it forbids the dealing in securities of a listed company by an insider in possession of UPSI; and on the other, the regulation prohibits the communication or procurement or counselling of such UPSI to any other person who is then legally bound to NOT trade in the scrip of the company in question. Chapter III of the PIT Regulations of 1992 deals with powers of the investigation of cases of insider trading by SEBI. Chapter IV lays down the policy on disclosures and internal procedure to be put in place by a company to ensure that insider trading does not occur. Schedule I deals with model code ....
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....ith the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information by virtue of such connection in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information." 52. The 2002 Amendment amended the definition of "Insider" and deleted the phrase "by virtue of such connection". Regulation 2(e) defines "Insider" to mean: (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 who is reasonably expected to have access to unpublished price sensitive information in respect of securities of the company, or (ii) has received or has had access to such unpublished price sensitive information." 53. Therefore, for a person to be an Insider under Reg. 2(e) (i), the following requirements need to be satisfied. Prior to 20-02-2002 A person can be an insider if SEBI is able to demonstrate that a. such a person was connected with the company OR deemed to have been connected with the company; AND b. rea....
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.... category as an insider if he fulfills both the ingredients of the first category cumulatively. 58. For the first category, if a person is a connected person, that itself satisfies half the component of the first category of insiders. However, it is pertinent to note that in order to fall under the first category, the term "connected person" must be read with the second ingredient viz., "reasonably expected to have access to unpublished price sensitive information". Therefore, not only does a person need to be a connected person to be an insider, but there must also be some reliable and convincing material to show such a connected person is reasonably expected to have "access" to the UPSI. The Scheme of PIT Regulations of 1992 makes it evident that these dual requirements need to be satisfied before a person can be called an "insider" under the PIT Regulations of 1992. The conjunctive "And" is, therefore, significant and cannot be ignored. 59. As far as the second category of "insider" is concerned (Regulation 2(e)(ii)), it clearly refers to a person who "has received or has had access to such unpublished price sensitive information". Thus, to fall under the second category o....
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....ssarily prepared at the end of the quarter and at the end of year. March 31, 2001 is the end of the quarter and the end of the financial year. Therefore any fabrication of the financial statements (which is the UPSI herein) would happen only when the financial statements have been prepared, approved by the Board and published. Since the financial statements are prepared only after 31.03.2001 and in light of the statement of senior counsel of SEBI, it would be appropriate to take 31.03.2001 as the date on which the UPSI was generated. D. Whether the SFIO Report is admissible in an adjudication under the PIT Regulations 64. The SFIO was set up by the Government of India by way of a resolution dated July 02, 2003, and it carried out investigations within the then existing legal framework under sections 235 to 247 of the erstwhile Companies Act, 1956, which falls under the Chapter on "Investigations" under Part VI of the Companies Act, 1956 which deals with Management and Administration of companies. With the advent of the Companies Act, 2013, Section 211 of the Act accorded statutory status to the SFIO and by virtue of various other provisions of the Companies Act, 2013, SFIO is....
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....mpanies Act, 2013 (and prior Companies Act, 1956) stipulates that the SFIO Report is admissible as evidence in any legal proceeding. S.246 of the Companies Act, 1956 states : "246. Inspectors' report to be evidence. A copy of any report of any inspector or inspectors appointed under section 235 or 237 authenticated in such manner, if any, as may be prescribed, shall be admissible in any legal proceeding as evidence of the opinion of the inspector or inspectors in relation to any matter contained in the report." (A similar provision is there in S.223(4) of the Companies Act, 2013) 70. When a statute expressly mandates that the SFIO Report (which is Report of the Inspector) is admissible in any legal proceeding as evidence, the WTM ought to have carefully considered the findings of the SFIO Report as well. 71. Even though SEBI is a separate agency tasked with enforcement of SEBI Act, 1992, it has to take into account the findings of the other Government of India investigating agencies so as to ensure that there are no incongruities and that it is on the same page with other investigating agencies regarding material facts and does not overlook the same. This is m....
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....es that were notified by the Central Government related only to corruption by Central Government servants. In due course, with the setting up of a large number of public sector undertakings, the employees of these undertakings were also brought under the purview of the CBI. Similarly, with the nationalization of the banks in 1969, the Public Sector Banks and their employees also came within the ambit of the CBI. CBI has grown into a multi-disciplinary investigation agency over a period of more than 5 decades, during which it has dealt with numerous cases of national and international importance. Today it has the following three divisions for investigation of crimes:- (i) Anti-Corruption Division - for investigation of cases under the Prevention of Corruption Act, 1988 against Public officials and the employees of Central Government, Public Sector Undertakings, Corporations or Bodies owned or controlled by the Government of India - it is the largest division having presence almost in all the states of India. (ii) Economic Offences Division - for investigation of major financial scams and serious economic frauds, including crimes relating to Fake Indian Currency Not....
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....mination of the witnesses. Therefore, this judgment of the Ld. CBI Court would at least have some persuasive value, if not binding. Therefore, the exclusion of such a relevant judgment, involving same facts will not lay down a good precedent. Appeal No. 462/2015 (Ms. B. Jhansi Rani Vs. SEBI) 79. In allowing Appeal No. 462/2015 the majority order has taken into consideration the fact that Ms. B. Jhansi Rani sold shares of Satyam between January 22 - February 05, 2001. The provisions of the then PIT Regulations particularly provided that a person could be held guilty of 'insider trading' only if it was proved that he or she sold the shares "on the basis of UPSI". This was the prevailing law at that time. As discussed above, the law was changed by the 2002 Amendment by amending the regulation 2 (h)(viii) of the PIT Regulations so as to delete the concept of "on the basis of UPSI" and by replacing the same with the principle of "while in possession of the UPSI". It is a fact that the SCN nowhere mentions that Ms. B. Jhansi Rani sold the shares on the basis of the UPSI. Therefore, the majority order has given her the benefit of doubt and her appeal has been allowed. 80. Apart f....
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....ng into existence); B. Sale of shares from 01.04.2001 to 19.02.2002 (prior to the 2002 Amendment to the PIT Regulations; C. Sale of shares from 20.02.2002 to 23.07.2003 (from date of 2002 Amendment to Appellant ceasing to be a Non-Executive Director plus 6 months); and D. Sale of shares from 24.07.2003 to 22.12.2008 (after Appellant ceased to be a Non-Executive Director plus 6 months) 85. For the sake of convenience, I deal with the first and last category at the outset. 86. The shares sold from 28.12.1999 to 31.03.2001 would not be covered by the PIT Regulations. As discussed above, the UPSI in the form of manipulation of financial statements came into existence after 31.03.2001. Consequently the sale of shares during this period cannot be considered. Since the order against Ms. B. Jhansi Rani has been quashed on this ground, the same will apply to CSR. 87. The sale of shares from 24.07.2003 to 22.12.2008 will also fall outside the ambit of PIT Regulations because CSR ceased to a Non-Executive Director on 23.01.2003. Once he ceased to be a director, he ceases to be a connected person. Consequently, he will cease to be an "Insider" and will be ou....
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....xpression "access" to UPSI were also examined in detail and appellants therein were exonerated. In the case of RPL, SEBI, by an Adjudication Order dated 2nd May, 2013, imposed a penalty of Rs. 11 Crore on RPL under Section 15 G of the SEBI Act, 1992, for violation of Regulation 3 of the PIT Regulations. The said order was challenged by the RPL before this Tribunal by way of Appeal No. 122 of 2013, which was quashed by this Tribunal by order dated 7th December, 2015, mainly on the ground that the said impugned order was merely based on presumption of the appellant being in possession of UPSI at the time of purchase of shares. After quashing the said order, SEBI was called upon to pass fresh order on merit and in accordance with law. After remand, the AO of SEBI by an Order dated 08.03.2016 has exonerated the Noticees therein specifically holding that definition of insider under Reg 2(e) required SEBI to provide evidence showing access to UPSI. Therefore, in that matter, even SEBI has recognised the need to prove access to UPSI before an entity/individual can be condemned as an insider. 93. The majority opinion holds that a director as a connected person is automatically an ....
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....owever this fact was in the knowledge of the then Chairman, the then CFO and Shri G. Ramakrishna and D. Venktapathi Raju and Shri C. Sriselam and Statutory Auditors but was never revealed to the Company or to the Board of Directors SCSL and by doing so, these persons concealed this fact of falsification of accounts from the company, the body of shareholders of SCSL as well as the Board of Directors of SCSL and thereby these persons practiced deception upon the company." 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. However, in the Impugned Order, the WTM drops the charge of PFUTP violation for lack of evidence. This clearly shows that the appellant CSR was never in possession of UPSI. In view of this, the finding of the WTM that the Appellant violated PIT Regulations during this period is held to be not legal....
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....ast financial year No. of Meetings attended No. of membership in boards of other Companies Attendance of each director in the last AGM Mr. B. Ramalinga Raju Promoter & Executive Director Chairman 4 4 2 Yes Mr. B. Rama Raju Promoter & Executive Director Managing Director 4 4 3 Yes Mr. C. Srinivasa Raju Non-Executive Director Director 4 2 - Yes Mr. P.V. Rama Rao Independent and Non-Executive Director Director 4 4 5 No Mr. C. Satyanarayana Independent and Non-Executive Director Director 4 4 2 No Dr (Mrs) Mangalam Srinivasan Independent and Non-Executive Director Director 4 2 - No Prof Krishna G. Palepu Independent and Non-Executive Director Additional Director 4 - 3 - Mr. Vinod K Dham Independent and Non-Executive Director Additional Director 4 - 2 - 102. The same pattern is there for the Annual Reports 2000-2001 and 2002- 2003. While the Appellant is described just as a Non-Executive Director, Mr. B. Ramalinga Raju and Mr. B. Rama Raju are described as "Promoter & Executive Director". This contras....
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....nvestigation Report. While questioning Mr. B. Rama Raju in question no. 83, the SFIO makes certain observations which make it abundantly clear that the SFIO considered Appellant to be one of the persons duped by B. Ramalinga Raju and B. Rama Raju. These observations being of paramount importance are reproduced herein below for the sake of convenience: "Q. No. 83. SCSL from time to time submitted quarterly shareholding of the Company to the stock exchanges in compliance with clause 35 of the listing Agreement.......Investigations further revealed that all family members of you and your two brothers and entities controlled by them sold shares of SCSL in excess of Rs. 750 crores since allotment/acquisition of shares (excluding shares transferred to SRSR Holdings Ltd.). On one hand, the company manipulated their accounts and on the other hands, the promoter group sold the shares of Satyam, further in order to show that promoter group were still holding shares of SCSL, the company included Mr. C. Srinivasa Raju, Satyam Associates Trust and Others (subcategory) in the promoters category and submitted to the stock exchanges, which is misleading to the shareholders and investors......
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....efore, evident that the conclusions are inconsistent and do not speak in the same voice. Therefore, no reliance can be placed on the promoter filings made by the former management of Satyam from 2001 to 2008. 109. In Para 44, WTM asserts that CSR made a belated protest about his inclusion in the promoter holdings. Since it is now evident based on the SFIO Report and the Judgment of the CBI Court that the promoter filings are incorrect, the Appellant's belated protest is irrelevant and no inference can be assigned to the same. In any case, when the Appellant ceased to be a connected person on July 23, 2003, any subsequent filings by Satyam showing the Appellant as one of the promoters were beyond his control and, hence, are irrelevant in determining whether CSR was an insider or not within the parameters prescribed by the PIT Regulations. 110. Turning to the submission advanced by SEBI that CSR was in possession of UPSI while executing trades during the relevant period by virtue of CSR allegedly being a "Relative" of Mr. B. Ramalinga Raju owing to the fact that Appellant was Mr. B. Ramalinga Raju's wife's sister's husband. As stated hereinabove, the expression used by SEBI is tha....
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....r, the WTM at Para 35 places extensive reliance on the definition of "Relative" for other Appellants, but chooses to completely disregard the same when it comes to the case of CSR. 112. The only logical conclusion that emanates from a simple reading of the law in existence at the relevant time is that CSR was not, legally speaking, a relative of Mr. Ramalinga Raju and cannot be termed as such owing to anything on the record. The finding as to the "relative" against CSR is therefore totally unwarranted and patently against the law. Further, under the PIT Regulations of 1992, a relative is usually relevant for identifying a "deemed connected person" under Regulation 2(h)(viii), and not for the purposes of establishing reasonable expectation of access to UPSI and possession of UPSI. 113. It is pertinently noted that in Para 44 the WTM also asserts that the CSR has failed to buy any shares during the relevant period and therefore draws an inference that he is reasonably expected to have UPSI and possession of UPSI. 114. In response CSR asserts that he had compelling reasons to sell shares and the same was not done while in the possession of UPSI, since he was never in possessi....
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....ears that the company in order to boost the sentiment announced bonus issue and issued bonus shares in October 2006. Thereafter, price of the scrip was range bound between Rs. 400- Rs. 520 till September 2008. ... This could be the trigger point to the promoters of SCSL, as almost all members of the promoters group (except Shri B Ramalinga Raju, Smt B Nandini Raju and Smt B Radha Raju) sold their entire shareholdings by September 2005 and the company could be facing credit crunch on account of falsified funds to meet their financial obligations by way of sale of shares of SCSL. Through this process all family members exhausted their shareholding. This left only core promoters holding shares of SCSL and they have no-other option other than raising funds by pledging of shares of listing its group company shares..." Para 4.7.27.4. 116. CSR sold 16,66,356 shares of Satyam during January 2007 to December 2008. The last transaction of sale of shares on 22-12-2008 is significant. As evident from the SFIO Report and the CBI Court Judgement, the Board of Satyam based on representations of former management announced a merger of Satyam with Maytas Infra Ltd and Maytas Properties ....
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.... ".. During the course of investigation it was found out that the Promoters of SCSL and their family members had incorporated about 374 companies over a period of past 8 to 10 years for the purposes of venturing into infrastructure development business including eight investment companies. The profiles of these companies included the names of directors, paid-up share capital, loans taken and advances given by them along with the names of statutory auditors. On scrutiny of these profiles, it was found out that all these companies were mainly promoted by about 15 individuals whose names are given below..." (Para 5.1.5 and 5.1.6 of SFIO Report) 120. In light of the above, the conclusion drawn by the WTM with regard to the connection drawn between Appellant and B. Ramalinga Raju and the probability of information flow with CSR cannot be sustained. I am, therefore, of the considered view that the Appellant is not an "Insider" under the PIT Regulations during the relevant period. 121. Once it is held that CSR is not an "Insider" under the PIT Regulations the inquiry should end there itself. Since the Majority has opined that CSR was in possession of UPSI, I am compelled to de....
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....ghtly not considered these facts as they are irrelevant for a determination of violation of PIT Regulations. 127. The majority opinion refers to CSR being a Director of Satyam Infoway till 2005 which was one of the companies floated by Ramalinga Raju and his family members. Based on these circumstances, the Majority opinion concludes that the Appellant was closely connected with several companies floated by Ramalinga Raju and his family members. This finding is neither present in Show Cause Notice nor in the Impugned Order. Mr. Khambata, Learned Senior Counsel, in the Clarificatory hearing took us through the new submissions made by SEBI in the written submissions. SEBI in its Written Submissions also fairly stated that all this material about CSR being a Director of Satyam Infoway was not part of the SCN or the Impugned Order. Mr. Khambatta, Learned Senior Counsel also pertinently brought to the attention of this Tribunal the fact that since CSR was not a nominee of Satyam on Satyam Infoway Board, but of another third party investor. 128. The majority opinion holds that even though CSR relinquished his position as an Executive Director on 31.08.2000, he continued as a Non- E....
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....Chintalapati Srinivas Raju got 8,00,000 shares of Satyam which eventually became 76,50,000 shares on account of bonus and stock split within a period of one year." 132. I have scanned the entire Show Cause Notice and the impugned Order to see, if there was any such mention of CSR becoming a director of Joint Venture Partner of various group companies floated by Ramalinga Raju on account of his close relationship. There is no such allegation in the Show Cause Notice nor is there a finding in the Impugned Order to this effect. On the contrary, as Mr. Khambatta pointed out in the List of Dates and the Appeal Memo, the Appellant formed SES Pvt. Ltd. in which he held 20% stake. In the Appeal, it is stated that he was the founding MD and CEO of SES Ltd. 133. When Satyam Enterprise Solutions Pvt. Ltd (SES) merged with Satyam, CSR received about 8 lakhs equity pursuant to a Scheme of Amalgamation approved by the AP High Court. As Mr. Khambatta rightly pointed out in the clarificatory hearing, the 8 lakh shares became 76 lakh shares on account of stock split and bonus issue which happened for all shareholders and not just for the Appellant, and more importantly without any action on t....
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....s Appeal can be disposed on the same grounds. 137. The Appellant sold 8 lakh shares from 04-01-2001 to 14-03-2001. After 31-03-2001, there was no dealing in securities by the Appellant, but Appellant only retuned 24 lakh shares which were never sold, but were merely returned to CSR. These shares which were returned were sold by CSR subsequently and were included in the Impugned Order against CSR. The SCN and the Impugned Order consider only the transactions between 04-01-2001 to 14-03- 2001. The fabrication of financial statements (which is the UPSI herein) commenced after 31.03.2001. Since the transactions undertaken by the Appellant were prior to the UPSI coming into existence, it would not fall within the prohibition in Regulation 3. 138. The similarity does not end there. Like Jhansi Rani, this Appellant also sold its shares prior to 2002 Amendment to the PIT Regulations. As discussed above, the prohibition under Regulation 3 prior to the 2002 Amendment can only be invoked if the insider sold shares on the basis of UPSI. There is no finding in the impugned Order that CHPL sold shares on the basis of UPSI. Ironically majority view has not applied the same yardstick on whic....
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....(Para 37). However, as discussed above, CSR ceased to be a connected person on 22.07.2003. Consequently, when the Appellant sold the shares on 04.08.2005, he could not be "a deemed to be connected person" since CSR himself ceased to be a connected person. On this short point alone, the order of the WTM is liable to be quashed and set aside. 143. However, this appeal raises important questions of law on invoking PIT Regulations against a dead person. The following questions arise: a. Do proceedings under PIT regulations abate upon the death of a person who is alleged to have committed insider trading? b. Can proceedings under PIT Regulations even be issued against a dead person? c. Can SEBI proceed against the legal heirs for disgorgement of unlawful gain? 144. In answering these questions, two situations arise : First, when an alleged offender dies after SEBI has made a determination of violation of the PIT Regulations. In this category, SEBI can subject to the provisions of SEBI Act and the PIT Regulations can recover the unlawful gain from the legal heirs, if it is found that the unlawful gains accrued to the estate. Second, an a....