Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): G. Mahalingam, Whole Time Member, while exercising the powers under Sections 11(1), 11(4) and Section 11B of the SEBI Act, gave directions restricting the Noticees from accessing the securities market for fraudulently manipulating of the price of the scrip with connected entities.

In the present matter, pursuant to investigation by SEBI, it was alleged following the allotment of shares under the Scheme of Amalgamation, Noticee nos. 1–6 i.e. Sunrise Asian and its Directors, had devised an arrangement whereby 83 connected entities had manipulated the price of the scrip in four patches of trading during the Investigation period. Out of which, 77 entities were counterparties to the sale of shares by 1059 entities at the manipulated price. Resultantly, Noticees 1–6 and 7-89 were alleged to have violated the provisions of the PFUTP Regulations, 2003.

The Tribunal, after considering the show cause notice, replies and the submissions that followed thereafter, was of the opinion that in the instant proceedings, Sunrise Asian and its Directors, had devised an arrangement for manipulating the price of the scrip with 83 other entities, thus violated Regulations 3(a)–(d) read with Regulation 4(1) of the PFUTP Regulations, 2003. And since 77 out of the 83 ‘connected entities’ were counterparties to the sale of shares, thus violated Regulations 3(a)–(d) read with Regulation 4(1), Regulations 4(2)(a) and (e) of the PFUTP Regulations, 2003. The Court further noted,

“…during the Financial Years 2013, 2014 and 2015, Sunrise Asian had registered a profit of only 0.27 Crore, 0.70 Crore and 0.95 Crore, respectively. The aforementioned actions of the aforementioned Noticees as detailed in the preceding paragraphs clearly resulted in ‘fraud’ under the PFUTP Regulations, 2003, being committed, which in turn affected the interests of investors in the securities market”.

Consequentially, Noticees 1-6 were restricted to access the securities market for a year, while Noticees 7-89 for six months. Whereas proceedings intiated against Noticees 50, 69 and 70 i.e. Ramesh Gopaldas Kataria, Ramesh G. Kataria HUF and Sarojini Ramesh Kataria stood abated.[Sunrise Asian Ltd., In re WTM/GM/IVD/ID7/13328/2021–22, decided on 06-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Ananta Barua, Whole Time Member while exercising the powers conferred under Sections 11(1), 11(4), 11(4A), 11A and 11B(1), 11B(2) and Section 12A(1) of SCRA, 1956 read with Section 19 and 11(2)(j) of the SEBI Act, 1992 and Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 imposed varied penalties on the Noticees, while restraining  them from the securities market.

In the instant case, it was alleged that the Noticees executed transactions which are non-genuine in nature, resulting in misrepresentation of the accounts/financial statements and misuse of account/funds of the company and that such acts were found to be fraudulent in nature as they induced the investors to trade in the securities of the company and had the potential to mislead the investors. Further, that the Directors have failed to exercise duty of care by misrepresenting the financial statements/misusing the funds of the company.

The Tribunal was of the opinion that,

“ …penalty under Sections 15A(a) and 15HB of the SEBI Act, 1992, only, is attracted and not the penalties under Section 15HA of SEBI Act, 1992 and Sections 23E and 23H of 78 SCRA, 1956”.

It further noted that

“Section 15HA of the SEBI Act, 1992 provides for imposition of penalty in case of fraudulent and unfair trade practices committed by any person. As in the present case, it has been found that violations of Section 12A (a), (b) & (c) of SEBI Act, 1992 and provisions of PFUTP Regulations, 2003 have not been made out, therefore, penalty under Section 15HA of SEBI Act, 1992 is not attracted against the Noticees (i.e. Noticee no. 1 to 9). I also not that Section 23E of SCRA, 1956 provides for penalty for failure to comply with, inter alia, listing conditions by ‘a company or any person managing collective investment scheme or mutual fund’”.

And the Tribunal imposed a penalty of Rs 30, 00, 000 on Eskay K ‘n’ it India Limited, Rs 2, 00, 000 on Noticee 3, Rs 3,00,000 on Noticee 4, Rs 3, 00, 000 on Noticee 5, Rs. 15, 00, 000 on Noticee 6 and Noticee 7.[Eskay K’n’it India Limited, In re, 2021 SCC OnLine SEBI 198, decided on 11-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Competition Commission of India (CCI): Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) addressed the allegations against the National Stock Exchange for alleged contravention of provisions of the Competition Act.

Present matter was filed against National Stock Exchange of India Limited for alleged contravention of Section 4, particularly Sections 4(2)(b)(ii) and 4(2)(c) of the Competition Act.

What were the allegations against NSE?

  • Indulged in practices of granting preferential market access to select brokers
  • Creating artificial information asymmetry
  • Market Manipulation in relation to co-location facilities
  • Uniform fee charged from all members towards co-location services, but allegedly uniform benefits have not been accorded to all trading members who had paid for the service.

Analysis, Law and Decision

While analysing the matter, Coram noted that the co-location facility was in vogue since 2009. Further, it was added that the choice of technology, which had been alleged to have created distortions, ceased to exist as far back as in 2016 and there seems to be confidence instilled in the system, with 188 members of the exchange availing the facility and the sectoral regulator specifying guidelines for adherence by the exchange for provision of such facility. As submitted by the Informant, even the charges payable for availing such facility have been considerably reduced.

Commission observed that

Mere pendency of matters in alternate forums does not axiomatically place any embargo on the Commission to halt its mandate in discharging its statutory obligations, in the face of any alleged anti-competitive conduct which is brought or comes to its notice.

Co-location facility creates a divide between two classes of trading members

NSE stated that the said facility was made available on a first come first serve basis and essentially there is no pick and choose. Further, it added that it is not the only exchange in India providing co-location facility, even other exchange like BSE is providing the same.

Coram stated that in the present case,  the consumers are the trading members who were looking for the co-locational facility for algorithmic trading.

Abuse of dominant position by NSE in provision of co-location facility?

Commission noted the submission of NSE that at the time of introducing co-location services, SEBI had not prescribed any specific technology to be used and that it had a choice between two technologies:

  • TCP/IP technology, and
  • MTBT

NSE, after studying practices of some leading international stock exchanges providing co-location services, came to a decision to have TCP technology as it provided market safety, reliability, integrity and accessibility.

Commission agreeing with the above submission that if there had been a bonafide choice of a particular technology, coupled with the fact that the sector regulator did not observe any instance of fraudulent conduct in violation of SEBI (PFUTP) Regulations, 2003 in the provision of the co-location facility which had been the mainstay of the allegations against NSE, then it ought not to be found in contravention of Section 4 of the Act.

Should the co-location facility be stalled as it is in itself anti-competitive?

A robust exchange acts as a backbone of the financial system and the provision of co-location facility by exchanges help increase volumes of trades manifold and provides liquidity to investors. This augurs well for the market, the companies and the economy.

Commission stated that to stop the co-location facility will be retrograde. Further noting that the Sectoral Regulator, SEBI did not stop the co-location facility in any manner since its introduction and had recognised the said service.

Hence, in view of the Commission, no prima facie case exists. [Manoj K Sheth v. National Stock Exchange, Case No. 35 of 2019, decided on 28-06-2021]


Advocates before the Commission:

For the Informant: Mr. Nithyaesh Natraj, Advocate Mr. Animesh Kumar, Advocate Mr. Anirudh, Advocate

For OP: Mr. Neeraj Kishan Kaul, Sr. Advocate, Mr. Somasekhar Sundaresan, Advocate, Mr. Naval Chopra, Advocate
Mr. Aman Singh Sethi, Advocate, Ms. Manika Brar, Advocate and Mr. M. Vasudev Rao, General Counsel 


Additional Information:

What are co-location facilities?

Co-location is the practice of renting space for servers and other computing hardware at a third-party provider’s data centre facility. Co-location helps in the faster movement of data. In the context of co-location services, NSE had on 31.08.2009, announced the launch of co-location services along with the guidelines/ procedure to be followed by members interested in availing co-location facility. Members availing co-location facility are allowed to take one or more leased lines to the co-location facility from different telecom service providers for the purpose of setting up or modifying parameters, trading related activities and hardware, software, network-related access, software download/upload and monitoring and data downloads.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty, Whole Time Member, in a detailed 167 paged order, following the principles of the preponderance of probabilities, held that the charges relating to violation of all the provisions laid down in detail in the show cause were found to have been substantially established.

In the pertinent matter, there were 13 Noticees, that were directly or indirectly an active part of the entire chain of events. It was when the SEBI noticed a sharp fall in the price of the scrip of Zylog Systems Limited (ZSL) that it conducted a preliminary investigation on the basis of which an ex-parte ad-interim order was passed restraining Noticees 2-7 from buying, selling or dealing in the securities markets, either directly or indirectly, in any manner, till further directions. The said directions were issued on the basis of certain prima-facie observations regarding multiple violations of the Securities Law, including misleading disclosures made by ZSL and its promoters, promoters using Company’s funds to deal in the shares of ZSL, dependent/relative of director using funds of ZSL to deal in its shares, non-compliance of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (the ‘SAST Regulations, 2011’), non-disclosures by ZSL and its promoters and directors etc. ZSL is a Chennai based information technology enabler and solutions provider for enterprises worldwide.

The show cause notice directly indicated with instances and enlisted 26 such observations:

The Company had, directly as well as through various connected entities, transferred funds to both Sthithi and Sripriya which were used by these entities for their dealings in the scrip of ZSL. The disclosed shareholding of the promoters did not match with their shareholdings as per their demat statements. It appeared that ZSL was being run and managed by four key persons viz. Sudarshan, Ramanujam, Srikanth and Srihari, who were known to each other well before the IPO of the Company was launched. At the same time, Srikanth was shown as an Independent Director in the RHP despite being directly and closely related to Srihari and Sripriya, and despite being a director in the wholly owned subsidiary of ZSL etc. The said appointment of Srikanth as Independent Director continued till 2010. Various irregularities in running the affairs of the Company, oral instruction being given to the staff handling desk functions, inadequate narration in the books of accounts of the Company for various fund transactions etc. suggested that the operations of ZSL were not being conducted in compliance with the Corporate Governance norms, amongst other things.

During the course of investigation, the price of the scrip of ZSL had witnessed heavy on account of increased supply of shares due to invocation of pledge and subsequent sale of shares of promoters by IFCI Ltd. and Karvy Financial Services Limited) on account of non-payment of interest due to be paid by the promoters. Despite being aware of that, ZSL informed BSE that it was having ‘business as usual’ and promoters were increasing their stake in the Company. Therefore, it was alleged that, despite facing severe financial stress and continuous selling of shares from the accounts of the promoters, ZSL made a contrarian disclosure falsely stating that promoters were increasing their shareholding and the Company was having ‘business as usual’. False and misleading statement in media were witneseed and thereby violating the provisions of Section 12A(a), (b), (c) of the SEBI Act, 1992 read with regulations 3(a), (b), (c), (d) and 4(1), 4(2)(a), (f) and (r) of the PFUTP Regulations, 2003. The promoters failed to make disclosures regarding their transactions in the scrip of ZSL as well as their pledge related transactions in the said scrip.

The Tribunal in its detailed order took note of all the points and the overwhelming factual evidences that the Noticees no. 2 to 7 were acting as one common group in respect of their dealings in the scrip of ZSL in furtherance of their common fraudulent scheme.

The following issues were dealt in detail by the Tribunal:

Issues: 

  1. Whether false and misleading disclosures/statements were made in the RHP as well as in subsequent filings, submitted to the stock exchanges?
  2. Whether Noticees no. 2 to 7, jointly or severally concocted an elaborate fraudulent scheme in furtherance of a common objective and, thereby, violated the provisions of SEBI Act, 1992 and PFUTP Regulations, 2003?
  3. Whether the Noticees no. 2 to 7, acting in concert with one another, have violated the provisions of regulation 3(2) of the SAST Regulations, 2011 and section 12A(f) of the SEBI Act, 1992?

The entire order does not only consist of the violations and the clear cut evidences to prove the same and the manner but also relieves the person not so involved in the scheme. For instance, it remarked,

“…remuneration and qualification are two crucial criterions to evaluate and adjudge the significance of a position held by a person in an organisation and his importance and status in participating in the management of a company. I find it difficult to believe that both Srikanth and Srihari, being more qualified and earning much more than Viswanathan, can claim that they were working under Viswanathan and were executing his commands in the Company, more so when it has already been observed on the basis of overwhelming factual evidence that both Srikanth and Srihari being very close to the promoters, have played crucial roles in giving effect to various transactions in shares and funds in the names of different conduit entities at their behest…”

The tribunal referred to SEBI v. Monarch Networth Capital Ltd., (2016) 6 SCC 368, wherein the Supreme Court, while wherein  while dealing with the issue of principles of natural justice, has, inter alia, observed that :

…Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A. No. 282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be sufficient compliance of the requirement of furnishing adverse materials to the affected party.

It further stated that,

“…the non-disclosure of relationships of Srikanth with Sripriya and Srihari appears to be a deliberate act on the part of the Company and is strongly suggestive of the fact that these three Noticees being part of the scheme cooked together by promoters of the Company and the appointment of Srikanth as an Independent Director was nothing but a eyewash as Srikanth cannot be held to be ‘independent’ at any point of time in any manner whatsoever even before the Company had floated its IPO…”. And that “…operations of ZSL were not being conducted in compliance with even the basic norms of Corporate Governance…”.

The tribunal also took note of the details about Srikanth as available on the MCA website indicating instances wherein Srikanth’s directorship with other companies was not disclosed in RHP, and mentioned them categorically. And further mentioned how “anyone can see a pattern of wrong disclosures regarding the directorship of Srikanth in various disclosures filed by ZSL and such wrong disclosure in the RHP of ZSL is not a one-off incident”. Vouching for the correctness of the statements despite knowing them to be outright false and misleading was also pointed out very clearly.

And the following were dealt in conjunction.

  1. Common Objective
  2. Role of other Noticees
  3. Funding of Sthithi and Spriya
  4. False and misleading disclosures by the Company and Promoters

It also stated that,

“…I note from the First Information Report filed by the Union Bank of India at Banking Securities and Fraud Cell, Central Bureau of Investigation at Bengaluru with respect to ZSL and its subsidiary ZSIL that the account of ZSL was already reported as fraudulent account by various other banks viz. Syndicate Bank, Dena bank, Federal bank and Andhra Bank on account of diversion of funds/non-creation of assets and submission of fake bills etc. I also note from the said FIR that Union Bank of India has declared ZSL as a wilful defaulter…”.

Directed Noticees 2-7 to make a public offer within 45 days of the present order, through a merchant banker, to acquire the shares of the Company from public shareholders in terms of the provisions of SAST Regualtions, 2011.

Directed Noticees 2-7 to pay interest at the rate of 10% per annum along with the offer price, for the period starting from the date when these Noticees became liable to make open offer for the first time i.e. from July 10, 2012, till the date of payment of consideration, to the shareholders. Further restrained from accessing the securities market including by issuing prospectus, offer document or advertisement soliciting money from the public and are further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner.

Restrained Noticee no. 3-7 from holding the post of director, or any key managerial position or associating themselves in any capacity with any listed public company and any public company.

Noticees 8-13 are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner.

In regards with Noticee 1, it was of the opinion, “…the Hon’ble Madras High Court vide its Order dated July 03 2014, has appointed the Official Liquidator, as the Provisional Liquidator of the Company, however, no further order on winding up of the Company has been passed till date. I find that at this stage, direction of any nature against the Company may not serve any purpose…”.

[Zylog Systems Ltd., In Re., 2021 SCC OnLine SEBI 145, decided on 14-06-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): G. Mahalingam (Whole Time Member) held that while directors are not prohibited from trading in units of the schemes managed by the Asset Management Company, they should ensure that such trading conforms to ethical and moral standards and legal norms expected to be complied by a person entrusted with quasi-fiduciary responsibilities.

Unfair trade Practice or Fraudulent?

Whether the redemption of units in some schemes of a mutual fund by a director of the Asset Management Company of the Mutual Fund and his immediate family, at a time when the said schemes were facing significant redemption pressure (schemes were later wound up) and the director was allegedly in possession of material non-public information relating to the same, would fall within the scope of ‘fraudulent’ or ‘unfair trade practice’ as defined under SEBI(Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

Background

Franklin Templeton Mutual Fund (FT-MF) is s SEBI registered mutual fund. Franklin Templeton Asset Management Company Ltd. (“FT–AMC”) is the Asset Management Company and Franklin Templeton Trustee Services Pvt. Ltd. (“Trustees”) acts as the Trustee of FT–MF.

Vide notice dated 23-04-2020, Trustees informed the unit holders of certain schemes of FT-MF that it was winding up the schemes in conformity with the provisions of Regulation 39(2)(a) of the SEBI (Mutual Fund) Regulations, 1996.

SEBI ordered Forensic Audit/Inspection in terms of Regulation 66 of the Mutual Fund Regulations and found that Noticee’s 1, 2 and 3 had redeemed units in the Impugned Debt Schemes during the period. In view of the same, SEBI issued a Show Cause Notice.

Analysis, Law and Decision

Insider trading Regulations

 Insider Trading Regulations, when they were notified in 1992, primarily sought to prohibit ‘insiders’ connected to the issuer of the security from trading on the basis of superior information obtained during the course of their employment or association with the issuer; whereas the PFUTP Regulations covered other forms of trading done by exploiting information asymmetries by any person, even though he may not be an ‘insider’ or connected to an ‘insider’.

Board noted that Courts have recognized that certain types of trades executed on the basis of superior information would fall within the definition of ‘fraud’ under PFUTP Regulations 2003.

Laws dealing with information asymmetries (PIT Regulations and PFUTP Regulations) essentially seek to address the issues arising out of disparities in access to material information, that is otherwise not legally available to general investors, and to prevent those persons having access to such superior information from exploiting the informational advantage, in order to protect the integrity of the market and maintain investor confidence.

Bench noted that Noticee 1 could reasonably be expected to be privy to material non-public information and it was held that redemption of units was done while being in possession of material non-public information.

Board expressed that the timing of the trades is also crucial circumstantial, evidence in the present matter.

Trades by Noticee  2, who is the wife of Noticee 1, was undertaken on March 23, 2020, and March 24, 2020- i.e. the trades were done in close proximity to the dates when Noticee 1 started redeeming his investments as well as that of Noticee 3. It is further seen that on March 24, 2020, both Noticee 1, on behalf of Noticee 3, and Noticee 2 were redeeming units.

It needs to be borne in mind that Noticee  2 was also experienced finance professional in her own right. Given her experience, she was expected to be aware of the sensitivity of the transactions undertaken by Noticee 1, being a key functionary of the AMC with access to material non-public information and its implications.

Given the facts and circumstances under which Noticee 2 had redeemed the units, it leads the Bench to conclude that such redemptions were done on the basis of material non-public information Noticee  1 had in respect of the Impugned Debt Schemes.

Whether the redemptions can be considered as fraudulent trades?

SEBI held that it found it difficult to hold that redemption of units by the Noticees satisfies the parameters of ‘fraud’ as defined under regulation 2(1)(c) read with regulation 3(a) of the PFUTP Regulations 2003, also the conduct of the Noticees did not satisfy the requirements for sustaining the charge under regulation 4(2)(q) of PFUTP Regulations 2003. 

Whether the redemptions can be considered as an Unfair trade practice? 

‘Unfair trade practice’ is not defined under the PFUTP Regulations 2003.

Supreme Court in the decision of SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 has observed that the scope of the term ‘unfair trade practise’ is wider than that of the term ‘fraud’ and activities which do not satisfy the parameters of ‘fraud’ could independently have proceeded under Regulation 4(1) if it can be considered as an ‘unfair trade practice’.

Bench expressed that the primary purpose for having laws prohibiting trading on the basis of asymmetric access to information is to foster confidence in the securities markets. Such trading by directors of a company is also a breach of the fiduciary duty as the insider effectively converted corporate information for private profits to the detriment of the other investors.

SEBI expressed that Regulations 18(25)(B)(vi) and 18(27)(vi), respectively, required the Trustees and the independent directors of the AMC/Trustee to put in place a ‘code of ethics’ which were designed to prevent fraudulent, deceptive or manipulative practices by insiders in connection with personal securities transactions. It was further noted that the AMC had formulated a Policy on Conflict of Interest.

Policy, which listed the obligations of the relevant persons, inter alia, requires employees and directors to “not [participate] in decision making in case person [is] having actual perceived or potential conflicts of interest in the transaction” and also requires them to “pro-actively report any actual perceived or potential conflicts of interest.”

Board added that Noticee 1 being a person having wide experience in securities market, it was expected that his conduct would be line with the quasi-fiduciary responsibility that a director of an AMC owed to the unitholders of the mutual fund.

On making an investment in the impugned debt schemes, Noticee 1 should have upfront declared his investments to AMC and should have sought to recuse himself from any decision related to the Impugned Debt Schemes and should have also refrained himself from accessing any non-public information relating to the schemes, material or non-material.

Therefore, the conduct of Noticee 1 in redeeming units in the Impugned Debt Schemes while in possession of material non-public information was not in line with the high ethical standards expected of a person vested with such quasi-fiduciary responsibilities and the same was also not in compliance with the ‘code of ethics’ and the ‘Conflict of Interest Policy’ of the AMC which clearly spelt out restrictions on dealing in securities while in possession of material non-public information.

Redemption of units by a director of the asset management company of a mutual fund while being privy to material non-public information cannot be considered as fair conduct.

Conclusion

Redemption of units by the Noticee 1 on his own behalf and on behalf of Noticee 3 while being privy to material non-public information was an ‘unfair trade practice’ and in contravention of Regulation 4(1) of PFUTP 2003.

Facts and circumstances and timing of the redemptions made by Noticee 2 lead to a distinct likelihood that the said redemptions were also based on material non-public information passed on by Noticee 1.

Since during the course of proceedings, Noticee 3 expired, proceedings against were abated.

However, since Noticee 1 had done the transactions on behalf of Noticee 3, the directions of disgorgement will be applicable to the corpus standing in the name of Noticee 3 also.

Directions

  1. Noticee 1 and Noticee 2 shall be restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year from the date of this order. During the period of restraint, Noticee 1 and Noticee 2 shall not liquidate their existing holding of securities including the units of mutual funds.
  2. Noticee 1 and Noticee 2 shall jointly and severally transfer the amounts mentioned within a period of forty-five (45) days, from the date of receipt of this order. In case of failure to do so, simple interest at the rate of 12% per annum shall be applicable from the expiry of the said 45 days till the date of actual transfer;
  3. Noticee 1 shall be liable to pay a monetary penalty of Rs 4 crores for the redemptions undertaken on his own behalf and on behalf of Noticee 3, and Noticee 2 shall be liable to pay a monetary penalty of Rs 3 crores for the redemptions from her account, under Section 15HA of the SEBI Act, 1992;
  4. Noticee 1 and Noticee 2 shall pay their respective penalties within a period of forty-five (45) days, from the date of receipt of this order. In case of failure to do so, simple interest at the rate of 12% per annum shall be applicable from the expiry of the said 45 days till the date of actual payment.

[Franklin Templeton Mutual Fund, In Re.,  2021 SCC OnLine SEBI 131, decided on 7-06-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty (Whole Time Member) in a detailed 92 paged order, barred six individuals and seven entities from the securities market for varying periods and directed some to disgorge illegal gains. Further made clear distinctions from the cases referred to, in regards with the instant matter, specifying very categorically the different factual threads.

The present matter pertains to the issuance of GDR by Zenith Birla (India) Limited and the independent and concerted efforts of the other Notices.. It had issued 1.81 million GDRs for USD 22.99 million in 2010. Thereafter, all the 1.81 million GDRs were cancelled and converted into equity shares. Post cancellation of the aforesaid GDRs, it was noticed that 4,77,30,000 shares of Zenith on conversion of 1,377,667 GDRs were sold in the Indian securities market through FII-sub-account namely India Focus Cardinal Fund  (IFCF). Similarly, 1,15,06,560 shares of Zenith on the conversion of 319,626 GDRs were sold in the Indian securities market through FII-sub account namely High Blue Sky Emerging Market Fund.  DRThe Company had concealed material facts from its shareholders and investors of Indian securities market and thereby had prevented them from taking an informed decision while dealing in the shares of the Company.

There were certain submissions made by the parties which the Court dealt with suitably, for instance, “…I note that the instant proceedings are in the nature of quasi-judicial proceedings and the provisions of Indian Evidence Act, 1872 are not strictly applicable to such proceedings. Further, the principle under Section 65 (a) of the said Act, itself provides for admissibility of a document as a secondary evidence under certain condition inter alia, when the original is in possession of the person against whom the document is sought to be proved, or of any person out of reach of, or not subject to the process of the Court. As stated in the beginning, the copies of the documents relied upon in the SCN to prove the allegations, were actually obtained during investigation through the help of overseas securities market regulators and the copies of all such documents relied upon in the SCN have been duly made available to the Noticees. The Noticees have filed their written replies to the SCN by referring to those documents, hence the objection to the reliability on those documents at this stage is without any reason and does not explain as to how these copies of documents have caused prejudice in defending their interest and contesting the allegations made against in the SCNs…”.

“Noticee no. 6 should understand that the instant proceeding is an inquisitional proceeding where an entity is required to offer comments / replies in response to the allegation levelled in the SCN. It is not an adversarial proceeding i.e. a dispute resolution proceeding where respective counter parties present their respective claims to a third neutral party, or an adjudicator for deciding the dispute…””… Hence the contention of the Noticee no. 6 is not tenable and he is expected to only confine his submissions in rebutting the allegations made against him in the SCN…”.

The Court further remarked, “On the basis of close connection of IFCF and HBS with AP and the role played by the AP, Vintage, IFCF and HBS in implementing the fraudulent scheme of GDR issue of Zenith, it is the call of justice that all these entities should be made jointly and severally liable to disgorge the said illegal gains earned by IFCF and HBS. Therefore, in my considered view, the gains made by these Noticees by selling such shares are liable to be disgorged since the underlying shares of those GDRs for which no consideration was paid by Vintage, were sold and unlawful gains were made out of such sale by these Noticees…”. Therefore, such acts providing partial and distorted information to the public about issuance of GDRs by the Company were observed to be acts falling in the category of fraudulent acts.

Common submission by some of the Noticees:

GDR were issued by the Company in 2010 while SEBI had issued SCN after 9 years of the GDR and such inordinate delay of around 9 years is unjustified and unfair.

Replying to which the court exclaimed, “….The submissions advanced by the Noticees may give a semblance of credibility on first blush, however, after scrutiny of the records before me, I am of the view that the aforesaid observations of the Noticees and the decisions relied upon by them would neither be applicable nor be helpful to the Noticees, as the facts and the context of the matters referred to above are distinguishable from the facts of the present matter…”

While taking cognizance of the individual and active role of the Noticees in connivance with Zenith, the Court took note of the role of the Bank also. The Court gave due credit to the corrective steps that the Bank took by removing the director from its joint venture, further dissolving and transferring its sub account. And therefore it stated, “…in my opinion, though the acts of the Noticee no. 13 are in violation of the provisions alleged in the SCN, taking cognizance of the aforesaid mitigating measures taken by it as a bank and as a FII, the matter needs to be considered accordingly…”.[Zenith Birla (India) Ltd, In re, 2021 SCC OnLine SEBI 75, decided on 30-03-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal (SAT): Justice Tarun Agarwala, Presiding Officer, Dr C.K.G. Nair  Member and Justice M.T. Joshi, Judicial Member affirmed the impugned order and allowed the appeal partly.

The present appeal has been filed against the order dated August 31, 2020, passed by the Adjudicating Officer i.e. AO of Securities and Exchange Board of India i.e. SEBI imposing a penalty of Rs. 8 lakh for violation of Regulation 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 i.e. PFUTP Regulations.

A show-cause notice was issued in the trading of the scrip of Malabar Trading Company Ltd. i.e. ‘MTCL’. It was alleged that the appellant had contributed to more than 5% of the total market positive LTP through 63 trades for a total quantity of 4304 shares during patch-1. It was further alleged that the appellant placed sell orders in the range of 1 to 500 shares when the respective buy order quantity was in the range of 100 to 3400 shares especially when more shares were available, inspite of which the appellant on most of the dates traded only on one share. It was, thus, alleged that the appellant was manipulating the share price and created a misleading appearance of trading in the scrip by such trades thereby violating Regulation 3 and 4 of PFUTP Regulations. The AO found that the appellant had no bonafide intention to sell when sufficient buy orders were available and despite having adequate holdings in the scrip of MTCL sold only one share per transactions which resulted in the creation of positive LTP and thus created a false misleading appearance of trading in the securities market. The AO, thus, held that such trading pattern amounts to manipulation of the price of the scrip.

The Tribunal observed that except on three occasions the appellant only sold one share at a time on a daily basis. This trading pattern created a misleading appearance with the intention to manipulate the market if not the price. Thus, even if there is no connection with the buyer the trading pattern shows a concerted effort to manipulate the market and therefore it was observed that the appellant was not acting as a genuine seller. It was further observed that appellant had no bonafide intention to sell because inspite of sufficient buy orders being placed with abundant quantity being available in the market the appellant was only placing sell orders of one share at a time. This clearly shows his intention of manipulating the market for vested reasons.

The Court thus held that the finding of the AO that the appellant had violated the provisions of Regulation 3 and 4 of PFUTP Regulations does not suffer from any error of law. The Court further held “in the given circumstances when the appellant was only selling miniscule quantity the penalty of Rs. 8 lakh is harsh and excessive and does not commensurate with the alleged violations. Given the surrounding circumstances we are of the opinion that the penalty of Rs. 1 lakh in the given circumstances shall be just and sufficient.”

In view of the above, the appeal was allowed and impugned order affirmed.[Tanuj Khandelwal v. SEBI, 2021 SCC OnLine SAT 78, decided on 04-01-2021]


Arunima Bose, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Ananta Barua, (Whole Time Member) found Chairman of Future Group, Kishor Biyani and its other promoters indulged in insider trading. The Board, in addition to a year ban on Kishor Biyani, Anil Biyani and Future Corp. Resource Pvt. Ltd. (FCRPL), had also imposed the penalty of Rs 1 crore on each.

The order was passed in connection with an announcement dated 20-04-2017 related to the “Composite Scheme of Arrangement between FRL, BSPL, PHRPL and their respective Shareholders”. SEBI had passed a show-cause notice regarding the said arrangement, alleging insider trading and wrongful gain thereby.

Whether there was an Unpublished Price Sensitive Information (UPSI)?  

On 20-04-2017, Future Retail Ltd. (FRL) made a corporate announcement to the stock exchanges regarding segregation of certain business of FRL through a Composite Scheme of Arrangement between FRL, BSPL and PHRPL and their respective Shareholders. The information related to scheme of arrangement, which resulted in the de-merger of certain business from FRL, had its own appreciable impact on the price of the shares of FRL and therefore, information was price sensitive.

Regulation 2(1) (n) of the Prevention of Insider Trading (PIT) Regulations, 2015 prescribes as under:

“………(n) “unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities”

Therefore, the information which was disclosed to the stock exchanges by FRL on 20-04-2017, prior to its disclosure was UPSI.

Whether Noticees except Noticee 7, are insiders?

The definition of “insider”, as given in Regulation 2(1)(g) of PIT Regulations, 2015 showed that any person,

  • who is connected person; or
  • who is in possession of or having access to UPSI,

Regulation 2(1)(d)(ii)(j) of PIT Regulations, 2015 inter alia provides that a company 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, shall be deemed to be connected person unless the contrary is proved. Noticee 2, Kishor Biyani had been shown as person exercising significant influence on FRL being significant beneficial owner of shares held by noticee 1 FCRPL in FRL. Kishor Biyani, having held beneficial interest in 32% shares of FCRPL was an insider as per the provisions.  Noticee 3, Anil Biyani, (Promoter of FRL) being immediate relative of Kishor Biyani was deemed to be connected persons in terms of the Regulations, 2015. FCRPL, being a connected entity was an insider as mentioned above. Noticee 4, the employee trust formed by FCRPL i.e., FCRPL Employee Welfare Trust (FCRPLWT) was deemed to be a connected person. Noticee 5 and 6 i.e., Rajesh Pathak  and Rajkumar Pande were also directors in other group companies of Future Group and had frequent communication with Kishor Biyani which had suggested direct or indirect association of with FRL, which was the requirement under Regulation 2(1)(d) of the PIT Regulations, 2015 for terming a person as “connected person”.  Noticee 8, Arpit Maheshwari was part of the emails where issue related to the scheme was being discussed. Since, he was privy to the UPSI, he was an insider in terms of Regulations 2(1)(g)(ii) of PIT Regulations, 2015.

Whether Noticees except Noticee 7, have traded in the securities of FRL when in possession of the UPSI?

The Board observed that FCRPL purchased Rs. 36,25,000 shares and FCRPLWT purchased Rs. 8,00,500 shares, of FRL during the period of UPSI. While Kishor Biyani and Anil Biyani who were insiders of FRL and were holding beneficial interest in 32% and 15% shares in FCRPL, respectively, were the persons who took the decisions for impugned trades on behalf of FCRPL, in the shares of FRL during the UPSI period. Noticee 5, in consultation with noticee 6, had issued instructions to IDBI to purchase the shares of FRL on behalf of noticee 4 during the UPSI period. IDBI then placed the order with Sajag Securities Pvt. Ltd., Stock Broker of Noticee 4, for purchasing the shares of FRL. While noticee 8 employed with FRL as Deputy Manager, had traded in the scrip of FRL during the period of UPSI. The Board held,

“Once it is established that an insider when in possession of UPSI has traded in the securities then it is a natural inference that such trades were on the basis of the UPSI.”

SEBI observed that noticee 7 (as a compliance officer of FRL) had violated Clause 4 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B read with Regulation 9(1) of PIT Regulations, 2015 as he failed to close the trading window with respect to the aforesaid announcement dated 20-04-2017. The Board further noticed that as per the list of people/entities submitted by FRL to whom pre-clearance was given for trading in the scrip of the FRL, noticee 7 gave pre-clearance to FCRPL for trading in the scrip of FRL while knowing the fact that FCRPL and its directors i.e. Kishor Biyani and Anil Biyani were insiders and might have access to the UPSI.

Directions:

In view of the aforesaid findings, SEBI issued following directions:

  • FCRPL, Kishor Biyani, Anil Biyani along with noticees 5 and 6 were restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, for a period of one (1) year;
  • Noticees 1, 2, 3, 5 and 6 were restrained from buying, selling or dealing in the securities of the Future Retail Limited (FRL) for a period of two (2) years;
  • Noticee 8 was restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, for a period of one (1) year; and further from buying, selling or dealing in the securities of the Future Retail Limited (FRL), for a period of two (2) years;
  • FCRPL, Kishor Biyani and Anil Biyani were directed to jointly and severally disgorge an amount of Rs. 17,78,25,000.
  • Noticee 8 was directed to disgorge an amount of Rs. 13,320 along with an interest at the rate of 12% per annum to Investor Protection and Education Fund (IPEF).
  • FCRPL and FCRPLWT were directed to jointly and severally disgorge an amount of Rs. 2,75,68,650 along with an interest at the rate of 12% per annum.
  • Penalty of Rs. 1 crore was imposed on FCRPL, Kishor Biyani and Anil Biyani each which was directed to be paid within a period of 45 days,
  • Noticee 5 and 6 were imposed with a penalty of Rs. 25 lakh, each and were directed to pay their respective penalties within a period of 45 days;
  • Noticee 7 was imposed with penalty of Rs. 10 lakh, and was directed to pay penalty within a period of 45 days,

However, SEBI clarified that the obligation of the noticees in respect of settlement of securities, purchased or sold in the cash segment of the recognized stock exchange(s), would be allowed to be discharged irrespective of the restraint/prohibition. Further, all open positions, if any, of the noticees, in the F&O segment of the recognised stock exchange(s), were permitted to be squared off, irrespective of the restraint/prohibition imposed by this Order. [Future Corporate Resources (P) Ltd.., In Re., 2021 SCC OnLine SEBI 28, decided on 03-02-2021]


Kamini Sharma, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Madhabi Puri Buch, (Whole Time Member) issued ex-parte order against National Stock Advisory Research (NSAR) on finding out its indulgence in unauthorised activities.

SEBI had received a complaint against NSAR, a proprietorship firm of Neeraj S Lodhi alleging that NSAR was an unregistered stock advisory firm; was in the business of taking money from small investors by providing them wrong trading tips and calls, and after receipt of money they did not respond to phone calls and messages of investors.

After conducting the examination in this matter, the Board noticed that neither NSAR nor its proprietor Neeraj S Lodhi was registered with SEBI in any capacity. The Board observed that NSAR had been putting information in public domain/advertising by using website namely www.nationalstockadvisory.com about the various services offered by it in securities market. It was also observed that various plans/packages were being offered by NSAR to avail Services. Thus, NSAR was prima facie, holding itself out as an investment Adviser without obtaining registration from SEBI and observing mandated regulations. Regulation 3(1) of SEBI (Investment Advisers) Regulations, 2013 states that:

“…no person shall act as an investment Adviser or hold itself out as an investment Adviser unless he has obtained a certificate of registration from the Board under these regulations”.

The Board held the activities of NSAR, prima facie, in violation of Section 12(1) of SEBI Act, 1992 read with regulation 3(1) of the IA Regulations, 2013. Therefore, to prevent NSAR from collecting any more funds from the public and indulging in unauthorized investment advisory activities, the Board by way of interim ex-parte order issued the following directions against NSAR and its proprietor Neeraj S Lodhi:

  • to cease and desist from acting as an investment advisor including the activity of acting and representing through any media (physical or digital) as an investment advisor,
  • not to divert any funds collected from investors
  • not to dispose of or alienate any assets,
  • to immediately withdraw and remove all advertisements, representations, literatures, brochures, materials, publications, documents, websites, communications etc.
  • not to access the securities market and buy, sell or otherwise deal in securities, either directly or indirectly, in any manner whatsoever;
  • to provide a full inventory of all assets held in their name,
  • ICICI Bank and SBI are directed not to permit any debits/withdrawals and not to allow credits, from/to the following bank accounts, without the permission of SEBI.
  • The Depositories are directed to ensure, that they neither permit any debits nor any credits in the demat accounts held by Neeraj S Lodhi.

[National Stock Advisory Research, In Re., 2021 SCC OnLine SEBI 27, decided on 01-02-2021]


Kamini Sharma, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

Security and Exchange Board of India (SEBI): Madhabi Puri Buch, (Whole Time Member) imposed certain restrictions on GJ Advisory Services and Profit Ideas Advisory Services (“Noticees”) for indulging in unregistered Portfolio Management Services.

SEBI received several complaints against noticees alleging unregistered portfolio management activities. On examination, the Board noticed that the noticees had undertaken the management of funds as well as securities of their clients and the fees/funds were collected through the Banks Accounts of the noticees. It was found out that both the noticees were engaged in ‘portfolio management services. The Board observed that by virtue of providing unregistered Portfolio Management Services, the noticees had collected an amount of Rs 8,89,23,049 as fees towards the management of funds and securities of clients.  Thus, the activities noticees were prima facie, in violation of Section 12(1) of SEBI Act read with Regulation 3 of Portfolio Management Services (“PMS”) Regulations.

The Board opined that permitting the investors to receive a portfolio management service from an unregistered entity would cause irreparable injury to the development of the securities market as the objective of SEBI is not only the protection of investors but also orderly development of securities market. Hence, the Board held that Gourav Jain and Poonam Jain who were the proprietors of GJ advisory and Profit Ideas respectively, were liable for unregistered portfolio management services and, therefore, the Board issued following orders against the noticees:

  1. to cease and desist from acting as a portfolio manager and to solicit or undertake such activity or any other activities in the securities market.
  2. Not to divert any funds raised from investors.
  3. Not to dispose of or alienate any assets, or any interest or investment or charge on any of such assets held in their name, except with the prior permission of SEBI.
  4. Immediately withdraw and remove all advertisements, materials etc. in relation to their portfolio management activity or any other unregistered activity in the securities market.
  5. Not to access the securities market and buy, sell or otherwise deal in securities in any manner.

Consequently, the directions were made to the Banks not to allow any debits/ withdrawals and not to allow any credits to the accounts of the noticees, without permission of SEBI. The Depositories were also directed to ensure, till further directions, that no debit or credit be permitted in the demat accounts held by noticees. [GJ Advisory services and Profit Ideas Advisory Services, In Re., 2021 SCC OnLine SEBI 2, decided on 04-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): S.K. Mohanty, (Whole Time Member) has barred two promoters of NDTV, namely Mr Prannoy Roy and Mrs Radhika Roy (the Noticees) from the securities market for 2 years and directed them to disgorge illegal gains of more than Rs 16.97 crore for indulging in insider trading under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992. These directions came after a probe was launched by SEBI to check various allegations of insider trading between September 2006 to June 2008.

The SEBI noted that both the noticees were in possession of unpublished sensitive information (PSI-6) with respect to proposed reorganisation of the company. The discussions around reorganisation of the company started around 7-09-2007, and was finally disclosed to the public on 16-04- 2008. During this time, SEBI noted Mr Roy was the chairman and whole-time director whereas, his spouse, Mrs Roy was the managing director. Both were privy to the sensitive information with respect to reorganisation of the company.

On 17-04-2008, the noticees sold their shares making a profit of more than 16.97 crores when the trading window for them was closed.

SEBI found them to have contravened Regulation 3(i) and Regulation 4 of the PIT Regulations, 1992 read with Regulation 12 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Section 12A(d) and (e) of the SEBI Act, 1992; and the NDTV’s Code of Conduct and regulation 12(2) read with 12(1) of the PIT Regulations, 1992. NDTV’s code of conduct for prevention of insider trading prohibited them from trading at least till 24 hours after the information was disclosed to the stock exchanges.

The Noticees were directed to disgorge the amount of wrongful gain of ₹16,97,38,335/- as computed in the show cause notice, along with interest at the rate of 6% per annum from April 17, 2008, till the date of actual payment of disgorgement amount alongwith interest, within 45 days from the date of coming into force of this order.  They were also restrained from accessing the securities market and further prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 2 years.[In the matter of New Delhi Television Ltd. WTM/SM/IVD/ID2/9711/2020-21, decided on  27-11-2020]


Nilufer Bhateja, Associate Editor has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

 Securities Exchange Board of India: G. Mahalingam, Whole-time member retrained the promoters of the Dewan Housing Finance Limited i.e. DHFL from accessing the securities market.

Dewan Housing Finance Limited (“DHFL”) was incorporated on April 11, 1984, and registered with National Housing Bank (NHB) under Section 29A of the National Housing Bank Act, 1987 has been carrying on the business of providing loans to retail customers for construction or purchase of residential property, loans against property, etc.

The equity shares of the Company are listed on BSE Limited and NSE Limited. The Company had issued Non-Convertible Debentures (NCDs) through public issue as well as private placements, which are listed on the stock exchange(s)and had more than Rs. 24000 crores worth of outstanding NCDs issued through the public issue as on May 31, 2019.

On January 29, 2019, Cobrapost, a media portal, published an article alleging that the promoters of the Company- Mr Kapil Wadhawan and Mr Dheeraj Wadhawan, had siphoned off more than Rs. 31,000 crores of public money primarily through grants and advances to shell companies pursuant to which DHFL issued a press release stating that the allegations are baseless.

On November 20, 2019, Reserve Bank of India (“RBI”) vide its Order superseded the Board of Directors of DHFL and appointed Shri. R Subramaniakumar as the Administrator and later filed an application to initiate corporate insolvency resolution process (“CIRP”) under Section 227 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and National Company Law Tribunal, Mumbai Bench admitted the application and confirmed the appointment of Shri R Subramaniakumar as the administrator. Grant Thornton India LLP (“Transaction Auditor”) was appointed to assist the RP in conducting a transaction audit of the Company which filed an initial report stating that certain transactions entered into by DHFL during the period FY 2006-07 to FY 2018-19 are fraudulent in nature, as per Section 66 of the IBC.

Observations made in the initial report

  1. DHFL has entered into certain fraudulent transactions, which were shown as bonafide transactions in its published financial statements as well as corporate announcements disseminated in the public domain.
  2. The Company had created a ‘logical partition’ in the Enterprise Resource Planning (ERP) Software used for bookkeeping and loan management purposes to store data pertaining to only one branch – Bandra, which was a virtual branch having a parallel set of books of accounts maintained by the Company and all the loan accounts presented in the said module appeared to be non-genuine.
  3. Out of Rs 23,815 crores shown as disbursed to Bandra Book entities in the accounts of the Company, only Rs 11,755.79 crores was actually disbursed to 91 entities, but was shown as 2, 60,315 home loan accounts in the books of the company.
  4. On verifying the financial statements of 50 of the said 91 entities it was noted that 34 entities had invested a portion of the loan amount received from the lender in companies which were linked to the promoters of DHFL having weak financial strength. These loans were unsecured and given without taking any collateral.
  5. The report concluded that the Company suffered a notional loss of Rs 3,348 crores as the interest charged on such loans was lower than the interest charged for other similar entities by the Company in the normal course of business.

Order by the Board

The Board observed that financial statements of a company are relied upon by debt investors for assessing the financial health and repayment capacity of the Company and hence their investment decisions would have been sullied by these fraudulent misstatements. The interests of investors who bought equity shares of the Company during this period have also been prejudiced because the financial statements of the company did not state the true and fair picture of the affairs of the Company

The Board relied on Regulation 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 and Regulation 4(1) of SEBI, Regulation 4(2)(f) and Regulation 4(2)(k)  (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“SEBI PFUTP Regulations, 2003”) which provides as under-

12A. No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;

(c) No person shall directly or indirectly engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets.”

Regulation 4(2)(f) of SEBI PFUTP Regulations, 2003

“Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities.”

Regulation 4(2)(k) of SEBI PFUTP Regulations, 2003

“Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading and which is designed or likely to influence the decision of investors dealing in securities.

The Board thus held that the interest of investors who take the decision of investing in the securities of the Company on the basis of financial position of the Company and disclosures made in the financial statements have been, prima facie, affected adversely due to the aforesaid transactions entered into by the Company and the consequent fraudulent misstatements in the financial statements of the Company and have violated Section 12A(a), (b) and (c) of the SEBI Act, 1992, Regulation 3(b), (c), (d), (d), Regulation 4(1) and Regulation 4(2)(f), (k) and (r) of the SEBI PFUTP Regulations, 2003 and Rakesh Kumar Wadhawan and Kapil Wadhawan have prima-facie violated Regulation 4(1) and other related provisions of the SEBI LODR Regulations, 2015.

The Board thus restrained the defaulting promoters from accessing the securities market and are prohibited them from buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly and associating themselves with any listed public company and any public company as directors/ promoters which intends to raise money from the public or any intermediary registered with SEBI.

In view of the above, the order was passed without any prejudice to Direction(s) or Order that may be passed by NCLT during CIRP of the Company under IBC, 2016.[Dewan Housing Finance Corporation Ltd., In Re., 2020 SCC OnLine SEBI 138, decided on 22-09-2020]


Arunima Bose, Editorial Assistant has put this story together

Legislation UpdatesNotifications

SEBI vide its Circular no. CIR/MRD/DRMNP/25/2014 dated August 27, 2014, has, inter alia, specified guidelines pertaining to Core Settlement Guarantee Fund and Default Waterfall for Clearing Corporations.

2. Pursuant to deliberations with the Risk Management Review Committee (RMRC) of SEBI and various stakeholders, it has been decided to amend the following provisions of the aforesaid Circular.

a. Clause 14 of the said Circular dated August 27, 2014 shall stand modified as under:

“Further Contribution to/ Recoupment of Core SGF

14) Requisite contributions to Core SGF by various contributors (as per clauses 7 and 8) for any month shall be made by the contributors before start of the month. In the event of usage of Core SGF during a calendar month, contributors shall, as per usage of their individual contribution, immediately replenish the Core SGF to MRC. However, such contribution towards replenishment of Core SGF by the members would be restricted to only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by Clearing Corporation to market participants.

In case there is failure on part of some contributor(s) to replenish its (their) contribution, same shall be immediately met, on a temporary basis during the month, in the following order:

(i) By CC

(ii) By SE”

b. Layer VII of the default waterfall, as specified under clause 16 of the said Circular dated August 27, 2014, shall stand modified as under:

“VII. Capped additional contribution by non-defaulting members of the segment. **

**

(i) CC shall call for the capped additional contribution only once during a period of 30 calendar days regardless of the number of defaults during the period. The period of 30 calendar days shall commence from the date of notice of default by CC to market participants.

(ii) CCs shall have relevant regulations/provisions for non-defaulting members to resign un-conditionally within the abovementioned period of 30 calendar days, subject to member closing out/settling any outstanding positions, paying the capped additional contribution and any outstanding dues to SEBI. No further contribution shall be called from such resigned members.

(iii) The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 10% of the Core SGF of the segment on the date of default in case of equity/ debt segments.

(iv) The maximum capped additional contribution by non-defaulting members shall be lower of 2 times of their primary contribution to Core SGF or 20% of the Core SGF of the segment on the date of default in case of derivatives segment.

(v) In case of shortfall in recovery of assessed amounts from non-defaulting members, further loss can be allocated to layer ‘VI’ with approval of SEBI.”

3. Clearing Corporations are directed to:

(i) put in place the adequate systems and issue the necessary guidelines for implementing the above decision.

(ii) make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the trading members/clearing members/custodians and also to disseminate the same on the website.

(iv) communicate to SEBI the status of implementation of the provisions of this circular through the Monthly Development Report.

4. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.


Securities Exchange Board of India

[Circular dt. 03-01-2020]


Note:

A core Settlement Guarantee Fund (SGF) is a corpus used for settlement of trades during defaults and all intermediaries — stock exchanges, clearing corporations, and brokers — contribute towards it.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty, Whole Time Member, passed an order finding the promoters of New Delhi Television Ltd. (“NDTV”)  Dr Prannoy Roy, Chairman (“Noticee 2”), Radhika Roy, Managing Director (“Noticee 3”) and RRPR Holdings (P) Ltd. (“Noticee 1”)  grossly violated the provisions of Section 12-A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 read with Regulations 3(a), (b), (c), and (d) and 4(1) of the SEBI (Prohibition of Fraudulent Trade Practices relating to Securities Market) Regulations, 2003. Further, Dr Pronnoy Roy and Radhika Roy were additionally found to have violated Clause 49(1)(d) of the Equity Listing Agreement read with Section 21 of the Securities Contracts (Regulation) Act, 1956. 

In view of such findings and in order to protect the interest of investors and the securities market the Board passed following Directions against the Noticees:

(i) All the Noticees are restrained from accessing the securities market and are further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 2 years. During the said period of restraint/prohibition, the existing holding, including units of mutual funds, of the Noticees shall remain frozen; 

(ii) Dr Prannoy Roy and Radhika Roy are restrained from holding or occupying position as Director or any key managerial personnel in NDTV for a period of 2 years; and 

(iii) Dr Prannoy Roy and Radhika Roy are restrained from holding or occupying position as Director or any key managerial personnel in any other listed company for a period of 1 year.

The backdrop

In August and December of 2017, SEBI received complaints from a shareholder of NDTV alleging, inter alia, that RRPR Holdings, which is one of the promoters of NDTV, and Dr Pronnoy Roy and Radhika Roy, who are promoters as well as Directors of NDTV, have violated the provisions of SEBI Act and the rules and regulations made thereunder by omitting to disclose material information to the shareholders of NDTV about certain loan agreements entered into by them. 

NDTV is a company listed on BSE and NSE, and the three Noticees together constituted for 63.17% aggregate promoters shareholding in NDTV during the period of investigation, i.e., 14-10-2008 to 22-11-2017. 

Upshot of findings in the investigation

(a) The Noticees entered into three loan agreements, one with ICICI Bank Ltd. (a rupee term loan not exceeding Rs 375 crores) and two with Vishvapradhan Commercial Private Ltd. (“VCPL”) (total amounting to more than Rs 400 crores, interest-free and payable at the end of 10 years period). These loan agreements contained material and price sensitive information, in as much as action/decision on many important matters pertaining to NDTV were made subject to prior written consent of the ostensible lender and without the knowledge of the minority shareholders of NDTV. 

(b) Further, under the VCPL agreements and the two call option agreements executed as supplementary to the said loan agreements, beneficial interest in 30% shares of NDTV was effectively vested in VCPL. All these information were profoundly material and price sensitive information which would have influenced the investment decision of the investors in the shares of NDTV, had they been made aware of this information at that time. 

(c) Terms of the loan agreements were devised to affect the interest of shareholders of NDTV. Although various clauses in the loan agreements deceitfully created binding obligations on NDTV, the Noticees consented to such clauses behind the back of the shareholders of NDTV to further their own private interests. 

(d) Having held the dominant position and being majority shareholders of NDTV, the Noticees manifestly assured VCPL to ensure swift compliance of such clauses of the loan agreements pertaining to NDTV, thereby taking all other shareholders for granted and also compromising the interest of shareholders of NDTV. 

(e) In order to conceal the said information from the investors so that the investors continue to trade in the shares of NDTV blissfully ignorant of the fact that the promoters of the company have already vested their voting rights to the extent of 30% in favour of a third external party, Noticees 2 and 3 chose to act in flagrant breach of Code of Conduct of NDTV. If the said information regarding loan agreements had been disclosed by Noticees 2 and 3 to the Board of Directors of NDTV, then the company was bound to intimate the same to the stock exchanges which in turn, would have disseminated such information on their websites for information of the general public. 

(f) The loan agreements were unmistakably structured as a scheme to defraud the investors by camouflaging the information about the adversarial terms and conditions impinging upon the interest of NDTV’s shareholders, thereby inducing innocent investors to continue to trade in the shares of NDTV oblivious to such adversarial developments in the shareholding of NDTV.  

Observation on fiduciary duty and conflict of interest

It was argued that Noticees 2 and 3 could not have acted in terms of the loan agreements in view of their statutory fiduciary duty towards NDTV. That even if the agreements entered into by Noticees 2 and 3 contained provisions prejudicial to NDTV or its investors, yet such agreements were unenforceable if they were in violation of the statutory fiduciary duty of Noticees 2 and 3 as Directors of NDTV.  

In Board’s opinion, the question of enforceability of an agreement by the Courts would arise only in case of breach of the agreement by any of the parties. However, if the parties to an agreement decide to honour the undertakings and covenants provided for in such agreement out of their own volition, such agreements can always be performed by the parties, provided agreement is not prohibited by law. In the present case, the VCPL loan agreements, even though prejudicial to the interest of NDTV and creating conflict for Noticees 2 and 3 in the discharge of their fiduciary duties on the Board of NDTV, these agreements had been dutifully complied by the Noticees, till date. The Noticees, being fully aware and conscious about their pivotal role and positions in NDTV, still agreed/consented and executed agreements containing clauses which have an adversarial effect on the shareholders of NDTV. It restricts NDTV from raising fresh capital, making any restructuring, going for a merger, etc., without the prior written consent of ICICI/VCPL. It certainly amounts to acting in breach of fiduciary duties by Noticees 2 and 3. 

Shareholder’s vote, right to property, and freedom to exercise thereof

It was also contended that Noticess were also shareholders of NDTV, and a shareholder’s vote being a right to property, prima facie may be exercised by him as he thinks fit in his own interest. 

Rejecting the contention, the Board stated that it is to be understood that the case against the Noticees was not that they could not have entered into such loan agreements or exercised their voting rights the way they desired to, but the case against the Noticees was that they entered into certain transactions with a third party whereby they agreed to comply with certain conditions which bind NDTV and the interest of its shareholders too. In other words, by entering into such transaction, Noticees brought their personal interest in conflict with the interest of NDTV.

Based on such findings, the Securities and Exchange Board of India passed directions as aforementioned against Dr Prannoy Roy, Chairman, NDTV Ltd.; Radhika Roy, Managing Director, NDTV Ltd.; and RRPR Holdings (P) Ltd. all promoters of NDTV Ltd. It was directed that the directions made in the order shall come into effect with immediate effect. [NDTV Ltd, In re, 2019 SCC OnLine SEBI 47, decided on 14-6-2019]  

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: The Board comprising G. Mahalingam as  Whole Time Member, allowed Oil India’s application seeking exemption/relaxation from strict enforcement of the requirement contained under Regulation 24(i)(e) of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

The aforesaid application was necessitated on account of the transfer of 333,20,401 equity shares held by the promoter of the company, i.e., Government of India to the Asset Management Company (AMC) of Central Public Sector Enterprise Exchange Traded Fund (CPSE–ETF). This activity was carried out as a part of the government’s disinvestment process.

Oil India submitted that the proposed buy–back inter alia will help in optimizing its capital structure and improve its key financial ratios and would also lead to a reduction in outstanding shares, improvement in earnings per share and enhanced return on invested capital.

The Board noted that as per Regulation 28 of the Buy–back Regulations, SEBI may, in the interest of investors and the securities market, relax the strict enforcement of any requirement of aforesaid Regulations except the provisions incorporated from the Companies Act, if it is satisfied that the requirement is procedural in nature or the requirement may cause undue hardship to investors.

It opined that the strict enforcement of Regulation 24(i)(e) of Buy–Back Regulations against Oil India, at this point in time, may result in undue hardship to investors including shareholders of the company who may seek to participate in the proposed buyback. In view thereof, the exemption/relaxation sought for by Oil India was allowed.[Buy-back of securities in Oil India Ltd., In re, WTM/GM/CFD/87/2018–19, Order dated 31-01-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India, Mumbai: The present case was remanded to SEBI from the order of Securities Appellant Tribunal before G. Mahalingam (Whole Time Member).

The question before SEBI was how to compute disgorgement amount based on inputs provided by the noticees and the period for which the noticees are to be restrained from accessing in the securities market and dealing in securities.

The facts of the case were that SEBI had passed its order against V. Srinivas (CFO), G. Ramakrishna (VP Finance) and Prabhakara Gupta (Head, Internal Audit), Ramalinga Raju and Rama Raju holding them liable under Sections 12A (a), (b), (c), (d) and (e) of the SEBI Act; regulations 3(b),(c) and (d), regulations 4(1) and regulations 4(2)(a),(e),(f),(k) and (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003; and regulations 3 and 4 of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Thereafter an appeal was preferred to the Securities Appellant Tribunal which affirmed the finding of SEBI on merits but remanded the case on grounds that the amount of disgorgement has been arrived at were based on closing price on the date of sales while it should be on the date of actual sales proceeds and that the cost of acquisition and taxes paid were not deducted. It was also alleged that SEBI uniformly restrained all the appellants from accessing the securities market for a period of 14 years without any reasonable cause. SEBI viewed that SAT in its order had observed Ramalinga Raju and Rama Raju to have created fictitious invoices and receipts whereas V. Srinivas, G. Ramakrishna, and Prabhakara Gupta though knew about the above fictitious documents allowed books of Satyam to be formed on the basis of these documents.

Board observed that the role of all the accused were different and similar restraint order could not have been given therefore SEBI directed to restrain the two noticee V. Srinivas and G. Ramakrishna from accessing securities market and dealing in securities for 7 years but for noticee VS Prabhakara accessing securities market and dealing in securities was restrained for 4 years deducting the time period already restrained for. The matter was disposed of with the above direction. [In the matter of Satyam Computer Services Ltd. (SCSL), 2018 SCC OnLine SEBI 165, order dated 16-10-2018]

Business NewsNews

This master circular consolidates and updates the requirements/obligations with regard to Prevention of Unauthorized Trading by Stock Brokers prescribed by the following circulars:

A. CIR/HO/MIRSD/MIRSD2/CIR/P/201 7/108 dated September 26, 2017

B. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/124 dated November 30, 2017

C. CIR/HO/MIRSD/MIRSD2/CIR/P/2018/109 dated January 11, 2018

II. SEBI in the past has taken several steps to tackle the issue of “Unauthorized Trades” viz Periodic Running Account Settlement, Post transactions SMS/email by exchanges/Depositories, Ticker on broker/DP websites etc. It was observed that in spite of measures taken, a considerable proportion of investor complaints is of the nature of “Unauthorized Trades”

III. To further strengthen regulatory provisions against unauthorized trades and also to harmonize the requirements across markets, it has now been decided that all brokers shall execute trades of clients only after keeping evidence of the client placing such order, which could be, inter alia, in the form of:

a. Physical record written & signed by client,

b. Telephone recording,

c. Email from authorized email id,

d. Log for internet transactions

e. Record of messages through mobile phones,

f. Any other legally verifiable record.

When a dispute arises, the broker shall produce the above mentioned records for the disputed trades. However for exceptional cases such as technical failure etc. where broker fails to produce order placing evidences, the broker shall justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt/payment of funds/ securities by client in respect of disputed trade, etc. shall also be considered.

IV. Further, wherever the order instructions are received from clients through the telephone, the stock broker shall mandatorily use telephone recording system to record the instructions and maintain telephone recordings as part of its records.

V. The Brokers are required to maintain the records specified at Para III above for a minimum period for which the arbitration accepts investors’ complaints as notified from time to time currently three years. However in cases where dispute has been raised, such records shall be kept till final resolution of the dispute.

VI. If SEBI desires that specific records be preserved then such records shall be kept till further intimation by SEBI.

VII. The earlier circulars on the same subject mentioned in Para 1 of this Master Circular stand rescinded.

VIII. This master circular shall continue to be effective from 1st April 2018.

IX. The Stock Exchanges are directed to:

a. bring the provisions of this circular to the notice of the Stock Brokers and also disseminate the same on their websites.

b. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above directions in coordination with one another to achieve uniformity in approach.

c. communicate to SEBI, the status of the implementation of the provisions of this circular in their Monthly Development Reports.

X. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

Securities and Exchange Board of India

[CIRCULAR SEBI/HO/MIRSD/DOP1/CIR/P/2018/54]