TaxTMI 
TaxTMI 
2022 (4) TMI 945
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....eller Pvt. Ltd. was incorporated on April 13, 2005 under the Companies Act, 1956 as a Private Limited Company. However, pursuant to a resolution passed by the shareholders on July 5, 2011, the company was converted into a Public Limited Company, following which the name of the company was changed to "PC Jeweller Ltd." (for short "PCJ") and a fresh certificate of incorporation was issued. 3. The genesis of the present dispute is rooted in the action of Respondent/SEBI against the appellants vide an impounding order dated 17.12.2019 and a showcause notice dated 24.04.2020. The crux of the allegations of the impounding order and the showcause notice are as follows: i. Padam Chand Gupta (P.C. Gupta) was the Chairman of PCJ during the relevant period and was a "connected person" in terms of Regulation 2(1)(d)(i) and an "insider" under Regulation 2(1)(g) of the SEBI (Prevention of Insider Trading Regulations), 2015 (for short "PIT Regulations"). ii. Balram Garg, who is the brother of P.C. Gupta and the Managing Director of PCJ is also a "connected person" in terms of Regulation 2(1)(d)(i) and an "insider" under Regulation 2(1)(g) of the PIT Regulations. iii.....
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....ket and buying, selling or dealing in securities, either directly or indirectly, in any manner for a period of 1 year from the date of the order and also restrained the appellants from dealing with the scrip of PCJ for a period of 2 years. 6. Aggrieved by the order of the WTM of SEBI, the Appellants filed appeals before the SAT. The Tribunal, vide its common judgement and order dated 21.10.2021, dismissed the Appeals preferred by the Appellants and held that: "Upon hearing both the sides, in our view, the reasoning of the Ld. WTM cannot be faulted with. The facts as highlighted by the Ld. WTM would show that though there was a family arrangement within the family on two occasions, there was no estrangement, as can be seen from the facts highlighted by the Ld. WTM (supra). Additionally, in our view, the very fact that appellant Shivani had authorized her cousin brotherinlaw i.e. appellant Amit to trade on her behalf, would belie the case of the appellants that family settlements means family estrangement. It cannot be gainsaid that the appellants are residing at the same address and even appellant Mr. Balram Garg's address is 'the front side' of the premise. The trading ....
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.... PIT Regulations, the burden of proof was on SEBI to establish any "communication" of UPSI by placing on record cogent evidence viz. call details, emails, witnesses etc. It was submitted that the Respondent in this case has failed to place any such evidence on record. Moreover, it was submitted that the presumption against "immediate relative" is provided in the Regulations to ensure that relatives who are financially or otherwise under the complete control of a connected person are not used for insider trading. However, in this case, no such possibility existed in relation to the appellant Mr. Balram Garg and the other appellants in C.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta and Amit Garg. 10. The learned Senior Counsel further contented that the reliance of the respondent on the transactions between appellant Sachin Gupta and the Company (PCJ) is against the principles of natural justice as these allegations were not part of the show cause notices. It was also submitted that the name of the appellant Balram Garg has been used interchangeably with that of late P.C.Gupta and there is no material on record for the WTM and the SAT to arrive at the finding that ....
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....f Rs. 10/each at a price of Rs. 350/per equity share. As before this date, the information about buyback was not disclosed, and since the information pertained to change in capital structure of the company, this information qualified as Unpublished Price Sensitive Information1 (for short "UPSI1"). Accordingly, the period from April 25, 2018 to May 10, 2018 has been taken as the period of UPSI1. 15. It was further submitted that on July 7, 2018, the lead Banker of PCJ, State Bank of India (for short "SBI"), refused to give No Objection Certificate (for short "NOC") for the buyback of equity shares. Hence, on July 13,2018, the Board approved the withdrawal of the buyback offer and the same was informed to the Exchanges after market hours. It was submitted that this information has been considered as Unpublished Price Sensitive Information2 (for short "UPSI2") as the same was likely to materially affect the price of the shares of the company. Moreover, the information pertaining to proposed buyback of equity shares of the company came into existence on July 7, 2018 and became public on July 13, 2018. Accordingly, the period from July 7, 2018 to July 13, 2018 has been taken as perio....
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....l Year 201516, Rs. 77 lakhs for the Financial Year 201617 and Rs. 78 lakhs for the financial Year 201718. ii. Sachin Gupta was the nominee of the Demat Account of late P.C. Gupta and after his death, the holdings of P.C. Gupta in the company were held by Sachin Gupta. Hence, it cannot be said that the father and son relationship was estranged. iii. Appellant Balram Garg and the Appellants No. 1,2, and 3 in C.A. No.7590 of 2021 i.e. Mrs. Shivani Gupta, Sachin Gupta and Amit Garg share the same residential address. 20. Reliance was placed on the SAT order in Utsav Pathak vs. SEBI (order dated 12.07.2020 in Appeal No. 430 of 2019) wherein the SAT had laid down the following ratio by relying upon the judgement of this court in SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368] and US District Court's order in United States of America vs. Raj Rajaratnam and Danielle Chiesi [09 Cr 1184 (RJH)]: "From the aforesaid foundational facts, the circumstantial evidence or on a preponderance of probability by a logical process of reasoning from the totality of the attending facts and circumstances as stated aforesaid, an irresistible inference can be drawn that the appella....
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....security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any officebearer of any stock exchange or selfregulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached; (f) direct any intermediary or any person associate....
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....ntage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.]" (emphasis supplied) Section 15G of the Securities and Exchange Board of India Act, 1992 "Penalty for insider trading. 15G.If any insider who,- (i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished pricesensitive information; or (ii) communicates any unpublished pricesensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or (iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished pricesensitive information, shall be liable to a penalty 81[which shall not be less than ten lakh rupees but which may extend to twentyfive crore rupees or three times the amount of profits made out of insider trading, whichever is higher]." (emphasis supplied) Securiti....
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....f; or (e) an official of a stock exchange or of clearing house or corporation; or (f) a member of 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; or (g) a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or (h)an official or an employee of a selfregulatory organization recognised or authorized by the Board; or (i) a banker of the company; or (j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest; NOTE : It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives and other categories of persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and is rebuttable. This definition is ....
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....ce sensitive information may demonstrate that he was not in such possession or that he has not traded or or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances. (h) "promoter"....................................... (i) "securities"....................................... (j) "specified"........................................ (k) "takeover regulations" ...................... (l) "trading" means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities, and "trade" shall be construed accordingly; NOTE :Under the parliamentary mandate, since the Section 12A (e) and Section 15G of the Act employs the term 'dealing in securities', it is intended to widely define the term "trading" to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc when in possession of unpublished price sensitive information. (m)"trading day" ................................. ....
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.... basis. It is also intended to lead to organisations developing practices based on needtoknow principles for treatment of information in their possession. (2) No person shall procure from or cause the communication by any insider of unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. NOTE:This provision is intended to impose a prohibition on unlawfully procuring possession of unpublished price sensitive information. Inducement and procurement of unpublished price sensitive information not in furtherance of one's legitimate duties and discharge of obligations would be illegal under this provision. (3) Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would:- (i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the 9[listed] company is of informed opinion that 10[sharing of such informatio....
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....in possession of unpublished price sensitive information: Provided that the insider may prove his innocence by demonstrating the circumstances including the following: - (i) the transaction is an offmarket interse transfer between 18[insiders] who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision. (ii) in the case of nonindividual insiders:a. the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decisionmaking individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and b. appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached; (iii) the trades were pursuant to a trading plan set up in ....
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....asith [(2005) 10 SCC 243] that: "The first appeal has to be decided on facts as well as on law. In the first appeal parties have the right to be heard both on questions of law as also on facts and the first appellate court is required to address itself to all issues and decide the case by giving reasons. Unfortunately, the High Court, in the present case has not recorded any finding either on facts or on law. Sitting as the first appellate court it was the duty of the High Court to deal with all the issues and the evidence led by the parties before recording the finding regarding title." The above position was reiterated by this Court in UPSRTC vs Mamta [(2016) 4 SCC 172]. 25. The SAT again fell in error when in spite of observing that there is no direct evidence which suggests as to who had disseminated the insider information to the appellants in C.A. No.7590 of 2021, it concluded on mere "preponderance of probability" that it was late P.C. Gupta as well as appellant Balram Garg who disseminated both UPSI to the appellants in C.A. No.7590 of 2021. 26. Importantly, the WTM arrived at the finding that the appellants in C.A. No.7590 of 2021, namely, Mrs. Shivani Gu....
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....family exited the Company by entering into a family arrangement dated 01.07.2011 whereby their shareholding in the company was reduced to a meagre 0.70%. In September, 2011, Amar Chand Garg also resigned as the Vice Chairman of the company and disassociated himself from the company. Further, the record reveals that the son of Amar Chand Garg, i.e. Amit Garg (3rd Appellant in C.A. No.7590 of 2021) was never associated with the company. On 31.03.2015, on account of certain disputes that had arisen between Sachin Gupta (2nd Appellant in C.A. No.7590 of 2021) and his parents P.C. Gupta and Smt. Krishna Devi, Sachin Gupta, so as to exit the company along with his family, resigned from his position as President (Gold Manufacturing) of the Company and Mrs. Shivani Gupta (1st Appellant in C.A. No.7590 of 2021 and wife of Sachin Gupta) also resigned from her post of Senior Assistant Manager, Karol Bagh Store of PCJ. Importantly, both Sachin Gupta and Smt. Shivani Gupta were, at no point of time, Directors of PCJ. 30. Subsequently, late P.C. Gupta and his son Sachin Gupta entered into another family arrangement dated 10.04.2015 whereby P.C. Gupta and his wife agreed to transfer at least 1....
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.... not result in complete estrangement of social relations between the parties, the SAT could not, by virtue of this very fact, discharge SEBI of the onus of proof placed on them to prove that the Appellants were in possession of UPSI. In our opinion, the approach adopted by the SAT turns the SEBI Act on its head as it places the burden of proving that there was a complete breakdown of ties between the parties on the Appellants in C.A. No.7590 of 2021 while conveniently ignoring the fact that the onus was actually on SEBI to prove that the appellants were in possession of or having access to UPSI. The legislative note to Regulation 2(1)(g) makes the above position of law explicitly clear. It states that: "... The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge after which the person who has traded when in possession of or having access to unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such inform....
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....e SEBI itself, vide its showcause notice dated 24.04.2020 had dropped the charges with respect to the UPSI1 period. This would mean that the notional loss purportedly avoided by appellant Mrs. Shivani Gupta was only for the shares traded during the UPSIII Period, and even according to SEBI, there was no case that she made any money or avoided any loss by trading in the shares of the company during the UPSI1 Period. 37. PhaseII [22.06.2018 to 06.07.2018 i.e. PreUPSIII Period]: PCJ had requested SBI to issue a NOC for the proposed buyback offer on 07.07.2018 and the said request was rejected on the same day by the SBI. However, even before the said refusal by the SBI, the appellant Mrs. Shivani Gupta had sold 1,00,000 shares on 06.07.2018 at a much lower price than the price at which the shares were sold earlier. On the date on which these shares were sold, the UPSI2 had not even come into existence. If the arguments of the respondent hold any water, the Appellants should have waited till UPSI2 and would only have subsequently offloaded maximum number of shares during the said period to avoid any notional loss. However, the records undercut the logic adopted by the respondent/SEBI....
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....are also of the opinion that in the absence of any material available on record to show frequent communication between the parties, there could not have been a presumption of communication of UPSI by the appellant Balram Garg. The trading pattern of the appellants in C.A. No.7590 of 2021 cannot be the circumstantial evidence to prove the communication of UPSI by the appellant Balram Garg to the other appellants in C.A. No.7590 of 2021. It would also be pertinent to note here that Regulation 3 of the PIT Regulations, which deals with communication of UPSI, does not create a deeming fiction in law. Hence, it is only through producing cogent materials (letters, emails, witnesses etc.) that the said communication of UPSI could be proved and not by deeming the communication to have happened owing to the alleged proximity between the parties. In this context, even the showcause notices do not allege any communication between the Appellant Balram Garg and the other appellants in C.A. No.7590 of 2021. This is evident from the following extract of the order of the WTM: "A perusal of the SCNs shows that allegations of Noticees no. 1 to 4 being connected person under Regulation 2(1)(....
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....he accused. Again, the circumstances should be of a conclusive nature and pendency and they should be such as to exclude every hypothesis but the one proposed to be proved. In other words, there must be a chain of evidence so far complete as not to leave any reasonable ground for a conclusion consistent with the innocence of the accused and it must be such as to show that within all human probability the act must have been done by the accused. In spite of the forceful arguments addressed to us by the learned Advocate General on behalf of the State we have not been able to discover any such evidence either intrinsic within Exhibit P3A or outside and we are constrained to observe that the courts below have just fallen into the error against which warning was uttered by Baron Alderson in the above mentioned case." [emphasis supplied] 42. This Court in Chintalapati Srinivasa Raju vs Securities and Exchange Board of India [(2018) 7 SCC 443] has further held that: "Further, under the second part of Regulation 2(e) (i), the connected person must be "reasonably expected" to have access to unpublished price sensitive information. The expression "reasonably expected" cannot be a ....
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....tional facts must be established before a presumption is made. In this context, in Seema Silk & Sarees vs. Directorate of Enforcement [(2008) 5 SCC 580] this Court has held that: "The presumption raised against the trader is a rebuttable one. Reverse burden as also statutory presumptions can be raised in several statutes as, for example, the Negotiable Instruments Act, Prevention of Corruption Act, TADA, etc. Presumption is raised only when certain foundational facts are established by the prosecution. The accused in such an event would be entitled to show that he has not violated the provisions of the Act." In the present case, as rightly argued by the learned counsel of the appellant, the foundational facts were not proved which could raise the alleged presumption. SEBI failed to place on record any material to prove that the appellants in C.A. No.7590/2021 were "connected persons" to Balram Garg as required by Regulation 2(1)(d)(ii)(a) read with Regulation 2(1)(f) of the PIT Regulations as none of the appellants C.A. No.7590/2021 were financially dependent on Balram Garg or even alleged to have consulted Balram Garg in any decision related to trading in securities. ....
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....arned counsel of the Respondent viz. SEBI vs Kishore R. Ajmera [(2016) 6 SCC 368] and Dushyant N. Dalal vs. SEBI [(2017) 9 SCC 660]. Suffice it to hold that these cases are distinguishable on the facts of the present case, as the former is not a case of insider trading but that of Fraudulent/Manipulative Trade Practices; and the latter case relates to Interests and Penalty rather than the subject matter at hand. Reliance placed on the case of Kishore R. Ajmera (supra) to show that presumption can be drawn on the basis of immediate and relevant facts is contrary to law already settled by this Court in the case of Chintalapati Srinivasa Raju (supra) where it is held that "a reasonable expectation to be in the know of things can only be based on reasonable inference drawn from foundational facts". It has further been held that merely because a person was related to the connected person cannot by itself be a foundational fact to draw an inference. 48. To conclude, the entire case of the Respondents was premised on two important propositions, that firstly, there existed a close relationship between the appellants herein; and secondly, that based on the circumstantial evidence (tradin....