Order in respect of M.K. Srinivasan Former Director of Karur Vysya Bank Ltd

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SECURITIES AND EXCHANGE BOARD OF INDIA

BEFORE THE ADJUDICATING OFFICER

 [ADJUDICATION ORDER NO. DSR/AO-01/2007-08]

 

 

In respect of

M.K. Srinivasan

 

(1)  Facts of the Case

(1.1) The Karur Vysya Bank Ltd. (hereinafter referred to as KVB) is a scheduled Commercial Bank in the private sector, having its Registered Office at Karur, Tamil Nadu. The scrip of KVB is listed at National Stock Exchange (NSE), Madras Stock Exchange (MSE), Coimbatore Stock Exchange (CSE) and Stock Exchange, Mumbai (BSE). Karur Mav Financial Services (hereinafter referred to as KMFS) is a partnership firm and is registered as sub-broker of Anush Shares and Securities Pvt. Ltd. The partners of KMFS are Shri M. R. Balaji Narasimhan, Shri M. A. Raghunathan, Smt. R. Varalakhmi, Smt. B. Lakshmi, Smt. M.S., Jeevarekha and Smt. M.V. Usha.

 

(1.2)  A letter dated 21.3.2001 was received by SEBI from Shri R.G. Somsekar from  Karur Town alleging that the directors had indulged in rigging of share price and insider trading in the scrip of KVB  prior to declaration of bonus issue. The complaint was forwarded to the various stock exchanges where the said entity was listed.

 

(1.3) NSE conducted investigation for the period i.e 6.12.2000 to 20.3.2001 and sent their investigation report vide letter dated July 8, 2002. NSE concluded that the trading pattern in the scrip was observed to be retail and widespread with clientele mainly belonging to the town of Karur. Importantly, NSE hinted that there could be possibility of trading on the basis of unpublished price sensitive information.

 

(1.4)  On obtaining the client details by NSE, it was discovered that KMFS was the top most sub broker in terms of gross purchases and gross sales. It is pertinent to note that Shri M.K. Srinivasan, Director (hereinafter referred to as noticee) KVB, is associated with KMFS by virtue of his wife and his sister in law being partners of KMFS. The Board of Directors of KVB were aware of the shortfall in meeting the projected performance since January, 2001 Board Meeting and that there was a possibility of capital augmentation to meet the shortfall on the basis of which the Board of Directors of KVB had decided to go in for bonus cum rights issue.

 

(1.5)  Thereafter, SEBI conducted investigation covering the period from 01.12.2000 to 31.03. 2001. The scope of the investigation was restricted to examining whether the trades done by individuals/entities apparently connected to the bank were in the nature of insider trading.

 

(2) Appointment of the adjudicating officer

 

(2.1)  The undersigned was appointed as the Adjudicating Officer vide order dated 03.12.2004 under Rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘the said Rules’), to inquire into and adjudicate upon the contravention of Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as ‘the said regulations’) read with Section 15G of the SEBI Act, 1992.

 

(3) Show cause Notice, Reply and Personal Hearing

 

(3.1)  A show cause notice under Rule 4(1) of the said Rules was served upon Shri M.K. Srinivasan on 20.7.2005 and he was informed about the investigations conducted into the dealings in the scrip of KVB during the period December 2000 to March 2001 and he being the director of KVB had full knowledge of the shortfall in actual profits/capital vis-a vis projections, etc., because on 31.01.2001, the unaudited financial results were submitted and the same were approved by the board. This information was also communicated to the Stock Exchanges. The results depicted a shortfall in projected profits/ networth.

 

(3.2)  The investigations further revealed that the noticee had traded in the name of his son Mr. Giridharan and purchased 13200 shares and sold 26200 shares in Settlement Number 53, 3,5,6,7,8,9,11 and 12 during December 2000 and March 2001 through KMFS. It was alleged that the noticee traded in the said scrip as an insider being in possession of the unpublished price sensitive information since January 2001 Board meeting till the news about bonus-cum-rights issue was flashed to the market.

 

(3.3) The noticee was asked to submit reply within 14 days from the date of receipt of the notice as to why an inquiry against the noticee cannot be held and why the monetary penalty in terms of Rule 5 of the said rules read with Section 15G of the SEBI Act, 1992 read with reg. 3 of the said regulations should not be imposed against him.

 

(3.4)  The noticee was given an opportunity to attend a personal hearing on 02.09.2005. However, the noticee failed to attend the personal hearing on the said date. Hence, the noticee was called upon to submit reply, if any, to the show cause notice before 05.10. 2005 and was also given, in the interest of natural justice, another opportunity of personal hearing on 10.11.2005. The noticee appeared before the undersigned on the said date and submitted that he had not made any profit out of the alleged transactions and had incurred losses. The noticee further contended that he was not aware of insider trading regulations at that point of time.

 

4. Examination of Issues and Findings

 

 Now I shall proceed to examine the case and my findings thereof are as under.

 

(4.1) The noticee has not denied his relationship with KMFS through his spouse Smt. M.S. Jeevarekha and his sister–in-law Smt. M. V. Usha. The noticee further did not deny his  relationship with Mr.Giridharan.  I note that the noticee has traded during  the period from 28.02.2001 to 02.03.2001 i.e. the date on which the news about the board meeting to consider about the bonus-cum-rights issue was informed to the stock exchanges.

 

(4.2) The question that arises for consideration is whether the noticee has received or in possession of any unpublished price sensitive information in respect of the scrip i.e. KVB. At this juncture, I note that definition of price sensitive information, which is enunciated in Regulation 2 (ha) of the said Regulations, reads as under:

 “(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;

(vii)  any 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 to 1956)

(j) ”stock exchange’ means a stock exchange which is recognized by the  Central Government or Securities and exchange Board of India under  section 4 of Securities Contracts (Regulation) Act, 1956 (42 of 1956)”

 

The above definition makes it clear that the issue of shares by way of rights and bonus comes under the definition of price sensitive information. In the present case, the Board decided, on 15-03-2001, to issue 59,99,928 bonus shares in the ratio of 1 equity share for every equity share held for cash at a premium of Rs.35/- per share on rights basis. Hence, it is clear that the information as to issuance of bonus-cum-rights shares is a price sensitive information.

 

(4.3) The next question that arises for consideration is whether the noticee is an insider or not. Regulation 2(e) of the said Regulations defines who is an insider and the same is reproduced hereunder.

 

 “(e) ‘insider” means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of company, or who has received or has had access to such unpublished price sensitive information.”

 

The issue arises for consideration is whether Director is a person connected with a company or is deemed to have been connected with the company. In this regard, I note that Regulation 2(c) and (h) of the said Regulations read as under:

 

 (c )  “connected person” means any person who-

 

(i)  is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or

 

(ii) Occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company {whether temporary or permanent} and who may reasonably be expected to have an access to unpublished price sensitive information in relation to the company.

 

 Explanation: For the purpose of clause (c ), the words “connected person” shall (mean) any person who is a connected person six months prior to an act of insider trading.

 

(h) ‘person is deemed to be a connected person’ if such person-

 

(i) is a company under the same management or group or any subsidiary company thereof within the meaning of section (1B) of section 370, or sub-section (11) of section 372 of the Companies Act, 1956, (1 of 1956) or sub clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case may be; or

 

(ii) is an intermediary as specified in section 12 of the Act, Investment Company, Trustee Company, Asset management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation.

 

(iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manger, investment advisor, sub-broker, investment company or an employee thereof or is a member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company;

 

(iv) is a member of the Board of Directors, or an employee, of a public financial institution as defined in Section 4A of the Companies Act, 1956; or

 

(v) is an official or an employee of a self Regulatory Organisation recognized or authorized by the Board of a regulatory body; or

 

(vi)  is a relative of any of the afoaresaid persons:

 

(vii) is a banker of the company

 

(viii) relative of the connected person:

 

(ix)  is a concern, firm, trust, Hindu Undivided Family, company or association of person wherein any the connected persons mentioned in such-clause (i) of clause ( c) of this regulation or any of the persons mentioned in sub-clauses (vi), (vii) or (viii) of this clause have more than 10% of the holding or interest

 

From the above definition, it is clear that Director is a person connected with the company. The noticee, at the relevant point of time, being the Director of KVB is a person connected with the company and by virtue of this he becomes an insider in the context of the case.

 

(4.4) I also find, from the investigation report, that the information as to issuance of bonus- cum-rights shares was informally discussed in the Board Meeting held on 27.02.2001 wherein the noticee being a Director took part in the deliberations. However, in all likelihood the noticee was aware of the bonus –cum rights issue because subsequent to 31.01.2001 (wherein it came to light that KVB had projected shortfall in profits) the discussions with regard to a possible capital augmentation through bonus –cum –rights issue cannot be ruled out.

 

(4.5) From the investigation report I find that the news as to bonus-cum-right issue was published to the market on 02.03.2001, being the date on which stock exchanges were intimated about the proposed Board Meeting for consideration of the issue of bonus-cum-right issue. I am, therefore, convinced that all the trading transactions in the scrip during the period i.e 28.02.2001 to 2.03.2001 and 5.3.2001(which was the date on which he sold 2600 shares purchased on 28. 02.2001) were undertaken by the noticee while he was being in possession of the said price sensitive information.

 

(4.6)  I am also convinced that the information as to the shortfall in actual profits/capital vis-à-vis projections falls within the ambit of Clause (vii) of the Regulation 2(ha) of the said Regulations.

 

(4.7) Therefore, the next question that arises is when the noticee came to know about the said price sensitive information. From the investigation report, I find that KVB was projecting to achieve a net worth of Rs.500 crores stipulated by the Reserve Bank of India for banks wanting to venture into emerging new horizons such as gold trading and insurance. In order to achieve this, long term plan was prepared by KVB in August 2000. It was originally planned to achieve the targeted net worth through internal accruals. However, the profits of the bank did not keep pace with projections. Hence the management of KVB decided to bridge the gap by way of increase in capital. I further find that as against the projected profit of Rs.99.13 crores by the end of March 2001, KVB had achieved only a profit of Rs.50/- crores by the end of December 2000. Hence, the gap in projection verses actuals was apparent by December end. Therefore, it can be concluded that the noticee being the Director was in possession of the said price sensitive information by the end of December 2000.

 

(4.8) The next question that arises for consideration is when this information was known to the market?  From the investigation report, I find that this information was made known to the market on 02.3.2001. Therefore, all the transactions done by the noticee in the scrip of KVB during this period i.e 28.2.2001 to 02.3.2001 were while being in possession of the said price sensitive information, which is an insider trading. The noticee further stated vide his letter dated 28.12.2005 that he had not traded in the shares of KVB prior to the said period. This only indicates that he took advantage of the price sensitive information that he was aware of and traded in the scrip. The date wise trades of the noticee as culled out from confirmation memo are depicted below.

 

Date	Settl. No.	Purchase	Rate	Purchase Consideration	Sold	Rate	Sale Consideration	Profit Made
5.1.01	1	0	0	0	3000	209	626400	626400
9.1.01	1	0	0	0	2500	205	512375	512375
19.1.01	1	0	0	0	1700	205	348243	348243
	1	0			7200
30.1.01	4	500	234		0	0
12.2.01	6	1400	318	445726	1400	331	462793	17067
13.2.01	6	2300	310	712624	2200	321	706393	-6231
	6	3700			3600
15.2.01	7	500	363	181525	500	373	186450	4925
16.2.01	7	1000	389	388941	500	403	201500	-1877441
19.2.01	7	1500	360	540033	500	368	184000	-356033
20.2.01	7	0	0	0	2000	275	550260	550260
	7	3000			3500
23.2.01	8	500	334	166925	200	342	68300	-98625
26.2.01	8	0	0	0	900	346	311100	311100
27.2.01	8	1900	335	635645	2400	336	805824	170179
	8	2400			3500
28.2.01	9	2600	347	901511	0	0	0	-901511
2.3.01	9	1500	367	549956	0	0	0	-549956
5.3.01	9	0	0	0	2600	363	943958	943958
	9	4100		4522886	2600		4420578	-102308.3133
								1282401
14.3.01	11	0	0		1000	334	334000	334000
23.3.01	12	1500	367	550500	0	0		-550500
Total		14200			21400

 

(4.9) Consideration of Section 15J factors

 

I reproduce Section 15J of SEBI Act, 1992 hereunder:

 

Factors to be taken into account by the adjudicating officer 15J. While adjudging quantum of penalty under section 15J, the adjudicating officer shall have due regard to the following factors, namely:

 

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c )  the repetitive nature of the default.

 

(4.10) In view of the factors laid down under section 15J of SEBI Act, it is relevant to examine the issue as to whether any disproportionate gain or unfair advantage wherever quantifiable, was made as result of the trading done by the noticee during the period when the information with regard to the bonus–cum rights issue was unpublished. It was observed from the day wise trading details as culled out from the confirmation memo for the period 05.01.2001 till 23.03.2001 that between the period 5.01.2001 till 19.01.2001, the noticee has only sold his previous holdings in the scrip of KVB and that too at a lower price as compared to the price on subsequent days i.e between the period 12.02.2001 till 27.02.2001 when the price of the scrip was much higher. Further, it is also observed that majority of his transactions between the period 12.02.2001 till 27.02.2001 were in the nature of jobbing transactions which do not appear to have helped in accrual of unfair gain to the noticee.

 

(4.11) Therefore, in my view, the relevant period for this purpose should be from 28.02.2001 till 02.03.2001. This is because of the fact that the information for calling the Board meeting to consider bonus –cum rights issue was intimated to the exchange on 02.03.2001, whereas the notice calling for the board meeting was issued on 28.02.2001.However, for the purpose of arriving at quantification of unfair gain made by the noticee, the date i.e 5.3.2001(which was the date on which he sold 2600 shares purchased on 28. 02.2001) should also be taken into consideration. Therefore, the relevant period for quantification of unfair gain made by the noticee should be from 28.02.2001 till 5.03.2001. Therefore, I am convinced the trading done by the noticee during this intervening period is only on the basis of unpublished price sensitive information vis-a-vis bonus–cum rights issue.

 

(4.12)  It is observed from the material available on record that during this period the noticee purchased 2600 shares of KVB on 28.2.2001 @ Rs. 347 amounting to a total consideration of Rs. 902200. Subsequently, he again purchased 1500 shares of KVB on 02.3.2001 @ Rs. 367 amounting to a total consideration of Rs. 549956. It is pertinent to note here that the noticee sold 2600 shares on 5.03.2001 at a much higher price i.e Rs. 363 with a total sale consideration of Rs. 943800. Therefore, in my view the quantification of the unfair gain accrued to the noticee can be calculated as 2600 x 363 – 2600 x 347 = Rs. 41,600.  This fact was admitted by the noticee vide his reply dated 28.12.2005. Further, vide the same letter, the noticee submitted that on 23.3.2001, he bought  1500 KVB shares at Rs.367/- and sold 1000 KVB shares on 14.3.2001 for Rs.334/-, thereby incurring a loss of Rs.33,000/- He also submitted that for the remaining 500 shares which were sold on 23.3.2001 at a price of Rs.278/- resulted in loss of Rs.44,500/-. Since the analysis is restricted for the period i.e.28.02.2001 till 05.03.2001, as explained herein above, therefore, the period after 5.03.2001 is not relevant because the information with regard to bonus- cum rights issue was already made public on 2.03.2001. Hence, the quantum of profit i.e Rs.41,600/- (made during the period i.e 28.02.2001 till 5.3.2001) can be considered to be a disproportionate gain made by the noticee.

 

(4.13)  Coming to the aspect of amount of loss caused to the investors or group of investors I find that invariably, the above said transactions done while being in possession of price sensitive information must have resulted in loss to the investors. Had the above said price sensitive information been known to the investors also, the price at which they tendered their shares would be reflective of the price sensitive information. The investors who sold the shares at the relevant time without the knowledge of price sensitive information would have tendered the shares at a higher price. In the same way, the investors who were in possession of price sensitive information would have purchased shares at higher price.

 

(4.14) As far as repetitive defaults by the noticee is concerned, it is observed that the noticee, after he came to know about the price sensitive information, continued to trade during the period i.e 28.02.2001 till 05.03.2001 , without complying with the said regulations. Therefore, I find that the noticee has committed default repetitively.

 

(4.15) I note that section 15G of SEBI Act (as was in force at the time of commission of violation) reads as follows:

 

 Penalty for insider trading 15G. If any insider who, -

 

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or

(ii) communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or

 

(iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price sensitive information, shall be liable to a penalty not exceeding five lakh rupees.

 

(4.16)   The contention of the noticee that he was not aware of insider trading regulations is untenable and does not hold good  inasmuch as ignorance of law is not an excuse. Further, activity like insider trading is absolutely detrimental to the interests of investors and the same has to be dealt with accordingly.

 

(4.17) I further note that vide SEBI (Amendment) Act, 2002, the penalty leviable under section 15G has been enhanced from Rs.5 lakh to Rs.25 crores or three times the amount of profits made out of insider trading, whichever is higher. It may be noted that the said amendment came into force w.e.f. 29.10.2002. Whereas, in the instant case the violation was committed by the noticee during the period 28.2.2001 to 5.3.2001 Therefore, while dealing with the applicability of enhanced penalty under Section 15G of SEBI Act, I have relied on the ratio laid down by Hon’ble Securities Appellate Tribunal in Rameshchandra Mansukahni vs SEBI (Appeal No.151/2004) to the effect that penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment. I have also considered and relied upon section 6 of the General Clauses Act,1897 and also ratios laid down by Supreme Court while interpreting the said section in Ambalal Sarabai Enterprises Ltd. vs. Amrithlal & Co (2001) 8 SCC 397, Darshan Singh vs. Ram Pal Singh and Another 1992 Supp (1) SCC 191,  Govind Das v. ITO, (1976) 1 SCC 906, Jose Da Costa v. Bascora Sadasiva Sinai Narcornium, (1976) 2 SCC 917  and Garikapati Veeraya v. N. Subbiah Choudhry, AIR 1957 SC 540, to the effect that statute unless expressly made retrospective is prospective in operation. I am, therefore, convinced that it is a fit case to impose a maximum penalty of Rs.5 lakhs against the noticee.

 ORDER

In view of my findings enumerated hereinabove and also after taking into consideration the facts and circumstances of the present case and material available on record, I, in exercise of powers conferred upon me under Rule 5 of the said Rules read with Section 15I and Section 15G of the SEBI Act, 1992, hold the noticee i.e. Shri M.K. Srinivasan (PAN No. being AAVPS7637J) guilty of insider trading and impose a penalty of Rs.5,00,000 ( Rupees Five lakhs)  for indulging in the act of insider trading. In my view, the above penalty is commensurate with the defaults committed by the noticee in the facts and circumstances of the case.

 

The Noticee should pay the amount of penalty by way of demand draft in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to:

 

Shri P. K. Nagpal

Executive Director, SEBI

“SEBI Bhavan”, Plot No. C4-A, ‘G’ Block

Bandra Kurla Complex

Bandra (East)

Mumbai 400 051

 

In terms of Rule 6 of the said Rules, copies of this order are sent to the Noticee and also to the Securities and Exchange Board of India.

 

 

 

Date : August 07,2007 D. Sura Reddy

Place : Mumbai Adjudicating Officer