BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-22/2005-06]

 

In the matter of Investigations

AND

In respect of

 

STRIDES ARCOLAB LTD

1.0              Securities and Exchange Board of India (SEBI) conducted investigation into price and volume of the scrip of Strides Acrolab Ltd. (hereinafter referred to as “SAL”), a company listed in the National Stock Exchange (NSE). The scrip of SAL is also listed in Mangalore and Bangalore Stock Exchanges.

 

2.0              Pursuant to the aforesaid investigation, SEBI vide order dated January 14, 2004, appointed Mr. K.R.C.V. Seshachalam as the Adjudicating Officer  (A.O.) under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') read with Section 15-I of SEBI Act, 1992 to inquire into and adjudge the alleged failure of SAL to comply with clause 36 of the Listing Agreement and Regulation 12(2) read with Schedule II of SEBI (Prohibition of Insider Trading) Regulations, 1992 [hereinafter referred as 'PIT Regulations'] for which penalty is imposable under Section 15HB of SEBI Act, 1992. The aforesaid appointment was communicated vide order dated January 19, 2004.

 

3.0              The matter was then transferred to Mr. A.C. S. Rao vide Chariman order dated December 28, 2004. Subsequently, the matter was transferred to the undersigned vide Chairman order dated December 20, 2005.

 

4.0              Mr. A.C. S. Rao then A.O., issued notice (SCN) dated February 07, 2005 under Rule 4 of SEBI Adjudication Rules to SAL., communicating the allegations levelled against it and calling up on it as to why an inquiry in terms of the said Rules should not be conducted against it. The SCN alleged that the CEO of SAL in an interview to CNBC TV 18 gave details of business prospects of SAL, without first disclosing the same to the stock exchanges in which SAL scrip is listed. The aforesaid is alleged to be in violation of Clause 36 of the Listing Agreement and the Code of Corporate Disclosure practices for prevention of Insider Trading as specified in Schedule II read with Regulation 12(2) of PIT Regulations.

 

5.0              SAL replied through its advocate, DSK Legal, vide letter dated February 28 2005. It was contented that the statement made on September 23, 2003 by SAL’s CEO did not fall within the definition of the term ‘information’. Since the statement of its CEO was only in the nature of projections and general in nature, reflecting the long term nature of the business, it is not price sensitive in nature and hence did not require disclosure to the exchange, the advocate stated. Further, the relevant information was disclosed to the stock exchanges prior to the interview, it was stated. Referring to the disclosure, pertaining to EBIT of SAL mentioned in the letter dated October 28, 2003, it was submitted that it was not mentioned in the SCN as an allegation. It was also argued that there was no trades by SAL based on price sensitive information, hence there was no violation. They submitted that the adjudicating proceedings were time barred as it was more than a year after SAL submitted its reply dated December 15, 2003 to the proceedings against it under Regulation 14(1) of PIT Regulations for the same set of facts and allegation.

 

6.0              Mr. A.C. S. Rao, the then AO, thought it fit to hold an inquiry and fixed March 30, 2005 as the date of hearing vide letter dated March 22, 2005. Mr. Sajit Survana and Ajay Shaw, Advocates, appeared before the AO on behalf of SAL and made their submissions. They submitted that SAL filed reply to SEBI’s SCN under Regulation 14(1) of PIT Regulations, dated December 08, 2003, vide its letter dated December 15, 2003. Since the facts pertaining to the aforesaid SCN is identical to the SCN issued by the AO, they expressed surprise at the adjudication proceedings in February 2005 when apparently, SEBI was satisfied with their reply dated December 15, 2003. The AO explained to the advocates that the disclosure pertaining to EBIT was also part of the adjudication proceedings, though it was not mentioned in his SCN, by oversight. The advocates agreed to make written submission on this aspect. 

 

7.0              The advocates filed their written submission dated April 07, 2005. They elaborated their arguments made earlier vide their letter dated February 28, 2005 and in the inquiry on March 30, 2005, citing various judgment to support their contentions. The advocates objected to the issue of EBIT being raised in the inquiry, whereas it was not even mentioned in the SCN of the AO. They averred that SAL has disclosed the news of agreement with Aspen Pharmacare to the stock exchanges by forwarding them the press releases dated September 18, 2003. The advocates submitted that the sprit of the disclosure norms were not violated as text of the statement made by SAL’s CEO in the interview was displayed in the web site of www.moneycontrol .com for the benefit of the public. There was no intention by SAL to make any unlawful gains, it was submitted.

 

8.0              The undersigned, offered SAL an opportunity for either personal hearing or filing written submissions in addition to the earlier submissions made before the AO, Mr. Rao. The advocate opted for both and appeared to hearing on March 06, 2005 before me and submitted that the statement made by the CEO Mr. Arun Kumar, SAL in CNBC was in continuation to its disclosure made to the stock exchanges about the agreement with Aspen Pharmacure. The advocate also filed copies of letters dated September 18, 2003 whereby the press release about the agreement with Aspan Pharmacare was disclosed to the Mangalore, Bangalore and the National Stock Exchange.

 

9.0              I have carefully gone through and considered the material on record and record my finings as follows:

9.1              SAL, vide its letter dated September 18, 2003 forwarded, to Mangalore, Bangalore and the National Stock Exchange, the information pertaining to signing of a Co-operation, development and supply agreement with Aspen Pharmacare for exchange of technical and product expertise. Copy of the press release to be released in this regard was also forwarded to the exchanges. Subsequently, on September 23, 2003 Mr. Arun Kumar the CEO of SAL gave an interview to CNBC TV 18, a business channel. The text of his statement, which has led to this proceedings, is as under:

(i)                  Over the last eight months we have been moving into regulated markets. Our two manufacturing sites in India, have got approvals from Australia, EU and the UK. Our philosophy of leveraging manufacturing with R& D is paying rewards because we give comfort to our partners that we don't compete and at the same time we are offering manufacturing and R & D skills sets"

 

(ii)                "Our EBITs (earning before interest and tax) are growing significantly with change in focus from unregulated to semi-regulated markets and we expected our gross margins to be in high 40s once the consolidation of regulated market strategies is completed"

 

(iii)              "Contract manufacturing for regulated markets with leading players will constitute a significant portion of our business.  I expect it to exceed 50% of our business in the next three financial years"

 

(iv)               "Significant  contracts are in the process of being signed.  The one we just signed with Aspen is the first major contract where we leverage our philosophy of partnerships.  A lot of such contracts in developed markets involve significant variation of site changes, which takes six to nine months.  So we can see significant growth in regulated market numbers in the next couple of quarters."

 

(v)               "On ATMs- AIDs TB and malaria projects- we're one of the few Indian companies approved by the procurement agencies.  We have received our first contract to service 20,000 patients with our ARBs"

10.0          Before going into the merits and demerits of the rival contentions, it may be emphasized that alleged violation of clause 36 of the listing agreement cannot be adjudicated upon under Section 15HB of the SEBI Act, 1992. The Section reads as under:

"Penalty for contravention where no separate penalty has been provided.

15HB: Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.]"

11.0          Listing agreement is a bilateral contract between the company which is seeking listing of its securities on one hand and the stock exchange on the other hand. Any violation of the same will attract action under the provisions of SCR (A), 1956 and not under 15I of the SEBI Act, 1992 as was also ruled by the SAT in the order dated August 01, 2003 in appeals No 13 &14 and in the matter of Kishore Rajaram Chhabria vs SEBI.

 

12.0          I now proceed to examine the contents of the interview given to CNBC TV 18 by Mr. Arun Kumar, CEO of SAL on September 23, 2003 to see if there is any violation of the Code of Corporate Disclosure practices for prevention of Insider Trading as specified in Schedule II read with Regulation 12(2) of PIT Regulations. Clause 1.1 of this code makes it unambiguous that the disclosure norm pertains only to ‘price sensitive information’. The definition of price sensitive information as per Regulation 2(ha) of the PIT Regulations, is as under:

"2 (ha) of PIT Regulations  :

[(ha) "price sensitive information" means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.

Explanation.- The following shall be deemed to be price sensitive information :-

(i)                 periodical financial results of the company;

(ii)               intended declaration of dividends (both interim and final);

(iii)             issue of securities or buy-back of securities;

(iv)             any major expansion plans or execution of new projects;

(v)               amalgamation, mergers or takeovers;

(vi)             disposal of the whole or substantial part of the undertaking; and

(vii)           significant changes in policies, plans or operations of the company.]

(i)                 "relative" means a person, as defined in section 6 of the Companies Act, 1956 (1 of 1956);

(j) "stock exchange" means a stock exchange which is recognized by the Central Government [or Securities and Exchange Board India] under section 4 of Securities Contracts (Regulation) Act, 1956 (42to 1956);

(k) 'unpublished" means information which is not published by the company or its agents and is not specific in nature.

Explanation.- Speculative reports in print or electronic media shall not be considered as published information.]"

13.0          From the perusal of the records, I do not find any data to suggest that there was any material impact on the price of SAL scrip post September 23, 2003 i.e. the date of interview. Therefore, the information disseminated in the interview cannot be said to be price sensitive information, as defined in the regulation. It is seen that contents of paragraphs (ii), (iii), (iv) & (v) (paragraph 9.1) of the interview also do not fall within the definition of deemed price sensitive information as defined in the explanation of the above definition. Content of paragraph (i) and part of paragraphs (iv) & (v) are already mentioned in the Press release dated September 23, 2003. Therefore, there cannot be any violation on this count as the requisite information has been disclosed to the stock exchanges.

 

14.0          It is observed that the contents of the interview are general in nature, as it is expected to be. If the information is 100% certain, then it is no longer an expectation, it becomes, an accounting statement. The SAT in its ruling in the order dated November 3, 2003 in the appeal No. 33 of 2001 Samir Arora v. SEBI, had ruled that “Information which finally turns out to be false or at least uncertain cannot even be labeled as information”. Going by the said ruling I refer to the following paragraph of the CNBC interview:

 

(iii)             "Contract manufacturing for regulated markets with leading players will constitute a significant portion of our business.  I expect it to exceed 50% of our business in the next three financial years"

 

The word used in the above statement is 'expected' and this type of statement cannot be labeled as information.  Further, the press release dated September 18, 2003, talked about mainly the agreement/partnership of SAL with Aspen Pharmacare, the largest pharmaceutical company listed in South African stock exchange. In the said press release CEO of SAL also talked about consolidation of growth in the regulated markets.  From the aforesaid, the submission of SAL that the interview contents are sequel to the press release, is found tenable, if both; press release and interview are read together.

 

15.0          Even assuming that the information in the interview is price sensitive in nature, it is not the charge that SAL or any of its insiders (as defined in the regulation) used this information for their private profit. On the contrary they have only disclosed it to the public at large, thereby fulfilling the objective of disclosure.

 

16.0          The objective of the Code of Corporate Disclosure practices for prevention of Insider Trading as specified in Schedule II read with Regulation 12(2) of PIT Regulations, is to disseminate information to the investors and the general public. Disclosure to the Stock exchanges is only a mean to achieve this end objective. In terms of clause 2.1 of this code, listed companies are required to disclose price sensitive information to stock exchanges and disseminate on a continuous basis. Moreover, clause 2.2 of this code make it abundantly clear that companies may consider ways of supplementing information released to the stock exchanges by improving investor access to their public announcements. Clause 7.0(i) of the Code specifies that dissemination of price sensitive information may be done through various media so as to achieve maximum reach. Clause 8.0 of the Code requires that the price sensitive information furnished by corporates to the stock exchange has to be published immediately in their web site by the stock exchange. In my opinion, that is exactly what SAL has done. CNBC TV 18 is a channel watched mainly by the persons having interest in securities markets. CNBC is watched by people with commercial interest, including investors and potential investors. Even assuming that all the information in the interview was price sensitive in nature (as defined in the regulation), SAL was only disclosing it to the public, through a TV channel that specializes in commerce and business. Moreover, the contents of the interview were also available in the website www.moneycontrol.com for the benefit of investors and general public. By this act, the end objective of the Code of Corporate Disclosure was achieved. From the above discussion, I find that there is no violation of Code of Corporate disclosure; the non disclosure to the stock exchanges , if any, was not intentional. This finding is supported by the conduct of SAL as gathered from the exhibit A to the letter dated February 28, 2005, detailing 63 instances of disclosures made to the stock exchanges for the period March 2003 to February 2005. Therefore, the charge against SAL that it violated the Code of Corporate Disclosure practices for prevention of Insider Trading as specified in Schedule II read with Regulation 12(2) of PIT Regulations, is not established and accordingly no penalty is imposed on SAL.

 

17.0          It may be emphasized here that this order does not imply that listed companies are no longer required to make disclosure to the stock exchanges as required under the Regulation; the facts and circumstances based on which findings are arrived in this particular case, does not qualify for a penalty in my opinion.

 

18.0          This order of adjudication is made and passed on 31st day of March 2006 at Mumbai.

 

 

AMIT PRADHAN

ADJUDICATING OFFICER