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 SAKSHAM FINANCIAL SERVICES PVT. LTD.
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) has initiated adjudication proceedings against Saksham Financial Services 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. It is also alleged that the noticee failed to comply with the summons dated August 29, 2002 issued by SEBI and on account of such failure, the noticee is liable to the penalty prescribed under Section 15A(a) 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 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 It is alleged that the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information relating to the merger of the company Zap Infotech Ltd with SIL.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 The unpublished price sensitive information was pertaining to the merger of SIL with Zap Infotech Ltd (hereinafter referred to as ZAP) in 2000.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alleged that the noticee was aware of the said impending merger and executed many transactions on the basis of the said unpublished price sensitive information.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.
REPLY
4. The noticee vide its letter dated September 30, 2005 stated that it had never been in receipt of any earlier notices / summons issued by SEBI and that it had never been engaged in any kind of unfair trading whether in the scrip of SIL or any other scrip whatsoever. Considering the said submissions, it was decided to grant the noticee an opportunity of hearing and the noticee was advised to attend the hearing in the matter on March 10, 2006. Shri. H.R. Gulgani , authorized representative of the noticee attended the hearing on March 10, 2006 and submitted the following:
· We have not received any earlier notice or summons from SEBI.
· As we have today received the copy of the letter stated to have been sent by SEBI on August 29, 2002, we shall check our records and inform you by March 21, 2006.
· We were acting as a sub-broker to CFS Financial Services. We shall submit the details regarding our dealings in the scrip of SIL during the year 2000 by March 21, 2006.
· We shall check our records and submit the details on any association / connection with the company SIL or its promoters / directors.
5. Subsequently, vide letter dated March 18, 2006, the noticee submitted the following details
· We have not invested in the scrip of SIL during the year 2000-01.
· We were subbroker to CFS Financial Services Pvt. Ltd., F-12 Green Park (Main) New Delhi during the period 2000-01.
· Details of our clients viz name, addresses, total investments and quantity are annexed.
· We don’t advice our clients for purchase or sale of any scrip. The rationale for investment is best known to the said clients.
· We were never associated with ZAP Infotech Ltd. / SIL. We do not know any of their promoters / directors.
· We have not introduced SS Kothari to ZAP Infotech.
CONSIDERATION OF EVIDENCE AND FINDINGS
6. It is alleged that the noticee failed to comply with the summons dated August 29, 2002 issued by SEBI and on account of such failure, the noticee is liable to the penalty prescribed under Section 15A(a) of the SEBI Act. The said allegation is taken as the first issue for consideration in the present adjudication proceedings. With regard to the said alleged violation, it is noted that the noticee had submitted that it did not receive the said summons. On perusal of the records, it is noted that no proof of delivery of the said letter is available on record. In the absence of proof of service of notice, the same cannot be deemed to have been served on the noticee.
7. The Honorable Securities Appellate Tribunal in the matter Appeal No.5 of 2006 Jay Shah Vs. SEBI held that proof of service of summons has to be necessarily taken into account while deciding questions of failure to comply with summons. The observations of the Honourable Tribunal are taken into account for necessary guidance. In the present adjudication proceedings as no proof of service of summons dated August 29, 2002 is available on record and further, the noticee had submitted that it did not receive the said summons, on the basis of the evidence available on record it cannot be concluded that the noticee failed to comply with the summons so as to be liable to the penalty under Section 15A(a) of the SEBI Act.
8. The second 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.
9. 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:
10. 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
11. 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.
12. It is noted from the submissions of the noticee that it traded in the scrip on behalf of its clients. The details of the trades executed by the noticee are as follows:
Table 1
|
Client Name
|
Purchase Quantity
|
Value
|
Sale Quantity
|
Value
|
|
Hashmat Rai Hakim Rai (HUF)
|
-
|
-
|
100
|
54352
|
|
Prakash Kapoor
|
200
|
85440
|
-
|
-
|
|
Calorex Investment
|
3800
|
1,895,034
|
700
|
432,208
|
|
Tele Infinlease
|
6200
|
2,318,130
|
7500
|
3,094,365
|
|
Hashmat Rai Guglani
|
-
|
-
|
300
|
107,257
|
|
Nisha Pahwa
|
-
|
-
|
100
|
48,034
|
|
Sai Investments
|
200
|
127,831
|
-
|
-
|
|
Saksham Investcare Pvt. Ltd.
|
100
|
40,737
|
-
|
-
|
|
S K Kapoor
|
100
|
36,859
|
400
|
86,640
|
|
Harendra Swain
|
100
|
40,892
|
-
|
-
|
|
Shruti
|
300
|
102,876
|
-
|
-
|
|
Manjula Devi
|
200
|
58,058
|
-
|
-
|
13. Though it is noted that substantial quantity of shares were transacted by the noticee during the period, the noticee had submitted that the said trades were executed for its clients and during the relevant time it was a sub-broker of CFS Financial Services Pvt. Ltd.
14. As per the definition of insider in the said provisions, the noticee cannot be regarded as an insider as apparently no connection is seen between him and the company. However the definition of insider encompasses those who receive the unpublished price sensitive information. Though the findings of the investigation indicate that the noticee may be involved in the merger of the companies, the role played by the noticee is not discernible from the material facts and circumstances of the case available on record. Further, the noticee had denied association with any promoters of the company or with the auditors. Hence on the basis of the evidence available on record, no adverse inference can be drawn against the noticee in respect of the alleged 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, the submission made by the noticee that it was executing the trades on behalf of the clients assume importance.
15. The trades executed by the noticee are not disputed, however it has stated that the same were executed on behalf of its clients as stated in table 1. It is alleged in the investigation report that the noticee was authorized by ZAP Infotech to deliver information and clarifications and dealt in the scrip.
16. It is noted from the submissions of the noticee that it was never associated with ZAP Infotech Ltd. / SIL and did not know any of their promoters / directors. The noticee also denied that it introduced SS Kothari who prepared the valuation report of ZAP Infotech to the company. In the absence of any evidence to the contrary on the basis of evidence available on record, it can not be concluded that there was nexus between the noticee and SIL / ZAP Infotech Ltd. / their directors and promoters. Further, it is pertinent to note that the evidence do not indicate that the noticee had access to the unpublished price sensitive information or any price sensitive information was communicated to the noticee by any other insider.
17. Investigation report suggest 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 noticed. 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.
18. 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. 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 15A(a) and 15G of the SEBI Act, 1992 in the present adjudication proceedings.
19. 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 Saksham Financial Services Pvt. Ltd. and to Securities and Exchange Board of India.
| PLACE: Mumbai |
Biju. S |
| DATE: November 30, 2006 |
Adjudicating Officer |