AI Drafter 
TaxTMI 
TaxTMI 
2012 (10) TMI 1221
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....of 2012, Mr. Manoj Gaur, is the Executive Chairman of the Jaiprakash Associates Ltd. (the company). Appellant in Appeal no. 59 of 2012 Mrs. Urvashi Gaur is wife of Mr. Manoj Gaur and appellant in Appeal no. 60 of 2012 Mr. Sameer Gaur is the brother of Mr. Manoj Gaur. By virtue of their being wife and brother respectively of Mr. Manoj Gaur they are persons deemed to be connected to the appellant in terms of regulation 2(h) of the Regulations. 3. The Board carried out investigations into the trading in the scrip of the company during the period September 29, 2008 to October 27, 2008 and came to a prima-facie conclusion that Mr. Manoj Gaur, Executive Chairman of the company was in possession of Unpublished Price Sensitive Information (UPSI) relating to financial results of the company for the quarter ending September 30, 2008 which was passed on by him to Mrs. Urvashi Gaur and Mr. Sameer Gaur and both of them traded on the basis of UPSI, thereby violating the provisions of the Regulations. The case of the Board is that the company received the trial balances for the quarter ending September 30, 2008 from various units in the first week of October 2008. Thereafter, the company made ....
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....natural justice and vitiates the order. Learned senior counsel further submitted that the entire foundation of the case, as set out in the show cause notice, is that consolidated trial balances of the financial results of the company for the quarter ending September 2008 were available on October 12, 2008 which were approved by the Board on October 21, 2008. Therefore, the period from October 12, 2008 to October 21, 2008 was considered to be the period when UPSI was in existence. According to learned senior counsel, the appellant has comprehensively replied to it contending that the quarterly results were not known till October 17, 2008 when the consolidated and finalized results were placed before the audit committee. According to him, without dealing with this submission of the appellant, the adjudicating officer has drawn a presumption that since the trading window was closed by the company on October 11, 2008, it proves that UPSI was in existence from that date. It was submitted by the learned senior counsel that it is not open to the respondent Board to abandon the entire foundation of the charge in the show cause notice and make out a totally new case for the first time in th....
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.... ICICI Bank (principal lender of the company) seeking no objection for a dividend upto 15 per cent to allege that the financial results were known to the appellant even as on October 14, 2008. According to learned senior counsel, it makes it clear that the Board's case is built on "shifting sands". It can never be assumed that the routine letter dated October 14, 2008 sent to the Bank was based on the knowledge of the final results for the quarter ending September, 2008 despite the fact that other evidence to the contrary was made available to the Board. According to learned senior counsel, the Board has totally ignored the evidence on record that quarterly financial results were available only on October 17, 2008 as is evident from the letter dated February 15, 2010 and May 31, 2010, the affidavit of the Director Finance and the letter of the auditors. Assuming that the trial balances were available on October 11, 2008, the same, in any case, cannot become UPSI because trial balances are to be consolidated in the finance departments of the company and it is only when final accounts are prepared and approved by the audit committee that the financial results can be considered to be ....
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.... Mr. Manoj Gaur was in possession of UPSI and hence the provisions of the Regulations were violated. It was further argued by learned senior counsel for the Board that merely because the financial results were crystalized on October 17, 2008 for placing it before audit committee it does not mean that the appellant could not have ascertained the performance of the company from the information available in the trial balances of the company which were available to him on October 11, 2008. He further submitted that regulation 3 of the Regulations prohibit an insider from dealing in securities of a company when in possession of any unpublished price sensitive information or to communicate any unpublished price sensitive information to any person. Pursuant to regulation 12 of the insider trading Regulations, all listed companies are required to frame a code of conduct as near to the model code of conduct as possible without diluting the provisions of model code of conduct prescribed under the Regulations. The company had framed a code of conduct prescribing closure of the trading window and such closing of the trading window is for the purpose of restraining misuse of UPSI. The closing o....
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....rder passed by the adjudicating officer does not call for any interference. 9. Before dealing with the rival submissions let us have a look at the relevant provisions of the regulations. "Definitions. 2. In these regulations, unless the context otherwise requires :- (a) ............... (b) ................ (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: (d) ........... (e) "insider" means any person who, (i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price....
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....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; and (vii) significant changes in policies, plans or operations of the company; (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 any unpublished price sensitive information; or (ii) communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possess....
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.... without diluting it in any manner and ensure compliance of the same. (2) The entities mentioned in sub-regulation (1), shall abide by the code of Corporate Disclosure Practices as specified in Schedule II of these Regulations. (3) All entities mentioned in sub-regulation (1), shall adopt appropriate mechanisms and procedures to enforce the codes specified under sub-regulations (1) and (2). (4) Action taken by the entities mentioned in sub-regulation (1) against any person for violation of the code under sub-regulation (3) shall not preclude the Board from initiating proceedings for violation of these Regulations. 10. Para 3.2 of the Model code of conduct as prescribed in Schedule I to the regulations is also relevant for our purpose and the same is reproduced hereunder for ease of reference:- "3.2 Trading window 3.2.1 The company shall specify a trading period, to be called "Trading Window", for trading in the company's securities. The trading window shall be closed during the time the information referred to in para 3.2.3 is un-published. 3.2.2 When the trading window is closed, the employees / directors shall not trade in ....
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....known or published by the Company for general information but, which if published or known, is likely to materially affect the price of securities of the Company in the stock market. This will include, but shall not be limited to, financial results, intended declaration of dividends, issue of securities, any major expansion plans or execution of new projects, amalgamation, mergers and take-overs, disposal of the whole or substantially the whole of the undertaking, such other information as may affect the earnings of the Company, any changes in policies, plans or operations of the Company, etc." "PRESERVATION OF UNPUBLISHED PRICE SENSITIVE INFORMATION : 9. The Directors and Designated Employees shall maintain confidentiality of all 'Unpublished Price Sensitive Information'. The Directors and Designated Employees shall not pass on such information to any person directly or indirectly by way of making a recommendation for the purchase or sale of securities of the Company based on the same." "PREVENTION OF MISUSE OF UNPUBLISHED PRICE SENSITIVE INFORMATION: 13. All Directors and Designated Employees shall be subject to certain trading restrictions as ....
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....this wrong doing, higher must be the preponderance of probabilities in establishing the same. In Mousam Singha Roy v. State of West Bengal (2003) 12 SCC 377, the learned judges of the Supreme Court in the context of the administration of criminal justice observed that, "It is also a settled principle of criminal jurisprudence that the more serious the offence, the stricter the degree of proof, since a higher degree of assurance is required to convict the accused." This principle applies to civil cases as well where the charge is to be established not beyond reasonable doubt but on the preponderance of probabilities. The measure of proof in civil or criminal cases is not an absolute standard and within each standard there are degrees of probability. In Hornal v. Neuberger Products Ltd. (1956) 3 All E.R.970 Hodson, L.J. observed as under: "Just as in civil cases the balance of probability may be more readily tilted in one case than in another, so in criminal cases proof beyond reasonable doubt may more readily be attained in some cases than in others." We are also tempted to refer to what Denning, L.J. observed in Bater v. Bater (1950) 2 All E.R. 458 wherein h....
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....e hands of persons connected to the company puts them in an advantageous position over the ordinary shareholders and the general public. Such information can be used to make gains by buying shares anticipating rise in the price of the scrip or it can also be used to protect themselves against losses by selling the shares before the price falls. Such trading by the insider is not based on level playing field and is detrimental to the interest of the ordinary shareholders of the company and general public. It is with a view to curb such practices that section 12A of the Sebi Act makes provisions for prohibiting insider trading and the Board also framed the Insider Trading Regulations to curb such practice." Regulation 3 of the Regulations prohibits an insider from dealing in securities of a company when in possession of unpublished price sensitive information or to communicate unpublished price sensitive information to any person. Regulation 2(ha) of the Regulations defines price sensitive information as any information which relates directly or indirectly to a company and which, if published, is likely to materially affect the price of securities of the company. The explanation t....
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....will be closed till such information is made public. When the Board sought information from the company with regard to the financial results for the quarter ending September 30, 2008 the company was evasive in its reply and, therefore, Board had no option but to arrive at its own conclusion with regard to date of existence of UPSI on the basis of material made available by the company. It was for the company to inform the Board about the date from which, according to the company, the UPSI came into existence. If the company fails to provide the desired information or furnish information, which according to Board is not correct, the Board may draw its own conclusion on the basis of material available on record. Admittedly, the company in its letter dated February 15, 2010 had informed the Board that the trial balances from various units started reaching the accounts department at corporate office in the first week of October 2008 till October 10, 2008 and thereafter the company made an announcement on October 11, 2008 with regard to the board meeting to be held on October 21, 2008. It is in the later communications that the company changed its stand with regard to availability of UP....
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....re the financial results or the amount of dividend or details of the rights issue. If we accept this argument of the learned senior counsel for the appellant that the moment a notice is sent to the stock exchange with regard to consideration of certain issues without details thereof, the same cannot be considered to be UPSI, it will be narrowing down the scope of the regulations defeating the very purpose of framing the regulations to prohibit insider trading while in possession of UPSI. When the company receives trial balances which are to be collated and ultimately examined by the internal committees, only those persons who are dealing with the issue are privy to such information and such information cannot be said to be in public domain. In the facts and circumstances of this case, the availability of the trial balances from the various units in the corporate office, which were discussed with the Executive Chairman of the company, leads us to the only conclusion that on the basis of trial balances, the UPSI was in existence on October 11, 2008 and Mr. Manoj Gaur being the Executive Chairman of the company was in possession of the same. The question that arises for further consid....
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....cation sector and the Executive Chairman of such company would not like to risk the reputation of himself and the company for 1000 shares. Similarly, Mr. Sameer Gaur is also a regular trader of shares of the company. Before trading on October 13,14 and 16, 2008 he was holding 1,10,250 shares of the company. The first sale of 1400 shares was made by him only on May 8, 2009. Till date, he is holding 62,882 shares. Looking at the trading pattern, the number of shares purchased and going by their status, it seems highly improbable that trading was done by them on the basis of UPSI. On the other hand, it is more probable that they traded in the normal course of business. If the intention of Mrs. Urvashi Gaur and Mr. Sameer Gaur had been to capitalize on the UPSI allegedly communicated by Mr. Manoj Gaur, the quantum of purchase would not have been so small. Both the appellants are financially independent and trade independently which is clear from their trading pattern that they have been buying the shares in similar quantities in the immediate past as well as on later dates. 18. Looking at the totality of the facts and circumstances of the case, it is highly improbable that trading d....
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....rd to the gravity of charge of insider trading, higher degree of preponderance of probabilities is needed to bring home the charge. The adjudicating officer has not brought any material on record to show that they were in possession of UPSI. 20. We may now take note of some other arguments which were advanced on behalf of the appellants. It was alleged that the principles of natural justice were violated on the ground that copy of investigation report was not provided to the appellants which has resulted in denial of fair hearing to them. It was also alleged that entirely a new case has been made out by the adjudicating officer while holding that the UPSI existed from October 11, 2008 whereas in the show cause notice, it was alleged that the information about the financial results etc. of the company was UPSI with effect from October 12, 2008. We are inclined to agree with the submissions made by learned Advocate General on behalf of the Board that there is no violation of the principles of natural justice on any of these counts. Regulation 9(i) of the Regulations specifically provides that only the findings of the investigation report are to be communicated to a person suspecte....