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]