In the matter of Mrs. Sadhana Nabera

BEFORE THE SECURITIES APPELLATE TRIBUNAL

 MUMBAI

 

                                                     Appeal No. 26 of  2007

                         Date of decision :  19.2.2008 

 

 

Mr. Bharat B. Merchant Advocate with Mr. Hitesh S. Jain Advocate for   Appellant.

Mr. Nishit Dhruva Advocate with Mr. Ravi Hegde and Ms. Dhwani Mehta Advocates for   Respondent.

 

Coram :    Justice N.K. Sodhi, Presiding Officer

                Arun Bhargava, Member

                Utpal Bhattacharya, Member           

 

Per : Justice N.K. Sodhi, Presiding Officer 

 

            This  order will dispose of three Appeals no. 26 to 28 of 2007 all of which are directed against the same order dated November 6, 2006 and in which common questions of law and fact arise.  By the impugned order, the adjudicating officer has found the appellants guilty of insider trading and has levied a penalty of Rs.5 lacs on each of them.

            A show cause notice was issued to each of the appellants alleging that they had violated the provisions of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (for short the regulations).  It is alleged that they dealt in the shares of Sun Infoways Ltd. (hereinafter called the company) on the basis of unpublished price sensitive information relating to its taking over the running business of Zap Infotech (for short Zap)- a partnership firm.  The precise charge levelled in the show cause notice against each of the appellants reads as under :

 

The company was proposing to takeover the running business of Zap and a memorandum of understanding (MOU) had been executed between the two.  This price sensitive information was not in the pubic domain and it is common case of the parties that this information when published would materially affect the price of the scrip of the company. Shri. Dilip Nabera (Nabera) who at the relevant time was the auditor of the company  is alleged to have been in possession of the aforesaid unpublished price sensitive information on the basis of which he and his wife Smt. Sadhana Nabera (Mrs. Nabera) traded in the shares of the company.  Adhunik Finance Pvt. Ltd. (for short Adhunik)- a company registered under the Companies Act is also alleged to have traded in the shares of the company on the basis of the aforesaid unpublished price sensitive information.  It is not in dispute that Mrs. Nabera was a whole time director of Adhunik and was holding 50% of its equity capital.

            One S.V. Gogate was the auditor of the company and he resigned in early June 2000.  The company in its extraordinary general meeting appointed Nabera as its auditor for the year 1999-2000 to audit the accounts for the period ending 31.3.2000.  It appears that the company sought Nabera’s consent for his appointment as an auditor which was conveyed to the company on 12.7.2000. Prior to conveying his acceptance in writing, Nabera by his letter dated 10.7.2000 disclosed his holding and that of Mrs. Nabera in the company to the company.  Nabera held 10700 shares in the name of Dilip Nabera HUF.  His wife Mrs. Nabera held 5300  shares which were disclosed.  Adhunik, too, had been trading in the scrip of the company but its holdings were not disclosed as, according to Nabera, Adhunik had traded as a sub-broker on behalf of its clients and that those trades were not the trades of Nabera and Mrs. Nabera.  It is common ground between the parties that Nabera joined the company as an auditor on 24.7.2000.  The adjudicating officer, after referring to the various provisions of the regulations including the definition of  ‘insider’ contained in Regulation 2(e) and taking  note of the fact that Nabera had been appointed as an auditor of the company in July 2000 and that the merger of Zap with the company had been proposed on the basis of valuation worked out by S.S. Kothari & co.- a firm of chartered accountants and that Zap had been valued to the tune of Rs.359 crores as on 31.3.2000 on the basis of which the company was to issue 5588200 shares of Rs.10 each at a premium of Rs.840 per share to the promoters/partners of Zap, came to the conclusion that the charges levelled against the appellants stood established and that Nabera, Mrs. Nabera and Adhunik traded in the scrip of the company on the basis of unpublished price sensitive information which was available to Nabera at the relevant point of time and that he was an ‘insider’ within the meaning of the regulations.  Accordingly, by order dated November 6, 2006 the adjudicating officer imposed a penalty of Rs. 5 lacs on each of the appellants which was then the maximum penalty leviable. It is against this order that the present appeals have been filed.   Mrs. Nabera has filed Appeal no.26 of 2007 whereas Nabera and Adhunik have filed Appeals no. 27 and 28 of 2007 respectively.

            We have heard the learned counsel for the parties.  The short question that we need to answer in these appeals is whether Nabera was an ‘insider’ and was he  in receipt of unpublished price sensitive information relating to the merger of Zap with the company.  It is not necessary for us to examine as to whether the information pertaining to the merger of Zap with the company was price sensitive information or not because the counsel on both  sides are agreed that it was so and we are in agreement with them. The terms ‘connected person’ and ‘insider’ have been defined in the regulations in clauses (c)  and (e) of Regulation 2 of the regulations and these clauses are reproduced hereunder for facility of reference :

 

A reading of the aforesaid clauses would make it clear that a director or an officer or an employee of the company or any other person  who holds position as a professional  and who may reasonably be expected to have access to any unpublished price sensitive information in relation to that company would be a ‘connected person’ within the meaning of the regulations.  Similarly, ‘insider’ is a person who is or was connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company and who has received or has had access to such sensitive information. Nabera, undoubtedly, was an auditor of the company for the year ending 31.3.2000.  He could be said to be an insider only if, as an auditor he could reasonably be  expected to have access to the unpublished price sensitive information relating to the merger of Zap with the company. We are of the considered opinion that Nabera as an auditor could not be expected, muchless reasonably, to have access to the information of merger of Zap with the company which was a policy decision. The powers and duties of auditors have been specified in section 227 of the Companies Act, 1956 and we have carefully gone through these provisions. Since the law does not give the shareholders any right of inspection of the books of account of the company, it provides for their examination by an independent agency such as the auditor who after auditing the accounts is required to place before them a certificate that so far as the balance sheet of the company is concerned, it gives a true and fair view of the company’s affairs as on the date of the closing of the financial year, and, in the case of profit and loss account, of its profit and loss for the financial year and to this extent he plays the role of a watchdog  on behalf of the shareholders of the company. In order to perform this duty, he has a right of access at all times to the books and accounts and vouchers of the company wherever kept and he is entitled to require from the officers of  the company such information and explanations as he may think necessary for the performance of his duties as auditor. An auditor is not concerned with the policy of the company nor does he sit on judgment on management decisions,  policies or the commercial prudence of transactions.  As observed by Lindley, LJ in London & General Bank (No.2), Re, (1895) 2 Ch 673-

 

In view of the above, we are of the view that Nabera had no concern with the information pertaining to the merger of Zap with the company nor was it a part of his duty to have access to such information while performing his duties.  No company would allow such sensitive information to reach the auditor till it has been made public.  The adjudicating officer has himself observed that there is no material on the record which could establish the date when Nabera received the unpublished price sensitive information.  He has also observed that there is no documentary evidence to show that the valuation report of Zap prepared by the chartered accounts was ever made available to Nabera in his capacity as  auditor. In this view of the matter, we have no hesitation in holding that as an auditor Nabera had no access to the information and on that basis alone, he cannot be said to be an ‘insider’ within the meaning of the regulations.

            There is yet another reason which persuades us to hold that Nabera and the other two appellants were not guilty of the charge levelled against them. As already observed earlier, Nabera joined the company as an auditor only on 24.7.2000 and he was to audit the accounts thereof for the year ending 31.3.2000. The adjudicating officer has observed in para 20 of the impugned  order that circumstantial evidence in the form of trades executed by Nabera and his associates in the scrip of the company would have to be looked into to find out whether he was in receipt of the unpublished price sensitive information. The adjudicating officer then refers to the details of the trades executed by Nabera and his associates and concludes in para 34 of the impugned order that  ‘the evidence available on record indicate that Shri. Nabera was aware of the impending merger and used the said information to his advantage through Smt. Sadhana Nabera and Adhunik Finance.’  He further concludes that the appellants violated Regulation 3 of the regulations. We are unable to agree with this reasoning. Merely because Nabera and his associates (the other two appellants) traded in the scrip of the company, would not lead us to conclude that the price sensitive information was available with Nabera or any one of them.  Whatever be the nature of trades executed, they do not in themselves,  in the facts and circumstances of this case, establish that Nabera was in receipt of price sensitive information relating to the merger of Zap with the company.  We have carefully gone through these trades as well and find that neither Nabera nor his wife traded in the scrip of the company between 24.7.2000 and 4.8.2000-the date on which the information pertaining to the impending merger of Zap with the company became public knowledge. As has been found by the adjudicating officer, MOU was executed between Zap and the company in regard to the takeover of the former and that  information relating to the proposed merger had been furnished to the Bombay Stock Exchange (BSE) where the shares of the company are listed and the same was put on the bulletin of BSE on 4.8.2000. It is common ground between the parties that any information on such a bulletin becomes public knowledge.  It is relevant to mention here that any price sensitive information pertaining to a company has necessarily to be furnished to the stock exchange where the shares are listed and this is the requirement of the listing agreement.  It is also not in dispute that the MOU was placed before the board of directors of the company in their meeting held on 16.8.2000 and the same was approved.  Again, the information pertaining to the approval and allotment of shares to the partners of Zap at Rs.850 per share on preferential basis was sent to BSE on 17.8.2000 on which date it was put on its bulletin which made it pubic knowledge. It is, thus, clear that the price sensitive information pertaining to the proposed merger remained unpublished information only upto 3.8.2000.  Nabera, admittedly, joined the company as an auditor only on 24.7.2000.  It is not the case of the adjudicating officer that Nabera was in receipt of the price sensitive information prior to his joining the company.  Even if he is taken as an insider, the said information qua him remained unpublished only for the period from 24.7.2000 upto 3.8.2000.  As already noticed, neither Nabera nor his wife traded during this period. When the information regarding the proposed merger was published on the bulletin of BSE on 4.8.2000 it came in the public domain and was available to all and sundry and thereafter it ceased to be unpublished price sensitive information. It follows that with effect from the date when the information became public, there was no bar for anyone, including those who were earlier insiders to trade on the basis of that information.  When Nabera and his wife did not trade during the aforesaid period they cannot be said to have violated the regulations.

            Now coming to Adhunik, which traded after Nabera joined the company as an auditor and till such time the price sensitive information came in the public domain.   We have examined the pattern of trading of Adhunik during this period and even before and after the said period and find that it was buying and selling the scrip of the company in large quantities though the purchases were more than the sales. Learned counsel for the parties were agreed and the adjudicating officer has also observed that the price sensitive information in the instant case was such which would result in price rise of the scrip of the company.   If Adhunik through Nabera had traded on the basis of any unpublished price sensitive information, it would have only purchased the shares of the company and would not have sold any.  Such is not the pattern of its trading. Moreover, we have already held that Nabera was not an ‘insider’.  We cannot, therefore, hold that Adhunik traded on the basis of any price sensitive information.

            Lastly, it was urged by the learned counsel for the respondent that Adhunik had borrowed large sums of money from the market to trade in the scrip of the company and, therefore, it could be presumed that Nabera was in receipt of price sensitive information on the basis of which he wanted to trade even though Adhunik had no funds of its own.  The argument is being noticed only to be rejected.  It is a matter of common knowledge that large number of traders and investors in the securities market trade after borrowing money and in this context it may be mentioned that some of the financial institutions come out with attractive schemes to lend money for trading in  securities.  Merely because Adhunik had borrowed money to trade in the scrip of the company cannot lead us to the conclusion that such trades were executed on the basis of any price sensitive information.  It is pertinent to mention that Adhunik had borrowed money both before and after the price sensitive information had become available in the public domain. 

            For the reasons recorded above, we cannot uphold the findings recorded by the adjudicating officer and hold that the charge levelled against the appellant is not established.  In the result, the appeals are allowed and the impugned order set aside with no order as to costs.

                                                                                                                                                                                                                                                Sd/-

                                                                                              Justice N.K. Sodhi

                                                                                                Presiding Officer

 

                                                                                                            Sd/-

                                                                                                  Arun Bhargava

                                                                                                       Member

           

                                                                                                            Sd/-

                                                                                               Utpal Bhattacharya
                                                        Member