- July 29, 2017
- Posted by: suvanlaw
- Category: SEBI
- Investment through Discretionary PMS covered within the ambit of Insider Trading Regulations
In its informal guidance dated July 25, 2016 issued to HDFC Bank Ltd., SEBI has expressed its views that investments made by an insider having possession of an Unpublished Price Sensitive Information (“UPSI”) through Discretionary Portfolio Management Scheme (“DPMS”) will be treated on par with trades done by the insider directly.
The Bank had requested SEBI to provide its informal guidance in the following circumstances:
- When the employee of the bank or his relative has no control over the investment making decisions and is in possession of UPSI of the Bank or of other listed companies with which the Bank deals or
- When the trading window is closed of the Bank or of the company with which the Bank deals.
Even while dealing in securities through DPMS, SEBI’s view is that the trades of the insider shall be assumed to be motivated by the knowledge and awareness of UPSI. With respect to dealing in securities when trading window of the Bank is closed, SEBI interpreted that Bank or the Company with which the Bank deals in securities through a DPMS would also be assumed to be motivated by knowledge and awareness of the UPSI.
This interpretation of SEBI is quite contrary to the approach adopted in the N.K. Sodhi Committee report. The Sodhi Committee report had recommended that investment by a DPMS on behalf of an insider should not be treated as violation of the Insider Trading Regulations. The rationale behind this view was that the persons taking decision on trade are different from the persons in possession of UPSI.
- SEBI Recalls Interim Order After 10 Years
SEBI has recently issued an order dated August 18, 2016 in the matter of Mr. Jayesh Shah & others, recalling two earlier Interim Orders dated January 12, 2006 and April 27, 2006. In these orders, certain entities including Mr. Jay Shah were directed not to buy, sell or deal in securities market till further directions. After almost 10 years of passing the Interim Orders, the WTM has finally relieved the aforementioned entities and has opined that, “after the investigation, SEBI did not find any ground to issue a show cause notice to the Noticees. Accordingly, the restraint vide the aforesaid interim orders, qua the Noticees need not continue and stands recalled.”
In a similar case like this, in the matter of Pyramid Saimira Theatre Limited, SEBI had passed an interim order dated April 23, 2009 under Sections 11, 11B and 11(4), without providing an opportunity of hearing to the parties, against 230 entities. Thereafter, almost 6 years later, by their order dated March 31, 2015 after concluding the investigation SEBI noted that the debarment need not continue in the case of the Appellants therein.
In light of the confirmatory orders recently passed by SEBI in the LTCG matters, it will be interesting to see the time taken by SEBI to complete its investigation.
- SEBI AO passes Order in the Navneet Publication India Ltd. matter, lets off HRI Cosmetic & Others
SEBI’s Adjudicating Officer in an Order dated November 29, 2016 has interpreted the SEBI (Prohibition of Insider Trading) Regulations, 1992. While answering the question as to when did the UPSI period got triggered, the AO observed that the UPSI came into existence only once the proposal to issue the bonus shares was approved by the Board of Directors and even if it is presumed that the promoter family was in knowledge of the proposal, before disclosing to the stock exchanges, it was just a proposal which needed to be approved by the BoD.
The AO also observed that Regulation 3 of PIT Regulations applies only when an insider’s trades are induced by the UPSI and not otherwise. In this case, the Adjudicating Officer held that the connection between the Noticees and promoter family of the Company was remote and there was nothing on record to suggest that the Noticees had traded in the shares of NPIL on the basis or while in possession of UPSI, since the Investigation Report contained only circumstantial evidence. In another Order dated December 2, 2016, in respect of Mr. Sanjay D Gala, in the Navneet Publication India Ltd matter, the AO held that even though the Noticee is the nephew of the MD, merely being related isn’t enough to prove that the Noticee was in possession of the UPSI and traded on the basis of the said UPSI.
The finding in this Order is in stark contrast with another Order by WTM, SEBI, dated February 4, 2016, in the matter of trading in the shares of Palred Technologies Limited wherein the connection was established on the basis of having mutual friends on Facebook with one of the promoters of the concerned entity.
- SEBI Order against Vijay Mallya & United Spirits Limited
In the past few weeks the heat seems to have increased on Vijay Mallya. SEBI had also played its part and by an ad-interim, ex-parte Order dated January 25, 2017, it has restrained former chairman Vijay Mallya and six former executives of United Spirits Limited (USL) from accessing the securities market for the alleged violations of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003. Further, SEBI has also restrained Vijay Mallya and Ashok Capoor from holding positions of Directors and Key Managerial Persons of any listed company.
SEBI has stated that the funds were diverted from the company and/or its subsidiaries to United Breweries Group companies, including Kingfisher Airlines during the period between 2010 and 2013. The SEBI order relies on an E&Y report dated June 29, 2016, which has observed that there was a diversion of funds and potentially improper transactions amounting to Rs. 1225.24 Crores. SEBI has stated that prima facie it appears that Mallya, Mr. Ashok Capoor along with the other KMPs were active in facilitating and/or had knowledge of the diversion of funds from USL to the companies of the UB Group. Following questions are still under examination by SEBI:
- Role of Auditor in non–detection of diversion of funds from USL
- The matter of Diageo entering into a Settlement Agreement with Mallya vis–a–vis USL’s agreement with Mallya.
- The aspect of change in control of USL
Further, NSE has issued a Circular dated February 1, 2017, quoting a SEBI e-mail directive which directs the Trading Members to square off their open interest positions they hold for the entities mentioned in the above order and to also ensure that no fresh positions are created for the said persons/entities.
- Evolving Jurisprudence on Self-trades in India
- Securities Appellate Tribunal has passed a common order dated February 10, 2017, on the issue of self-trades remanding back orders passed against 11 entities to SEBI. The SAT Order also observes that SEBI has decided to take a fresh look in the matters of self-trades.
- Apart from the SAT Order, SEBI’s Adjudicating Officer has also recently passed 3 orders dated February 22, 2017,February 27, 2017&February 27, 2017, on the issue of self-trades, in respect of various entities and the stock brokers through whom these entities were alleged to have entered into self-trades.
- These entities had repeatedly entered into self-trades in the shares of MIC Electronics Limited (“MIC”), through a stock broking firm which acted as counter-party to the self-trades. It was alleged that these self-trades created artificial volume in the shares of MIC and thereby Regulations 3 & 4 of SEBI PFUTP Regulations were violated by the entities and, provisions of SEBI (Stock Broker and Sub Broker) Regulations, 1992 were violated by the stock broking firms.
- The AO Order has found that there has been no violation of any SEBI regulation and has also emphasized that there should be a regulatory distinction between unintentional self-match trades and intentional/willful, manipulative (and illegal) wash trades. It also states that there is a necessity of ‘intent’ and the element of ‘fraud’ as a pre-requisite in all the parts of Regulations 3 and 4 of SEBI PFUTP Regulations. This observation is likely to have wider ramifications.
- These orders show a positive change in SEBI’s stand on self-trades. With a new Chairman at the helm, the brokers have reason to be optimistic about a reasonable policy view being taken by SEBI.
- Discretion of Compliance Officer in SEBI Insider Trading Regulations – A new look
SEBI has issued a ‘path-breaking’ Informal Guidance in the matter of Kirloskar Chillers Private Limited in the context of SEBI (Prohibition of Insider Trading) Regulations, 2015 which may otherwise look innocuous. Detailed views of Suvan Law Advisors can be seen at BloombergQuint and TV Channel.
- SEBI orders against Reliance Industries Limited in a Decade Old Unlawful Gains Case
SEBI vide its order dated March 24, 2017, has barred Reliance Industries Limited (RIL) and its 12 alleged Front Entities from dealing in equity derivatives in the F&O segment of stock exchanges for a period of one year from March 24, 2017, while allowing them to square off or close out their existing open positions. SEBI has further directed RIL to disgorge, within 45 days of the order, an amount of Rs. 447.27 crores along with interest at the rate of 12% per annum.
The case dates back to March 2007, when RIL decided to offload approximately 5% of its equity shareholding in Reliance Petroleum Limited (RPL) and thereafter, has executed separate agreements with its 12 front entities, in the month of October-November 2007 which have taken huge short positions in the Futures derivatives of RPL which were going to expire on November 29, 2007. SEBI observed that, most of the entities had never traded in F&O segment of RPL for the period of April 2007 to November 2007.
However, the entities took substantial positions in the 2007 November Futures contracts of RPL, at a time when large block of shares in the company were sold by RIL in the cash segment at a price below the Last Traded Price, at the last 10-minute time-patch of the trading session of November 29, 2007, thereby bringing down the price in the cash segment and consequently in the derivatives segment of the RPL scrip. Since there was no rollover of the net short positions in the November RPL derivatives by any of the front entities of RIL, their short positions expired at the lowered settlement price of November 2007 derivatives contracts which eventually led to unlawful gains to RIL.
On an analysis of the trading strategy adopted by RIL in the cash market, specifically on November 29, 2007 being the expiry day of the November Futures of RPL, SEBI observed that there has been a manipulation of the last half an hour settlement price by RIL and its actions along with that of its front entities constitute a violation of the provisions of section 12A of SEBI Act, 1992 read with regulations 3, 4(1) and 4(2)(e) of the SEBI (PFUTP) Regulations, 2003.
The Regulator further rejected the defence taken by RIL of trading being done as a hedging strategy on the note that: “RIL was not genuinely hedging the risk but was aiming at reaping huge speculative profits by cornering futures positions and playing a fraud on the general investors and the market.”
- SEBI’s informal guidance on applicability of Insider Trading Norms
SEBI in its informal guidance issued to Prabhudas Liladhar Pvt. Ltd. dated December 23, 2016 (made public on April 6, 2017) has stated that the provisions related to Code of Conduct under SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT regulations”) applies to “all connected persons” and not to “designated persons” only. This is at variance with the understanding of explicit statutory provisions and SEBI’s interpretation so far.
For detailed comments on the above-mentioned informal guidance note, please refer to our Article on Bar & Bench.
- SEBI- Adjudication Order in Respect of Sumanth Kumar Reddy Mettu in the matter of Aurobindo Pharma Ltd. – May 22, 2017
Upon receiving certain alerts and complaints, SEBI carried an investigation to find out the possible irregularities of price manipulation, insider trading etc. in the shares of Aurobindo Pharma Ltd. (“APL”). The Adjudicating Officer is the order dated May 22, 2017 found that Sumanth Kumar Reddy Mettu (“Noticee”), the son of one of the then Whole Time Director and the son-in-law of a promoter of APL, had traded for 40,000 share option contracts in derivatives of APL (30,000 buy stock option and 10,000 sell stock option) before the announcement of the Quarterly Financial Results for the quarter ending March 2013 (i.e. on May 30, 2013) while the Trading Window was closed (i.e. from May 21, 2013-May 31, 2013).
It was observed that, as per Regulation 2(ha) and 2(k) of SEBI (Prohibition of Insider Trading) Regulation (“PIT Regulations”), periodical financial result of a company, until the same are declared, is considered as unpublished price sensitive information. Therefore, it was alleged that the Noticee, being an insider, traded while being in possession of UPSI.
During the course of hearing provided to the Noticee, it was brought on record that the Noticee had already paid an amount of Rs. 5 lacs to the Prime Minister Relief Fund as a penalty imposed upon him by APL for the alleged violation of their code of conduct. After authenticating the documents submitted with this regard, including the certificate issued by ICICI Bank Ltd. for such payment and the copy of the order passed by the APL, it was concluded that it will be unfair and unjust to penalize the Noticee for an act for which he was already penalized. And therefore in view of equity, justice and good conscience, the case against the Noticee was disposed of without any penalty.
- SEBI provides additional interim reliefs in LTCG matters
In past few months, SEBI has passed various orders, pending completion of investigation and based upon prima facie findings, against entities alleged to be misusing the stock exchange for evading taxes. Until now, the market regulator had issued interim orders to various entities banning around 1200 entities from securities market.
In response to these interim orders, various entities had filed their replies praying for revocation of the order against them. Considering these representations, SEBI had initially granted limited interim reliefs. All these entities that approached SEBI for revocation of interim orders were inter alia granted the following interim reliefs:-
- Sell securities (other than those shares which are suspended from trading) lying in their demat accounts as on the date of Interim Order and deposit the sale proceeds in an Escrow Account.
- Subscribe to/ redeem Mutual Fund units through SIP.
- Utilize 25% of their portfolio value for their business purposes and/or for meeting other exigencies subject to the condition that the balance portfolio value does not go below the profit/loss made by them.
- Use the aforesaid proceeds in the Escrow Account to subscribe to units of mutual funds, which shall be always held in demat form.
Additionally, in August 2016, SEBI had passed certain confirmatory orders, including in the matter of Four scrips in SME Segment, Radford Global Ltd., Mishika Finance and Trading Ltd. and, First Financial Services Ltd. While the directions issued in the interim order have been confirmed, SEBI has provided additional interim reliefs in addition and with modification to the abovementioned interim reliefs.
Some of these additional interim reliefs are:
- Upto 25% of the portfolio value or the amount (including the portfolio in the demat account) in excess of profit/loss or value of shares purchased to give exit, whichever is higher can be used for business purposes.
- Entities are permitted to enter into delivery based transactions in cash segment in the securities covered in NSE Nifty 500 Index scrips and/ or S&P BSE 500 scrips, deal in Debt/ Government Securities, invest in ETF, avail benefits of corporate actions, tender the shares lying in their demat account in any open offer/ delisting offer.
- Recent Rulings on Insider Trading
SAT Order in the matter of Shelter Infra Projects Pvt. Ltd., November 30, 2016:
In its Order, the Tribunal has held that it is the overall responsibility of the company and the board of directors to ensure that the Code of Conduct is followed in letter and spirit. Interestingly, SAT also went on to observe that the Adjudicating Officer of SEBI was not justified in holding the Compliance Officer alone responsible for closing the trading window and disclosing the Board resolution to the Stock Exchange. Therefore, in the Tribunal’s opinion, the fact that the AO has erroneously held that the directors are not liable cannot be a ground to hold that the company must also escape penal liability for failing to close the trading window during the existence of unpublished price sensitive information (UPSI).
Another important observation made was regarding the question as to when did the UPSI come into existence. The Bench observed that the UPSI came into existence on June 19, 2009 when in a meeting it was decided that the Share Purchase Agreement formalities should be completed within a week and not on the day that the SPA was approved by the Board and signed (30th July, 2009).
- Partial but Substantial Relief for Satyam Group Entities
The Hon’ble Securities Appellate Tribunal has passed an Order May 12, 2017 in the matter of Satyam Group Industries thereby partially setting aside SEBI’s order to the extent it relates to the period for which the appellants are restrained from accessing the securities market and the quantum of illegal gain directed to be disgorged by the appellants. The matter has been remanded to SEBI for passing fresh order within 4 months, on merits and in accordance with law after reviewing the quantum of punishment awarded by it.
SEBI had passed an Order dated July 15, 2014 against the Appellants who were the then Chairman, Managing Director, Chief Financial Officer (‘CFO’), Vice President (Finance), Head (Internal Audit) of Satyam Computer Services (‘Satyam’) respectively, holding them guilty of violating the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations, 1992). SEBI had debarred the Appellants from accessing the securities market and prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly for a period of 14 years. Additionally, the Appellants were directed to disgorge the unlawful gains arising out of sale/ pledge of Satyam shares during the period from 2001-2008 along with interest at the rate of 12% per annum from 07.01.2009 till the date of payment.
The Tribunal questioned the uniform order of debarment for 14 years passed against all the Appellants even when the role played by the Chairman and MD was found to be different from that of CFO, V.P. Finance and Head, Internal Audit. The Hon’ble SAT held that the WTM was required to consider the question, as to who had made illegal gain on sale/transfer of Satyam shares by the connected entities group while in possession of UPSI and accordingly direct that person/ entity to disgorge the illegal gain. According to SAT, SEBI itself was not clear as to who had made illegal gains and who should be directed to disgorge the illegal gains arising on sale/transfer of Satyam shares by the connected entities.
Moreover, in 2006, the Chairman, MD and their spouses had transferred shares of Satyam held by them to SRSR Holdings Pvt. Ltd. (‘SRSR’), a company wholly owned by a wholly owned company by the Chairman, MD and their family members. Further, in 2007 – 2008, SRSR had pledged those shares to enable 10 group entities belonging to the Chairman’s and MD’s family to avail loan. Therefore, the Bench found the order by the WTM directing that the Chairman and MD to jointly and severally disgorge Rs. 1258 crore, lacking justification as the WTM did not record any reasons to show how pledging of Satyam shares by the aforesaid entities to avail loan for 10 group entities amounted to making illegal gains by the Chairman and MD.
- US take on Insider Trading – Bassam Yacoub Salman v. United States
On December 6th, the U.S. Supreme Court while upholding the insider trading conviction of Bassam Salman unanimously held that a jury may infer an insider has breached a duty simply by gifting confidential information to a trading relative. Maher Kara joined Citigroup’s healthcare investment banking group in 2002 and began discussing inside information with his brother Michael, who in turn used to trade on the basis of the said information. Michael shared the said information with Salman (Maher’s brother in law) and others and Salman made over $ 1.5 million in profits by trading based on the tips provided by Maher to Michael. Salman was charged with conspiracy to commit securities fraud and insider trading in 2011 and found guilty. He applied for a new trial, but his request was denied. He then appealed to the U.S. Court of Appeals for the Ninth Circuit and argued there was insufficient evidence that he knew the information used for trades was from insider information. The Ninth Circuit then affirmed Salman’s conviction and held ‘a gift of confidential information to a trading relative or friend is sufficient to establish an insider trading violation’. Salman then appealed to the Supreme Court and the Supreme Court held that a person commits insider trading where they know that the tippee benefits from disclosing the information and a personal benefit can be inferred when a personal relationship is involved, because of the likelihood that the tipper will return the favor. Thus, the Court found that Salman’s knowledge of Maher’s potential for personal benefit from the tip supported his conviction for insider trading.
- SAT upholds SEBI Order on Investigation
SAT, in an Order in the matter of Sudha Commercial Company Limited dated January 20, 2017 upheld the decision of SEBI that no further investigation is needed under Section 11C of SEBI Act in the circumstances of the case. The Appellant had sought investigation u/s 11C, which was rejected by SEBI on the ground that the surveillance system of SEBI did not produce any alert and even the stock exchanges did not provide any adverse report on the trading pattern.
The Tribunal held that in the absence of any specific information provided in the complaint, SEBI could not enter into rowing enquiry as to whether any employee of Hindustan Petroleum Corporation Limited had leaked Unpublished Price Sensitive Information prior to the announcement on July 12, 2016 especially when abnormal trading was noticed even prior to July 11, 2016, thereby upholding SEBI’s order