ORDER UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST SHRI. DILIP PENDSE, SMT ANURADHA PENDSE AND NALINI PROPERTIES LIMITED.
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) has initiated adjudication proceedings against Shri. Dilip Pendse, his wife Smt. Anuradha Pendse and Nalini Properties Limited (hereinafter commonly referred to as the ‘noticees’) for the alleged violation of the provisions of SEBI (Insider Trading) Regulations, 1992 (hereinafter referred to as the ‘Insider Trading Regulations’) in respect of their dealings in the shares of Tata Finance Ltd (hereinafter referred as ‘TFL’). Shri. S V Krishnamohan was appointed as the Adjudicating Officer to conduct the adjudication proceedings. Subsequently, I was appointed as the Adjudicating Officer to conduct the inquiry in the matter.
SHOW CAUSE NOTICE
2. A show cause Notice under Rule 4(1) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995 was issued to the noticees alleging that, Smt. Anuradha Pendse and M/s. Nalini Properties had sold shares of TFL on 28th March 2001 based on unpublished price sensitive information relating to the financial position of TFL which was not in public domain. The unpublished price sensitive information was provided to them by Shri. Dilip Pendse who at the relevant point of time was the Managing Director of TFL.
3. The price sensitive information was pertaining to the loss of Rs.79.37 crores suffered by Nishkalp Investment and Trading Co Ltd, (hereinafter referred to as NITC) a wholly owned subsidiary of TFL. This information was made public only on 30th April 2001. Shri Dilip Pendse, besides being MD of TFL was also the Director of NITC at the relevant time. It is alleged that Shri. Pendse was aware of the poor financial position of TFL on account of the losses incurred by NITC before the information was made public on 30.04.2001. It is further alleged that on the basis of the said unpublished price sensitive information provided by Shri. Dilip Pendse, 40,000 shares of TFL were sold by Smt. Anuradha Pendse and Nalini Properties on March 28, 2001 and March 30, 2001 at a price of Rs.90/-per share and made unjust profits on account of the said sale. The details of shares sold by the Smt. Anuradha Pendse and Nalini Properties Limited are as under:
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Name of sellers
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Relationship with Mr. Dilip Pendse
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No. of shares sold
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Sale price
(Rs.)
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Receipt of money for the sale
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Dmat transfer of shares to the buyer
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Smt.. Anuradha Pendse
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Wife
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10,000
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90
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26.04.2001
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28.03.01
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Nalini Properties (P) Ltd.
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Wife and father of Shri Dilip Pendse are the Directors
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30,000
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90
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30.03.2001
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Total
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40,000
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4. On account of the above dealings, the noticees are alleged to have violated the provisions of Regulation 3 of the Insider Trading Regulations.
REPLY
5. The noticees failed to submit any reply within the stipulated time. In view of the same, the noticees were advised to attend the hearing on September 22, 2005. Advocate Shri. Santosh Pawar, M/s. Bhave & Co Advocates attended the personal hearing on behalf of the noticees and sought an adjournment on the ground that the Counsel instructed by them expressed his inability to attend the matter on the said date. Subsequently, the noticees through their Advocates submitted their reply to the show cause notice. The noticees attended the personal hearing granted on November 10, 2005 and inter alia submitted the following :
· The requirement of notice under Regulation 6 of the Insider Trading Regulations is a prerequisite before undertaking any investigation under Regulation 5 and no such notice has been issued to the noticee. Failure to give notice as required by the provisions of Regulation 6 is fatal and the proceedings must fail on this ground alone.
· There is no application of the provisions of Section 15 G of the SEBI Act or Regulation 3 of the Insider Trading Regulations as there has been no communication of price sensitive information
· The impugned transactions took place in September 2000. The broker member had informed the Stock Exchange vide letter dated September 16, 2000 that the transactions had been completed on a principal to principal basis.
· The disciplinary action committee of the Stock Exchange, Mumbai vide their 3rd May 2003 had acknowledged that the impugned transaction were reported to the Exchange.
· Smt. Anuradha Pendse held 45,000 shares at the relevant point of time and sold 10,000 shares out of her holding. The balance approximately 35,000 shares were sold in 2002-03 and 2003-04. The noticee filed her Income Tax Returns for the year 2000-2001 and paid capital gains tax on the basis of the contractual price of Rs.90/- per share.
CONSIDERATION OF EVIDENCE AND FINDINGS
6. One of the contentions raised by the noticees is that no notice was given to them before undertaking the investigation. In this regard it is pertinent to note that Regulation 6(2) of the Insider Trading Regulations states that where the Board is satisfied in the interest of investors or in public interest that no notice should be given, it may by an order in writing direct that the investigation be taken up without such notice. Further, as the present adjudication proceedings, have been initiated subsequent to the investigation, the issues in respect of the investigation cannot be looked into in a proceeding of this nature.
7. The main issue for consideration in the matter is whether Smt. Auradha Pendse and Nalini Properties sold the shares of TFL on the basis of the unpublished price sensitive information provided to them by Shri Dilip Pendse and on account of their said actions, whether the noticees contravened the provisions of the Insider Trading Regulations so as to be liable to the penalty under Section 15 G of the SEBI Act.
8. As mentioned before, NITC is stated to be an wholly owned subsidiary of Tata Finance Ltd. NITC had suffered provisional loss of Rs.79.37 crores for the year ended 31st March 2001. Shri Dilip S Pendse was the MD of TFL and also the director of NITC at the relevant time. The NAV of the investments of NITC was made available to Shri Pendse on a daily basis and estimated Profit & loss Statement of TFL for the quarter ended 31.3.2001 was put up to him on 6.1.2001 .Further, in the Board meeting of NITC its loss was estimated at Rs.17.10 crores for the nine months ended 30th June 2001 as against the profit of Rs.11.46 crores for the 6 months period ended on 30th Sept 2000. The estimated erosion of NAV of the portfolio of NITC for the year ended 31.3.2001 was stated to be around Rs.146 crores. There was substantial erosion in the value of investments of NITC and its subsidiaries.
9. The information regarding the loss suffered by NITC was made public on 30th April 2001 to the shareholders of TFL as additional information in the Prospectus of rights issue. The above factual details are not disputed.
10. In view of his connection with the company, Shri. Dilip Pendse can be regarded as an insider within the meaning of regulation 2(e) of the Insider Trading Regulations which reads as under
“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 reasonable be expected to have access to unpublished price sensitive information in relation to that company.
11. As stated before, Smt.Anuradha Pendse is the wife of Shri. Dilip Pendse and Smt. Anuradha Pendse and father of Shri Dilip Pendse were the directors of Nalini Properties Ltd. In this regard, it has to be determined whether they were in receipt of any unpublished price sensitive information and dealt with the shares of TFL on the basis of the unpublished price sensitive information. As per the above definition of insider, any person who had received the information or had access to unpublished price sensitive information is also regarded as an insider.
12. Unpublished price sensitive information is defined as 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) such other information as may affect the earnings of the company;
(viii) any changes in policies, plans or operations of the company
13. In view of the above definition of unpublished price sensitive information, it can be concluded that the provisional loss of Rs.79.37 crores by NITC and the estimated erosion of its NAV for Rs.146 crores as on 31st March 2001 was an unpublished price sensitive information till 30th April 2001 when it was made public on the said date as additional information to the Rights Issue prospectus of TFL. Any such unpublished information which is of concern directly or indirectly to a company if published is likely to materially affect the price of the securities. Anybody who is in possession of the said information prior to it being made public would be in a position to sell the shares and make profits at the expense of other shareholders who do not have such information. In his official capacity as MD of TFL and also a director of NITC at the relevant time, the NAV of the investments of NITC was made available to Shri Pendse on a daily basis and estimated Profit & loss Statement of TFL for the quarter ended 31.3.2001 was put up to him 6.1.2001. Further, in the Board meeting of NITC on February 2, 2001 its loss was estimated at Rs.17.10 crores for the nine months ended 30th June 2001 as against the profit of Rs.11.46 crores for the 6 months period ended on 30th Sept 2000 was discussed. The estimated erosion of NAV of the portfolio of NITC for the year ended 31.3.2001 was stated to be around Rs.146 crores. Hence by virtue of his participation in the board meetings of the company as well as by scrutinizing accounts such as estimated profit and loss accounts for the quarter ended 31.3.2001, Shri Dilip Pendse was aware of and was in possession of the aforesaid unpublished price sensitive information relating to the financial position of NITC and the impact of the same on TFL.
14. As stated before, the said information was made available to the public only on April 30,2001. It is the case of the noticees that the impugned transactions had taken place in September 2000 much prior to the period in March 2001 when the unpublished price sensitive information was alleged to have been communicated by Shri Pendse to the noticees. In support of their contention the noticees are relying on the communication sent by the Stock Broker Malini Sanghvi Securities to the Stock Exchange Mumbai indicating that the trades were executed on principal to principal basis on September 16, 2000. It is further contended by the noticee that credits were passed to the running accounts of the sellers in September 2000 itself.
15. As per the delivery and payment details in respect of the said transactions it is pertinent to note that the shares were given to the broker by Smt. Anuradha Pendse on March 28,2001. Nalini Properties had given the delivery of shares to the broker on March 30, 2001. It is also observed that the said shares were further sold by the broker to the new buyer namely IECL on March 30, 2001. It is also noted that in respect of the shares sold by Smt. Anuradha Pendse to the broker, payment in respect of the sale of 10,000 shares of TFL was made at the rate of Rs.90/- per share only on March 30, 2001 for an amount of Rs.9 lakhs. With regard to Nalini Properties, though it is noted that credits for other transactions have been made by the broker to the account of Nalini Properties, no payment in respect of the sale of 30,000 shares of TFL on September 16, 2000 is seen, which as per the noticee is the date on which the transaction was executed. Further it is pertinent to note that Nalini Properties had given the shares to the broker only on March 30, 2001.
16. The above facts pertaining to delivery of shares and payment thereof clearly indicate that the broker was merely making credit entry without actually receiving the shares or making payment for the same. In this regard, it is pertinent to note that the noticees have not produced any documentary proof disputing / rebutting the dates of delivery of shares and payment thereof. However their contention is that the said transactions were reported to the Stock Exchange by the Broker on September 16, 2000. In this regard, it is pertinent to note that as the transactions were off-market deals the same had to be necessarily settled by way of delivery and payment in terms of the provisions relating to spot contract under Section 2 (i) of the Securities Contracts Regulation Act 1956 which states the following :
“.Spot delivery contract means a contract which provides for ,-
(a) actual delivery of securities and payment of a price therefor either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of securities or remittance of the money therefor through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality.
(b) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when the securities are dealt with by a depository.
17. As the delivery of shares and payment in respect of the same did not take place within the prescribed time the said transactions cannot be termed as a spot transaction. All other transactions in securities have to be necessarily through the Stock Exchange.
18. With regard to the contention of the noticees that the said transactions were reported to the stock exchange, it appears that such reporting was done without ensuring that the norms of delivery and payment in respect of spot transactions were adhered to. In this context, no plausible explanation has been provided in respect of the delay in delivery of shares and the payment in respect of the same. Though it is contended that the transactions have taken place in September 2000, the evidence available on record show that the impugned transactions took place only in March 2001 after a gap of six months. Further, no reasonable explanation has been provided for effecting delivery of shares and payment few days prior to the date on which the price sensitive information became public. These facts clearly indicate that the impugned transactions took place in March 2001 and not in September 2000 as contended by the noticees.
19. As mentioned earlier, unpublished price sensitive information leading to the erosion in the value of the shares of TFL was available to Shri. Dilip Pendse. The noticees have denied communication of the said information by Shri Dilip Pende to his wife and associates. However no plausible explanation has been provided by the noticees in respect of the payment and delivery of shares in March 2001. As stated before, the unpublished price sensitive information was made available to the public on April 30, 2001. Selling of shares through off market deals few days prior to price sensitive information made public suggest that the shares were sold on the basis of the unpublished price sensitive information communicated by Shri Dilip Pendse to his associates. As held by the Honourable 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. The preponderance of probabilities and the fact that the impugned transactions were executed few days prior to the date on which the unpublished price sensitive information was made available to public clearly indicate that Shri. Dilip Pendse and his associates indulged in insider trading.
20. The standard of proof required in a proceeding of this nature is not necessarily that of the strict standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the involvement of the delinquent in the misconduct. The strict rules of standard of proof to the exclusion of all reasonable doubt required in a criminal case may not be applicable to a proceeding of this nature. The Honourable Supreme Court’s decision in Gulabchand vs Kudilal AIR, 1966, SC 1734 is relied upon in this regard.
21. The closing price of the shares of TFL on 30th April 2001 when the adverse financial statement was made public was Rs.30.10 whereas the noticees sold 40,000 shares when this information was not in public domain on 28.3.2001 at a price of Rs.90/- per share. Therefore, undue enrichment of Rs.23,56,000/- was made by Smt. Anuradha Pendse and Nalini Properties Ltd at the expense of the other share holders who were unaware of the adverse financial condition of NITC and TFL before it was made public on 30th April, 2001.
22. 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:
23. In view of the above provision, as it is proved that Smt. Anuradha Pendse and Nalini Properties dealt in the shares of TFL on the basis of the unpublished price sensitive information communicated by Shri. Dilip Pendse, it is concluded that Shri. Dilip Pendse, Smt. Anuradha Pendse and Nalini Properties Ltd had violated Regulation 3 of Insider Trading Regulations and are guilty of insider trading. In view of the above actions, Shri. Dilip Pendse, Smt. Anuradha Pendse and Nalini Properties are liable to the penalty prescribed under Section 15G of the SEBI Act.
24. In this regard, the provisions of Section 15G of the SEBI Act, 1992 on the date of the violation read 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”
The said penalty was substituted by SEBI (Amendment) Act, 2002 with effect from 29.10.2002 whereby a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, has been provided.
25. It is pertinent to refer to the order of the Hon’ble Securities Appellate Tribunal in Appeal No.151/2004 in the matter of Rameshchandra Mansukhani NRI vs SEBI wherein the Honourable Tribunal held that the penalty existing on the date of commission of the violation should be imposed and not enhanced penalty which came into being by way of subsequent amendment. The order passed by the Honourable Tribunal is relied upon in this case.
26. The provisions of Section 15J of the SEBI Act, 1992 and Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely:
1. The amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of default
2. The amount of loss caused to an investor or group of investors as a result of the default
3. The repetitive nature of default
27. With regard to the above factors to be considered while determining the quantum of penalty in the present adjudication proceedings, the amount of disproportionate gain or unfair advantage made as a result of the default, appears to be Rs.23,56,000/-. With regard to the loss caused to the investors, no quantifiable figures are available to assess the exact loss caused to the investors.
ORDER
28. Having regard to the nature and gravity of the violation committed by the noticees, the factors contained in Section 15 J of SEBI Act, 1992 and considering the penalty provided under the provisions of Section 15 G of the SEBI Act at the time the violation was committed, I impose a penalty of Rs.5,00,000/- (Rupees Five Lakhs) each on Shri. Dilip Pendse, Smt.Anuradha Pendse and Nalini Properties Limited.
29. Penalties shall be paid by the noticees by way of demand drafts drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. Demand drafts shall be forwarded to the Chief General Manager, Investigation Department – ID7, Securities and Exchange Board of India, Mittal Court, “B’ Wing, First Floor, 224, Nariman Point, Mumbai – 400 021.
30. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiries and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to the noticees and to the Securities and Exchange Board of India.
| Date : September 27, 2006 |
Biju. S |
| Place : Mumbai |
Adjudicating Officer |