TaxTMI 
TaxTMI 
2003 (11) TMI 636
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....ame order SEBI directed to (i) initiate prosecution under section 24 of the SEBI Act and (ii) adjudication proceedings under section 15I read with section 15 G of the SEBI Act against the Appellant. 3. The Appellant is the Managing Director of ABS Industries Ltd., Vadodara (ABS) a company incorporated under the Companies Act 1956 (name of the company has been subsequently changed to Bayer ABS Ltd.). The main business of ABS is manufacture of ABS resins (Acrylonitrile Butadiene Styrene) and SAN, (Styrene Acrylonitrile resins). Shares of ABS are listed on Bombay Stock Exchange National Stock Exchange, Ahmedabad Stock Exchange and Vadodara Stock Exchange. Bayer AG (Bayer) is a company registered in Germany having many subsidiaries in various parts of the world. Bayer took controlling stake in ABS in October 1996 by acquiring (a) 55,80,000 shares in the allotment made on a preferential basis by ABS (@ ₹ 70/-) (b) 20% shares from the existing shareholders @ ₹ 80/- per share in a public offer. 4. It has been stated by SEBI that there were allegations of purchases being made prior to announcement of Bayer acquiring controlling stake in ABS, on the basis of inside in....
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....SE on October 1, 1996 in this regard; (c) this purchase was financed by the Appellant; (d) while holding that there was requirement to establish "profit" for the purpose of establishing a violation of Regulation 3 read with Regulation 4 of the SEBI Regulations and accordingly making no specific finding that the Appellant had made any profit from the said transaction, and further finding that in fact the action of the Appellant in this regard were beneficial to the Company, the Chairman found the Appellant in breach of Regulation 3, and in violation of the Regulation, pursuant to the provisions of Regulation 4 thereof; (e) while finding that issuance of directions under the Regulation 11 would be "inoperative and infructuous" in the facts and circumstances, pursuant to section 11(1) Read with Section 11 B of the SEBI Act, the Chairman who Suo motu directed the Appellant to deposit a sum of ₹ 34,00,000 with the Investor Protection Funds of BSE and NSE to compensate the investors who may come forward at a later period of time seeking compensation for the loss incurred by them in selling at price which were lower than the offer price; 8. While makin....
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....telecommunication instruments, were planning to put up facilities in India. The Appellant was aware of the importance of technological arrangements with foreign companies so as to remain an important market player in the new economic scenario. In this regard, ABS had serious dialogues with reputed global manufacturers of ABS resin, including Japan Synthetic Rubber ("JSR") (which was also the Company's existing technical collaborator), Mitsubishi Rayon, Toyo Engineering, Dow Chemicals, Monsanto Chemicals, etc. since 1994. There had been several frequent reports and articles in various newspapers and magazines from late 1994, all through 1995 and most of 1996 that ABS was seriously contemplating association with a foreign company. In this context paginated index copy of the relevant press clippings filed in the Tribunal was referred to. In mid - July 1995, the Company signed a secrecy agreement with Monsanto to explore the possibility of technical/foreign collaboration, while dialogues with other foreign companies continued. In November 1995, Monsanto's styrenic business worldwide was taken over by Bayer. As a result of this, the contractual rights and obligations u....
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....at stage, there was no agreement or understanding between the parties and there was no certainty that the parties would infact agree to go ahead with the joint venture. Accordingly the Board authorised the Appellant to undertake further discussions in the matter. There was no concrete proposal whatsoever before the Board on which it could take a decision, at that stage. The resolutions passed by the Extraordinary General Meeting were subject to the approval by the financial institutions. On September 29, 1996, the Appellant visited Germany again, with a view to obtain a definite commitment from Bayer to enter into the said joint venture/merger and to agree on the terms and conditions on the basis of which the parties would do so. The experts were involved for the first time at this stage to iron out the methodology and modality of investment. Appellant travelled with the Company's legal counsel for this purpose. Bayer had invited their merchant bankers and legal advisors to be present at the said discussions in Germany. This was the first time that the said experts were involved in the discussions, as it was hoped that the discussions would for the first time culminate in a def....
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....ome null and void. Subsequently, the shareholders passed a special resolution on October 30, 1996 approving the preferential allotment of shares to Bayer. At this meeting, UTI categorically opposed the preferential allotment to be made to the promoters. This is recorded in the minutes of the meeting. 14. In the last week of December, 1996, owing to considerable pressure from the financial institutions, Bayer was forced to increase the offer price from ₹ 70/- per share to ₹ 80/- per share. The announcement to increase in the offer price appeared in the news papers on December 27, 1996. However, this decision was taken by Bayer and its merchant bankers pursuant to their discussions with the financial institutions. The Appellant was not involved in any manner in that decision. 15. The Company has significantly benefited by the induction of Bayer. All creditors continue to rate the Company with the highest creditworthiness having the entire loan repayments and schedules being met in a timely manner. It has also strengthened the relations with vendors, suppliers, and employees and also in relation to research and development. If the joint venture/merger was not successful,....
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....the stock exchanges that a Board meeting was going to be convened to discuss and decide on raising of further capital through preferential offer, if any. (e) Further, the Appellant had instructed Shri Kedia again to purchase further shares from the market. In fact, after the press advertisement on October 8, 1996 1,24,250 shares were purchased at a price of over ₹ 80/- Therefore, clearly the shares were acquired only to fulfill the obligation undertaking by the Appellant to Bayer to ensure that it obtains 51% shares in the Company. The Appellant did not seek to acquire the shares in order to make any profit therefrom. Bayer's induction was extremely critical to the Company, and it is only with this objective in mind, i.e. in order to ensure that Bayer succeeds in obtaining 51% shares in the Company, that the Appellant requested Shri Kedia to acquire the shares. The Principles of Insider Trading 17. The SEBI Regulations on insider trading seek to prohibit persons who by virtue of their connection with a company received unpublished sensitive information from using such information/dealing in the securities of the company on the basis of such information to make sec....
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....on is only when information is entrusted for a corporate purpose and should not be used for personal benefit on the principle that there is inherent unfairness when the party takes advantage of such information knowing that it is unavailable to others. Consequently it is only when the information is being misused for personal benefit or where a person takes advantage of such information that there would be a contravention of fiduciary obligation cast upon the corporate insider who is in possession of the material information. The decision of the SEC does not suggest that the information cannot be used even for a corporate purpose. In fact, the SEC has recognised that if there are conflicting fiduciary obligations the obligation to the company is paramount and there is no compulsory bar to the use of such information. In the context in Cady Roberts at page 11 it is stated that "even if we assume the existence of conflicting fiduciary obligations, there can be no doubt which is primary here." Additionally on page 12 the court has considered what fiduciary duty was owed and in this context stated: " In the circumstances, Gintel's relationship to his customers was su....
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....ld not threaten legitimate business practices. So read, the anti fraud provisions would not impose duty on a tender offeror to disclose its acquisition plans during the period in which it "tests the water" prior to purchasing the full 5% of the target co.'s stock. Nor would it proscribe "warehousing". Likewise, market specialists would not be subject to a disclosure or refrain requirement in the performance of their every day (455 US 243) market functions. In each of these instances, trading is accomplished on the basis of material non-public information, but the information has not been unlawfully converted for personal gain. 23. Justice Blackmun in his dissent inter alia observes "The duty to abstain or disclose arose, not merely as an incident of fiduciary responsibility, but as a result of the "inherent unfairness" of turning secret information to account for personal profit." He went on to observe "the concept of 'insider' itself has been flexible; wherever confidential information has been abused prophylaxis has followed. 24. The US Supreme Court had once again considered the principle of disclose or abstain in Dirks ....
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.... the Supreme Court went on to observe "As the facts of this case clearly indicate, the tippers were motivated by the desire to expose the fraud see supra 648-649. In the absence of a breach of duty to shareholders by the insider, there was no derivative breach by Dirks. Blackman J. in his descent in footnote 11 explained requirement of scienter in insider trading cases. The Court observed "....when the disclosure to an investment banker or some other advisers, however, there is normally no breach because the insider does not have scienter; he does not intend that the insider information be used for trading purpose to the disadvantage of shareholders. Moreover, if the insider in good faith does not believe that information material or non-public, he lacks the necessary scienter, Earnst & Earnst v. Hochfelder 425 US, at 197. In fact, the scienter requirement functions in part to protect good faith errors by this type Id, at 211, n.31" 25. In the context of the facts and circumstances of the case, and in view of the said legal position it cannot by any stretch of imagination have been said that the Appellant had breached Regulation 3 and rendered himself liable for pen....
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....M/s. Rajasthan Polymer & Resin Ltd., (2) M/s. Polychem Ltd., and (3) M/s. Bhansali Engineering and Polymer Ltd., have suffered significant loss and that their networth had been wiped out significantly and they were nearly sick companies for the past several years. It was also pointed that in this background it was imperative and in the interests of company and its stakeholders, such as shareholders, lenders, employees, suppliers, etc., that the company survived. The only way for ABS to survive was the introduction of a foreign partner. Bayer was one of the largest and most reputable global conglomerates in this business and their induction into the company would go a long way in the survival and growth of the Company. (g) The Chairman in his decision of 1st June 2001, appreciated the fact that the Company gained substantially from the take over by Bayer AG, as mentioned in para 14(x) of the Reply. The Chairman went on to observe "however, there are many advantages (some of which are listed in para 14 above) which are not possible to quantify in terms of gain, there is no doubt ABS Industries really gained immensely from the take over by Bayer AG." (h) The Appellant ....
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....appropriation theory outlaws trading on the basis of non-public information by a corporate 'outsider' in breach of a duty owed not to a trading party, but to the source of the information." 11 and 12 The misappropriation theory advanced by the Government is consistent with Santa Fe Industries Inc Vs. Green 430 US 462, a decision underscoring that section 10(b) is not an all purpose breach to fiduciary duty ban; rather it trains on conduct involving manipulation or deception." 27. The Court while considering the earlier decisions of the US Supreme Court in Chiarella and Dirks observed: "......This Court found no obligation, see id., at 665 - 667, 103 S.Ct. at 3266 - 3268, and repeated the key point made in Chiarella; There is no "general duty between all participants in market transactions to forego action based on material, the non-public information." 28. Consequently even while continuing with the misappropriation theory in the context of insider theory the US Supreme Court did not lose sight of the underlying principles of insider trading and breach of fiduciary duty which it settled in its earlier decision while dealing with the classical ....
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.... the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and as pointed by Lord Denning, it would be idle to expect every statutory provision to be "drafted with devine prescience and perfect clarity. We can do no better than to repeat the famous words of Judge Learned Hand when he said: ..."it is true that the words used, in another literal sense, are the primary and ordinarily less reliable source of interpreting and meaning of any writing; be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning" 6.It is a well recognized rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided." 33. Considering the settled principles of interpretation, Regulation 3 must be interpreted bearing in mind the basic underlying assumption and the intent of t....
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....ensitive information relating to the affairs of a company, and deal in securities of such company or cause the trading of securities while in possession of such information or communicate such information to others who use it in connection with the purchase or sale of securities. Thus, by benefiting certain investors as compared to others. Insider trading prejudices smooth functioning of the securities market and undermines investor's confidence." 35. In the light of the underlying principles relating to the prohibition of insider trading as well as the objects and reasons and intention behind the Regulations, it is abundantly clear that what was intended to be prohibited under Regulation 3 was the dealing in securities which was with a view to misuse information for obtaining unfair advantage. One of the indicia of that unfair advantage was making of profit. Consequently if the dealing in securities was not with a view to misuse the information or gain unfairly from the use of the information or to use information to make profit, that dealing in securities was not prohibited or covered by Regulation 3. 36. The impugned transactions were undertaken by the Appellant in di....
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...."manipulation or deception" by the insider (Dirks v. US SEC 403 (646), that proof of mens rea to manipulate or deceive is therefore necessary. The clearest evidence of the "manipulation" or "deception" being perpetrated by a corporate insider is when an insider uses the unpublished price sensitive information to make secret profit/personal gains. The necessary circumstance for liability is to ascertain whether the insider has made any secret profits or personal gains. If such benefit can be established, the insider is liable for the offence for insider trading (Dirks v. SEC 406 US 646). 42. The U.S. Supreme Court, while considering the Appeal in the case of Dirks v. SEC, while holding that personal benefit/personal gains form the basis of liability of insider trading stated: "In some situations the insider will act consistently with his fiduciary duty to shareholders and yet release of the information may affect the market. For example, it may not be clear - either to the Corporation insider or to the recipient analyst - whether the information be viewed as material non-public information. The Corporation Official may mistakenly think informati....
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....ider trading is unlawful conversion of unpublished price sensitive information resulting in secret profits/ personal gains. The Regulations 48. The prohibition against Insider Trading in India is provided for in Regulation 3 of the said Regulations which so far as relevant, reads : Prohibition on dealing, communicating or counseling on matters relating to insider trading - No insider shall - either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information" Regulation 2(e) defines an insider : "Insider means any person who 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, by virtue of such connection, to unpublished price sensitive information in respect of securities of the company or who has received or has had access to such unpublished price sensitive information." Connected person is defined by a Regulation 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 o....
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.... would not be in breach of the Regulations if they are undertaken for a corporate purpose, that any other interpretation of Regulation 3 would render the same absurd for inter alia the following reasons: a) All corporate activities on the basis of unpublished price sensitive information would stand proscribed. b) Corporate insiders would be subject to a form of strict liability against dealing in securities even if they act in furtherance of their duty to the Company. c) A corporate insider would be liable although he has committed no breach of his fiduciary duties, to the Company. d) Promoters cannot consolidate their holdings in their company subject to limit prescribed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, on basis of unpublished price sensitive information. 52. Chapter III of the SEBI Regulations on insider trading sets out SEBI's powers to investigate into suspected breaches of the said Regulation. Regulation 5 empowers SEBI to inter alia investigate and inspect the books of account and other records and documents of the insider. Regulation 6 prescribes the procedure to be followed for the purpose of investigation. Re....
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.... any final and/or conclusive determination as to whether the insider has acted in breach of the Regulations. It is for that reason that advisedly the Regulation does not empower the Board to call for any Documentary evidence or to summon any persons it considers necessary as witnesses before passing the said directions provided for therein. It is significant to note that in contrast Section 15-I(Power to Adjudicate) of the said Act expressly confers upon the Adjudication Officer the power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document which in the opinion of the Adjudicating Officer may be useful for or relevant to the subject matter of the inquiry. 56. From the scheme of the SEBI Act read with the Regulations it is apparent that a final and conclusive determination as to whether an insider has breached the Regulations can only be done by the Adjudicating Officer, pursuant to the provisions of Sections 15- G, 15-I and 15-J of the said Act and not by the Board pursuant to Regulation 11. 57. The fact that SEBI, while framing the said Regulations did not intend to confer upon the ....
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....d this information was not available to sellers and public at large. 17. The information about the "takeover" is price sensitive information, this can be seen from expression "unpublished price sensitive information" which is defined in Regulation 2 (k) of the Regulations. This expression reads as under: "unpublished price sensitive information" means any information which relates to the following matters or is of concern directly or indirectly, to a company, and is not generally known or published by such company for general information, but which it published, is likely to materially affect the price of securities of that company in the markets- (i) financial results (both half yearly and annual) of the company (ii) intended declaration of dividends (both interim and final); (iii) issue of shares by way of public rights, bonus shares (iv) any major expansion plans or execution of new projects; (v) amalgamation, mergers and takeovers; (vi) disposal of the whole or substantially the whole of the undertaking; (vii) such other information as may affect the earning of the company; (viii) any changes in the policies, plans or o....
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....ing was to be convened to discuss and decide raising of further capital through a preferential offer, for the purpose of the said merger/takeover. Further, it is empirically able to establish that the general information that the company was merging/entering into a joint venture with another company and/or Bayer AG was not price sensitive information and did not materially affect the price of securities of ABS Industries in the market, e.g. in February 1996, the Express Weekly (Edition of 8th January to 14th January, 1996) carried an article wherein it was mentioned that ABS Industries was contemplating a tie-up with Monsanto (subsequently, publicly taken over by the Bayer AG). On the very next day after the article was published, the price of ABS's share on the Bombay Stock Exchange dropped to ₹ 72.28 from prior high of ₹ 84.74 as on 2nd January 1996. The share price continued to decline and as at 31st January 1996, stood at ₹ 76.80. Similarly the price of ABS share on the NSE on 9th January 1996 dropped to ₹ 73 from a high of ₹ 83 on 1st January, 1996. Similarly, when ABS Industries informed the Stock Exchanges that Board will be meeting to consi....
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.... unpublished price sensitive information. It is not open to SEBI to make the said submission and the same should be struck off from the record of the proceedings. If the same is considered at this stage the same would violate natural justice as the Appellant has had no opportunity to place on record and plead that the said information was neither material nor price sensitive no unpublished. It was Bayer's world wide policy that it required to hold 51% equity of any company it enters into a tie-up/ merger / take-over with, which fact is widely known, therefore the said information can not be regarded to be unpublished. Power to direct disgorgement / compensation 66. The impugned order directs the Appellant to deposit a sum of ₹ 34.00,000/- with the Investor Protection Funds of BSE and NSE, purportedly to compensate investors who may come forward at a later period of time seeking compensation for the alleged loss incurred by them in selling the said shares to I. P. Kedia at a price lower that the aforesaid price. The said direction is in breach of principles of Natural Justice, unreasonable, arbitrary and ultra vires the provisions of Regulation 11 and /or Section 11 read....
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....It may issue such directions; (a) to any person or class of persons referred to in section 12, or associated with the securities marked; or (b) to any company is respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market." 68. Paragraphs 33, 34 & 35 of the said notice issued to the Appellant pursuant to Regulation 9, reads that: "33. Section 11B was inserted by the Securities (Amendment) Laws, 1995. This provision of the Act operates independently of and in addition to the regulations. Besides section 11B being a part of the SEBI Act, is superior and wider to the regulations which are pieces of subordinate legislation. 34. To protect the interest of investors and integrity of the market it is considered, fit and proper, in the facts of the case, to issue a direction because SEBI as a regulatory body would be failing in its duty if it does not take corrective steps to protect the interest of investors and integrity of the market. Besides it is also the duty of SEBI to ensure that the transactions in the securities market are carried out in a fair and transparent manner and there is....
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....rt in the matter of B.P. Plc v. SEBI (SEBI Appeal No.10 of 2001 in Appeal no.37 of 2001) dated May 2, 2002 by which the Hon'ble Bombay High Court upheld SEBI's directions to the Appellants therein to pay interest to the aggrieved investors. This judgment and order is clearly distinguishable from the facts and circumstances of the present matter. In B.P. Plc's case it was held that SEBI has the power to direct the payment of interest to aggrieved investors on a conjoint reading of the provisions of the said Regulation 44 and Section 11B of the said Act. Regulation 44 confers wide powers upon the board which include "taking action against the person concerned", in the interest of the securities market, that it is due to these wide powers conferred by Regulation 44 that it was held that SEBI has the power to award interest to the aggrieved investors. 72. It was also argued on behalf of SEBI that the power to direct disgorgement of alleged profits, to aggrieved investors is an equitable power which vests in SEBI, and that such a direction of disgorgement is compensatory in nature. It is well established that equitable powers can only be exercised by courts and no....
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.... the purposes enumerated therein, which do not include compensating any aggrieved parties. Further that the said Regulation 11 does not empower the Board to arrive at any final and/or conclusive determination as to whether any person has acted in breach of the said Regulations for reasons more particularly stated above. Such final and conclusive determination can only be made by the Adjudicating Officer, pursuant to the powers conferred upon him by sections 15-G, 15-I and 15-J of the said Act or pursuant to a prosecution initiated by the Board pursuant to Section 24 of the said Act. Therefore there is no question of any award of compensation being made by the Board pursuant to Regulation 11. 76. No aggrieved party has come forward till date, despite the fact that the impugned order is dated June 10, 2001 and was widely available and publicized shortly thereafter, that there appear to be no aggrieved persons, to compensate, that this being the case, the said directions to deposit ₹ 34,00,000/- is in the nature of penalty. It is well established in law that power exercisable pursuant to Section 11 B of the said Act is purely remedial in nature, and that no penal orders can be ....
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....l benefit 80. The impugned order at paragraph 20 stated: "It was contended that in the absence of any evidence that acquisition was for trading purpose, i.e. the process of buying and selling with intent to make profit, there cannot be violation or contravention of the insider trading Regulations. The contention is not acceptable as the word used in the Regulations is "dealing in securities". This expression is defined in Regulation 2(d) which reads as "dealing in securities means and act of buying, selling or agreeing to buy, sell or deal in any securities by any person either as principle or gent". Thus, mere act of buying is covered under the Regulation." 81. From paragraph 20 it is clear that the impugned order proceeds on the basis that profit is not an essential ingredient for the purpose of establishing a breach of the said Regulations. Therefore the impugned order fails to make any finding whatsoever with regard to any alleged profit made by the Appellant. Despite this in the course of the hearing before the Tribunal it was for the first time submitted on behalf of the Respondent that the Appellant had made a profit by entering into the sai....
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....tors was to consist of the total number of nine directors out of which Bayer was entitled to appoint and nominate the majority number of directors i.e. five directors on the Board. Clause 2.2 further provides that as long as the Appellant owns not less than the minimum required shares of the said joint venture company, he would be entitled to appoint and nominate only four directors, which appointments include the nominees of Financial Institutions. Further, that in case the Financial Institutions decide to appoint more than two nominee directors, Bayer would also have the right to appoint additional directors in order to maintain its majority on the Board. From the said Clause 2.1 and 2.2, it is abundantly clear that the Management control of the resultant joint venture company does not vest with the Appellant, and in fact vests with Bayer. Clause 3 (Management) and in particular Clause 3.3. thereof expressly provides that although the Appellant was continued as managing director of the resultant joint venture company till 1998 and thereafter till 2003, and as such was in charge of the day to day management of the resultant joint venture this power was subject to the superintenden....
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....shares as contemplated in the original draft shareholders agreement. Infact the financial institutions opposed allotment of any additional shares to the Appellant as originally contemplated. Consequently, in fact the Appellant has personally suffered in the process of ensuring the successful entry of Bayer into ABS. 86. It is incorrect that the Appellant made any profit/personal benefit by entering into the said transactions through the said I.P. Kedia. The Appellant has not contravened Regulation 3 of the SEBI Regulations as alleged and the impugned order is accordingly liable to be set aside. The Respondent's submissions 87. This is a case which essentially deals with violations of the SEBI Insider Trading Regulations by the Appellant. The facts relating to acquisition of shares are not seriously disputed by the Appellant. The Appellant has only argued that purchase of shares was not done on the basis of price sensitive information and in any event the said purchases were not effected on the basis of unpublished price sensitive information. The Appellant has further contended that the purchase of shares even if held to have been made on the basis of unpublished price sensi....
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....etween the 8th and 20th of September 1996; therefore it can safely be concluded that the "in principle" agreement was arrived at on the 5th and 6th of September 1996. On 29th September, 1996 the Appellant once again visited Germany alongwith his legal advisors and the Merchant Banker and the legal advisors for Bayer in India. On 2nd and 3rd October, 1996 Legal consultants of both companies worked out a draft subscription agreement and shareholders agreement setting out the terms and conditions and obligations of the respective parties. These agreements were approved by the respective Board of Directors of ABS and Bayer respectively on 5th October 1996. On 8th October, 1996 Bayer made an open offer for purchase of 20% shares of ABS at ₹ 70/- per share, which was raised to ₹ 80/- per share on 26th December 1996. On 30th October, 1996 ABS held an Extra Ordinary General Meeting at which resolutions are passed inter alia for allotting to Bayer 55,80,000 equity shares and the Appellant 4,20,000 shares on preferential basis @ ₹ 70/- per share. Between 9th September and 8th October 1996 the Appellant himself and through his investment companies Tash Investment ....
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....heir shares to Bayer at a public offer. There is nothing in the submission made by the Appellant to substantiate this incorrect premise. It is therefore clear that Bayer would have been able to obtain the necessary 20% at the open offer and there is no material available on record to suggest anything to the contrary. As per the agreements disclosed by the Appellant, he was only required to co-operate with Bayer in the public offer, such co-operation can never extend to or justify acting contrary to law. In this context referred to Caddy Robert's case. 91. Under the Insider Regulations, profit element is not an ingredient of the offence of insider trading. The Appellant has admitted that the price at which the shares were purchased during the said period was between ₹ 59/- and ₹ 62/-. The entire 1,82,500 shares were offered in the open offer to Bayer at the rate of ₹ 80/- per share. SEBI has taken the average cost of purchase during the said period at ₹ 61.50 per share and accordingly has arrived at the profit made on sale of the said shares to Bayer at the open offer at ₹ 34,00,000/- During the course of inquiry the Appellant was shown the basis o....
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....h October 1996 the Appellant had financed Mr. Kedia and directed him to purchase shares of ABS on the basis of the aforesaid price sensitive information. The Appellant is therefore guilty of having breached Regulation 3. It is clear from the bare reading of Regulation 3 that the prohibition of insider trading by an insider is an absolute offence and that benefit or gain is not an ingredient of the offence. The SEBI (Insider Trading) Regulations, 1992 96. The relevant provisions of SEBI (Insider Trading) Regulations, 1992 are:- Regulation 2(c) "connected persons" 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 the company by virtue of sub clause (10) of Section 307 of the 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 and who may reasonably be expected to have access to unpublished price sensitive information in relation to that company." Regulation 2(e) ""Insider" means any person wh....
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....panies Act, 1956 (1 of the 1956); Regulation 2(k) "Unpublished Price Sensitive Information" means any information which relates to the following matters or is of concern directly or indirectly to a company and is not generally known or published by such company for general information but which if published or known is likely to materially affect the price of securities of that company in the market- (i) financial results (both half yearly and annual) of the company (ii) intended declaration of dividends (both interim and final) (iii) issue of shares byway of public right bonus etc. (iv) any major expansion plans or execution of new projects (v) amalgamation, mergers and takeovers (vi) disposal of whole or substantially the whole of the undertaking (vii) such other information as may be affect the earnings of the company (viii) any changes in policies plans or operations of the company. Information gained relating to issue of shares by way of preferential allotment (Regulation 2(k) and relating to amalgamation, mergers, and takeovers (Regulation 2(k)(v)) are undoubtedly "price sensitive information." Regulation 3 "3. prohibition on dea....
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....tive information. Merely to reinforce the point that information relating to mergers is unpublished price sensitive information, SEBI in the impugned order has cited the following judgements of the U.S. Courts. 1. Basic Incorporated 484 US page 224. 2. TCS Industries Inc. Vs. Northway 426 US 449. 98. With reference to the Appellant's objection that the information relating to the merger with Bayers was not an unpublished price sensitive information, the Appellant had referred to articles published in various newspapers and magazines. SEBI in the impugned order at pages 70 to 74 had effectively dealt with the same. Even the Appellant himself had treated the said information as confidential and the Appellant had not even disclosed the same to his own brother-in-law, whom he had instructed and put in funds for the purpose for purchasing shares of ABS. This itself proves that the said information was unpublished price sensitive information and the Appellants arguments to the contrary cannot be and ought not to accepted. Insider Trading in the United States of America. 99. The Insider trading law in the USA is part of the general law relating to fraud. Under the federal syste....
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....w's relating to insider trading. Concepts and developments in Insider trading law by judge made law in the USA and UK have also to be considered with reference to the existing legislation relating to insider trading in the USA and UK and those concepts and developments cannot be imported into the Indian legislation relating to insider trading which is a well defined and self contained code. 102. Under Regulation 2(k) of the Insider Regulations what is meant by Unpublished Price Sensitive Information is clearly defined. The 3 Judgements of the U.S. Courts referred to in this regard in of the impugned order are only to re-inforce the fact that information about merger is Price Sensitive Information and has been consistently recognised as such all over the world and especially in the U.S.A. where the law of insider trading is the most developed. 103. It was submitted that in the Impugned Order SEBI has merely cited the classic statement of the law relevant to insider trading as was very eloquently set out in the case of SEC Vs. Texas Gulf Sulphur Co.(410 F 2d.848) that " Anyone in possession of material insider information must either disclose it to the investing public or,....
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....e ground that he was also trading in implementation of his estate plan. He would be doing both. Yet even to regard the good and the bad purpose as alternative is to sugar coat the pill. In the case just put, the insider would be using insider information to implement his estate plan more effectively. He would be like someone who robbed a bank with the intention of giving the money to charity. The noble end would not immunize the ignoble means of achieving that end from legal punishment". This case was specially cited to meet the Appellants argument in defence that since the Appellant had traded on the basis of insider information but had done so for a corporate benefit he had not committed a breach of the Regulations. 108. The Judgement of the U.S. Supreme Court in the case of Dirks Vs. SEC reported in 463 U.S. 646 is totally inappropriate as it was a tipper-tippee" case, whereas the present case is one of an insider himself trading on the basis of the Unpublished Price Sensitive Information, and the concept of gain is irrelevant to the offence of insider trading under the SEBI Act and the Regulations. Dealing in securities as defined under Regulation 2(d) i.e. the mere ....
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....nt context. The issue in that matter, related to the construction of the word "Obtained", in Section 1(3) of the Companies Securities (Insider Dealing) Act 1985. In the present Appeal, there cannot be any dispute that the Appellant was an insider at the appropriate time and that by reason of his possession he had Price Sensitive Information. 112. The Appellant also relied on the above Judgement of the erstwhile Appellate Authority, in Hinudstan Lever Ltd. vs. Securities & Exchange Board of India 1998 SCL 311 which was at that time the Central Government. The Appellate Authority held, that there was no power to invoke the provisions of Section 11(1) read with Section 11B of the Act, for the purpose of imposing an Order directing compensation to be paid to the UTI, this is evident from Para 23 of the Order whereby the Appellate Authority held inter alia that the general powers of the Act could not be used and that only the powers under Section 15G of the Act, could be invoked. The Appellate Authority also held that an Order directing prosecution, should be based on conclusive determination of all aspects of insider trading and on specific justification in terms of the grav....
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....st of investors and the integrity of the securities market and for due compliance with the provisions of the Act/Rules made thereunder and the Regulations. 116. SEBI's power under Regulation 9(2) is also very wide and is not couched with any restrictions or conditions. Regulation 11 refers to Regulation 9(2) and empowers SEBI to give such directions, "..... to protect interest of investors, and in the interest of the securities market......". The powers under Regulation 11 are also very wide and are not couched with any conditions/restrictions, the directions set out in Regulation 11(a)(b) and (c) can therefore only be illustrative, in spite of the use of the word "namely". Unless the provision is so interpreted, it would impose a restriction on the powers of SEBI to give directions, when the operative part of the section contains no restriction on the power of SEBI to pass orders in the interest of investors and the securities market. On a proper and purposive interpretation of Section 11(2)(g) read with Regulation 9(2) and Regulation 11, it is clear that SEBI has the power to order a person found guilty of Insider trading under Regulations 3 and 4 and to ....
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....USA there does not appear to be any investor protection fund as there exists in India. Even otherwise in fact and law the cases cited are not applicable to the facts of the present case or the Indian law. Tribunal's findings: 118. I have carefully considered the detailed submissions and the material available on record. I have also perused the authorities cited by the Counsel for the parties. 119. The charge against the Appellant is that of violating the SEBI Regulations on insider trading. Though much has been said in the order about the acquisition of shares by Mr.Kedia on behalf of the Appellant, ultimately it has boiled down to the purchase of only 1,82,500 shares by Shri Kedia during the period September 9, 1996 1st October, 1996. Both the parties have chronicled the sequence of developments preceding the acquisition of shares of ABS by Bayer. I do not consider it necessary to repeat the same and further burden this order. From the particulars furnished by the parties, it appears to me that ABS was considering to diversify its product range. For the purpose it was considering proposals from overseas companies from the beginning of 1995. It was in July 1995 ABS signed a ....
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....scussion with Bayer. It is also noted that on 29th September 1996 to October, 1996 the Appellant visited Bayer's office in Germany along with legal Counsel to "work out legal modalities". Bayer's legal advisers and merchant bankers were also present in the said meeting and in these meetings all modalities, valuations and offer price were finalised, subject to Board approvals. According to the Appellant on 1.10.1996 "a commercial understanding to proceed with the transaction was arrived in Germany. It was only at this stage that the transaction as well as the terms thereof acquired certainty." It seems that the meetings of legal advisers and merchant banker of ABS and Bayer was held only to "work out legal formalities" in pursuance of the discussion the Appellant had with Bayer people in Germany on 5/6th September, 1996. If there was no clear understanding and any decision about the nature of association of Bayer with ABS there was no question of working out legal formalities. Meeting held during September 29 to 3rd October, 1996 was only to complete the modalities/formalities with reference to the decision arrived at in the meeting the Appellan....
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....hares at the rate of ₹ 82/- on 8th October, 1996 after publication of public announcement, by way of negotiated deal. To a question "when it can be said the general public came to know about strategic alliance between Bayer Industries and ABS Industries ? - The first news item appear to be carried out in the second week of October, 1996 by various financial dailies."" The Appellant's answer was that "The information on the strategic alliance with Bayer was first given out by way of communique to Bombay Stock Exchange/NSE on 1st of October, 1996 indicating that in the Board meeting of 5th October a preferential allotment to M/s. Bayer Industries may be discussed." This statement from the Appellant confirms that till 1.10.96 arrangement with Bayer was an unpublished price sensitive information. To another question the Appellant had stated: "I would like to state that when I instructed Mr. Kedia between 9th September to 1st October 1996, date of intimation to Stock Exchange to purchase the shares of ABS Industries Ltd., I did not think even in my wildest imagination that I was committing any offence of any nature. My action was prompted by my f....
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.... explore the possibilities further and accordingly a team, from Bayer AG was allowed to visit in the first week of July 1996 to have Technological evaluation alongwith preliminary due diligence which was to be carried out by M/s. C.S. First Boston, USA on their behalf and part of their team. The information required by them have been given to the visiting team. Since the second half of July and August are traditionally holiday period in Europe, it was indicated that we could have further discussion some where in September, 1996". 122. To a question as to "Have you or any of your Pvt. Limited Cos. given any loan to Shri Ishwar Kedia? If yes, who negotiated this loan and what was the terms and conditions" the Appellant's answer was "When I returned from my trip from USA and Germany around 8/9/96 I learnt that Mr. IP Kedia telephoned my accountant Mr. S.R.Patel who is in my office handling my files. Mr. Patel informed me that Mr. IP Kedia is in urgent need of around ₹ 10 lacs. I told him to organise this money from Bank of Baroda against the FDR Deposit of my brother. The money was organised on my instruction from BOB and the money was sent to Mr. Ishwar....
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....at I was holding, 30% institutions were holding, around 25% my relations and friends were holding, 10% and balance was held by the public. I thought without creating any unnatural movement in the market either in price or sentiment if I could muster up some shares it would eventually help me reaching 51% target for Bayer as and when required. There was no intention at any point of time to make any financial gain out of such transaction. After our discussion in the Board meeting on 20th Sept. Board gave direction to proceed to have negotiation with Bayer and we left to Germany for such discussions around 29th Sept. From the time I gave instruction to Mr.Kedia to purchase such share until the date of public announcement he had procured on my behalf roughly more than 2 lacs shares. I categorically confirm that I had not informed Mr. IP Kedia about any discussion with Bayer AG for any possible joint tie up. As a matter of fact on the morning of 8th Oct. he was angry with me for not informing him earlier. Later on at 11.00 a.m. he called me and told on telephone that a lot of shares 1 lacs - 120000 at a price of around ₹ 81/- was available. By this time he had procured roughly abo....
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....t I had to maintain my shareholding as on the date they acquired ..... . It was therefore important for me not to dilute my shareholding but to get as much shares from the market in the natural course and accordingly with the best of the intention I had borrowed money from I-Sec at 27%. I had also borrowed money ranging 25-29% to finance these purchase. I once again would like to reiterate that I had no intention to make any money out of it. Only condition paramount in my mind was that Bayer gets 51% for the success of the discussion leading to possible joint venture. At any point of time I had no knowledge of committing any offense. The share subscription agreement which were approved by the Board and also sent to financial institutions and our communications to the Fin Instns requesting their approvals will amply support my above submissions". 123. On a perusal of the material available on record it is clear that the Appellant was frantic to bring in Bayer and that since Bayer's entry was subject to the condition that it would associate with ABS only if it held 51% in the capital of ABS this 51% procurement was required to be organised. The Appellant in that process did....
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....specific information is the price sensitive information, which I do not find having been disclosed in any of those press cuttings/reports. The fact that ABS was negotiating with few companies to bring in a partner was there since 1995. But specific details were not known to the public till 1.10.1996 i.e. the date on which the Stock Exchanges were informed. 125. SEBI is mandated to protect the interests of investors and promote the development of and to regulate the securities market. For the purpose SEBI is empowered to take suitable measures. In Section 11 of the SEBI Act, the powers and functions of SEBI have been specified. In terms of clause (g) of sub section (2) of section 11, SEBI is empowered to take measures for "prohibitting insider trading in securities". SEBI in exercise of its regulation making power available under section 30 of the SEBI Act has notified on 19.11.1992 Securities and Exchange Board of India (Insider Trading) Regulations, 1992 (the SEBI Regulations). This regulation has been substantially modified vide amendments made in the year 2002. The applicable regulation to the present case is the unamended regulation as it was the one in position at t....
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....sider coming in possession of inside information in relation to a company with whom he is connected which will have a material effect on the market price of the company's securities will be tempted to take advantage of such inside unpublished price sensitive information before it became public and make profit by buying the securities if the information is likely to lead to a rise in price and selling the shares already held if the information is likely to cause a fall in the price of such securities. By virtue of the confidential information, the insider gains an unfair secret advantage which will benefit him at the expense of the person he deals with". 130. The rationale behind the prohibition on insider trading, as Lord Lane puts it "is the obvious and understandable concern...about the damage to public confidence which insider dealing is likely to cause and the clear intention to prevent so far as possible what amounts to cheating when those with inside knowledge use that knowledge to make a profit in their dealing with others" (Attorney General's Reference No.1 of 1988 (1988) BCC 765 affirmed by the House of Lords as reported at (1989) BCC 625. The objec....
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.... on procedural aspects. Chapter II is the "charging" chapter. 133. Back to Chapter II. As stated earlier the Appellant has been found guilty of indulging in dealing in securities prohibitted by regulation 3(i)thereby attracting the provisions of regulation 4. We have seen the provisions of the said regulation. Regulation 3 is not only on dealing or trading in securities. There are three prohibitions. These are with respect to (i)dealing (ii) communication and (iii) counselling. In other words an insider in possession of price sensitive information is prohibitted from doing these three things with regard to concerned securities. We are here concerned on the applicability of clause (i) of regulation 3. The person who is prohibitted is "insider". What is prohibitted is dealing in listed securities on the basis of any unpublished price sensitive information. Expressions "insider", "dealing in securities" "unpublished price sensitive information" etc. have been defined in regulation 2 of the SEBI Regulations as follows: 2(d) "dealing in securities means an act of buying, selling or agreeing to buy, sell or deal in any securities ....
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....ion in relation to that company; 2(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 official or a member of a stock exchange or of a clearing house of that stock exchange, or a dealer in securities within the meaning of clause (c ) of section 2, and section 17 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), respectively, or any employee of such member or dealer of a stock exchange; (iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or, is a member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management company of a mutual fund or is an employee thereof who has a fiduciary relationship with....
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....he SEBI Regulations, need be considered. 140. The Appellant, admittedly is the Managing Director of ABS. It is also on record that he was privy to the discussions with Bayer in the matter of Bayer acquiring shares of ABS, eventually leading to ABS's merger with Bayer. Since, by virtue of his position in ABS, and his role in the active transactions it can be easily concluded that he had access to the information relating to the entry of Bayer in ABS. Therefore, he can be safely considered as insider. The Appellant has not denied SEBI's finding that he is an insider. The dispute is as to whether the material information was an unpublished price sensitive information. 141. The Appellant's claim is that he had acted in the interest of ABS. According to him the company has benefitted by the induction of Bayer. He has stated that all creditors continue to rate the company with the highest credit worthiness having the entire loan repayments and schedules being met in a timely manner, that it has also strengthened the relations with vendors, suppliers and employees and also in relation to research and development. According to the Appellant, if the joint venture/merger with B....
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....₹ 80/- by 25th of December just 5 days of closure to get the shares from financial institutions and the success of the offer. UTI and LIC did offer a large chunk of shares at ₹ 80/- which confirms my belief. However, I had no role to pay in the revision of the price since it was purely the matter between the merchant bankers of Bayer Industries and themselves." It is in the context of the said uncertainty, and in his anxiety to make some way or other to bring into a reality the induction of Bayer to ABS, the Appellant has stated that "I wanted to get as many shares for completing 51% for Bayer for the success of the arrangement. I therefore authorised Mr. I. P. Kedia even to buy at around ₹ 81/- since there was bulk lot of 1,20,000 shares even if it meant a certain financial loss." It is noted that this purchase was made after publication of the public announcement by Bayer to acquire 20% of ABS's shares at the rate of ₹ 70/- This is indicative of the Appellant's commitment to see that Bayer comes in as a joint partner for the benefit of ABS. 145. There is no denial of the fact that the shares tendered by Mr. Kedia in the public offer....
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....There is nothing on record to show that the relevant information was "generally known" as has been claimed by the Appellant. 148. Thus the charge that the Appellant, an insider, on the basis of the unpublished price sensitive information' purchased the shares of ABS, remains established. But in my opinion the purchase of shares in the light of the facts and circumstances as stated, can not be considered to be in violation of the SEBI Regulation so as to be proceeded against the Appellant. 149. While making the finding that the Appellant is in breach of Regulation 3 and 4 of the said Regulations the Respondent has relied upon case laws from the United States of America to "explain the philosophy of insider trading and to give a conceptual clarity and to reinforce the said order". According to the Appellant the impugned order proceeds on a misreading of the US case law. The Appellant had submitted that since the Respondent has extensively referred to the US law while interpreting the SEBI Regulations on insider trading not only in the case of the Appellant but also in the case of Hindustan Lever, decided earlier, it is apparent that the Respondent has consid....
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....rmation available to them by virtue of their position in the company do not gain an unfair advantage which will benefit them at the expense of the persons they deal with. What is being aimed at by the regulation is to prevent insiders taking unfair advantage over other shareholders. SEBI's argument is that regulations 3 & 4 of the SEBI Regulations do not require anything else to be proved to proceed against the person except that the person is an insider and that he had dealt with in the securities on the basis of the unpublished price sensitive information According to the Respondent under the SEBI Regulations profit element is not an ingredient of the offence of insider trading. SEBI had submitted that from a bare reading of regulation 3 it is clear that prohibition of insider trading by an insider is an absolute offence and that benefit or gain is not an ingredient of the offence. It is difficult to accept the version of SEBI. Once SEBI's view is accepted the very purpose of imposing prohibition on insider dealing in the securities on the basis of the unpublished price sensitive information would become meaningless. If an insider, based on the unpublished price sensitive....
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....offence "was punishable with imprisonment for a term which shall not be less than one month but which may extend to three years or with fine which shall not be less than two thousand rupees but which may extend to ten thousand rupees or with both." Further in terms of section 15G of SEBI Act persons indulging in insider trading are liable to a monetary penalty not exceeding twenty-five crore rupees or three times the amount of profits made out of insider trading whichever is higher (prior to the amendment to the section on 29.10.2002 the maximum penalty leviable was rupees five lakhs). The monetary penalty provided in section 15G is in the case of adjudication of the offences by an adjudicating officer appointed by SEBI. Penalty provided in section 24 is "without prejudice to any award of penalty by the adjudicating officer under the Act." 153. It is an accepted fact that the practice of insider trading requires to be checked and those who indulge in insider trading should be severely dealt with by awarding harsh penalties, as insider trading is outright cheating and not compatible with fair market transactions. Considering the gravity of the offence, the legis....
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....interest of the company shares were purchased and, therefore the Appellant can not be considered to have violated the prohibition contained in regulation 3(i). The fact that the Appellant in the process of tendering the shares in the public offer, tendered the shares at a price higher than the rate at which he purchased the same can not be viewed as an action to gain unfair advantage over other shareholders. The gain was incidental to the main objective of enhancing the interest of ABS. He was already in management of the control of the company. It is too presumptuous to say that he had traded in the securities to protect his interest. He has not retained his managerial position at the cost of any other person. 156. In the totality of the facts and circumstances and in view of the underlying objective of the insider trading regulation, I am not inclined to agree with the finding that the Appellant is guilty of indulging in insider trading as alleged by the Respondent. Since there is no evidence to show that he had gained unfair advantage over other shareholders the direction to deposit ₹ 34 lakhs to compensate any investor who seeks compensation as a result of the sale of sh....