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., WTM/GM/IMD/06/2021-22, decided on 7-06-2021]

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

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National Consumer Disputes Redressal Commission (NCDRC): Justice V.K. Jain (Presiding Member) addressed the question of who can be considered a consumer under Section 2(1)(d) of Consumer Protection Act in light of trading of shares.

Complainant opened Demat Account with respondent 1 in India Infoline Ltd. Respondent 3 an employee of Respondent 1 carried out unauthorised trading of shares in his Demat Account without his consent and caused heavy losses to him.

The above-stated incident was brought to the notice of respondents 1 and 2, but they did not address the complaint.

After a loss of Rs 55,000, complainant tried to close the account but was not allowed to do so and further was carried out by respondent 3 from his Demat Account without his consent, causing him a loss of Rs 1,72,020.

In view of the above complainants approached the District Forum concerned by way of consumer complaint seeking the compensation of the above-referred amount.

Respondent 1 stated that complainant had entered into a mutual agreement with respondent 3 allowing him to trade into his account and on coming to know this, respondent 1 terminated the services of respondent 2 and 3.

Aggrieved with District Forum’s decision, an appeal was filed with State Commission wherein the appeal was allowed and the complaint was dismissed.

Analysis and Decision

Who can be said to be a consumer?

The above-stated question was considered in Springdale Core Consultants (P) Ltd. v. Pioneer Urban Land and Infrastructure Ltd., CC No. 349 of 2017, decided on 16-03-2020.

 “…Trust was not a consumer within the meaning of Section 2(1(d) of the Consumer Protection Action, which excludes a person who obtains goods and services for a commercial purpose. It was held by this Commission that providing hostel facilities to the nurses was directly connected to the commercial purposes of running the Hospital and was consideration for the work done by them in the hospital.”

Bench observed that there was no evidence of the complainants trading in the shares on a large scale. Complainants were stated to be in service though, in the account opening form, they had claimed to be in business.

No evidence or even allegation of the complainants was found carrying out large scale trading in stocks and shares.

If a person engaged in a business or profession other than regular trading in shares, open a Demat Account and occasionally carries out trading in shares, it cannot be said that the services of the broker were hired or availed by him for a commercial purpose, the scale of such trading by a casual investor being very low. Such a person cannot be said to be in the business of buying and selling shares on a regular basis.

In view of the above, the Commission held that the complainants were consumers within the meaning of Section 2(1)(d) of the Consumer Protection Act.

Whether the trading by respondent 3 in the Demat Account of the complainants was done with the consent of the complainants or it was done unauthorizedly without their consent and without instructions from them?

Commission on perusal of the letter dated 20-10-2009, stated that respondent 3 was trading without instructions from the complainants and that is why he promised to the complainant that he would be responsible in case his losses were to increase.

With regard to the alleged private agreement between respondent 3 and complainant, no evidence was found.

Hence, in view of the above-stated discussion, Commission held that respondent 3 has caused loss to the complainant by unauthorised trading in his Demat Account, therefore he is responsible to compensate the complainant.

Being the employer of respondent 3 and being the broker with whom the Demat Account was opened, respondent 1 was equally liable to compensate the complainants.[Vaman Nagesh Upaskar v. India Infoline Ltd., 2020 SCC OnLine NCDRC 469, decided on 28-10-2020]


Counsel for the Petitioner: Advocate Astha Tyagi

Counsel for the Respondent 1: Advocate Ajit Rajput

Legislation UpdatesNotifications

Risk Management and Inter-bank Dealings- Permitting AD Cat-I banks to voluntarily undertake user and Inter-Bank transactions beyond onshore market hours

As announced in the Statement of Developmental and Regulatory Policies dated October 04, 2019, it has been decided to accept the recommendation of the Task Force on Offshore Rupee Market to permit AD Cat-I banks to offer foreign exchange prices to users at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.

Accordingly, the following section is being added in Part C (Inter-Bank Foreign Exchange Dealings) of the Master Direction- Risk Management and Inter-Bank Dealings:

“6. Customer and inter-bank transactions beyond onshore market hours

Authorised dealers may undertake customers (person resident in India and persons resident outside India) and inter-bank transactions beyond onshore market hours. Transactions with person resident outside India, through their foreign branches and subsidiaries, may also be undertaken beyond onshore market hours.”


Reserve Bank of India

[Circular dt. 06-01-2020]

Business NewsNews

A private placement, rather than a public issue, is the markets regulator’s favoured route to start trading in securities receipts issued by asset reconstruction companies (ARCs). SEBI’s move aimed at allowing only informed investors to trade in the securities. Only certain “qualified buyers” will be permitted to trade in them, and the minimum lot size will be Rs 10 lakh. The intention is to allow only informed investors to trade in these securities. A committee set up by the Securities and Exchange Board of India (SEBI) has made these recommendations, and the regulator’s board meeting on 28-12-2017 approved them.

The offer of Security Receipts (SRs), which are proposed to be listed, may be allowed only to Qualified Buyers through private placement. Initially, security receipts issued by ARCs to banks in exchange for some of their bad loans will be sold to qualified buyers such as financial institutions, banks and alternative investment funds (AIFs) through a process of private placement. Later, high -net-worth individuals (HNIs) and portfolio managers will be allowed to trade in them. Listing of securities receipts was initially proposed to improve liquidity in the securitization industry and help speed up the resolution of the stressed assets in the banking system. SEBI then formed a committee with representatives from the central bank, stock exchanges, credit rating agencies and ARCs to study the matter.

The Reserve Bank of India has defined “qualified buyer” as financial institutions, banks, insurance companies, mutual funds, or any category of non-institutional investors it specifies. Existing holders of security receipts have also been allowed to sell them in an offer for sale (OFS). The net asset value of these receipts may be disclosed quarterly. Existing RBI guidelines require such disclosures twice a year. Listing of these receipts would happen through the Electronic Book Mechanism, which is currently applicable for listing of debt securities. To begin with, SEBI has kept the listing of securities receipts optional. However, if the holder(s) of existing SRs wants to undertake an offer for sale, then such SRs shall be mandatorily listed by the issuers. While the committee suggested that AIFs be allowed to subscribe to the listed SRs, existing SEBI norms limits qualified buyers only to those AIFs which are body corporates.

At the second stage, after seeing the level of interest and the operation of the market, the RBI may consider expanding the definition by including HNIs, portfolio managers having an investible fund base of Rs 10 crore or above and family trusts, with net worth of Rs 500 crore.

[Source: Livemint]