Adjudication Order No. BS/AO-2/2007
ORDER UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT READ WITH RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST GREAT EASTERN MERCANTILE PVT. LTD.
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) has initiated adjudication proceedings against Great Eastern Mercantile Pvt. Ltd. (hereinafter referred to as the ‘noticee’) for the alleged violation of the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as the ‘Insider Trading Regulations’) in respect of its dealings in the shares of Sun Infoways Ltd. (hereinafter referred as ‘SIL’). It is alleged that on account of the violation of Section 3 of the Insider Trading Regulations committed by the noticee, it is liable to the penalty prescribed under Section 15G of the SEBI Act. Initially, Shri. S.V. Krishnamohan was appointed as the Adjudicating Officer to conduct the Adjudication Proceedings. Subsequently, I was appointed as the Adjudicating Officer in the matter.
SHOW CAUSE NOTICE
2. A Show cause notice in terms of the provisions of Rule 4(1) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘Rules’) was issued to the noticee on August 9, 2005 alleging that the noticee had violated the provisions of Insider Trading Regulations. It is alleged that the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information relating to the merger of the company Zap Infotech Ltd. with SIL.
3. The unpublished price sensitive information was pertaining to the merger of SIL with Zap Infotech Ltd. (hereinafter referred to as ZAP) in 2000. It is alleged that the noticee was aware of the said impending merger and executed many transactions on the basis of the said unpublished price sensitive information. On account of the above dealings, the noticee is alleged to have violated the provisions of Regulation 3 of the Insider Trading Regulations.
4. It is noted that the said notice sent by registered post was returned undelivered and in view of the same, substituted service of the notice was effected on January 4, 2006. The noticee failed to reply to the show cause notice, however considering the facts of the case it was decided to conduct an inquiry and the noticee was advised to attend the hearing scheduled on March 2, 2006. The noticee failed to attend the inquiry on the said date.
5. As the noticee failed to reply to the show cause notice despite being granted sufficient time and opportunities, the inquiry is proceeded on the basis of the facts and material available on record.
CONSIDERATION OF EVIDENCE AND FINDINGS
6. The issue for consideration in the matter is whether the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information and on account of the said dealings, whether the noticee contravened the provisions of the Insider Trading Regulations so as to be liable to the penalty under Section 15 G of the SEBI Act.
7. Regulation 3 of the Insider Trading Regulations as existing on the date of the impugned transactions provided the following :
“No insider shall-
(i) either on his own 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, counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities.
8. Unpublished price sensitive information is defined in Regulation 2(k) which was substituted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20-2-2002. Prior to its substitution, clause (k) read as under :
‘(k) “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) the information as may affect the earnings of the company;
(viii) Changes in policies, plans or operations of the company
9. As can be seen from the above definition, any information pertaining to merger of companies is regarded as price sensitive information. As per the findings of the investigation conducted by SEBI, the merger of Zap with SIL was proposed on the basis of the valuation of Zap Infotech by SS Kothari & Co. It is stated that SS Kothari & Co. had valued Zap to the extent of Rs.359 Crores as on 31.3.2000. It is further observed in the investigation report that subsequent to the above valuations, Sun Infoways and Zap Infotech agreed to merge and in consideration of which, Sun Infoways Limited was to issue 55,88,200 shares of Rs.10/- each at a premium of Rs.840/- per share to the promoters of Zap Infotech. Any such unpublished information which is of concern directly or indirectly to a company which, if published, is likely to materially affect the price of the securities.
10. In this regard, while analyzing the question as to when the said information pertaining to the merger was made public, it is noted that BSE’s Bulletin dated 4.8.2000 had mentioned that a board meeting of the company is proposed to be convened on 16.8.2000 for finalizing the acquisition of the entity viz ZAP Infotech. Subsequently BSE bulletin dated 17.8.2000 stated that on 16.8.2000 the MOU with ZAP was approved for Rs.475 Crores by allotting shares to promoters of ZAP at Rs.850 per share as per preferential basis.
11. In this regard, it is noted that the said information provided by BSE bulletin was on the basis of the letter of SIL dated 16.8.2000 apprising BSE of the merger. Hence it can be seen that the information regarding the merger was in public domain on 17.8.2000.
12. It is noted from the investigation report that the noticee executed following trades in the scrip
|
CLIENTS
|
BROKER
|
BUY
|
SELL
|
GROSS
|
|
Great Eastern Mercantile Pvt. Ltd.
|
JCL
|
0
|
7500
|
7500
|
|
Great Eastern Mercantile Pvt. Ltd.
|
SMK
|
0
|
4500
|
4500
|
13. Settlement wise breakup of the above trades of the noticee is as follows
Through Joindre Capital Services
|
Sett. No.
|
Date
|
Quantity Purchased
|
Price
|
Quantity sold
|
Price
|
|
11/2000-01
|
5.6.2000 to 9.6.200
|
0
|
0
|
4000
|
200.90
|
|
12
|
12.6.2000 to 16.6.2000
|
0
|
0
|
500
|
249.08
|
Through JCL Securities Private Ltd.
|
Sett. No.
|
Date
|
Quantity Purchased
|
Price
|
Quantity sold
|
Price
|
|
10/2000-01
|
29.5.2000 to 2.6.2000
|
0
|
0
|
1500
|
171.40
|
|
11
|
5.6.2000 to 9.6.200
|
0
|
0
|
4500
|
228.70
|
|
12
|
12.6.2000 to 16.6.2000
|
0
|
0
|
1500
|
257.30
|
14. It is further noted from the investigation report that for some of the above trades, counterparty buyer was Adinath Propcon Pvt. Ltd. Details of these trades are as follows:
|
Instances where seller is Great Eastern Mercantile Pvt. Ltd. through Shreepati Holdings and Finance Pvt. Ltd. and the buyer is Adinath Propcon Pvt. Ltd. through Shilpa Stock Brokers Ltd.
|
|
DATE
|
TIME
|
MEMBER
|
QUANTITY
|
PRICE
|
B/S
|
CPCODE
|
CLIENT CODE
|
Counter Client
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
13/06/2000
|
1:49:35 PM
|
D0216
|
100
|
252
|
S
|
D0608
|
GREAT
|
ADINATH
|
|
|
|
TOTAL
|
1000
|
|
|
|
|
|
15. Though it is observed that the noticee had executed substantial quantity of trades during the period, it is pertinent to see whether the noticee can be regarded as an insider and whether the transaction were executed on the basis of unpublished price sensitive information.
16. The provisions of Regulation 2(e) of the Insider Trading Regulations at the relevant point of time defined the term ‘insider’ in the following manner :
“2. In these regulations, unless the context otherwise requires :—
(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 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;”
Further, Regulation 2(c) reads as under :
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 and who may reasonably be expected to have access to unpublished price sensitive information in relation to that company.
17. As regards the connection between the noticee and SIL, it is stated in the investigation report that the shares sold by the noticee belonged to pre issue period and SIL certified that they were the original shareholders of the company. Further, the investigation report also alleges fund transfers between the noticee and SIL. Details of the same are as follows
|
GREAT EASTERN(A/c-0162000002195)
|
Sun Infoways Limited(A/c-0192050001257)
|
|
Date
|
Transaction Details
|
Debit(Rs)
|
Credit(Rs)
|
Balance
|
Date
|
Transaction Details
|
Debit(Rs)
|
Credit(Rs)
|
Balance
|
|
04/08/00
|
Funds Transfer Versova
|
250000
|
|
314500
|
04/08/00
|
Funds Transfer-0152000002081
|
|
250000
|
295268.00
|
|
07/08/00
|
Cash Deposit Versova
|
--
|
150000
|
1267500
|
07/08/00
|
Cheque Paid
|
150000
|
--
|
207638.75
|
|
08/08/00
|
Versova Funds Transfer
|
50000
|
-----
|
17500
|
08/08/00
|
Funds Transfer- 152000002081
|
----
|
50000
|
165425.75
|
|
16/08/00
|
Funds Transfer -0152000002081
|
75000
|
-----
|
17500
|
16/08/00
|
Funds Transfer -0152000002081
|
----
|
75000
|
166304.75
|
|
27/11/00
|
Funds Transfer - 0602320000666
|
100000
|
-----
|
17580
|
27/11/00
|
Funds Transfer - 0602320000666
|
------
|
2500000
|
2545968.10
|
18. It is pertinent to note that no connection is seen between the noticee and SIL as per the definition of insider in the said provisions, the noticee can not be regarded as an insider as apparently no connection is seen between him and the company. It is alleged that there was a fund transfer between the noticee and SIL and the noticee was acting on behalf of the auditor of the company, Shri Dilip Nabera. However in the present factual situation, it has to be seen whether the price sensitive information was communicated to the noticee.
19. The definition of “insider” encompasses those who receive the unpublished price sensitive information. As held by the Honourable Securities Appellate Tribunal in Appeal No. : 50/2003 DSQ Holdings Limited Vs. SEBI, the person who receives unpublished price sensitive information is clearly in an advantageous position ahead of other investors. Though the findings of the investigation indicate that the noticee may be part of a group of entities trading in the scrip, the role played by the noticee is not discernible from the material facts and circumstances of the case available on record. Hence on the basis of the evidence available on record, no adverse inference can be drawn against the noticee in respect of the allegation that the noticee had executed trades in the scrip on the basis of unpublished price sensitive information. As it is seen that the evidence available on record do not indicate that the noticee had access to the price sensitive information, in the absence of any evidence to the contrary, it can not be concluded that the noticee executed the said trades on the basis of unpublished price sensitive information or such price sensitive information was communicated to the noticee by an insider.
20. Investigation report suggests that large number of transactions were executed by many entities who appear to be connected and on the basis of which, it is alleged that the purpose of such transactions are for creation of artificial interest in the scrip. In view of the same, alleged violations of the provisions of SEBI (Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 1995 were also observed. However it is pertinent to note that the present adjudication proceedings have been instituted for the alleged violation of the provisions of Insider Trading Regulations.
21. As stated before, on the basis of the facts and evidence available on record, it can not be concluded that the noticee violated the provisions of Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 1992. As the violations alleged to have been committed by the noticee are not established, no penalty is imposed on the noticee in terms of the provisions of Section 15G of the SEBI Act, 1992 in the present adjudication proceedings.
22. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 copies of this order are sent to Great Eastern Mercantile Pvt. Ltd. and to Securities and Exchange Board of India.
PLACE: Mumbai Biju. S
DATE: January 4, 2007 Adjudicating Officer