THE SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
UNDER SECTION 15-I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
AGAINST SHRI DILIP S. PENDSE
IN THE MATTER OF INSIDER TRADING IN THE SHARES OF M/s TATA FINANCE LTD.
1.0 Background:
1.1 M/s. Tata Finance Limited (hereinafter referred to as "TFL") is a company having its shares listed on The Stock Exchange, Mumbai (BSE) and the National Stock Exchange of India Ltd. (NSE). Niskalp Investment and Trading Company Limited (hereinafter referred to as "NITCL"), a wholly owned subsidiary of TFL, is an investment company incorporated under the Companies Act, 1956. Shri Dilip S. Pendse (hereinafter referred to as “Shri Pendse”) was the Managing Director of TFL”) from 01.06.96 to 31.5.2001 and director NITCL during 19.06.1997 to 1.6.2001.Shri Jaivant Esvonta Talaulicar (hereinafter referred to as “ Shri Talaulicar”) was a Director of TFL during January 3, 1995 – August 17, 2001 and the Director of NITCL from March 15, 1991 and its Chairman from May 1995 till September 21, 2001.During the period 6.2.2001 to 20.7.2001, Shri Avadhoot L. Shilotri (hereinafter referred to as ‘Shri Shilotri) was the President and Chief Executive Officer of NITCL. Immediately, prior to this period, he was the Vice President (Investments) of TFL.
1.2 The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigations (during August / November 2001) into the alleged manipulation and insider trading in the shares of TFL. Pursuant to the said investigations, vide order dated August 21, 2002, Shri J. Ranganayakulu, Joint Legal Adviser, SEBI was appointed as the Adjudicating Officer under section 15I of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) read with rule 3 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘the Adjudication Rules’) to inquire into and to adjudge the alleged contraventions as mentioned in the order dated August 21, 2002. Subsequently, by an order dated December 10, 2004, the matter pending before the said Adjudicating Officer was transferred to the undersigned.
1.3 As per the said orders, the present inquiry and adjudication proceedings is in respect of the alleged contravention under section 15G of the Securities and Exchange Board of India Act, 1992 (SEBI Act) read with regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as ‘the Prohibition of Insider Trading Regulations’) by Shri Pendse, Ex-Managing Director of TFL and Ex- director of NITCL.
1.4 A Show cause notice dated 08.08.2002 was separately issued by SEBI to Shri Pendse in respect of the independent proceedings under sections 11 and 11B of the SEBI Act read with regulation 11 of the Prohibition of Insider Trading Regulations.
2.0 Show Cause Notice, Reply/hearing and Inquiry:
2.1 The erstwhile Adjudicating Officer had issued a Show Cause Notice dated 29.09.2003 under rule 4 of Adjudication Rules read with Section 15G of SEBI Act to Shri Pendse mentioning the findings of investigations including that Shri Pendse had aided through counseling and organizing the deals in the shares of TFL for Shri Talaulicar and his family members and has thus violated regulation 3 of the Prohibition of Insider Trading Regulations, and the following: –
(a) The rights issue of 9% cumulative convertible preference shares of TFL, which was approved at the meetings of the Board of Directors of TFL held on 04.01.2001 and 29.01.2001, opened on 30.03.2001 and closed on 30.04.2001. The final letter of offer in respect of said rights issue contained financial results of TFL and NITCL as on 31.12.2000 and 30.9.2000, respectively. It was disclosed that the Profit After Tax (PAT) for TFL and NITCL was Rs.16.41 crores and 11.46 crores, respectively. For the financial year ended 30.6.2000, dividends from NITCL, which amounted to Rs.10.81 crores, was largely responsible for the profits of TFL. Thus, any loss suffered by NITCL would adversely impact the profits of TFL, which would in turn affect the price of the shares of TFL.
(b) Subsequently, in the light of complaints received by SEBI and TFL alleging non-disclosure of losses of NITCL in the letter of offer, TFL on 30.04.2001 disclosed to its shareholders that NITCL had suffered a provisional loss of Rs.79.37 crore as on 31.03.01 which was mainly due to erosion of value of investments held by it as against the reported profit of Rs. 11.46 crores as on 30.09.2000.
(c) The material information pertaining to the substantial erosion in the value of stocks held by TFL and NITCL and that NITCL had incurred a provisional loss of Rs. 79.37 crores as on 31.03.2001 was not disclosed in the letter of offer in respect of the said rights issue. Thus, this price sensitive information was not available to the general public prior to 30.04.2001 and was therefore, unpublished price sensitive information. This price sensitive information was available to ‘insiders’ such as Shri Talaulicar, Shri Pendse and Shri Shilotri.
(d) On 31.03.2001, Shri Talaulicar alongwith his family members received Rs. 69 lacs from JIP Investment (JIP), a sub- broker of JHP Securities Pvt. Ltd. (JHP), a member of BSE. This amount of Rs. 69 lacs was the consideration for the sale of 1,00,000 shares of TFL held by Shri Talaulicar and his family members at the rate of Rs. 69 per share. The said consideration was paid by NITCL to JHP on 30.03.2001 and the same was transferred to JIP on the next day, which in turn was paid to Shri Talaulicar and his family members on 31.03.2001.
(e) The payment was made to Shri Talaulicar by way of 5 cheques. The monies were debited from the bank account of JIP on 04.04.2001 and 07.04.2001. Shri Talaulicar in return handed over 1,00,000 shares of TFL to JIP on April 04. 2001. According to the submission made by Shri Talaulicar, no sale contract / bills for the sale of 1,00,000 shares TFL were received by him. However, delivery instructions were given by Shri Talaulicar to the depository for transfer of 1,00,000 shares of TFL to JIP’s account and on 4.4.2001, the shares were transferred to JIP’s account with another depository.
(f) Subsequently, during May 18,2001 to May 29, 2001, the said shares were sold at the rate of around Rs. 34/ per share in the market by JIP through JHP and Shri Prashant J. Patel, member of NSE on behalf of Shri Talaulicar and his family members. The excess money was refunded by Shri Talaulicar and family to JIP.
(g) Shri Talaulicar had requested Shri Pendse to sell his 1,00,000 shares of TFL and an off-market sale was arranged on behalf of Shri Talaulicar by Shri Pendse. Shri Talaulicar had admitted that Shri Pendse while handing over the 5 cheques informed Shri Talaulicar that the shares of TFL held by him and his family had been sold to a close friend of Shri Pendse. Shri Talaulicar being a director of TFL at that time was aware of the prevailing market price of TFL shares. This appears to be an unusual transaction as somebody who could purchase the liquid shares of TFL traded on a premier stock exchange at a rate of Rs.40/ per share in the market bought the said shares at the rate of Rs.69/ per share for some unexplained reasons.
(h) Copies of bills date 06.09.2000 issued by JIP in favour of Shri Talaulicar and his family members for sale of 1,00,000 shares of TFL confirm the understanding reached between Shri Talaulicar, Shri Pendse, JIP and JHP for arranging the sale of shares of Shri Talaulicar and his family members and transferring the funds to them. As the then market price of TFL shares was about Rs.40/per share i.e. well below the agreed consideration, Shri Talaulicar with the help of Shri Pendse arranged through JIP to backdate the contract to suitably match with the consideration of Rs.69/ per share.
(i) Shri Talaulicar was informed by Shri Pendse and Shri Shilotri in early May 2001 that the shares had not been sold in March 2000 as agreed and that the sale was going to take place during May at the prevailing market price of about Rs. 34 per share only. Shri Talaulicar was told to refund the difference between the price paid to him and the market price of the shares. Consequently, Shri Pendse with the help of Shri Shilotri gave orders to one Shri Bharat J. Patel who is an associate of JHP and Shri Prashant J. Patel, member of NSE for the sale of these 1,00,000 shares from May 18 to May 29, 2001 in the market at the market price at the rate of around Rs. 34 per share.
(j) The findings of the internal independent committee set up by Tata Group later confirmed by investigations by SEBI also revealed that Shri Pendse had contacted Shri Bharat Patel around 27.03.01 to undertake two back dated sale and purchase transaction in TFL shares at a price around 69 / 70 per share, indicating that he would indicate the names of the seller and purchaser subsequently. Again Shri Pendse instructed Shri Patel to execute the sale transaction in the name of Shri Talaulicar and his family members. In the month of May 2001, Shri Shilotri had called Shri Patel repeatedly to stress that in the light of developments Shri Talaulicar was disturbed about the transaction and Shri Shilotri requested that the shares be sold in the market. Accordingly, the shares were sold by JIP, excess amount was refunded by Shri Talaulicar and fresh contract notes were issued in the names of Shri Talaulicar and his family members.
(k) The disclosure of the above price sensitive information to the general public by TFL on 30.04.2001 had alerted Shri Pendse and Shri Shilotri to regularize the payments made by NITCL to Shri Talaulicar and sale of the shares by Shri Talaulicar and his family members. This prompted Shri Pendse and Shri Shri Shilotri to advise to sell the shares in the market at the prevailing market rate of around Rs. 34/ per share and refund the balance amount to NITCL through JIP and JHP.
2.2 In the show cause notice it was alleged that Shri Pendse aided Shri Talaulicar through his counseling and organizing the dealings in the shares of TFL and has thus violated the provisions of then existing regulation 3 of the Prohibition of Insider Trading Regulations.
2.3 After seeking further time to file reply, M/s. Bhave & Co., advoctes for Shri Pendse had filed the reply to the show cause notice vide their letter dated October 28, 2003. The erstwhile adjudicating officer had issued notices dated 15.07.04 and 16.09.04 granting opportunity of personal appearance to Shri Pendse in accordance with the Adjudication Rules. However, no personal appearance had been made by any authorized representative of Shri Pendse on the dates so fixed citing reason that Shri Pendse was in judicial custody since 2003 in Tihar Central Prison, Delhi and he was not able to appear before the erstwhile adjudicating officer.
2.4 The undersigned issued another notice dated October 10, 2005 to Shri Pendse in terms of Rule 4 of the Adjudicating Rules, fixing a date of personal appearance on October 31, 2005. M/s. Bhave & Co., advocates of Shri Pendse, vide their letter dated 21.10.05 submitted that pursuant to the show cause notice dated 08.08.2002 the Whole Time Member, SEBI, having found Shri Pendse guilty of violation of the then existing provisions of regulation 3 of the Insider Trading Regulations, passed an order dated 22nd December 2003 under Section 11 (4) (b) and 11B of the SEBI Act and regulation 11 of the Insider Trading Regulations directing Shri Pendse to dissociate himself from the securities market and not to deal in securities for a period of 6 months. Shri Pendse had challenged this order before the Hon’ble Securities Appellate Tribunal; Mumbai (SAT) in the appeal No. 92/2005 which was kept for final hearing on 28.11.05. They had submitted that subject matter of the show cause notice in the present proceedings and the pending appeal are the same. Therefore, the present proceedings may be adjourned till the disposal of the appeal by the SAT.
2.5 It had been clarified to the learned advocate of Shri Pendse on dates of hearing fixed in the matter that, in terms of Adjudication Rules, Shri Pendse could appear through his lawyer or any authorized representative. However, after seeking adjournments of hearings fixed on various dates such as 30.11.05, 28.12.05, 24.01.06, 07.02.06, etc., the advocates of Shri Pendse appeared on 24.04.06 when Shri V.M. Singh, advocate alongwith Shri Santosh Pawar, advocate and Shri Pendse appeared and made submissions.
2.6 Shri V.M. Singh, advocate relied upon the reply dated October 28, 2003 filed in the present proceedings. A copy of the written submissions filed before SEBI in respect of the show cause notice dated 08.08.02 was also issued by SEBI was also filed and relied upon by the learned advocate. The learned advocate sought to refer and rely upon the documents stated to be relied upon by SEBI during the proceedings initiated by show cause notice dated 08.08.02. A compilation of (containing 346 pages) the documents furnished to Shri Pendse by SEBI vide its letter dated 11.10.02 was also filed. It was pointed out that vide order dated 16.03.06 Hon’ble SAT had dismissed the above mentioned appeal filed by Shri Pendse against SEBI order dated 22.12.03 as the same had become infructuous.
2.7 Learned advocate denied the allegations mentioned in the show cause notice dated 29.09.03 and the charge that Shri Pendse contravened the provisions of the Prohibition of Insider Trading Regulations alleged in the show cause notice. The submissions on behalf of Shri Pendse are summarized as under -
(a) Shri Pendse was not aware of and had no knowledge of the payment of Rs.69 lacs from JIP to Shri Talaulicar. Shri Pendse was also not aware of and had no knowledge that Shri Talaulicar has delivered 1,00,000 shares of TFL on 04.04.01 or any other date to JIP. Shri Pendse was not aware of the alleged transaction between JHP and JIP and between JIP and Shri Talaulicar and his family. The amount of Rs. 70 lacs was paid as ad hoc margin by NITCL to JHP.
(b) It is denied that Mr. J E Talaulicar requested Shri Pendse to sell the 100,000 shares of TFL. He was also not aware of and had no knowledge that the transaction of sale of shares of TFL was by way of an off-market sale. He had not arranged the sale of shares of Shri Talaulicar and his family.
(c) It is denied that there was ever any understanding between Shri Pendse on one hand and Shri Talaulicar and/or JHP and JIP on the other hand for arranging sale of shares. Shri Pendse was not aware of and had no knowledge of alleged backdated contract allegedly issued by JIP. It is also denied that Shri Pendse the shares had been sold to a friend of his or that the said friend was committed to buy the shares of TFL at a high price.
(d) It is denied that Shri Pendse informed Shri Talaulicar that the said shares had not been sold in March 2001 and that the sale would take place in early May 2001.Shri Pendse denies having told Shri Talaulicar to refund the difference between the price paid to him and the ruling market price of the shares. He was also not aware of the sale of 1,00,000 shares of TFL by JIP through JHP in the market and he had no knowledge of the refund of the differential amount to JIP by Shri Talaucliar.
(e) Shri Talaulicar was the Chairman of NITCL and a director of TFL at the relevant time and was aware of financial conditions of NITCL and impact of the same on the profits of TFL. It is admitted that additional information was disclosed to the shareholders of TFL on 30.04.01.
(f) Shri Talaulicar was actively involved in the day to day management of NITCL and used to actively monitor the investments made by NITCL. All the investment decisions of NITCL were taken by the Board of NITCL and / or by the Investment Committed of NITCL, both chaired by Shri Talaulicar.
(g) Shri Talaulicar was an ‘insider’, who was in receipt of the knowledge of the financial condition of NITCL as well as TFL, who was in the knowledge of the daily NAV statement of NITCL and was also aware of the market price of the shares of TFL. Shri Pendse had at no stage counseled, organized or otherwise aided Shri Talaulicar in the sale of the said shares and the other alleged transactions.
(h) In his letter dated 30.11.2001 written to SEBI, Shri Talaulicar has stated that Shri Pendse advised him that rather than he sells the TFL shares he should take housing loan from Tata Home Finance Ltd. (Para 6). Mr. J.E. Talaulicar has also stated that he decided to sell the shares held by him and his family members in TFL. He spoke with Shri Pendse and Shri Shilotri of his desire to sell the shares and they offered to organize the sale of his shares. (Para 10). Shri Talaulicar has also mentioned the reason for his divestment in Para 24 of his statement and has stated that he advised Shri Pendse to sell the shares. In his statement dated 18.06.2002, Shri Talaulicar has stated that he requested Shri Pendse to sell his family’s 1,00,000 shares. Thus, it can be seen that Shri Pendse had dissuaded Shri Talaulicar from selling the said 1,00,000 shares.
(i) The show cause notice alleges that Shri Pendse had aided Shri Talaulicar through his ‘counseling’ and ‘organizing’ the dealings in the shares of TFL and has thus violated said regulation 3 of the Prohibition of Insider Trading Regulations. Regulation 3(i) of the said Regulations as they existed at the material time has no application to Shri Pendse. Shri Talaulicar had decided to sell his shares and he had actually sold the shares. Shri Pendse did not sell or otherwise deal in any securities.
(j) The allegation that Shri Pendse has violated regulation 3 of the Prohibition of Insider Trading Regulations is incorrect. Regulation 4 provides that to be guilty of insider trading (i) the violation must be by an insider and (ii) the insider must deal in securities, or (iii) the insider must communicate any information, or (iv) the insider must counsel any person dealing in securities in contravention of the provisions of regulation 3. The first condition must be fulfilled alongwith either of the three conditions. Even assuming that Shri Pendse was an insider in terms of regulation 2 (e), none of the other conditions have been fulfilled so as to constitute a violation of regulation 4.
(k) An ‘insider’ can be said to have committed the violation of regulation 3 (iii) of the Prohibition of Insider Trading Regulations only if he had ‘counseled’ or ‘procured’ any other person to deal in securities of any company on the basis of unpublished price sensitive information. As far as the application of Sub-regulation (iii) of Regulation 3 of the insider trading regulations is concerned, it is submitted that there was no counseling or procurement. The word ‘counsel’ as defined in the Collins English Dictionary (3 rd Ed.) means – advise or guidance of behaviour / conduct, etc. The meaning of the word ‘procure’ as defined in the said dictionary is to obtain or acquire. Shri Pendse has not counseled Shri Talaulicar to deal in shares, rather he has counseled him to take a loan instead of selling the shares. It is unconceivable how someone who has counseled against a trade can be accused of insider trading.
(l) It would be absurd to suggest that Shri Pendse had aided Shri Talaulicar, an ‘insider’, for dealing in securities of a company in which Shri Talaulicar was not only an ‘insider’ but was also admittedly aware of and in the know and knowledge of the alleged ‘unpublished price sensitive information’. Since Shri Talaulicar was an insider as alleged, there was no need to counsel Shri Talaulicar and regulation 3 would not be applicable.
(m) There is no role attributable to Shri Pendse. The intention/motive of Shri Pendse has not even been raised or attempted to be dealt with in the show cause notice. the noticee. In the present proceedings, intention/motive of the insider is relevant. In proceedings of this nature, it is incumbent for the motive to be established but in the present case, not only is the motive not established, it is not even attempted to be established. There was no motive and no motive could be attributable to Shri Pendse. There was no pecuniary gain by Shri Pendse. The show cause notice does not even allege any benefit or gain or profit by Shri Pendse.
(n) The internal committee appointed by TFL i.e. the Kale Committee did not hear Shri Pendse and therefore SEBI should not rely upon the report of the said committee.
(o) The Adjudicating officer is bound to consider the factors specified under section 15J of the SEBI Act read with rule 5 of the Adjudication Rules.
(p) Assuming whilst denying any wrongdoing, the infraction, if any, is technical or venial in nature. No case for imposition of monetary penalty has been made out inasmuch as it is not even suggested in the e show cause notice that Shri Pendse was guilty of willful default or contumacious conduct or defiance of the law.
3.0 Consideration of the Issues and Findings –
3.1 I have carefully considered the charges leveled in the show cause notice, the replies and submissions on behalf of Shri Shilotri and other materials available on record.
3.2 I note that for the alleged violations, in respect of the transaction in question, by Shri Talaulicar, Shri Shilotri and Shri Pendse separate and independent proceedings under sections 11 (4) (b) and 11of the SEBI Act and regulation 11 of the Insider Trading Regulations had been initiated. By orders dated 14.10.03, 02.01.04 and 21.12.03, respectively they had been directed to disassociate themselves from the securities market and not to deal in securities for the periods specified in the respective orders. The appeals filed by them have been dismissed by Hon’ble SAT or the Supreme Court, as the case may be. The scheme of the Act contemplates that different actions have different facets. In the instant case, considering the facts and circumstances of the case, the SEBI also initiated adjudication proceedings against Shri Talaulicar, Shri Shilotri and Shri Pendse.
3.3 In the instant proceedings, the allegation is that Shri Pendse has been guilty of violating regulation 3 of the Prohibition of Insider Trading Regulations thereby attracting the provisions of regulation 4, which inter alia attracts the monetary penalty under section 15G of the SEBI Act. In this context, it is necessary to refer to then existing provisions of regulation 3 allegedly contravened by Shri Pendse which reads as under:
“3. No insider shall
(i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information; or
(ii) communicate 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) counsel or procure any other person to deal in securities of any company on the basis of unpublished price sensitive information.”
Regulation 4 reads as under:
“4. Violation of provisions relating to insider trading.
Any insider who deals in securities or communicates any information or counsels any person dealing in securities in contravention of the provisions of regulation 3 shall be guilty of insider trading.”
3.4 There are three prohibitions envisaged in regulation 3. These are with respect to (i) dealing (ii) communication and (iii) counselling. An ‘insider’ in possession of price sensitive information is prohibited from doing these three things with regard to concerned securities. Under the facts and circumstances of the present case as mentioned in the show cause notice dated 29.09.03, the instant proceedings are concerned with the applicability of clause (iii) of regulation 3. In terms of this clause, the person who is prohibited is “insider”. What is prohibited is counseling or procuring any other person to deal in securities of any company on the basis of unpublished price sensitive information. Thus, what need to be established in these proceedings are whether in respect of the transaction in question, Shri Pendse is an ‘insider’ and he counseled or procured Shri Talaulicar to deal in shares of TFL on the basis of any ‘unpublished price sensitive information’.
3.5 In terms of regulation 2 (e) of the Prohibition of Insider Trading Regulations an ‘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, by virtue of such connection to unpublished price sensitive information in respect of securities of the company or who has received or has had access to such unpublished price sensitive information.”
It is clear from the definition that a person to be considered as ‘insider’ should be one who is or was actually connected with the company or deemed to have been connected with the company. 2nd limb is that by virtue of such connection the person is reasonably expected to have access to ‘unpublished price sensitive information’ or ‘has received or has had access to such unpublished price sensitive information’. The term “connected person” has been defined in regulation 2(c) and includes any person who is a “director” of a company, as defined in clause (13) of section 2 of the Companies Act, 1956 or is deemed to be a director of that company by virtue of clause (10) of section 307 of the Companies Act, 1957. As per section 2(13) of the Companies Act 1956, a “Director” includes any person occupying the position of director, by whatever name called. It is admitted position that Shri Pendse was the ‘managing director” of TFL and also a director of NITCL during the period of the transaction in question. It is sufficient for a person to be treated as connected person with a company if he is a “director” on the Board of that company. Thus, Shri Pendse is safely considered as ‘insider’ being a ‘connected person’ with TFL.
3.6 The next question is whether, being an’ insider’, Shri Pendse was reasonably expected to have access or he had received or he had access to any unpublished price sensitive information in respect of the equity shares of TFL. The term “unpublished price sensitive information” has been defined in regulation 2 (k) the Prohibition of Insider Trading Regulations, as under: -
“ Unpublished Price Sensitive Information’ means any information which relates to the following matters or is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market –
i) financial results (both half-yearly and annual) of the company;
ii) intended declaration of dividends (both interim/final);
iii) issue of shares by way of public rights, bonus, etc.;
iv) any major expansion plans or execution of new projects;
v) amalgamation, mergers and takeovers;
vi) disposal of the whole or substantially the whole of the undertaking;
vii) such other information as may affect the earnings of the company;
viii) any changes in policies, plans or operations of the company.”
Any information, in order that it is unpublished price sensitive information must be related to any of the specified matters. The information must, however relate to one or more of the matters enumerated in the definition. It is noted that the aforesaid specified matters include any information, which may affect the earnings of the company. Further, any information which is of concern directly or indirectly to a company which is not generally known or published by such company for general information but which after publishing is likely to materially affect the price of its securities in the market shall be considered as unpublished price sensitive information. It is a known fact that it is not only the performance of the company per se that affects the price of its securities but the performance of any of its subsidiaries which is expected to have significant impact on the earnings of the company would also be a matter of concern to the company as it might materially affect the price of the equity shares of the company.
In the present case, in respect of the transaction in question, the material information that NITCL had incurred a provisional loss of Rs. 79.37 crores as on 31.03.2001 was not disclosed in the letter of offer in respect of the above said rights issue of TFL. The said material information was not available to the public prior to 30.04.2001 and was therefore, unpublished price sensitive information. Shri Pendse has not denied this fact. Further, SEBI vide order dated 22.12.03 has found that any unpublished information about the deterioration in the performance of NITCL for the year ended March 31, 2001 should have been unpublished price sensitive information in respect TFL. Hon’ble SAT has also, vide order dated 21.05.04 in the appeal filed by Shri Shilotri, while dealing with issue in respect of the impugned transaction i.e. the transaction involving insider trading by Shri Talaulicar and Shri Dilip S. Pendse in concert with Shri Shilotri observed that on 31.3.2001 people inside the management of NITCL knew that NITCL had incurred an enormous loss of Rs.79.37 crores. This information was available to the insiders such as Shri Talaulicar, Shri Pendse and Shri Shilotri on 31.3.2001. This loss on the part of NITCL would have adversely affected the profits of TFL and it was un- published price sensitive information in respect of TFL. In view of these findings , I do not consider it necessary to repeat the same and further burden this order.
3.7 As per the minutes of NITCL’ s Board meeting held on February 2, 2001, the estimated profit and loss account of NITCL for the period ended January 31, 2001 itself showed a loss of Rs.17.10 crores. Shri Pendse was privy to the information that NITCL was in fact incurring loss, which would impact the profit of TFL and the value of its equity shares. The Board of Directors of TFL in its meetings held on 04.01.2001 and on 29.01.2001 approved the rights issue of TFL. By virtue of his position in NITCL and TFL, it can be easily concluded that Shri Pendse had access to the un-published price sensitive information relating to the financial position of NITCL which was likely to have adverse impact on the price of equity shares of TFL. Therefore, he can be safely considered as ‘insider’. The disclosure about price sensitive information that NITCL had incurred a loss of Rs. 79.37 crores for the year ended 31.03.2001 was not available to public except the insiders including Shri Pendse till 30.04.01 when TFL disclosed to its shareholders the said price sensitive information and gave an option to subscribers in the rights issue to withdraw their applications. Thus, the said price sensitive information came in public information only on 30.04.2001. Therefore, any transaction by ‘insiders’ between 31.3.2001 and before 30.4.2001 on the basis of the said unpublished price sensitive information in contravention of Regulation 3 would attract regulation 4 of the Prohibition of Insider Trading Regulations.
3.8 As managing director of TFL and director of NITCL, Shri Pendse was holding a position of fiduciary relationship with the shareholders of both the TFL and NITCL. The fiduciary responsibility cast upon him requires him to take utmost care and be diligent. The whole idea behind prohibiting insider trading is to ensure that persons by virtue of their position in the company and based on the confidential information available to them by virtue of their position in the company do not gain an unfair advantage.
3.9 The next question is whether Shri Pendse had counseled Shri Talaulicar to deal in the shares of TFL held by him and his family members, based on the unpublished price sensitive information? It is admitted position that Shri Talaulicar sold 1, 00,000 shares of TFL held by him and his family members.
3.9.1 It is contented that there was no ‘counseling’ or ‘procurement’ by Shri Pendse in respect of the alleged transaction as he had not advised Shri Talaulicar to sell. The lexicon meaning of “counseling” includes act or process of “assisting” or “guidance”. In my view, any ‘assistance’ or ‘guidance’ or ‘help’ or by an insider to another to “deal in securities’ of a company on the basis of unpublished price sensitive information can be covered under the word ‘counseling’ and organizing the dealings or aiding in dealings in securities on the basis of unpublished price sensitive information can be covered under the word ‘procure’ and such acts can come within the ambit of the Prohibition of Insider Trading Regulations. The words ‘ counsel’ or ‘procured’ have been used to cover all types of acts, advices, helps and the accessories before and after the fact of dealings prohibited by regulation 3.
3.9.2 Admittedly, Shri Pendse had earlier advised Shri Talaulicar to take a loan for acquiring a flat in Goa. Shri Pendse had also arranged for application to the Government for necessary permission for Shri Talaulicar to avail himself of a loan from Tata Housing Finance Ltd. (THFL) and he was also following up the application. Shri Pendse had been described by Shri Talaulicar as his friend and the circumstances of the case and conduct of Shri Pendse as found in investigations and SEBI order dated 22.12.03 confirm the same. The information available on record indicates that in earlier in November 2000, Shri Pendse advised Shri Talaulicar to avail a loan from THFL rather than sell his shares, however later in March 2001, Shri Pendse had assisted or guided or aided Shri Talaulicar for the sale of 1,00,000 shares of TFL held by him and his family members. Shri Pendse has sought to rely upon the statement of Shri Talaulicar that he had requested Shri Pendse to sell his family’s 1,00,000 shares. I note that in the said statement Shri Talaulicar has further stated that in consideration of the shares, Shri Pendse handed over cheques of the aggregate consideration of Rs. 69 lacs and Shri Talaucliar executed delivery instructions to his depository HSBC. Shri Talalulicar had also stated that Shri Pendse who had “arranged” for the sale of shares had also told him that the shares had been sold to a friend of Shri Pendse. It is observed said non- transparent deal was arranged by Shri Pendse at price at the rate of Rs.69/-per share when the prevailing market price of TFL share was around Rs.40/per share.
3.9.3 It has been found during investigations that the sale had been organized by Shri Pendse through an off market deal. Shri Talaulicar had caused transfer of 1 lakh shares of TFL held by him and his family members to the account of JIP and in turn he and his family had received from JIP a sum of Rs.69 lakhs as sale consideration. It is also observed that NITCL, the then subsidiary of TFL had transferred a sum of Rs.70 lakhs to JHP on March 30, 2001 purportedly as “ad-hoc margin”. The voucher in respect of the said payment of Rs. 70 lacs made by NITCL on 30.03.01 to JHP was signed by Shri P.B. Karyekar, Ex- Company Secretary and Accountant of NITCL, Shri Shilotri and Shri Dilip S. Pendse. This was obviously to enable the broker to pay the amount of consideration of 69 lacs to Shri Talaulicar and his family members. The transfer of the sum of Rs.69 lakhs by JHP to JIP on the very next day and issuance of cheques dated March 30, 2001 for an aggregate sum of Rs.69 lakhs by JIP to Talaulicar and his family members cannot be said to be an unrelated transaction or mere co-incidence. Subsequently, Shri Pendse with the help of Shri Shilotri gave orders to one Shri Bharat J. Patel of JHP and Shri Prashant J. Patel, member of NSE for the sale of the said 1,00,000 shares from May 18 to May 29, 2001 in the market at the market price at the rate of around Rs. 34 per share. The bills dated 06.09.2000 were arranged to be back date the contaract to suitably match with the consideration of Rs 69/ per share.
3.9.4 It is contended on behalf of Shri Pendse that since Shri Talaulicar himself was “an insider”, there was no need for him to be counseled by Shri Pendse or any other person. The learned advocate of Shri Pendse emphasized that the “other person” referred to in Regulation 3 does not include an “insider”. In my view, this interpretation of the expression “other person” is not correct. The expression “other person” includes any person other than the person ‘counseling’ or ‘procuring’. The expression includes an ‘insider’ also. If the intention was otherwise, the expression “any person other than the insider” could have been used in the regulations. It cannot be said that “one insider” cannot counsel another “to deal in securities” of a company on the basis of unpublished price sensitive information which both may be having.
3.9.5 The above acts of Shri Pendse suggest that Shri Pendse counseled and procured/organised the dealings in shares of TFL by Shri Talaulicar. In view of the same I also reject the contention that there is no role attributable to Shri Pendse.
3.9.6 The other contention raised by and on behalf of Shri Pendse is that in the present proceedings, the intention/ motive of the ‘insider’ is relevant and there was no motive and no motive could be attributable to Shri Pendse. Further, it is incumbent for the motive to be established in these proceedings. In my view, under the SEBI Act and the Prohibition of Insider Trading Regulations, insider trading by an insider on the basis of any unpublished price sensitive information as envisaged in regulation 3 thereof per se is prohibited and in terms of regulation 4 an insider so dealing in securities is guilty of insider trading so as to attract the provisions of section 15G of the SEBI Act. It is clear that abovementioned regulation 3 does not bring in mens rea as an ingredient of insider trading. The act of insider trading itself is punishable under Chapter VIA of the SEBI Act and intention or motive is not relevant. The instant proceedings are initiated under Chapter VI A of the SEBI Act (section 15I) read with the Adjudication Rules. The scheme of SEBI Act regarding imposition of penalties is very clear. In respect of the violations as alleged in present case, the SEBI Act contemplates actions by way of directions, imposition of monetary penalty and by way of prosecution. The provisions of SEBI Act and the Prohibition of Insider Trading Regulations contemplate imposition of monetary penalty as civil liability for the act of insider trading as prohibited by the said Act and Regulations. As held by the Hon’ble High Court of Bombay in the matter of SEBI Vs. Cabot International Capital Corporation (2004) 2 Comp LJ363 (Bom) Chapter VI-A of the SEBI Act deals with the penalties and adjudication. This Chapter nowhere deals with criminal offence. The defaults specified in respective sections of this Chapter are nothing, but failure or default of statutory civil obligations provided under the SEBI Act and the Regulations made thereunder. Section 24 of the SEBI Act separately deals with the criminal offence under the SEBI Act and its punishments. The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68SCL216(SC) has also held that in the provisions and scheme of penalty under Chapter VI A of the SEBI Act, there is no element of any criminal offence or punishment as contemplated under criminal proceedings. Thus, in proceedings under Chapter VI A of the SEBI Act, mens rea is not an essential element for imposition of penalty.
3.9.7 The Hon’ble Supreme Court of India in Sri Ram Mutual Fund’s case has also held that once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. In view of these judgements, the contentions of Shri Pendse in this regard are not maintainable and I reject the same accordingly.
4.0 In view of the above, it is established that Shri Pendse aided Shri Talaulicar through counseling and organizing the insider trading transaction by Shri Talaulicar in the shares of TFL on the basis of the unpublished price sensitive information and he had violated Regulation 3(iii) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Thus he is guilty of insider trading in terms of regulation 4 thereof and is therefore, liable for penalty under section 15G of the SEBI Act for such contravention.
5.0 Vide orders dated 27.04.06 and 20.10.06 monetary penalties have been imposed upon Shri Shilotri and Shri Talaulicar pursuant to the Adjudication Proceedings initiated against them.
5.1 I note that on criminal complaints filed by TFL against Shri Pendse for certain financial irregularities, legal proceedings had been initiated and with effect from 31.05.01 he ceased to be a director of TFL.
6.0 ADJUDICATION OF THE QUANTUM OF PENALTY
6.1 As held by Hon’ble Supreme Court of India in Sri Ram Mutual Fund’s case that once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant.
6.2 I find that the contraventions by Shri Pendse has occurred before the amendment of section 15G on 29.10.2002.Therefore, the penalty should be in terms of the unamended provision of Section 15G. The unamended Section 15G reads as under –
“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”
6.3 While adjudging the quantum of penalty in this case, I have considered the factors provided under section 15J of the SEBI Act read with rule 5(2) of the Adjudication Rules. Section 15J mandates the Adjudicating Officer to “have due regard to” the factors mentioned therein. Thus, the regard must be had also to the factors enumerated in section 15J together with all the factors relevant for the exercise of the power under section 15I of the SEBI Act.
6.4 There is nothing on record to suggest that as a result of the contravention as found herein above; Shri Pendse has made any pecuniary gain. However, the loss caused to investors and the unfair advantage to the violator as a result of such contravention may also not always be possible to be specified in pecuniary terms. The entire scheme of the SEBI Act contemplates deterrent actions in cases of violations regarding insider trading.
6.5 It is the duty of SEBI to inter alia protect the interests of investors in securities and to regulate and develop the securities market. This duty recognizes that orderly development of the securities market requires investors’ confidence in the market. It also acknowledges that investors’ confidence depends on the comfort afforded to investors that they are placed on equal footing and that they will be protected against the improper use of inside information by the insiders. With this objective, section 11 (2) (g) of the SEBI Act empowers SEBI to take measures for prohibiting insider trading in securities. The Prohibition of Insider Trading Regulations have been framed as a measure to prohibit insider trading. The intention behind the prohibitions provided in Prohibition of Insider Trading Regulations is inter alia to ensure that the insiders do not breach the fiduciary duty or the duty arising out of a relationship of trust or confidence towards the investors. Inequitable and unfair trade practice such as insider trading affect the integrity and fairness of the securities market and impairs the confidence of the investors.
6.6 Therefore, the spirit behind prohibition of insider trading is that the insiders must disclose or abstain. They should not take the position adverse to the interest of the general investors and should not place their interest or the interests of those to whom they communicate the unpublished price sensitive information or for whom they counsel or procure the deals ahead of the interest of the investors. As held by the Hon’ble Securities Appellate Tribunal in Appeal No.: 50/2003 DSQ Holdings Limited Vs. SEBI, the persons who receive unpublished price sensitive information is clearly in an advantageous position ahead of other investors.
6.7 The prohibitions provided in the Act and the Regulations have specific purpose as mentioned above and the penalty provisions for enforcing the regulations need to be given effect to ensure that a level playing field is provided to all participants and the securities market works on sound business principles. Therefore, even if no quantifiable loss is caused to any investor or no unfair advantage is made as a result of violations, it has to be kept in mind that in respect of contraventions of Prohibition of Insider Trading Regulations the violator should face the consequences otherwise the objects of the regulations and also of the regulatory jurisdiction would get defeated. In this regard, the following observations of Hon’ble High Court of Bombay in the matter of SEBI Vs. Sangeeta J. Valia, vide order dated 05.10.03,is worth mentioning –
“……… The provisions of penalty for non-compliance of the said mandate of the Act is definitely with an object to have an effective deterrent to ensure better compliances of the provisions of such laws, which is in the in the interest of public at large, investors and essential to regulate and control such markets, through the regulatory authority, like SEBI.”
6.8 It is noted that pursuant to separate investigations, adjudication proceedings had been initiated in respect of the allegations that pursuant to same unpublished price sensitive information (as found in this case) communicated by Shri Pendse, 40,000 shares of TFL were sold by Smt. Anuradha Pendse and Nalini Properties on March 28, 2001 and March 30, 2001 at the rate of Rs. 90/ per share. In the said adjudication proceedings, vide order dated 27.09.06 Shri Pendse has been found guilty of violation of regulation 3 of the Prohibition of Insider Trading Regulations and a penalty of Rs. 5 lac has been imposed upon him. In view of the same, it is clear that Shri Pendse has committed repeated defaults of insider trading prohibited by Prohibition of Insider Trading Regulations.
6.9 Under the facts and circumstances of this case the violation is not technical violation or minor defect or is based on bona fide belief. Therefore, I am satisfied that the present case deserves imposition of monetary penalty under Section 15 I read with Sections 15G and 15J of the SEBI Act.
7.0 ORDER
7.1 Having considered the facts and circumstances of this case and after taking into account the factors under section 15J and other relevant factors as mentioned above, I find that a penalty of one lac and fifty thousand rupees would be commensurate with the violation, as found in this case. Accordingly, in exercise of the powers conferred upon me in terms of section 15I read with rule 5 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of one lac and fifty thousand rupees on Shri Dilip S. Pendse.
7.2 Shri Dilip S. Pendse shall pay the penalty amount within a period of 45 days from the date of receipt of this order through a demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India” and payable at Mumbai and send the same to Shri Sanjiv Dutt, Chief General Manager, Securities and Exchange Board of India, SEBI Bhawan, 5th Floor, Plot No. C-4 A, G-Block, Bandra Kurla Complex, Mumbai- 400 051. As required under rule 6 of the Adjudication Rules a copy of this order is being sent to Shri Dilip S. Pendse through his advocates and also to SEBI.
| Dated: December 29, 2006 |
SANTOSH SHUKLA |
| Mumbai |
ADJUDICATING OFFICER |