TaxTMI 
TaxTMI 
2020 (8) TMI 83
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....after referred to as 'PIT Regulations, 2015') for the period of January 25, 2017 to April 05, 2017 (hereinafter referred to as 'Investigation Period'/'IP'). The Company is listed on NSE and Bombay Stock Exchange (BSE). It is observed that Mr. B Renganathan (hereinafter referred to as 'Noticee') was the compliance officer and Company Secretary of EFSL during IP. 2. During the course of investigation, it was observed by SEBI that Ecap Equities Limited (hereinafter referred to as 'Ecap'), a wholly owned subsidiary of EFSL, had acquired Alternative Investment Market Advisors Private Limited (hereinafter referred to as 'AIMIN'), a fintech company, on April 05, 2017 by entering into a share purchase agreement (SPA). The same was disclosed by EFSL to NSE and BSE on the same day. Further, a Term Sheet in respect of the said transaction was signed between Ecap and AIMIN on January 25, 2017. 3. Therefore, it was alleged that the acquisition of AIMIN by Ecap was a price sensitive information which had come into existence on January 25, 2017 upon signing of Term Sheet. Despite that, the Noticee, being the compliance officer of the company, failed to close the trading window during the pe....
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.... 'AIMIN') on April 05, 2017. As per disclosure made by the company with NSE and BSE "AIMIN is a fintech company for fixed income analytics with innovative trade protocols that aids bond market with efficient price discovery. FinTech is playing a vital role in transforming the financial industry worldwide as well as in India. Edelweiss is actively looking to adopt innovative FinTech Solutions to aid in matters related to illiquidity, accessibility and seed to improve offering to customers. This acquisition will help grow Edelweiss fixed income advisory business. The proposed acquisition is not with the promoter /Promoter Group and also does not fall under the related party transaction.'' iii. It is observed that the aforesaid transaction resulted in the acquisition of AIMIN by Ecap Equities Limited (Ecap), a wholly owned subsidiary of EFSL. It is further observed that the said disclosure was made in terms of Regulation 30 of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. Thus, in terms of PIT Regulations, the said announcement made by EFSL is the unpublished price sensitive information (UPSI) as per Regulation 2(1)(n)(iv) and 2(1)(n)(vi) of PIT Regu....
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....January 25, 2017 and the same was published on April 05, 2017. Therefore, the period of UPSI has been considered as January 25, 2017 to April 05, 2017. vi. It is noted that Regulation 9 of PIT Regulations, casts a responsibility on the Company to frame its Code of Conduct to prevent Insider Trading. Further, in terms of Regulation 9(3) of PIT Regulations, the compliance officer of the Company is responsible for the administration of the said code of Conduct. In furtherance to that, as per Clause 4 of Model Code of Conduct under Schedule B to PIT Regulations, compliance officer of a listed entity is responsible for closing of the trading window when he determines that a designated person or class of designated persons can reasonably be expected to be in possession of unpublished price sensitive information. It is also directed in the said Clause that the Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. vii. Therefore, in terms of the UPSI in the present matter, it is alleged that the Noticee was required to close the trading window on or before January 25, 2017 to April 05, 2017, during when the UPSI ....
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.... of ownership servers and domain names and finalization of the necessary agreements, had to be undertaken before closing of the deal, and after signing of the Term Sheet. d. It is pertinent to note that during the course of such negotiations, only a handful of people were aware of the Proposed Acquisition and adequate measures were implemented to ensure strictest confidentiality with respect to the same. Given that this share purchase was more akin to a business - technology upgradation, the Compliance Officer was not a party to these discussions. The Compliance Officer informed the stock exchanges upon execution of the SPA (as defined hereinafter). The Noticee, thus being the compliance officer of EFSL, was included in the list of people involved in the Proposed Acquisition shared with SEBI through EFSL's letter dated January 29, 2019 (Annexure 3 of the Notice). e. Thereafter, a Share Purchase Agreement dated April 5, 2017 ("SPA") was signed between Ecap as the buyer, AIMIN as the target company and promoters of AIMIN as the selling shareholders, to acquire 100% shares of AIMIN for a purchase consideration of INR 4,00,00,000 (Rupees Four Crores Only). Pursuant to....
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....ut in a media report cannot hold any evidentiary value. As stated above and the detailed response set out below, the final decision to acquire AIMIN took place on the date of signing of the SPA and not the date of Term Sheet. j. In fact, the Hon'ble Supreme Court of India has, in the matter of B. Singh (Dr.) v. Union of India observed that: "It is too much to attribute authenticity or credibility to any information or fact merely because it found publication in a newspaper or journal or magazine or any other form of communication, as though it is gospel truth. It needs no reiteration that newspaper reports per se do not constitute legally acceptable evidence." (emphasis supplied) k. Further, it is pertinent to note that the Notice selectively relies on the said Article and ignores some crucial statements made therein. For instance, the article provides that 'A Term Sheet is a non-binding document which does not constitute an offer, an agreement, agreement in principle, agreement to agree or commitment to provide financing'. The Article further provides that signing of a Term Sheet is merely the first step in many steps before a transaction is consummated,....
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.... in terms of Regulation 2 (1)(n)(iv) and 2(1)(n)(vi) of the PIT Regulations. Further, in paragraph 6 of the Notice, it is stated that the period during which such UPSI was in existence was from January 25, 2017 to April 5, 2017 ("Alleged UPSI Period"). Information on the Proposed Acquisition was not UPSI q. Regulation 2(1)(n) of the PIT Regulations defines "unpublished price sensitive information" as any information, relating to a company or its securities, directly or indirectly, which upon becoming generally available, is likely to materially affect the price of the securities". r. The note to Regulation 2(1)(n) of the PIT Regulations also highlights the fact that such information should be likely to materially affect the price upon coming into public domain. s. The term 'materially' has not been defined in the PIT Regulations and even the examples cited above are preceded by the term "ordinarily", thereby allowing parties to rebut any presumptions made about the price sensitivity. In this regard, it may be pertinent to refer to decision by Hon'ble SAT in the case of Mr. Anil Harish v. Securities and Exchange Board of India, wherein the Hon'ble....
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....es of the listed entity. Information which may be relevant to a reasonable investor includes any information which affects (i) the assets and liabilities of the listed entity, (ii) the financial condition of the listed entity, (iii) major developments in the business of listed entity/industry, or (iv) any information previously disclosed to the market. w. In the present case, the Proposed Acquisition was not likely to, by any tangible metric, materially affect the price of securities of EFSL as per the definition of UPSI under Regulation 2(1)(n) of the PIT Regulations. This is amply evident from the following facts: i. Edelweiss Group, in its normal course of business, continued to evaluate opportunities for adopting innovative fintech products and upgrade its technology, in order to better serve its customers. Financial services providers such as the Edelweiss Group continuously seek avenues to improve their systems and the adoption of new technologies such as purchase of the software, systems, etc. to improve their operational efficiencies. ii. Instead of just purchasing the software from AIMIN (which would not have triggered any such disclosure under t....
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....ss Group. x. From the above, it is evident that the Proposed Acquisition cannot be deemed to be 'price sensitive' as it neither materially affects the prices of securities nor impacts the investment decision of a reasonable investor. y. Further, at the time of announcement of the Proposed Acquisition on April 5, 2017, the price of scrip of EFSL was INR 168.25. After the announcement, the price of the scrip moved to INR 171.65, INR 181.4 and INR 178.85 on April 6, 2017, April 7, 2017 and April 10, 2017 respectively. Such movement cannot be deemed to be unusual or extraordinary, especially given various other factors that were in existence concomitantly, including: - i. The Insurance Regulatory & Development Authority of India ("IRDAI") had accepted the registration application form IRDA/R2 of Edelweiss General Insurance Company, a wholly owned subsidiary of EFSL, for carrying on business as a general insurance company in India ("IRDAI Approval"). ii. During the period from January 25, 2017 till April 5, 2017, quarterly results of EFSL were also announced, along with declaration of interim dividend which may have resulted in upward movement of pric....
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.... and effort in augmenting customer experiences would be subject to constant window closures and exchange intimations. Such a practice would not only increase the compliance cost of entities but also dilute the significance of such actions. Investors would be unable to distil for commercially relevant information and the same may also result in the development of a practice where listed companies merely implement closures mechanically to avoid liability, instead of focusing on the underlying substance and significance of the developments, which is core philosophy of the PIT Regulations. This is also the reason why this definition is prefixed by the term "ordinarily", so as to allow parties to adduce factual evidence to disprove and rebut the price sensitivity of certain corporate actions. Materiality under Regulation 30 of the Listing Regulations dd. Regulation 2(1)(n)(vi) of the PIT Regulations, prior to its omission by the Amendment, provided that any material events in accordance with the listing agreement shall be considered UPSI. Regulation 30(2) of the Listing Regulations provides that any event specified in Para A of the Part A of Schedule III of the Listing....
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....e Noticee. Date of Alleged UPSI coming into existence ii. In the alternative, and without prejudice to any of the submissions made in this reply, even assuming that the Proposed Acquisition was UPSI in terms of PIT Regulations, it is submitted that the UPSI Period as stated in paragraph 6 of the Notice, (i.e., from January 25, 2017 to April 5, 2017), is completely incorrect and fallacious. jj. As already mentioned above, the Term Sheet was executed to further discussion with AIMIN and finalise the terms and conditions with respect to the Proposed Acquisition. In view of the above, the statement in paragraph 6 of the Notice that the UPSI came into existence on January 25, 2017 and existed up until April 5, 2017 is entirely without basis. kk. As one of India's pre-eminent financial institutions, Edelweiss Group is constantly exploring avenues for overall growth of the organization, achieving better operational efficiencies and economies of scale, in order to better serve its clients. These activities are in normal course and cannot be deemed to be price sensitive information per se as the same do not have any impact on an industry level. Every disc....
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....icee prior to any commercial agreement being reached between Ecap and AIMIN would have been counter-productive and may have adversely affected the interests of the investors, leading to creation of a false market and causing unnecessary speculation in the market. qq. Further, the Principles of Fair Disclosure for fair disclosure of UPSI as provided in Schedule A of the PIT Regulations envisages "prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally available." rr. This is supported by the recommendations of the Sodhi Committee Report which are as follows: "85. The Committee believes that it is necessary to statutorily lay down the principles that every such code should conform to such as the need for prompt disclosure of material information that could impact price discovery no sooner than credible and concrete information comes into existence. Speculative disclosures or selective disclosures that could in fact have an adverse impact on the market and the price discovery process should be avoided". (....
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....d the PIT Regulations (including the Model Code) and ensured at all times that UPSI was preserved appropriately and there was no misuse of UPSI or any confidential information. yy. In the instant case as well, there was no misuse of the Alleged UPSI by any of the relevant persons and the pith and substance of the law has been complied with. The facts of the case do not merit imposition of penalty zz. At the outset, since no contravention has been made out, there cannot be imposition of any penalty on the Noticee. aaa. However, in the alternative and without conceding the Noticee's primary position as set out above, it is submitted that the allegation is only of a technical nature. bbb. Based on the submissions set out above, it is our respectful submission that the allegation made against the Noticee does not warrant imposition of any penalty under Section 15HB of the SEBI Act read with Rule 5 of the Adjudication Rules. CONCLUSION ccc. In light of the submissions made above, it is manifestly evident that the Notice and the allegations made out therein are entirely without factual and legal basis or emanating from any un....
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....cap and AIMIN were in the midst of negotiating the final commercial terms of the Proposed Acquisition. vi. In the absence of any specific decision being arrived at in connection with the Proposed Acquisition, it is submitted that no UPSI could be said to have been in existence since January 25, 2017 itself. vii. In any event, notwithstanding the fact that no announcement had been made of the closure of the trading window on account of the Proposed Acquisition, even as a practical matter, the persons who were privy to the Proposed Acquisition had not sought any pre-clearance for trading nor were any trades executed in the scrip of EFSL from January 25, 2017 to April 5, 2017. viii. Without prejudice to all the submissions on behalf of the Noticee, it is respectfully submitted that the Noticee or any designated persons as per the Code of Edelweiss did not gain any unfair advantage or make any profit due to the alleged violations in the Notice. ix. Further, the investors/ shareholders of EFSL made no losses due to the alleged violation in the Notice and no complaint has been received from the investors in this regard till date. x. The Notice....
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....rds for Code of Conduct to Regulate, Monitor and Report Trading by Insiders prescribed in Schedule B read with Regulation 9(1) of PIT Regulations, 2015? b. If yes, whether the Noticee is liable for penalty and what should be the quantum of penalty? 11. Before moving forward, the relevant extracts of the provision of the PIT Regulations, 2015, allegedly violated by the Noticee, are reproduced hereunder. PIT Regulations, 2015 Code of Conduct. 9. (1) The board of directors of every listed company and market intermediary shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B to these regulations, without diluting the provisions of these regulations in any manner. SCHEDULE B Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders 4. Designated persons may execute trades subject to compliance with these regulations. Towards this end, a notional trading window shall be used as an instrument of monitoring trading by the....
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....rovisions of Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders mentioned in Schedule B read with Regulation 9(1) of PIT Regulations, 2015? 13. Now I proceed to deal with the first question stated as above. I note that in terms of the provisions of Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders prescribed in Schedule B to PIT Regulations, 2015, the trading window is required to be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure shall be imposed in relation to such securities to which such unpublished price sensitive information relates. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. 14. I note that the Noticee was the Company Secretary and Compliance Officer of EFSL during the investigation period. Therefore, in terms of Regulation 9(3) of PIT Regulations, 2015, it was the duty of the Noticee to administer the Minimum Standards for Code of Conduct to R....
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....(Rs. Four Crores only). b) SEBI has relied upon the definition given in a newspaper article. In a quasi-judicial proceeding of this nature, a definition set out in a media report cannot hold any evidentiary value. c) Ecap was a wholly owned non-material subsidiary of EFSL at the time of transaction. For the financial year ended 2017, total income and net profits of EFSL and Ecap were respectively, INR 66,188.42 crores and INR 6,093.06 crores, and INR 2,155.52 crores and INR 18.49 crores. For the financial year ended 2016, total income and net profits of EFSL and Ecap were respectively, INR 52,680.81 crores and INR 4,143.83 crores, and INR 6,251.24 crores and INR 498. 99 crores. From a bare perusal of this information, it is clear that for neither of the financial years, did the total income or the net profits of Ecap exceed 20% of the consolidated total income or net profits of EFSL. d) It is critical to note that AIMIN was not being acquired to foray into a new business line or materially alter/expand existing businesses of the Edelweiss Group. It was merely being brought within the fold as a captive service provider to improve operations of the Edelweis....
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....tive of actual price witnessed post disclosure of the information. 20. The Noticee has argued that the announcement was not UPSI citing factors such as gross income, net profit etc. of EFSL and Ecap. In this regard, I note from the disclosure under consideration dated April 05, 2017, as available on the website of BSE, that no disclosure has been made on parameters such as gross income, net profit etc. of either EFSL or of Ecap as has been argued in the reply to the SCN, enabling investors to understand the announcement the way the Noticee has presently been arguing before me. Also, I note that the said announcement nowhere mentions anything regarding consideration paid for the said acquisition. Therefore, the aforesaid parameters were not forming part of the announcement made by EFSL. In light of the above, it cannot be reasonably expected that the market would have weighed the subject acquisition keeping the above parameters in mind. Therefore, the Noticee, now handling the allegation by using the said undisclosed parameters as a tool in his hands and arguing for the first time during the present proceedings is not correct. 21. The Noticee has further submitted that EFSL ha....
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....5. I further note that the Noticee has submitted that the said disclosure was made to stock exchanges in pursuance to the LODR Regulations irrespective of "materiality". I note that in terms of Regulation 30(2) read with Explanation (ii)(a) of Clause 1 of para A of Part A of LODR Regulations, any event regarding a listed company acquiring or agreeing to acquire shares or voting rights in, a company, whether directly or indirectly, such that the listed entity holds shares or voting rights aggregating to five per cent or more of the shares or voting rights in the said company is deemed to be material events. In the present matter, I note that Ecap has acquired the entire shareholding in AIMIN, thus fulfilling the criteria of material event. Also, the announcement carries the information to the investors that the acquisition would help grown Edelweiss's Fixed Income advisory business. Therefore, the argument of the Noticee to the effect that it was a mandatory disclosure without testing for materiality is misconceived and therefore has no appreciable merits. 23. I also that the Noticee has argued that clause (vi) of Regulation 2(1)(n) of PIT Regulations, 2015 has been subsequent....
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....ormation but also was effective in pulling up the price of the scrip of EFSL. From this angle also, I note that the announcement considered to be not UPSI is grossly misconceived. 25. Thus, I am of the view that both the questions mentioned in Para 19 of this Order are answered in the affirmative in the present matter. I also note that the said questions were raised in another adjudication order dated March 28, 2014 in the matter of Man Industries (India) Ltd. The said ratio was upheld by the Hon'ble SAT vide its order dated July 26, 2016. 26. I also note that the Noticee has argued to the effect that the acquisition was in the ordinary course of business thus not warranting any classification as UPSI as it had no impact at the industry level. In this regard, the Notice has argued that the acquisition did not have any impact at the "industry level". It does not stand to reason as to why an announcement, per se, has to be viewed from the industry point of view. The object is to see whether the announcement will have any impact on the security to which it relates to. The announcement may or may not have any impact at an industry level. Thus, the argument of the Noticee is not a....
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....nding on the subsidiary of appellant Jubilant Life Sciences. As regards the ceiling on the price, there was a binding offer to that extent. The ultimate agreement to transfer the hospital was to take effect after due diligence is carried by NGHP. When actual transfer was effected on March 2, 2014, it can easily be concluded that the due diligence was carried out some time before it and the decision regarding the transfer was taken between the parties..." 30. In view of the ratio as pronounced in the Hon'ble SAT order referred supra, I find that the term sheet has fructified and transformed into a final transaction by way of an SPA. Therefore, I hold it not incorrect to take the view that the UPSI had come into existence on the day of signing of Term Sheet itself. In spite of the above, I note that the allegation in the present matter is non-closure of trading window which admittedly had not been closed, therefore, it seldom matters when the UPSI had actually begun. 31. In light of the above discussions and based on the materials made available to me, I am of the view that there was certainly a duty cast upon the Noticee to close the trading window in view of the existence of ....
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....ting the order of the Hon'ble SAT dated May 15, 2019 in the matter of Piramal Enterprises Ltd. (hereinafter referred to as "Piramal matter"). In order only to assess gravity of the above arguments, the Noticee was advised to furnish certain details which were replied vide emails dated July 13 and 15, 2020. 36. In regard to the argument citing Piramal matter, I am of the view that the said order doesn't apply in the facts of the present matter for two different reasons. Firstly, the above said order of Hon'ble SAT was in respect of SEBI (Prohibition of Insider Trading) Regulations, 1992 wherein the responsibility of closing of trading window was on the company. On the other hand, under PIT Regulations, 2015, the said responsibility has been vested on the compliance officer of a listed company. Also, in Piramal matter Hon'ble SAT has noted that the proceedings against the compliance officer was settled through settlement mechanism. However, I find that is not the position in the present matter. Also, I find the present matter to be different in terms of the repetition of violation which is discussed in the ensuing paragraphs. 37. I note that the Noticee has relied upon the deci....
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....lts 12-Jul-18 3 Q2 Financial Results 11-Oct-18 4 Q3 Financial Results & Interim Dividend 09-Jan-19 1 FY 2019-20 Annual Financial Results & Dividend 15-Apr-19 2 Q1 Financial Results 01-Jul-19 3 Q2 Financial Results 01-Oct-19 4 Q3 Financial Results 01-Jan-20 1 FY 2020-21 Annual Financial Results 01-Apr-20 39. From the above I observe that the Noticee closes trading window only on occasions of declaration of financial results barring one instance for issuance of securities in September 2017 during the six financial years. However, on perusal of the corporate announcements made by EFSL to the Stock Exchange(s) and disseminated on the websites thereof which information / data is publicly available, I note that there were, apparently, many corporate announcements made by EFSL. The corporate announcements pertain to EFSL itself, or to its subsidiaries or Edelweiss Group. I find such disclosures are warranted in terms of Regulation 30 of LODR Regulations. Further upon perusal of the Code for Prohibition of Insider Trading of EF....
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....cee that there was no repetition of violation is not acceptable. I am of the considered view that a repetitive violation, in disregard to the applicable provisions of law, cannot be construed to be a technical violation. 43. I note that the compliance officers are expected to discharge a responsible role in the corporate functioning. The standards of good compliance aid and build up good corporate governance to add value and confidence to the market and its investors. 44. At this juncture, it is noteworthy to quote the observations of the Hon'ble Supreme Court of India in the matter of SEBI Vs. Shriram Mutual Fund [2006] 68 SCL 216(SC) that "In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulations is established and hence the intention of the parties committing such violation becomes wholly irrelevant....". ORDER 45. After taking into consideration the facts and circumstances of the case, material/facts on record, the reply submitted by the Noticee and also the factors mentioned in the preceding paragraphs, I, in exercise of the powers conferred upon me under Section 15-I of t....