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IN THE SECURITIES APPELLATE
TRIBUNAL MUMBAI Appeal
No: 83/2004
In
the matter of:
CORAM ��������� Justice
Kumar Rajaratnam, Presiding Officer ��������� Dr.
B. Samal, Member ��������� N.L.
Lakhanpal, Member Per:��� N.L. Lakhanpal, Member 1.
The
appeal is taken up for final disposal with the consent of parties.� Heard Mr. C.A.Sundaram, Senior Advocate for
the appellant and Mr. Rafique Dada, Senior Advocate for the respondent. 2.
The
appellant challenges the impugned order passed by SEBI dated �13.1�� In the light of
the above and in exercise of the powers conferred on me in terms of Section 19
of the SEBI Act, 1992, read with Section 11(4) and 11B of SEBI Act, 1992, read
with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations 2003 and Regulation 11 of
SEBI (Prohibition of Insider Trading) Regulations, 1992, I hereby prohibit Shri
Samir C. Arora not to buy, sell or deal in securities, in any manner, directly
or indirectly, for a period of five years. The period of prohibition already
undergone by Shri Samir C. Arora by virtue of the interim order dated 3.
The
facts very briefly are as follows: Alliance Capital Mutual Fund (ACMF) is a mutual fund registered with the
Securities and Exchange Board of India (SEBI).�
This Fund has been sponsored by Alliance Capital Management Corporation
of 4.
Based
on detailed investigations as summarized in the show-cause notice, and after
hearing the appellant the following issues were framed in the impugned order by
SEBI for determination. i.
Whether
Shri Samir C. Arora is guilty of professional mis-conduct inviting action under
Sections 11(4) and 11B of the SEBI Act, 1992? ii.
Whether
Shri Samir C. Arora is guilty of violating the provisions of Regulations 4(a),
4(b), 4(c), 4(d) and 5 of SEBI (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 1995? iii.
Whether
Shri Samir C. Arora is guilty of violating the provisions of Regulation 3 of
SEBI (Prohibition of Insider Trading) Regulations, 1992? 5.
Each
of these issues framed for consideration has been answered in the impugned
order in the affirmative and against the appellant. 6.
Activities
like insider trading, fraudulent trade practices and professional misconduct
are absolutely detrimental to the interests of ordinary investors and are
strongly deprecated under the SEBI Act, 1992 and the Regulations made there
under. No punishment is too severe for those indulging in such activities.� For the same reason, charges must be proved
based on cogent materials and in accordance with law.� It is therefore incumbent upon this Tribunal,
being the first appellate forum to examine the materials for and against the
appellant in support of each charge very carefully. 7.
The
first charge relates to professional misconduct inviting action under Section
11(4) and 11B of the SEBI Act, 1992. Basically SEBI�s case against the
appellant is that when ACM decided to sell its India business; he opposed its
sale vehemently; that when he failed in his efforts to stop the sale; he joined
hands with a third party, Henderson Global Investors, to acquire the India
business from ACM; that against the Indian bidder, HDFC�s bid of $40 to $50
million he made a relatively lower bid of $33 million in the belief that he
would be a successful bidder; that his understanding with Henderson Global was
loaded heavily in his favour; that in furtherance of this personal objective he
proceeded to bring down the valuation of the India business by spreading and
later not denying the rumours about his impending exit from the India business
if the sale was effected in favour of any bidder other than Henderson Global,
thereby inducing redemption pressure on the mutual fund; and that by continuing
to manage the assets of ACMF during this crisis period of redemption pressure;
he actually brought down the net asset value (NAV) and the assets under
management (AUM) of ACMF because of which almost all the bidders had to walk
out of the bidding process;� that when
the other bidders started reducing their bids, he and Henderson Global in fact
raised their bid from $30 to $33 million to $32 to $35 million with a view to
persuading ACM to sell the business to them; and that by these actions he
aborted ACM�s plan of selling its India business.. 8.
The
second component of the charge of professional mis-conduct rests on the fact
that in addition to him being incharge of equity investments funds of ACMF in
his capacity as Head, Asian Emerging Markets, ACM, 9.
As
against this the appellant�s version is that he was indeed opposed to the sale
of ACM�s India business and that he had openly expressed his views about this
to the ACM management.� According to him
the employees have a right to express their view freely and frankly to the
management about the critical issues affecting the company�s business and
future of employees.� When he failed in
his efforts to persuade ACM to desist from the sale he informed ACM in writing
about his intention to be one of the bidders for the purchase of the 10.
On
the basis of the submissions made by the learned counsel on both sides as above
we find that the main grievance of SEBI was the appellant�s decision to make a
bid for the purchase of ACMF which he was handling as part of his
responsibilities as an employee of ACM.�
We would therefore frame the following issues for arriving at a finding
on the first charge of professional misconduct. i)�������� Whether the appellant�s
participation in the bidding process even while continuing to be in employment
of ACM was per se wrong - legally,
morally or ethically. ii.�������� If not, whether the
appellant�s subsequent conduct enabled him to derive any undue benefits by
compromising the interests of ACM or the general body of investors. 11.
So
far as the first of these issues is concerned we can begin by examining the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. These
regulations lay down a detailed frame work for the registration, constitution,
management and operation of mutual funds.�
The regulations also prescribe constitution and management by an asset
management company and lay down duties of its Directors and other officers such
as the Chief Executive Officer, the Fund Manager, the Custodian and the
Compliance Officer. Regulations 25(6A) and (6B) mention the role of Fund
Managers and are reproduced below: �(6)(a) The Chief Executive Officer (whatever his
designation may be) of the asset management company shall ensure that the
mutual fund complies with all the provisions of these Regulations and the
guidelines or circulars issued in relation thereof from time to time and that
the investments made by the Fund Managers are in the interest of the unit
holders and shall also be responsible for the overall risk management function
of the mutual fund.� ���.. �(6B)�� The fund managers (whatever the designation
may be) shall ensure that the funds of the scheme are invested to achieve the objectives
of the scheme and in the interest of the unit holders.� 12.
The
appellant was admittedly the fund manager and it can be concluded from the
above that his responsibility was to make all investments in the interest of
the unit holders and for the purpose of achieving the objects of specific
funds. The 5th schedule to this regulations prescribed a code of
conduct. �trustees
and asset management companies must avoid conflict of interest in managing the
affairs of the scheme and keep the interest of all unit holders paramount in
all matters�. 13.
The
only responsibility that the Regulations prescribe for the fund managers, for
which he can be considered as directly answerable to the regulator, SEBI, is to
ensure that the funds of the schemes are invested to achieve the objectives of
the schemes and in the interest of the unit holders.� The rest of the SEBI (Mutual Funds)
Regulations, 1996, including the Code of Conduct prescribed in the 5th
Schedule prescribe responsibilities for the Trustees, the Custodians, asset
management companies and others. The responsibility for avoiding conflicts of
interests, is laid down specifically by the Code of Conduct in the 5th
Schedule on the Trustees and the asset management companies. Thus, if it is
SEBI�s case that conflict of interest situation was created because of the
appellant bidding for ACMF and still continuing to manage its equity
investments, the liability should be fastened on to the Trustees and the asset
management company and certainly not on the appellant who was merely an
employee and was required to carry out the responsibilities assigned to him by
his employer. In fact it is not clear from the impugned order whether this
indeed is the position taken by SEBI because of the contradictory positions
taken by SEBI at different places in the impugned order.� Thus in para 7.44 a categorical position is
taken that �in consonance with the well recognized ethical principles Shri Samir C. Arora should have resigned
as fund manager of ACMF before proceeding to bid for buying stake in ACAML to
avoid conflict of interest�.� While in
para 7.46 it has been observed that �I find that Shri Arora�s bid for
acquiring ACAML itself is not being questioned and what is called into question
is the conduct of Shri Arora as a professional fund manager in the matter of
the said bidding.� Paras 7.44 and 7.46 are reproduced below: �7.44 � I find that there is an inherent flaw in the
denial by Shri Samir C Arora of conflict of interest on the ground that his
bidding was done transparently and after informing the management of Alliance
Capital.� As a Fund Manager, it was
paramount responsibility of Shri Samir C. Arora, to enhance the AUM of the
mutual fund for the benefit of the Unit holders. However, in contrast, in his
role as a bidder, his interest would have been to acquire the fund at the
cheapest possible price. From the subsequent events it is observed that by his
actions/inactions, Shri Samir C Arora has let the AUM fall, knowing that the valuation
of the AMC depend on AUM, so as to achieve his selfish objective of acquiring
the fund along with Henderson at a lesser price and in the process he has
compromised his position of fiduciary responsibility with unit holders and the
sponsor. Therefore, there can be no doubt that the acts of Shri Samir C. Arora
were directly in conflict with his interest as a Fund Manager. �In consonance with the well recognized ethical principles, Shri Samir C Arora
should have resigned as Fund Manager of ACMF before proceeding to bid for
buying the stake in ACAML to avoid any conflict of interest. ACAML, too,
should have sought his resignation before submission of his bid along with �7.45
������.. �7.46�� The parallel sought to be drawn between Shri
Arora�s bid (along with 14.
Similarly
the impugned order itself takes note of the dilemma whether to fasten the liability
for creating a situation of conflict of interest on the mutual fund, the AMC,
the Trustees or on a mere employee. This has been dealt with in the impugned
order in para 7.60 and para 12.3. These paras are reproduced below: �7.60�� It is true
that the code of conduct as specified in the MF regulations is applicable to
the mutual funds, the AMC and the Trustees. However, the various acts of omission and commission by Shri Arora
resulted in the violation of code of conduct by the said entities.� Hence Shri Arora cannot escape responsibility
stating that the code of conduct is not applicable to him.� The compliance of the Regulations by the
Mutual Fund inter alia depends on the honest discharge of duties by the persons
in key positions in the Fund.� Shri Samir
C. Arora, being in the key position as a fund manager is guilty of professional
misconduct.� (Emphasis supplied) ����������� ����� �12.3�� Normally, action
needs to be taken against the entity found guilty of violation of law.� However, a corporate body operates and acts
through its directors and other key persons in charge of its business
operations.� Corporate personality
carries with it the discipline that those who avail themselves of the inherent
privileges must abide by laws and regulations and adhere to the standards. A
strong culture, positive or negative, will directly impact the control
environment.� Failure to take
responsibility for the health of corporate culture can lead to apathy and a
diet deficient of reinforcing procedures. It allows a malignancy to take hold
and grow undetected.� It may be,
therefore, essential, in appropriate cases, to lift the corporate veil and take
action against the individuals, whose conduct is primarily responsible for the
misconduct or violation of law by corporate body besides action against the
corporate body.� Securities market is a
very sensitive market and is prone to risks.�
Shri Samir C. Arora, the Fund Manager of ACMF who was a key functionary,
is guilty of misconduct and violation of law as narrated herein before and primarily
responsible for the commissions and omissions of the Alliance Capital Mutual
Fund and its AMC. Therefore, action against him is required in order to protect
the interest of investors and ensure safety, integrity and the orderly
development of securities market, besides action against the Alliance Capital
Mutual Fund and its AMC which SEBI has already initiated under the applicable
rules and regulations.� 15.
It
is thus clear from the reading of the impugned order as well as the Mutual Fund
Regulations that there was no bar on the appellant Shri Samir C. Arora making a
bid for buying out ACMF once ACM decided to sell it off. In fact para 7.46
specifically recognizes that position.�
Similarly the impugned order recognizes that the responsibility for
various compliances with the Mutual Fund Regulations is on corporate entity and
not on the individual employees.� While
we are in agreement with the observations made in para 12.3 of the impugned
orders reproduced above about the need to lift the corporate veil and take
action against the individuals in specific circumstances.� We believe that such action should be taken
against the appellant for violation of any specific law or Regulation.� No law or Regulation has been brought to our
notice by SEBI to the effect that management buy out is not permissible. That
is certainly not the position emerging from the impugned order and its
underlying records placed before us.� The
question therefore is entirely moral and ethical.� 16.
It
is thus almost common ground that the appellant did not violate any law, rule
or regulation in making a bid for ACMF. The learned Senior Counsel for the
appellant Shri C.A. Sundaram, however, was at pains to point out repeatedly
during the hearing that his main concern during the appeal proceedings was to
put up a defence on moral and ethical aspects also because admittedly there had
been no breach of any law. The learned Senior Counsel, however, pointed out
that even if the appellant was acquitted of this charge in appeal on legal
grounds, he would still have to live the rest of his long life, with the
ethical and moral stigma if the position was not clarified.� We therefore now proceed to examine that
dimension of the issue not only because of the appellant�s purported
sensitivity but also because very often there is very thin dividing line
between what is legally wrong and what is morally or ethically wrong. 17.
The
main contention of the learned Senior Counsel for the appellant was that it was
a case of management buy out which is a common practice and a very desirable
practice whenever any transfer of ownership of any business is in the offing.
The learned Senior Counsel pointed out that the impugned order itself
recognizes in para 7.46 (reproduced above) that �management buy outs which
began in the USA during 1960s and gained currency elsewhere� refers to a
corporate finance activity whereby the existing �management� with outside
financial backing/leveraging buy the��
business, in certain circumstances like impending bankruptcy of the
company or its parent, death of the current owner (promoter), privatization,
etc�.� It was the contention of the
learned Senior Counsel for the appellant that far from being an immoral or
unethical step, the bid offer by the appellant along with �In the last few weeks, I have been
approached by a number of private equity funds and large investors suggesting
that I lead a management buy out of our �In pursuing this option, my first
priority was to avoid any actual or perceived conflicts of interest with my
current role and with �There are
a number of advantages for Alliance Capital in pursuing this option: �1)������ This buy out option would provide
continued employment and betterment opportunities to most employees of �2)������ The probability of the assets failing
ahead of the conclusion of the sale and thereby impairing value reduces
dramatically with this option.� As both
the equity and fixed income management teams and the marketing and servicing
teams remains the same, there is less likelihood of flight of assets.� In this connection, I am forwarding you
another email highlighting the potential risks to our funds with any random
change in ownership (the said article appeared in the Business Line dt. �3)������ I would like to reduce to a minimum any
adverse impact caused to our Global Emerging Markets team if this proposal goes
through. Therefore, to reduce the disruption, we will not insist that the two
Asian Emerging Markets analysts based in �4)������ Depending on your interest and strategy,
we can also work out the management of India Liberalization Fund so as to
preserve its high ratings. �5)������ Henderson Global Investors, being an
offshore investor, would be in a position to buy the �If this
deal if concluded, I will move back to �I have
attached along with this email scanned images of the original letters from
Henderson Global Investors. I will send you the originals by courier on Monday
9th and they should reach you by the middle of the week. �Please
advise me on how to proceed next. �Regards
and best wishes.� 18.
The
learned Senior Counsel for the Respondent Shri Rafiqua Dada argued in this
context that even though Shri Samir C. Arora may have informed ACM about his
bid which in any case he was bound to, it was not a matter merely between the
employer and employee because investors� interests were also involved.� In response, the learned Senior Counsel for
the appellant invited our attention to the news that appeared in Economic Times
dated �SECOND MANAGEMENT-LED MOVE AFTER GILBEY�S �Alliance Cap MF chief Samir Arora
bids for co �Shalini
Singh, Chennai 16, December �SAMIR
Arora, CIO, Asian Emerging Markets, Alliance Capital Mutual Fund, is learnt to
have submitted a management-led bid for the company. �Management
buyouts are rare in �It is
learnt that the bid is backed by Henderson Global Investors, a UK-based firm
that manages $ 100-billion worth of assets globally and is owned by AMP, an
Australian financial services group. �Alliance
Capital currently employs close to 50 people in �The bid
was submitted on December 6 and scotches market rumours that Mr. Arora is
resigning from the company over the next few days. If the bid is accepted, Mr.
Arora will be forced to relocate from �According
to analysts, Mr. Arora�s departure will result in massive selling in his
counters, which will thereby erode the value of the company. �The move
is expected to give comfort to existing investors and stability to the
employees of the Fund. Mr. Arora, the company�s first employee, joins Stanchart
Mutual Fund, Prudential ICICI MF, Franklin Templeton, Sun F&C Mutual Fund,
HDFC Mutual Fund, Birla Mutual Fund and IDBI Principal Mutual Fund in the race
to acquire 100 per cent equity in Alliance MF. �Ranked
the third best Asian Fund Manager in 1998 by the Asian Money� Magazine, Mr. Arora controls $ 625 million
worth of funds around the globe, with $325 million invested in � 19.
It
was thus the case of the learned Senior Counsel for the appellant Shri Sundaram
that Shri Samir C. Arora vehemently but openly opposed the sale of ACMF; that
when he did not succeed in persuading ACM, he attempted a management buyout
with the help of Henderson Global Investors; that he openly and transparently
informed ACM of all the pros and cons of his bid; that he submitted his bid
ahead of all others and pointed out to ACM that he was doing so, so that he
could not be suspected later of basing his bid on any insider information; that
the fact of he being one of the bidders was in the public domain through the
media; that when the due diligence process and the presentation to various
bidders started, he kept himself aloof from it because he was one of the
bidders; that he met the redemption pressures caused due to the impending
change in ownership and control of ACMF to the best of his ability by
liquidating some assets to the full satisfaction of ACM as well as the unit
holders; that even when most bidders backed out he and Henderson Global did not
change the bid amount; and that he even called on SEBI officials to inform them
about his having bid for ACMF and about other developments. On this last issue
the learned Senior Counsel for the Respondents Shri Rafiqua Dada stated that
even though the appellant did call on SEBI officials during January 2003 he had
not informed them about his being one of the bidders. In support of this
contention the learned Senior Counsel Shri Rafiqua Dada filed affidavits of
Shri P.K. Nagpal, Chief General Manager, SEBI and Shri P.R. Ramesh, Executive
Assistant to Chairman, SEBI. We have carefully gone through these affidavits.
It is seen that while Shri P.R. Ramesh, Executive Assistant to Chairman, SEBI
has clearly stated in his affidavit that �Samir Arora has not at all discussed
about his personal proposal to acquire Alliance Capital Asset Management
Company Limited along with Henderson Global ���. Shri P.K. Nagpal has not made
any such specific denial and has only said inter
alia that �I have therefore had only general discussions with Samir Arora
on the regulatory requirements which I have clarified in my official duty as
SEBI Divisional Chief�. Shri P.K. Nagpal does state in his affidavit, however,
that Shri Samir C. Arora discussed with him �about the requirements of registration
of a new mutual fund and change in controlling interests of a mutual
fund�.� Learned Senior Counsel for the
respondents argued that this is not the same thing as seeking a clearance for
making a personal bid to buyout ACMF. However, the appellant insists that he
discussed his own bid in its entirety with SEBI and that in any case SEBI must
have known about it from the wide coverage in the media and could have advised
him against this.� The appellant thus
argued that management buyouts are desirable in business and in any case not
forbidden by any law, rule or regulation and that he made his bid in full
transparency and in full view of the management, the media, the unit holders
and the regulator. In fact the learned Senior Counsel for the appellant Shri
Sundaram argued that the regulator which started investigations in to this
buyout six months later in June, 2002 should have been aware of these
developments on a contemporaneous basis in respect of, admittedly, one of the
most important mutual funds in the country. On this aspect we are inclined to
agree fully with the learned Senior Counsel for the appellant that if SEBI did
find something wrong in this process, SEBI could have acted six month earlier
and asked the appellant to withdraw his bid or to direct ACM to ignore the
appellant�s bid rather than merely observing in the impugned order by way of obiter dictum that he should have
resigned as fund manager before proceeding to make a bid for buying the stake
in ACAML. 20.
It
is thus clear that there was nothing wrong legally, morally or ethically in the
appellant submitting his bid to ACM for consideration on a competitive
basis.� SEBI�s case thereafter is that
regardless of whether his bid was right or wrong it did create a situation of
conflict of interest, because while being the fund manager, it was his
paramount responsibility to enhance the AUM of the mutual fund for the benefit
of the unit holders; as a bidder his interest was to acquire the fund at the
cheapest possible price.� The learned
Senior Counsel for the appellant Shri Sundaram argued that this proposition was
entirely fallacious because no sane person acting even in his extreme self
interest would ever destroy the asset he wants to buy.� According to the appellant the main
responsibility of the appellant as fund manager at the relevant time was to
safeguard the NAV which he did through judicious investments / disinvestments
even in the face of a tremendous redemption pressure. It is, however, SEBI�s
case, as per the impugned order, that there was also a fall in NAV. The
relevant paras dealing with the fall in the NAV are reproduced below: �7.31�� I find no merit
in the argument that there is no material correlation between the fall in the
AUM of ACAML and fall in the NAV of the schemes of ACMF. It is a well known
fact that when there is significant and unprecedented redemption pressure and
consequent distress / urgent sale of assets to meet the redemption pressure,
the value realized from such sale of assets would be sub-optimal. It is common
that sale of assets under distress condition fetches much lesser value than
what it would have fetched if sold under normal circumstances / at appropriate
time.� ����� �7.36�� Shri Samir C
Arora has argued that SEBI itself has envisaged a framework for exit by investors
when there is a change in management. The regulation cited by him is meant
to provide an exit option for the unit-holders in the event of any change in
the controlling interest of the asset management company. To cite the said
regulation in defense of his deliberate�
actions / inactions to cause redemption is at best sophistry.� 21.
�As against this the learned Senior Counsel for
the appellant argued that the market itself was in decline due to factors
unrelated to the present episode and that despite this declining market trend
the appellant had so managed the affairs that the funds managed by him suffered
the least decline in the NAV.� The
learned Senior Counsel furnished to us a list of all the 103 mutual fund
schemes operational in the market at the relevant time showing the NAV of each
such fund on 02/12/2002 and 31/01/2003 as well as the bench mark indices like
BSE 200, NSE, CRISIL balanced Index, and BSE TECK index.� These figures show that in the category of
equity funds, the NAV of Alliance Basic Industries showed a growth of 7.5%,
Alliance Frontline � 3.17%, Alliance Capital Tax Relief� 96 � 2.56% while Alliance Equity showed a
decline of 0.20% against BSE 200 index of -1.03%.� Similarly in the case of Balanced Funds
Alliance 1995 showed a negative return of -0.46% against Crisil Balanced Index
of � 1.08%. In respect of the Technology Sector Funds Alliance New Millennium
Funds showed a return of -6.41% against BSE DECK index of -10.43%. In the
consumer / pharma sector funds, however, the performance of Alliance Buy India
showed a return of -9.89% against the BSE 200 index of -1.203%. Thus while the
performance of these funds may or may not point towards a clear conclusion it
is not possible for us to subscribe to SEBI�s view that NAV of these funds was
deliberately brought down because of conflict of interest situation by Shri
Arora to enable him to buy ACMF cheap. This is particularly so when we find
that six of the seven 22.
That
brings us to the question of evidence. The question repeatedly asked during the
appeal proceedings by the learned Senior Counsel for the appellant was to what
was it that he actually did to achieve his allegedly nefarious ends. In answer
to this question the only allegation in the impugned order which accuses the
appellant is that he did not clear the confusion about his continuance with the
fund after its sale to a third party and that this confusion brought down the
AUM and the NAV.� We have seen from the
figures above that the NAV cannot be said to have came down steeply in
comparison with the bench mark indices.�
The AUM did indeed came down by about Rs. 200 crore in respect of equity
funds which were managed by him and about Rs. 800 crore in respect of the debt
funds with which he was not even remotely connected.� The appellant had argued during the proceedings
before SEBI that any change in management of a mutual fund was generally
accompanied by a fall in AUM and he had cited a specific example of the Zurich
Mutual Fund and the Sun F&C Mutual Fund. The impugned order rejected the
example of Sun F&C Mutual Fund on the ground that it was not comparable
with ACMF due to its much smaller AUM.�
The example of Zurich Mutual Fund has been rejected by citing its AUM on
March 31, 2003, that is the date when the agreement for its takeover by HDFC
Mutual Fund was entered into and May 31, 2003 because the merger actually took
place in June, 2003. During the proceedings before us the learned Senior
Counsel for the appellant Shri Sundaram vehemently challenged this finding as
being based on selective data thus accusing SEBI of suppresio veri and
suggestio false.� The learned Senior
Counsel submitted that the uncertainty in respect of Zurich MF was during the
period October 2002 to 23.
That
takes us back to the question of uncertainty. Was this uncertainty caused due
to ACM�s decision to sell ACMF or was it caused because of Shri Samir C.
Arora�s opposition to such sale or was it because of his becoming a bidder
himself or worst of all, was it because of the dubious role played by him from
his vantage position of a fund manager in thwarting this sale.� It is common sense in financial markets that
uncertainty leads to investor nervousness and that the basic decision of ACM to
sell ACMF would have caused this uncertainty. We have seen above that there was
nothing legally, morally or ethically wrong in Shri Samir C. Arora making a bid
for the purchase of ACAML the asset management company of ACMF.� We have also seen that there was no
precipitate fall in the NAV of the funds managed by ACMF which would show
that� this� fund�
continued� to� be�
managed� professionally� and�
rather� competently even during this
period of uncertainty. However, the fact remains that the AUM did fall
substantially during this period. According to the learned Senior Counsel for
the appellant, even assuming everything against the appellant the only thing
wrong that the appellant did to bring down the AUM according to the impugned
order was that he did not deny the rumours about his impending exit from ACMF
in the event of sale to anyone other than himself and Henderson Global. In this
context the learned Senior Counsel for the appellant was at pains to point out
that even if he had wanted to, the appellant was not in a position to deny
these rumours because that was the factual position.� According to the learned Senior Counsel the
appellant was managing ACMF only in his capacity as an employee of ACM
Singapore and that in the event of the sale of ACMF to a third party he would
naturally have ceased to have anything to do with ACMF because in that event he
would have continued to serve as Head, Asian Emerging Market, Singapore.
Similarly if his bid had been successful, his employment with ACM would have
automatically ended and he would naturally have handled the operations of the
ACMF under a new management. There was nothing therefore that the appellant
could have said or done to neutralize the market rumours because what the
market was talking about was facts and not rumours.� Therefore, according to the learned Senior
Counsel for the appellant, even if SEBI�s entire case against the appellant is
accepted, it can not amount to any professional mis-conduct, firstly because he
merely made an honest and transparent bid for a management buyout which was
getting more and more to be considered as a healthy rather than any pernicious
practice and secondly because fall in AUM cannot be attributed to his actions
or inactions. The fall could be either due to general market sentiment or due
to impending change in the management and certainly not due to any perceptions
about his continuance or otherwise with the fund after the sale. Thirdly, even
assuming as SEBI does, that the fund was entirely synonymous with Shri Samir C.
Arora in popular perception, there was nothing he could do to dispel that
perception because anything he could have stated in the circumstances would
have been contrary to facts and would have made things worse for the Indian
Fund since he was known as the Guru of Mutual Fund according to SEBI and any
false statement would have made things worse.�
SEBI�s position in this regard is summarized in para 7.15 of the
impugned order which is reproduced below: �7.15�� It is clear that the fall in AUM of ACAML was
not merely due to rumours and
speculation regarding the proposed sale, but due to the uncertainty
regarding the continuation of Shri Arora as fund manager.� While Shri Arora let the rumours persist
without clarifying the matter to the public his team members added to the
confusion and uncertainty by proposing to quit the fund if it was not sold to
Shri Arora and Henderson. The persistent rumours about Shri Arora leaving
the Fund and redemption pressures should have normally edged anyone in Shri
Arora�s place to clarify the matter to the public, so as to stem the redemption
pressure. The fact that he did not choose to do so, corroborates the doubt that
he did deliberately induce the redemption pressure and thus fall in AUM of the
fund to gain a bargaining power as bidder.� (Emphasis supplied) 24.
In
any case, as we have observed above even if it is accepted that Shri Samir C.
Arora did indeed drive down AUM someway or the other although there is not even
an iota of evidence to substantiate this charge, the only aggrieved party was
ACM which would have got lesser value for the sale of its India business and
ACM was not before SEBI as a complainant. We agree that in certain situations a
substantial redemption pressure in a short period of time can adversely affect
the NAV of a mutual fund as well thereby adversely affecting the interest of
the unit holders thus bringing the regulator SEBI into the picture. However, we
have seen above, there was no precipitate fall in the NAV despite redemption
pressure possibly because this pressure was handled in an intelligent and
competent manner by liquidating the assets which would not have a significant
bearing on the NAV.� In the circumstances
we are not inclined to accept SEBI�s case that Shri Samir C. Arora�s role in
this entire transaction smacked of any professional mis-conduct.�� Both the issues framed on page 10 of this
order are answered in favour of the appellant. 25.
The
second limb of the charge of professional mis-conduct is summarized in para
7.51 of the impugned order which is reproduced below: �7.51�� I find that in
terms of regulations 2(1)(c) of SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 ACMF and ACM are persons acting in concert.
Further, I also find that Shri Arora manages the funds belonging to the ACMF
and ACM. Therefore, their shareholding in various companies are to be
aggregated inter alia for the purposes of disclosure requirements under the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and
SEBI (Prohibition of Insider Trade) Regulations, 1992. Hence, the contention of
Shri Arora that CMF, Alliance Capital and its FIIs and sub-accounts are not
persons acting in concert is not tenable.��
26.
In
short SEBI�s case is that the equity investments of ACMF as well as of ACM
which was also operating in India through FII route were required to be clubbed
for the purpose of making disclosures under the SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 (�Takeover Regulations� hereinafter)
and SEBI (Prohibition of Insider Trading) Regulation, 1992.� While details of the companies in respect of
which such disclosures are not made have not been provided in the impugned
order, it would be reasonable inference from the reading of the charge that
while the disclosure requirements were met by ACMF and ACM separately, the two
were required, according to SEBI, to aggregate their equity investments in
different companies for the purpose of disclosure requirements. Since Shri
Samir C. Arora was incharge of such equity investments in respect of both ACMF
as well ACM he has been held guilty of professional mis-conduct.� Shri Samir C. Arora�s defense in this regard
is two fold. Firstly, he argues that he was only a fund manager and that the
responsibility for meeting the disclosure requirements is that of the Mutual
Fund, the AMC, the Trustees and the Compliance Officer and not that of the fund
manager.� The impugned order acknowledges
this position in para 7.54 which reads as follows: �7.54�� I agree that under any provisions of
securities law, compliance requirements was not the fund manager�s responsibility. However, I note that
Shri Samir C. Arora being key personnel of a mutual fund should have conducted
himself professionally and ensure compliance with the Mutual Fund Regulations
in letter and spirit.� Hence, the
contention of Shri Arora that there is no basis for levying such a charge
against him is not tenable.� (Emphasis
supplied) 27.
Secondly,
Shri Samir C. Arora has contended that since the mater was not free from doubt
a reference had been made to SEBI by the Compliance Officer which had in fact
clarified that no such clubbing was required for the purpose of disclosures
even if the FII and the mutual fund were in the same parent group.� The learned Senior Counsel for the appellant
Shri Sundaram invited our attention in this regard to SEBI�s documents at
Exhibit-S, which is reproduced below: �SECURITIES AND EXCHANGE BOARD OF INDIA MUTUAL FUNDS DEPARTMENT �Re:���� Clarification under SEBI Takeover Code �
Reference from Alliance Capital Asset Management (India) Ltd. �Placed
below is a reference on the captioned subject, received from Alliance Capital
Asset Management (India) Ltd. The Asset Management Company of Alliance Capital
Mutual Fund. �Alliance
Capital management LP, which is a part of the parent organization of Alliance
Capital Mutual Fund also operates in the Indian capital markets as an FII
registered with SEBI through a number of sub-accounts Regulation. 7 of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations requires that
every acquisition of over 5% of shares/voting rights be reported to the target
company within 4 working days. The word �acquirer� is defined in the
regulations to include persons acting in concert. The following persons are inter
alia, defined as persons acting in concert. �I)������� Mutual Fund with sponsor or trustee or
asset management company. �II)������ Foreign Institutional Investors with
sub-account(s) �For the
purpose of computing the sub-limit of 5%, ACMF aggregates the holdings across
all the schemes of mutual funds along with holdings of trustee company and AMC.
However, it is not aware of equity holding of the FII/its sub accounts.
Regulation 24(2) prohibits sharing of inside information across the various
activities.� Consequently, the holdings
of FIIs/its sub accounts are not aggregated while computing the 5% limit for
complying with the takeover code. �AMC has
requested us to clarify that the same is in compliance with the takeover code. �Our Opinion �The query
raised by the AMC has arisen since it is required to comply with provisions of
Regulation 24(2) and on account of provisions of this regulation sharing of
information between the mutual fund and FII sub-accounts is prohibited.
However, it wants to be sure that the provisions of the takeover code do not
get attracted if the aggregate holding of Mutual Fund and FIIs exceeds the
trigger limits. �We feel
that as per the definition of persons acting in concert, there is no provision
of clubbing across different categories i.e. FII along with mutual fund
schemes. Therefore in our opinion there is no violation of the takeover code in
letter and spirit. ����. May seek the concurrence of the ��. Department in the
matter. �Submitted
please. �Sd/- �Lilit Vermani �May 14, 2001 �Sd/- �GM(Sh.P.K. Nagpal) �DGM (����) �We agree
with the view given on the pre-page by MFD.�
As persons mentioned in Reg.2(1)(c)(2)(i) �(x) of Takeover Regulations
cannot be �deemed to be acting in concert� across categories, hence FIIs with
sub accounts cannot be deemed to be acting in concert with Mutual Fund along
with AMC�s� person ------ even if FII and
Mutual Fund are under the same parent group. �Submitted �-The
aforesaid clarification is in order in terms of Reg. 2(1)(e)(2) of the Takeover
Regulations, 1997, read with paras 2.22 and 2.23 of Bhagwati Committee Report
(copy placed below) �sd/- �25./10/01 �Member (JRV) � sd/- �GM � PKN � MF sd/- 25/5/01 �AGM � RR � sd/- 25/5� 28.
In
the light of the above document and in the light of what has been observed in
the impugned order which is in para 7.54 we have absolutely no hesitation in exonerating
Shri Samir C. Arora on this aspect of the charge. It is also mentioned in para
7.61 of the impugned order, though in passing, that there was a further
conflict of interest in Shri Samir C. Arora managing the equity investment of
both ACM and ACMF. Para 7.61 is reproduced below: �7.61�� Clause
1 of Code of Conduct in terms of Fifth Schedule to the SEBI (Mutual Funds)
Regulations, 1996 mandates that Mutual fund schemes should not be organized,
operated, managed or the portfolio of securities selected, in the interest of
sponsors, directors of asset management companies, members of Board of trustees
or directors of trustee company, associated persons as in the interest of
special class of unit-holders rather than in the interest of all classes of
unit-holders of the scheme. Shri Samir C Arora was managing the equity
portfolio of ACMF and at the same time he was also managing the Indian
allocation of FII/sub-accounts belonging to ACM.� While
doing so, he managed the portfolio of securities in the interest of sponsors
and to the detriment of the unit-holders of ACMF, thereby he aided and abetted
the violation of the above clause by the trustees and Asset Management Company
of ACMF.� (Emphasis supplied) 29.
In
this regard the learned Senior Counsel for the appellant Shri C.A. Sundaram,
pointed out that there was no Regulation barring the fund manager from
performing this dual role and the learned Senior Counsel for respondent Shri
Rafique Dada, fairly conceded this position. The learned Senior Counsel for the
appellant Shri Sundaram also gave two other instances of Dr. Mark Mobius and
Mr. Sanjiv Duggal, who were managing the domestic mutual fund as well as the
FII investments of the same parent company in full knowledge of SEBI.� Dr. Mark Mobius is President of Templeton
Emerging Markets based in Singapore and manages the Templeton Indian Growth
Fund in addition to being a Director of the Templeton Asset Management (India)
Pvt. Ltd.� Mr. Sanjiv Duggal is Chief
Investment Officer of HSBC Asset Management (India) Limited and is also special
advisor to HSBC Asset Management (Europe) Limited, which manages the FII fund,
HSBC India Growth Fund. In any case, this allegation forms part of issue No.2
framed in the impugned order which is going to be discussed in detail hereinafter.
30.
In
the meanwhile there are two other issues emerging from the impugned order. One
of these is a dispute about whether Shri Samir C. Arora was an employee of ACMF
or of ACM, Singapore or of ACM, Delaware.�
This contention arose out of the defense put up by the appellant Shri
Samir C. Arora.� We do not find it
worthwhile to elaborate on this in detail because it is common ground that Shri
Samir C. Arora was in fact managing the entire equity portfolio of the India
fund ACMF. It therefore does not matter in what capacity he was doing
that.� Similarly the impugned order makes
out that the appellant�s financial arrangement with Henderson Global Investors
was very much loaded in his favour and that the appellant therefore had an
immense personal interest in the Indian deal. It is nowhere the appellant�s
case that he was motivated entirely by altruistic considerations.� The deal with Henderson talks of upfront
purchase of 6.7% of equity by the appellant with his own money. Thereafter he
was to obtain 10% as additional principal equity and 3.33% by way of vesting
principal equity. This 10% and 3.33% was to accrue to him as a reward for
continuing with the new entity for a certain number of years. In the light of
our findings on different aspects of the issue as above we do not consider
these terms of the MOU between the appellant and Henderson Global Investors as
germane to the issues before us. The MOU was in the nature of a contract
entered into between two willing and able parties of their own volition and
need not be of any interest to the public authorities. If the terms of the MOU
had been any different as regards remuneration or rewards, it would have had no
bearing on the facts of the case. 31.
It
is thus clear that the appellant opposed ACM�s decision to sell its India
business and that when he failed in his efforts to persuade ACM, he made a bid
along with Henderson Global for a management buy out.� SEBI�s case is that he ought not have made
such a bid.� No Law or Regulation has
been brought before us to show that the appellant could not have made such a
bid once a decision had been taken by the overseas management to exit.� It was an open and transparent bid and the
bid amount was far below the preemptive bid of HDFC.� There is also some material to show that the
appellant visited SEBI and had a discussion on this aspect.� Even the media had announced that the
appellant had made a bid.� There is no
evidence to show that he was in any way responsible for the fall in AUM.� In fact there is evidence to show that every
change in ownership and/or management of a mutual fund is accompanied by a fall
in AUM and sometimes even NAV.� It is
illogical to blame the appellant for not having issued a statement about his
continuance in or exit from ACMF after the sale, which according to SEBI was a
contributory factor for the fall in AUM.�
No Regulation has also been brought before us barring a fund manager of
an Indian Mutual Fund from also acting as the fund manger of FII sub-accounts.� In fact some instances of individuals acting
in such dual capacity with the full knowledge of SEBI were brought to our
notice and this position was not contested by SEBI.� For all these reasons therefore, we do not
consider that the charge of professional misconduct as framed in issue no. 1 in
the impugned order is made out against the appellant. SECOND ISSUE 32.
The
second issue framed in the impugned order against the appellant is �whether
Shri Samir C. Arora is guilty of violating the provisions of Regulation 4(a),
4(b), 4(c), 4(d) and 5 of SEBI (Prohibition of Fraudulent and Unfair Trade
Practices regarding Securities Market) Regulations, 1995.� The gravamen of this charge against Shri
Arora is that, being entrusted with equity funds of ACMF as well as of ACM
through the FII route, he compromised the interests of Indian unit holders for
benefiting the parent company ACM. This he did by: (a)������ first of depressing the
value of stocks of some specified companies by massive selling of ACMF holdings
thereon; (b)������ and subsequently
purchasing the same at depressed prices on behalf of ACM thereby benefiting the
ACM at the cost of ACMF, thus harming the interest of Indian unit holders. 33.
�The impugned order details such transactions
in the equities of four Indian companies, namely, Balaji Telefilms Limited
(BTL),� Mastek United Phosphorous Ltd.,
and Hinduja TMT (HTMT). In respect of BTL it is alleged that on September 6,
2001, ACMF and ILF (FII account of ACM) had together sold 4,15,000/- shares
while� they had sold 2,19,700 shares on
September 11, 2001. On September 19, 2001 the India fund, ACMF purchased
3,91,960 shares at a price of 186.42 per share while the sponsored funds
purchased 47,620 and 1,32,198 shares at a lower price of Rs. 174.50 and 174.68
on September 26/27, 2001. In defense the appellant has quoted the same figures
to show that despite massive sales on�
September 6 and on September 11, 2001 the price actually rose from Rs.
216/- to 226/- and that the price of BTL started falling thereafter not because
of his sale or purchase but because of the September 11, 2001 attacks on the
World Trade Centre in line with the prices of other Indian media stocks.� Regarding the difference of Rs. 12/- per
share in the purchases made for the India fund and on behalf of the FII
sub-account he has stated that there was a difference of one week between the
two purchases and that no one can possibly predict in the stock market what the
price would be one week later.� 34.
In
relation to Hinduja TMT SEBI has taken the figures of January, 2003 as against
the figures of September, 2001 in the case of BTL.� The allegation in respect of this scrip is
the same, namely, that the sales were effected between January 16 to January
31, 2003 to depress the price so that the scrip could be re-purchased on
February 3, at the depressed price. In reply the appellant has contended with
facts and figures that the total sale during January 16 to January 31, 2003 of
52,000 shares over a period of 12 days during which 3.7 crore shares of the
same scrip had been traded could, in no circumstances be considered to be
contributing towards depressing the price. According to the appellant the price
of the scrip came down not because of his sale of 52,000 shares but because of
SEBI�s action against Hinduja TMT on 23rd/24th January,
2003 banning them from dealing in securities for two years.� The appellant has contended that these sales
were made to meet the redemption pressure (reference charge No.1 above) and
that the purchase of 3,28,000 shares on February 3, 2003 was at a higher price
and not at the depressed price as contended by SEBI. The purchase was made
because the sale of 1CMF by then had been called of and the redemption pressure
was over. 35.
In
respect of Mastek the allegation is that 1,75,000 shares were sold on July 25,
2002 at a price of Rs. 372.32 with a view to depressing its price and 5,20,000
shares were purchased between July 29, 2002 to July 31, 2002 at the depressed
price ranging between Rs. 323 to 357 per share. The second aspect of the charge
in respect of Mastek is that on August 23, 2002, 50,000 shares were sold on net
basis on behalf of ACMF while 2.5 lakh shares were purchased by him on behalf
of offshore funds on the same day.� The
appellant has explained with figures that the price of Mastek on July 25, in
fact increased from the opening of 368.95 to 372.32 despite his having sold
1,75,000 on that day because his sale was a miniscule 1.91% of the total
turnover of Mastek on that day.�
Regarding repurchase between July, 29, 2002 to July 31, 2002 he has
explained that trading is the main source of a mutual funds income and that
there was nothing wrong in purchasing when the price fell as also selling when
the price increased.� He has furnished
actual figures to show that out of the alleged 5,20,000 shares purchased at the
supposedly depressed price ranging between Rs. 323/- to Rs. 357/-, 1,00,000
were purchased on 29/7/2002 @ Rs. 355/-, another 2,00,000 on 30/07/2002 @ Rs.
357/- and the remaining 2,20,000 shares were purchased on 31/07/2002 @ Rs.
323/-. Regarding the transactions on August 23, 2002, he has explained that
there was no contradiction in the view taken in respect of the two funds,
namely, the India funds and the Offshore funds. According to him both the funds
had bought Mastek on August 23, 2002.�
However, since the stock went up more than 10% that day, a view was
taken as per the company policy to realize profits for both the funds. However,
similar quantities could not be sold for both the funds since the sales could
only be made from the shares available with the respective funds before that
day�s purchases because mutual funds are allowed to trade only on delivery
basis.� Therefore, the appellant has
argued that proportionate selling of 2,50,000 shares would have implied selling
45,000 shares for FII funds and 2,05,000 for ACMF funds which were rounded off
to 50,000 for FII funds and 2,00,000 for domestic funds. 36.
In
respect of United Phosphorous Limited the allegation is that on October 10,
2002 Shri Arora sold 2.84 lakh shares at Rs. 174/- on behalf of ACMF and bought
about 1 lakh shares at Rs. 162.22 on behalf of ILF.� Shri Arora has responded saying that there
was nothing wrong in ACMF�s selling on October 10, 2002 because the price was
ruling at 13% higher than the previous day. Similarly according to him there was
nothing wrong in ILF buying when the price came down to Rs. 162/- during intra
day trading. 37.
The
appellant�s overall defense in respect of these transactions is that he traded
in numerous securities and managed equity investments in hundreds of companies and
that picking a few transactions selectively over a period of two years to try
and depict that these trades were meant to help offshore funds at the expense
of the domestic funds is not in good taste.�
According to him, he has furnished figures to show that the quantities
traded by him were insignificant and that in actual fact they did not have any
significant impact on the prices of these scrips.� All the trades of the mutual funds are
required to be delivery based and they were undertaken in the interest of unit
holders to take advantage of the prices prevailing on particular dates.� At this stage, the learned Senior Counsel for
the respondent intervened to say that these transactions were mentioned only by
way of illustration. Shri C.A.Sundaram, however, strongly objected to that
statement saying that the impugned order nowhere takes the position that these
are only illustrative transactions. We have checked the impugned order and we
are in agreement with the appellant.� The
position therefore is that these are the only transactions that the respondent
has been able to locate and identify in support of the charge.� However, in order to arrive at a definitive
finding on this issue it will be useful at this stage to look at Regulations
4(a), 4(b), 4(c) and� 4(d) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities
Market) Regulations, 1995. The full test of the Regulations is reproduced
below: �4���� No person shall --� �(a) � effect, take part
in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially
raising or depressing the prices of securities and thereby inducing the sale or
purchase of securities by any person; �(b)�� indulge in any
act, which is calculated to create a
false or misleading appearance of trading in the securities market; �(c)�� indulge in any
act which results in reflection of prices of securities based on transactions that are not genuine trade
transactions; �(d)�� enter into a
purchase of any securities, not intended
to effect transfer of beneficial ownership but intended to operate only as a
device to inflate, depress or cause fluctuations in the market price of
securities.� (Emphasis supplied) 38.
For
interpretation of this Regulation the learned Senior Counsel for the appellant
Shri C.A. Sundaram invited our attention to the orders passed by this Tribunal
in (1) Videocon International Ltd. Vs. SEBI [(2002) 38 SCL 422
(SAT-MUM)]; (2) Nirmal Bang Securities (P) Ltd Vs. Chairman, SEBI
[(2004) 49 SCL 321 (SAT-MUM)]; and (3) Sterlite Industries (India) Ltd. Vs.
SEBI [(2001) 34 SCL 485 (SAT-MUM)].�
However, learned Senior Counsel for the respondent Shri Rafique Dada
brought to our attention that appeals had been filed against the orders of this
Tribunal in these cases and that such appeals were pending even though there
were no interim orders.� We are therefore
not referring to any of these orders for interpreting this regulation and we
are confining ourselves to a bare reading of the text. It will be seen from 4(a) that before
accusing any person under this regulation it is necessary to establish that he
has acted with the intention of
raising or depressing the prices of securities artificially and that because of this artificiality about
the sentiment of the market, some investors should have been induced towards
the sale or purchase of such securities. 4(b) reinforces the artificiality
aspect and the intention aspect by forbidding any act which is calculated to create a false or misleading appearance of trading in the securities market.
In the same vein 4(c) forbids any act which results in reflection of prices of
securities based on transactions that
are not genuine trade transactions.�
4(d) practically defines these non genuine trade transactions as ones
which do not result in transfer of beneficial ownership. Looked at in this
context, even if one leaves out the intention part, it is seen that there is no
element of artificiality or false or misleading appearance of trading or
non-genuine transactions. Each of the transactions recounted in the impugned
order was a delivery based transaction which it is required to be in the case
of a mutual fund as per SEBI�s own directives.�
Each of these transactions therefore resulted in transfer of beneficial
ownership.� Similarly each of the
transactions was on screen and in accordance with the price discovery mechanism
of the Exchange.� None of the ingredients
of these regulations is therefore attracted in the present case.� We are also in complete agreement with the
learned Senior Counsel for the appellant that it is not fair to pick up a dozen
odd trades spread over a period of two years and analyse them in hind sight not
only to depict them as good trades or bad trades but to arrive at a finding of
unfair trade practices on that basis.� In
the securities market prices change from minute to minute the appellant has
shown with facts and figures that none of these trades artificially depressed
or otherwise affected the securities market because the volumes sold or
purchased by him were insignificant. SEBI has rejected this contention in the
impugned order by computing the volumes as a percentage of volumes only in
respect of delivery based trades. May be SEBI is right about the basis of
comparison though opinions could differ. However, the proof of the pudding is
in the eating and the figures show that the prices did not change significantly
in response to the impugned trades. Of course, by definition, any large
purchase will push prices just as any large sale will bring the price down and
such trades by mutual funds have to be large in volumes.� Thus any transaction by Mutual Funds or
Institutions could be vulnerable to the charge of being manipulative. That is
the reason why so many ingredients have been built in to the FUTP regulations.� Similarly there is no evidence whatsoever
even to suggest that any investor was induced to buy or sell shares on the
basis of the impugned transactions. It used to be said in the Middle Ages That
the Holy Roman Empire was neither Holy nor Roman nor an Empire any longer. The
same can be said about the impugned transactions in the context of Regulation
4. There was nothing artificial or unfair or misleading about them. There is a
perfectly rational and plausible explanation underlying each of them. And that
is saying a lot for a market that is by definition speculative. We have
therefore no hesitation in holding this part of Issue No.2 as not established
against the appellant. 39.
We
now come to Regulation 5 of SEBI (Prohibition and Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 1995 which reads as
follows: �No person
shall make any statement, or disseminate any information which- (a)������ is misleading in a material particular;
and (b)������ is likely to induce the sale or purchase
of securities by any other person or is likely to have the effect of increasing
or depressing the market price of securities, if when he makes the statement or
disseminates the information � (i)������� he does not care whether the statement
or information is true or false; or (ii)������ he knows or ought reasonably to have
known that the statement or information is misleading in any material
particular; (2)������ Nothing in this sub-regulation shall
apply to any general comments made in good faith in regard to:- (a)������ the economic policy of the Government, (b)������ the economic situation in the country, (c)������ trends in the securities markets, or, (d)������ any other matter of a similar nature, whether
such comments be made in public or in private.� 40.
�The charge in this regard is that he made a
statement in an interview to Business Standard dated May 5,2003 praising the
stock of Digital Globalsoft (DGL) in view of its impending merger with HP ISO
and later on disposing of the entire holding of the funds managed by him during
the period May 8, 2003 to May 12, 2003.�
The allegation is that his statement to Business Standard on May 5, 2003
pushed up the price of DGL from Rs. 531/- to Rs. 597/- on May 7, 2003.
Thereafter he liquidated his entire holding to take advantage of this price
increase. It is stated that since the funds managed by him had a significant
stake of about 4.45% he deliberately increased its price and later on
liquidated his entire holding by taking profits.� It will be instructive to read the full text
of the statement dated May 5, 2003 which according to him was actually made on
April 30, and was only published on May 5. The full text of this statement
(Exhibit � T) was as follows: � �Our technology exposure remains bottom
up� �What�s
your allocation to tech stocks and how do you find the valuations? �Our
allocation to technology stocks is 10.5 per cent of the portfolio or about 16
per cent of the equity component. Currently we have 65 per cent of the fund in
equity and the balance in fixed income.� �In
Alliance 95, our main technology exposure remains bottom up selections and
include Mastek, E-Serve, Digital Globalsoft and Hinduja TMT. Only two of these
are directly affected by the slowdown affecting the overall software sector
(impacting companies like Infosys, Satyam and others).� E-Serve International is actually a BPO
company and its profits that came out showed a seven per cent
quarter-on-quarter growth in revenue and a 16 per cent growth in
bottomline.� For the year ended, its
profits increased by over 136 per cent.�
Also interestingly, E-Serve has a tax rate in 2002-03 of over 31 per
cent unlike all other IT companies. This rate is obviously very high as the
company has a fair proportion of exports. �Hinduja
TMT is also not software but a BPO company and is leveraged to the successful
implementation of the new cable bill.�
Mastek � after it was cut in half in a few trading days - trades at a
P/E of less than eight, and at these valuations even a growth rate of 10 per
cent next year would be adequate to support the current price. �Digital
Globalsoft � as per market rumours � may merge with HP ISO in India, which will
make it the sole subsidiary of a US $ 70 billion-plus IT company and therefore
be the obvious beneficiary of all the business that the parent can send to
India, plus its normal business. �You
portfolio appears to be overweight on banks? How much more steam do you expect
in the sector? �We are
overweight on banking stocks due to the low valuations, high ROEs (in high
teens), huge unrealized gains, decent provisioning coverage and recent
regulatory changes related to non performing assets. The dividend yield of the
sector is also very high. �Unlike
other funds, we also remain significantly weighted in HDFC Bank which is a
longer term (10-15 years) story in terms of high quality management and growth,
although, because of its existing high quality, it does not need or benefit
from the recent regulatory changes. There is ample scope for rerating in this
sector as valuations are really low, both compared to other sectors within
India and to the banking sector within Asia. �What
makes you bullish on the auto sector? �Among the
old economy, India�s auto sector is very attractive.� The manufacturing strength of these companies
is comparable to the best in the world.�
Low valuations and reasonable growth rates plus good corporate
governance is what attracts us to our current holdings.� 41.
Shri
Arora�s defense is that the statement is only factual and is certainly not
misleading in any material particulars.�
According to him the mere fact that the price of DGL happened to
increase after this statement is not sufficient to satisfy the ingredients of
this Regulation because only statements misleading in material particulars and
likely to induce sale or purchase of securities, etc., are forbidden by this
regulation.� The statement in question,
the full text of which is reproduced above was read repeatedly during the
hearing before us by the learned Senior Counsel for the appellant Shri Sundaram
as well as the learned Senior Counsel for the respondent Shri Rafique
Dada.� We have carefully applied our
minds to the statement.� We find from an
examination of this statement that it is not a suo-moto or an off-hand kind of
statement.� The statement is a specific
reply to a pointed question of the newspaper asking �what is your allocation to tech stocks
and how do you find the valuations?� In response the appellant replied that
their allocation to tech stocks is 10.5% of the portfolio or about 16% of the
equity component and that �In Alliance 95 fund our main technology exposure
remains bottom up selections and include Mastek, E-Serve, Digital Globalsoft
and Hinduja TMT. 42.
Thereafter
he goes on to discuss the prospects of each of these four companies. He praises
three out of these four and only in the case of Hinduja TMT he says that its
prospects are leveraged to the successful implementation of the new Cable
Bill.� About DGL he says that it will be
obviously the beneficiary of all the business that the parent can send to India
in the context of its impending merger with HP ISO as per market rumours.� We are finding it difficult to find anything
in this statement which is not within the parameters laid down in Regulation 5.
The impugned order does not even attempt to show any word or phrase which was wrong
or misleading in any material particular in this statement which is a sine qua non of Regulation 5. In para
8.41 of the impugned order it is stated that Shri Arora himself has not denied
that such a statement will induce transactions in securities.� It is true that any statement, particularly
from a person well respected in the securities market, will induce sale or
purchase of those particular securities, but the problem is that the Regulation
does not prohibit such statements.� It
prohibits only those statements which are misleading in any material
particulars and are likely to
induce transactions in securities. It is further provided that even misleading
statements are prohibited only if at the time of making such statements the
person concerned does not care about its truth or falsity or he knows or ought
reasonably to have known that the statement was misleading in any material
particular.� We find that the statement
makes it clear that the appellant is talking only about the securities in which
his funds have an interest and then goes on to discuss each of those
securities.� In fact the overall tenor of
the statement is more like a defense of his investments in these technology
stocks rather than on inducing investors to buy or sell any of these securities.
This defense of his portfolios he owed to his unit holders. There is not a
single word or phrase that can be considered even remotely misleading in any
material particular. In fact, he attributes very carefully the likely merger of
DGL and HP ISO to market rumours. It is conceded at so many places in the
impugned orders that merger had been under discussion since October, 2002 and
that this information was in the public domain. The only thing he added on his
own was that the natural corollary of merger would be the sending of its
business by the parent company to India because DGL, after merger would be its
sole subsidiary in India. If this comment is to be interpreted as being
misleading in any material particular the better course of action for the
respondent would be to ban the access of all fund managers and all other market
intermediaries to mass media. 43.
However,
to be fair to the respondent its real cause for concern seems to be that within
a few days after this statement he liquidated the entire holdings of the funds
managed by him in DGL without there being any noticeable change in the
objective market conditions. Shri Arora contends on the contrary, that there
indeed was a change in such conditions because his own equity analyst Mr.
Laxminarayan and an independent market rating agency CLSA- rated as the best in
India had downgraded the stock to �sell� level on 08/05/2003 and 09/05/2003
respectively and it was this that prompted him to liquidate his stocks.� This entire episode is the subject matter of
the next charge � that of insider trading � which is being examined in detail
hereinafter. For the present, the only charge in respect of this statement is
violation of Regulation 5 of the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Relating to Securities Market) Regulations. We have seen in
that context that we do not find the impugned statement that appeared in
Business Standard dated May 5, 2003 as being in violation of these regulations.
We thus find that the charge of violation of Regulations 4(a), (b), (c), (d)
and 5 fails in its entirety. 44.
We
now come to issue No:3 �Whether Shri Samir C. Arora is guilty of violating the
provisions of Regulation 3 of SEBI (Prohibition of Insider Trading)
Regulations, 1992? 45.
This
charge, as already mentioned, really emerges from and can in fact be considered
to be in continuation of the last transaction relating to Digital Globalsoft
(DGL) discussed above in paras 39 to 43. The factual position in this regard is
that the merger of Digital Globalsoft (DGL) and HP ISO (Hewlett Packard) at the
global level had been in the offing for quite some time since October, 2002 and
this fact was admittedly in the public domain. The due diligence process was on
and the negotiations seem to have reached a critical stage around May/June,
2003.� On May 2, 2003, Digital appointed
Bansi Mehta & Company (BMC) to recommend a merger ratio for the proposed
de-merger of HP ISO Division of Hewlett Packard (HP) and its merger with DGL.
BSM finalised the valuation ratio for the de-merger on May 7, 2003 and this
ratio was discussed in the Board meeting of DGL on May 12, 2003. The Board,
however, did not announce the merger and decided instead to seek fairness
opinion from a third party.� The ratio
was finally announced by DGL after another Board meeting on June 6/7, 2003. The
merger ratio was perceived to be adverse by the stock market and the price of
the DGL scrip fell from Rs. 500.50 to Rs. 371/- on June 9, 2003 because of the
announcement of the merger ratio.� The
charge against Shri Samir C. Arora is that he had inside information that the
Board meeting of DGL on May 12, 2003 would announce the merger ratio which was
going to have an adverse impact on the value of the scrip and that on the basis
of this insider information he sold the entire holdings of ACMF as well as ACM
between May 8, 2003 and May 12, 2003. According to the respondent SEBI, the
information that the Board of DGL would be discussing the merger ratio in its
meeting on May 12, 2003 was not in public domain because as per the statutory
information filed by the Company with the Stock Exchange, its Board was to be
discussing only the financial results.�
It is alleged that based on inside information, Shri Samir C. Arora
first moved up the price of the scrip from Rs. 537.55 on 2nd May,
2003 to Rs. 597.25 on May 7, 2003 with his statement made on April 30, 2003 and
published on May 5, 2003 and then sold all the holdings of the funds managed by
him over the next four trading days thereby averting a loss of about Rs. 23 crore
to the Funds managed by him. 46.
By
way of evidence SEBI, is relying on the statement published in Business
Standard which has been dealt in paras 39 to 43 above and the reasons recorded
by him contemporaneously on files for liquidating the entire holdings on
different dates.� These notings are
reproduced below:
47.
From
these notings SEBI has concluded that the liquidation of the entire holdings of
the funds managed by him in DGL could only have been because of the insider
information that he had.� This insider
information, according to SEBI was firstly that the Board of DGL was going to
discuss the de-merger ratio in its meeting on May 12, 2003 despite DGL not
having included this item in the formal agenda filed with the stock exchange as
well as the actual de-merger ratio suggested by BCM to the Board of Directors
of DGL.� This inference had been reached
by SEBI on the basis that there was no other reason for the appellant to
liquidate the entire stock in DGL because (1) the scrip was good and promising
in view of the impending merger as per his own statement published in Business
Standard; (2) the price of this scrip was rising continuously; and (3)
financial results actually announced on September 13, 2003 by the Board of DGL
were quite encouraging and in accordance with market expectations.� By way of further evidence, SEBI is relying
on the statement of Shri Som Mittal, Managing Director of Digital Globalsoft
Limited to the effect that he had known Shri Samir C. Arora for the past 5 to 6
years.� SEBI has also observed that Shri
Bhaskar Laxminarayan, one of the analysts working under Shri Samir C. Arora had
been having regular management meetings with DGL.� The impugned order also takes note of the
fact that the funds managed by Shri Samir C. Arora were the single largest
shareholder group of DGL after Compact Computer Holdings Limited �and therefore
ACM had a special interest in DGL and vice-versa.� SEBI has thus concluded that
Shri Samir C. Arora being an employee of ACML � an asset management company �
was an insider as per the definition of �insider� in the relevant Regulations
and that his liquidation of the entire funds from May 8 to May 13 was on the
basis of insider information about the unstated agenda of the Board meeting as
well as the actual de-merger ratio. 48.
As
against this the appellant�s contention is that his statement that appeared in
Business Standard on May 5, 2003 has been read by the respondents entirely out
of context.� It is his contention that in
this statement he was only defending the holdings of the funds managed by him
in IT Companies. The appellant argues that the profit and loss of a fund is
entirely dependent on its trading activities and that a fund owes it to its
unit holders to remain alert about the happenings in respect of different
scrips and to avoid undue risks.�
According to him it was the declared policy of the funds managed by him
to avoid uncertain situations which would run the risk of jeopardizing the
interests of the unit holders.� He has
argued that even assuming that he rated DGL as a good investment in his
interview with the Business Standard recorded on 30th April, 2003,
it did not mean that he would not sell any stocks of this scrip regardless of
any changes that might take place in relation to financial results or corporate
issues. The appellant has cited reports that appeared in the Economic Times
dated May 8, 2003 and Business Line dated May 11, 2003 in support of his
contention that the entire market was indeed expecting an imminent announcement
of a merger plan. These two reports according to the appellant should negate
any inferences about he alone being privy to the fact that the Board of
Directors of DGL could discuss and possibly announce the de-merge ratio after
its meeting on May 12, 2003.� The
appellant has contended that even though he did consider DGL to be a good
investment option on April 30, 2003, he sold the shares of DGL between May 8, 2003
and May 12, 2003 exactly for the reasons recorded by him on different dates and
for no other reasons whatsoever.�
According to him DGL scrip was down graded on May 8, 2003 by ACM�s
analyst Shri Bhaskar Laxminarayan as well as Mr. Anirudh Dange of CLSA Emerging
Markets, the most celebrated software analyst for the Indian market.� He has furnished documents (Annexures P and Q
� pages 181CV to 181 DG � memorandum of appeal) showing that both S/Shri
Anirudh Dange and Laxminarayan were highly qualified analysts and that CLSA was
rated in the 2003 Brokers� Poll published in Asiamoney � a publication of
Euromoney group� -� as the best equity research entity on almost
all parameters.� He has also filed CLSA�s
report dated 8th May, 2003 on DGL downgrading this scrip to �Sell�.
He has thus argued that in the face of this mounting expert opinion it would
have been breach of faith on his part with the unit holders of the funds
managed by him if he had continued to hold on to the stocks DGL just because he
had commended it on April 30, 2003.� He
has also filed during the hearing of the appeal the copy of the guidelines of
ACM on portfolio construction which enjoins on the fund managers to hold 75% of
the portfolios in �1� rated stocks and sell all stocks that dropped to �3�
rating.� He has also furnished a list of
other mutual funds which sold all or substantial shares of DGL during the month
of May 2003, possibly because of uncertainties associated with its merger
plans.� The list includes SBI Magnum
Multiplier Plus 1993, which sold its entire stock of 1,58,126 shares, HDFC
Equity Fund which sold 70845 out of its total holding of 2,50,808 shares,
Franklin India Prim Plus, which sold 20000 out of its 30000 shares, Deutsche
Alfa Equity Funds which sold 10000 out of its 15000 shares and Tata Pure Equity
Fund which sold its entire holding of 111522 shares. Of course the list also
includes funds like HSBC, IL&FS, Prudential ICICI and UTI Mastershare which
bought significant quantities during the same month.� He has therefore concluded that the sale of
DGL shares was prompted entirely by the expert reports and the uncertainties
arising out of the impending merger plans of DGL with HP ISO and not because he
had any insider information about the proposed merger ratio. 49.
The
appellant has further argued that he had no access whatsoever to the
recommendations of BSM about the merger ratio and that SEBI have not produced
any evidence to show that he had any such access. Regarding the statement of
Shri Som Mittal, CEO of DGL, he has pointed out that SEBI has relied selectively
on some portions of Shri Som Mittal�s statement while ignoring the rest of the
statement.� He has drawn our attention to
the statement wherein Shri Som Mittal has categorically stated that even though
he knew Shri Samir C. Mehta for the last 5 or 6 years he had not met him during
2003 and that no analyst from Alliance Mutual Fund had visited him during
2003.� He has also drawn our attention to
the letter written by Shri Bansi Mehta on July 15, 2003 to SEBI in response to
its summons wherein Shri Mehta had stated that he had himself written the
actual merger ratio in the report in his own hand at the time of signing the
report and sealing it in a clothlined envelope sealed with the personal seal of
the Managing Partner before it was delivered to Mr. Hemant Soonawala, an
independent Director of DGL. The appellant has thus argued that the information
originated with Shri Bansi Mehta and was taken to the Board Meeting in the
United States by Mr. Soonawala personally and that there was no way he could
have been privy to this information.�
According to him SEBI has not even attempted to find out as to who could
have leaked this price sensitive information to him and in what manner and was
relying only on the provisions of the Regulation and the fact of his having disposed
of all the DGL shares in a matter of four days to fasten such a grave charge of
insider trading on him.� Since SEBI is
relying on the fact that he liquidated his entire holdings in DGL as some kind
of an unusual conduct which could have been occasioned only because of the
insider information which he had somehow come to possess, he has furnished a
list of other portfolios where he had also liquidated the entire holdings in
accordance with the portfolio construction guidelines of ACM and his own assessment
of the situation.� The list includes a
complete liquidation of stocks of MTNL on September 2, 2002, Mastek on April
10, 2003, Infosys Technologies on April 10, 2003, Satyam Computers on May 7,
2003, Century Textiles on October 30, 2002 and Balaji Telefilms on May 23,
2003. These investments were sold for various reasons. Thus for instance the
complete exit from Infosys Technologies was for the reason �Infosys guidance is
well below expectations, will put huge pressure on the sector valuations� while
the reason for exit from Satyam Computers was �price rallied nicely � Taking
profits�.� The exit from Century Textiles
was for the reason that �selling this stock with lower conviction to try and
concentrate on better ideas�.� From these
examples the appellant has argued that even during the same month of May 2003
he had made a complete exit from some good scrips depending on his assessment
of the situation on a day to day basis and that the grave charge of insider
trading should not be levied only in respect of DGL just because he made a
complete exit prior to the Board meeting in the absence of any evidence
whatsoever about his having had any access to any insider information.� The appellant has taken strong objection to
the fact that the impugned order claims that there is no need for any specific
evidence simply because he falls in the definition of an insider and that the
alleged information was covered in the definition of price sensitive
information and that he made a complete exit from the stock.� He has also challenged SEBI�s interpretation
of the relevant provisions of SEBI (Prohibition of Insider Trading) Regulation,
1992 and has argued that he could by no stretch of imagination be considered as
an insider with regard to Digital Globalsoft and that his normal routine
actions as fund manager have been wrongly interpreted by the respondent as
violations of Insider Trading Regulations. The Regulations are reproduced
below: �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 when
in possession 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; ����������� �Provided that nothing contained above
shall be applicable to any communication required in the ordinary course of
business or profession or employment or under any law.� 50.
The
term �insider� has been defined in 2(e) which reads as follows: �2(e)�� �insider� means
any person who, is or was connected with the company or is deemed to have been
connected with the company and reasonably expected to have access to
unpublished price sensitive information in respect of securities of a company
or who has received or has had access to such unpublished price sensitive
information;� 51.
�Connected
person� has been defined in 2(c) as follows: �2(c)�� �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 of
(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 whether temporary or permanent and who may reasonably be expected
to have an access to unpublished price sensitive information in relation to
that company.� ����������� �Explanation:- For the purpose of clause
(c) the words �connected person� shall mean any person who is a connected
person six months prior to an act of insider trading;� 52.
�Person
is Deemed to be connected person� has been defined in Regulation 2(h) as
follows: �2(h)�� �person is
deemed to be a connected person�, if such person� ����������� �(i)����� is a company under the same management or
group, or any subsidiary company thereof within the meaning of sub-section (1B)
of section 370, or sub-section (11) of section 372, of the Companies Act, 1956
(1 of 1956), or sub-clause (g) of section 2 of the Monopolies and Restrictive
Trade Practices Act, 1969 (54 of 1969) as the case may be: ����������� �(ii)���� is an intermediary as specified in section
12 of the Act, Investment company, Trustee Company, Asset Management Company or
an employee or director thereof or an official of a stock exchange or of
clearing house or corporation; ����������� �(iii)
is a merchant banker, share transfer agent, registrar to an issue, debenture
trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment
Company or an employee thereof, or, is a member of the Board of Trustees of a
mutual fund or a member of the Board of Directors of the Asset Management
Company of a mutual fund or is an employee thereof who has a fiduciary
relationship with the company; ����������� �(iv)
is a Member of the Board of Directors, or an employee, of a public financial
institution as defined in section 4A of the Companies Act, 1956; ����������� �(v)����� is an official or an employee of a
Self-regulatory Organization recognized or authorized by the Board of a
regulatory body; ����������� �(vi)� is a�
relative of any of the aforementioned persons: ����������� �(vii)�� is a banker of the company; ����������� �(viii)� relatives of the connected person; or ����������� �(ix)
is a concern, firm, trust, Hindu undivided family, company or association of
persons wherein any of the connected persons mentioned in sub-clause (i) of
clause (c), of this regulation or any of the persons mentioned in sub-clause
(vi), (vii) or (viii) of this clause have more than 10 per cent holding or
interest�; 53.
In
Regulation 2(ha) �price sensitive information� has been defined as under: �(ha)��� �price
sensitive information� means any information which relates directly or
indirectly to a company and which if published is likely to materially affect
the price of securities of company. ����� �Explanation - �The following shall be deemed to be price
sensitive information:-- (i)
periodical
financial results of the company; (ii)
intended
declaration of dividends (both interim and final); (iii)
issue
of securities or buy-back of securities; (iv)
any
major expansion plans or execution of new projects; (v)
amalgamation,
mergers or takeovers; (vi)
disposal
of the whole or substantial part of the undertaking; and (vii)
significant
changes in policies, plans or operations of the company;� 54.
On
the basis of this regulation Shri Rafique Dada, Senior Counsel for the
respondent SEBI, contended at the time of hearing, that the appellant is a
�deemed to be connected person� under Regulation 2(h)(iii) by virtue of being
an employee of an asset management company, namely, ACAML. The information
regarding the merger ratio as well as the information that the Board was going
to discuss it and possibly announce it, was price sensitive information.� It was unpublished price sensitive
information because it had not been included in the agenda papers filed with
the stock exchanges in advance.� Further
it is seen from his action of having disinvested the entire stock of its funds
in a short period of four trading days between May 8 to May 12, 2003 after
having spoken well about the DGL scrip in his interview to Business Standard
that he was in receipt of this price sensitive information. From these
definitions and on the basis of the liquidation of the entire stock, SEBI has
concluded that he had dealt with the securities of DGL in violation of
Regulation 3 thereby rendering himself liable to action under Regulation 11
which includes orders under Section 11 debarring him from dealing in
securities.� On the contrary the learned
counsel for the appellant Shri C.A. Sundaram, argued that if SEBI�s
interpretation of the Insider Trading Regulation is upheld, it would lead to
disastrous consequences so much so that every broker or merchant banker or in
fact every intermediary in the market and his employee or relative would become
a deemed to be connected person of every other listed company in the
country.� It was therefore his contention
that the definition of a person deemed to be a connected person in Regulation 2(h)(iii)
had to be read in conjunction with the definition of a connected person in
Regulation 2(c)(ii) meaning thereby that all these intermediaries can be
considered as deemed to be connected only in relation to the companies with
whom they have business or professional relationship and who can
reasonably be expected to have access to unpublished price sensitive
information in relation to that company. It was therefore his contention that
so far as DGL was concerned, the appellant was a rank outsider because the only
relationship he had with DGL was that he was buying and selling its shares in
the secondary market like any other ordinary investor.� Shri C.A.Sundaram, learned Senior Counsel for
the appellant, further argued that even if Shri Rafique Dada�s interpretation
of a deemed to be connected person was accepted, the appellant would still not
fall in the definition of an insider in terms of Regulation 2(e) because he was
not reasonably expected to have access to any unpublished price sensitive information
in respect of securities of DGL and SEBI had not produced any evidence to
establish that he had, in fact, received or in fact
had any access to the unpublished price sensitive information. 55.
We
have carefully gone into the contentions of the learned Counsel on both sides.
We are prima facie in agreement with
the learned Senior Counsel for the appellant that SEBI�s interpretation of
these definitions is indeed wide and it could lead to the unintended
consequence of making almost every market player vulnerable to the charge of
insider trading even in respect of companies with whom they may have had
absolutely no professional or business relationship.� However, for the purpose of the present
appeal, we are accepting Shri Rafique Dada�s interpretation of the terms
�connected person� and �deemed to be connected person� to see whether even on
the basis of these interpretations the appellant can be considered to be an
insider. For this purpose it would be worth reproducing Regulation 2(e) once
again as follows: �2(e)�� �insider� means
any person who is or was connected with the company or is deemed to have been
connected with the company and is reasonably expected to have
access to unpublished price sensitive information in respect of securities of a
company or who has received or has had access to such
unpublished price sensitive information;� (emphasis supplied) 56.
As
discussed above, accepting the definition adopted by SEBI, the appellant can be
deemed to have been connected with the company but as Shri Rafique Dada conceded
during arguments, he was not reasonably expected to have access to unpublished
price sensitive information.� Thus we are
left with the clause �or who has received or has had access to such unpublished
price sensitive information�.� It is thus
seen from a reading of this definition of an insider that in the case of a
person connected or deemed to be connected and reasonably expected to have
access to such information, there could be a prima facie
presumption of being an insider once these two conditions are met with because
the conjunction between these conditions used in the regulation is �and�.�� Persons not reasonably expected to have such
access who are covered after the conjunction �or� but who have actually
received or have had actual access to such information can be treated as
insiders only if they have received price sensitive information or have had in
fact� had such access to such
information.� That means that the fact of
such connected or deemed to be connected persons having received information
will have to be established by evidence satisfying reasonable standard of
proof.� During the hearing there was
considerable debate on the issue of standard of proof. Arguing for the
respondents the Senior Counsel Shri Rafique Dada insisted that the last word on
the subject of standard of proof in civil proceedings had been said by the
Constitutional Bench in Gulabchand Vs. Kudilal (AIR 1966 SC 1734)
while Senior Counsel Shri C.A.Sundaram relied on Shantiprasad Jain & Union of
India Vs. Directorate of Enforcement (AIR 1962 SC 1764). According to
Shri Rafique Dada, the Supreme Court had held that in a civil case involving
allegations or charges of criminal or fraudulent character, the insistence on
proving charges clearly and beyond reasonable doubt was wrong.� In this judgment it had also been inter alia held that �it is apparent
from definitions of the words �proved�, �disproved� and �not proved� given in
Section 3 of the Evidence Act that it applied the same standard of proof in all
civil cases.� It makes no difference
between cases in which charges of fraudulent or criminal character are made and
cases in which such charges are not made but this is not to say that the Court
will not keep in mind the presumption of honesty or innocence or the nature of
the crime or fraud charged.� It is wrong
to insist that such charges must be proved clearly and beyond reasonable doubt.
Shri C.A. Sundaram on the contrary relied on the following extract from the
judgment in Shantiprasad Jain�s case: �on the
evidence above referred to, we are satisfied that the deposits in account No.
50180 were made by the German firm on the conditions stated by the appellant.
We have reached this conclusion on a consideration of the evidence on record
without reference to any abstract doctrine as to burden of proof.� It is only right to observe that the
proceedings under the Act are quasi criminal in character and it is the duty of
the respondents as prosecutor to make out beyond reasonable doubt that there
has been a violation of the law.� Vide
the decision in re.� H.P.C. Productions
Limited 1962-2 WLR 51 cited for the appellant�.� 57.
There
is no doubt that the law on the subject of burden of proof in civil proceedings
has been laid down in Gulabchand�s case.� We, however, find that the respective
contentions are merely a question of interpretation. Thus the statement in the Gulabchand
case to the effect that �this is not to say that the Court will not keep in
mind the presumption of honesty or innocence or the nature of the crime or fraud
charged� and the statement in Shantiprasad�s case that �it is the
duty of the respondent as prosecutor to make out beyond all reasonable doubt
that there has been a violation of the law� are basically pointing to the same
threshold of proof and concept of proof beyond reasonable doubt can have no
application to a an enquiry conducted by SEBI as it is not arising out of a
criminal case.� This Tribunal has
recently taken a view in Imperial Corporate Finance and Services Pvt.
Ltd., Mumbai Vs. Securities and Exchange Board of India, Mumbai, appeal
No. 56/2003 that �before any person is found to have violated the concept of
due diligence there must be an enquiry and the findings must be sustained by
higher degree of proof than that required in a civil suit, yet falling short of
the proof required to sustain the conviction in a criminal prosecution. It thus
finally boils down to examination of the quality of evidence in support of the
charge and the balancing of possibilities for and against the person charged consistent
with the presumption of innocence or honesty of the person charged.��� Ultimately it depends on the facts of each
case.� For the purpose of the present
case, we shall proceed to deal with the facts of the case and determine whether
SEBI on the evidence has made out a case on the preponderance of
probability.� We do not think that in
disputes relating to securities market it is necessary for the respondent to
prove the case beyond reasonable doubt.�
However, it cannot be forgotten that even in a civil dispute, there must
be legally sustainable evidence before a person is found guilty of violation of
Regulations. 58.
Just
to recapitulate, what we have before us by way of evidence against the
appellant are his own notings on the proposals for selling the stock of DGL
during the period May 8, 2003 to May 12, 2003 after his interview to Business
Standard defending his holding of this stock. Since everything in relation to
this charge hinges on these notings it would be worthwhile examining these
notings datewise. Thus on May 8, 2003 his notings were as follows:
Obviously
no objection can be taken about this decision and the reasons underlying this
decision because selling shares for taking profits is a legitimate trading
activity of a mutual fund since there is no other way the unit holders of the
fund can be rewarded or more efficient mutual funds differentiated from the
less efficient ones.� Thereafter on May
9, 2003 the records read as under:
It is here that the respondent attributes insider information of course without any proof except that the appellant made a reference to the event risk.� 59.������ The respondent contends that the only event was only the forthcoming Board meeting which was merely going to discuss financial results as per the agenda filed with the Stock Exchanges and that since the market expected the financial results to be good there was no event risk involved prompting any nervousness leading to reduction in exposure. According to the respondent the nervousness was due to the insider information that the Board was going to discuss and announce the merger on the basis of a merger ratio which the appellant knew was going to be adverse. According to the appellant, the event mentioned here was simply the event of Board meeting and that when the Board meets it can discuss anything on or off the agenda including, possibly the merger issues.� On May 12, 2003 the notings are as follows:
The issue,
thus before us is whether the appellant sold the stocks for the reasons
recorded contemporaneously or whether it was based on insider information to
the effect that the merger ration which was likely to have an adverse impact on
the price of the shares was going to be announced after the Board meeting on
May 12, 2003.� The basic rule for
interpreting a document in evidence is to read it for what it says on the face
of it unless there is very strong and compelling evidence to look for hidden
meanings into the text of the document. During the hearing, we put it
repeatedly to the learned Senior Counsel, Shri Rafique Dada about any
collateral evidence, which could assist us in reading a different meaning as
suggested by the respondent into these records. Shri Rafique Dada very fairly
stated, as always, that this was all he had and that in his opinion this was sufficient
to satisfy the test of preponderance of probabilities. The only collateral
evidence is the appellant�s interview to Business Standard which has already
been discussed elaborately in para 39 to 42 of this order and the statement of
Shri Som Mittal, CEO of Digital Globalsoft to the effect that he had known the
appellant for the last 5-6 years though he had not met him during 2003.�� The appellant, however, maintained that the
stock was liquidated in keeping with ACM�s policy of getting out of stocks which
are down graded and not exposing unit holders funds to unduly risky
situations.� As mentioned earlier, he has
given a list of stocks from which he had exit completely some of them during
the same month of 2003 itself to show that complete liquidation of a particular
stock was nothing unusual for a mutual fund.�
He has also furnished a list of other funds, including some prominent
ones, which had also made an exit from DGL during the same month. According to
him, the merger was being talked about since October 2002, BSM had been
appointed to suggest a merger ratio on May 2, 2003 and the Board was meeting on
May 12, 2003. Putting the three factors together and apprehending the
announcement of a merger after the board meeting was an assessment, which any intelligent
fund manager could have arrived at without any insider information. We note
that the fact of the Board meting was already in the public domain; that the
Board is not precluded from taking up items not listed in the formal agenda and
that it is not SEBI�s case that the appointment of BSM for suggesting the
merger ratio on May 2, 2003 was unpublished price sensitive information. It is
therefore an entirely logical and rational proposition put forward by the
appellant that his trading in this stock of DGL between May 8, 2003 and May 12,
2003 was on the basis of his analysis and assessment of the situation and the
downgrading of the stock by CLSA and not based on any inside information. This
is apart from the fact that the respondent has completely believed the version
of Shri Bansi Mehta about his having personally written the merger ratio in the
report in his own hand just before sealing the envelope and getting it
delivered to the independent Director Shri Soonawala as also the fact that the
envelop was carried to the United States by Shri Soonawala personally and was
opened directly in the meeting of the Board itself.� Thus while not suspecting the source where
the information was generated or the channel of transmission of the information
to the final destination and at the same time accusing some third party, though
technically an insider as per SEBI�s interpretation of the Regulation, of being
in receipt of that information is, according to us, something in total defiance
of elementary logic.� The impugned order
on these aspects reads as follows. �9.15.� It is not
material whether Shri Arora was providing any service to DGL.� The factual position was that the entities
managed by Shri Arora, at some time or other, held as much as 10% of the paid
up capital of the equity capital of DGL which holding was next only that of the
controlling holder viz. Compaq.� He and
his analysts were maintaining constant and close interaction with the
management of DGL.� I find that Arora was
indeed an Insider within the meaning of Insider Trading Regulation. �9.16�� The sequence of
events narrated in the SCN dated Feb. 20, 2004 clearly shows that Shri Arora
was in possession of unpublished price sensitive information relating to the
proposed merger of HP-ISO division with DGL and he has dealt in the scrip of
DGL while in possession of the published price sensitive information. As shown
in an earlier paragraph, the said information was indeed price sensitive. �9.17�� I find that
since Shri Arora would indeed come within the ambit of an �insider� as defined
in Regulation 2(c) and 2(h)(ii) of SEBI (Prohibition of Insider Trading)
Regulations, 1992, the requirement for SEBI to show that any other Insider has
shared unpublished price sensitive information with Shri Arora does not arise. ���. �9.19�� As noted earlier
Shri Arora was an Insider with respect to DGL, I note that the circumstances
narrated in the SCN adequately show that Shri Arora has indeed dealt in the
scrip of DGL on the basis of unpublished price sensitive information. As per
Regulation 2(e) of the SEBI (Prohibition of Insider Trading) Regulations, 1992,
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 to unpublished price sensitive information in respect of
securities of a company, or who has received or has had access to such
unpublished price sensitive information.�
I view of this, I find that Shri Arora has indeed violated Regulations 3
of Insider Trading Regulations. �9.20.� The denial of
Shri Som Mittal and Shri Tendulkar of Digital that they had any interaction
with Shri Arora during 2003 is not relevant since as noted earlier Shri Arora
is an Insider with respect to DGL and has dealt in the scrip while in
possession of unpublished price sensitive information.� This aspect is fairly borne out of
preponderance of circumstantial evidence available in this case. �9.21�� The issue of
Alliance Capital having sold 17.00 lakhs shares of DGL during the past six
months has no relevance whatsoever to the charge of Insider Trading against
Shri Arora and is an obvious attempt by Shri Arora to divert attention from the
charges against him. I find it unnecessary to examine the motive of any person
who may or may not have shared the unpublished price sensitive information with
Shri Arora.� 60.������ Based on the above extracts it seems that
SEBI�s case simply is that the appellant is covered in the definition of an
insider, that the merger ratio was a price sensitive information; that since he
liquidated his entire stock after having once commended it he must have done so
as an insider on the basis of this price sensitive information and that because
of these circumstances it is not necessary for SEBI to show how and from whom
and from where he accessed this price sensitive information.� We regret our inability to accept this line
of reasoning. However, in the absence of any clinching evidence in the impugned
order we have even tried to go back to the show cause notice since the show
cause notice dated February 20, 2004 is referred to in paras 9.16 and 9.20. The
sequence of events mentioned in para 7.13 of the show cause notice is therefore
reproduced below: �7.13�� In view of the
aforesaid sequence of events it is observed that you have off-loaded 14,66,140
shares of DGL in four consecutive trading days starting from May 8, 2003 based
on unpublished price sensitive information pertaining to the de-merger of
HP-ISO into DGL as there was no adverse market information which could have
prompted you to off-load entire holding in DGL by the Funds managed by
you.� The same is evident, inter alia,
from the following: �
On
April 10, 2003 the funds managed by you together held 14.66 lacs shares
constituting 4.45% of the paid up equity capital of DGL. �
There
were no transactions in the scrip of DGL by the funds managed by you since
April 11, 2003. Thus, the sale on May 8, 2003 has been done after a period of
about 1 month. �
In
an interview to Business Standard dated May 5, 2003 you had given favourable
opinion regarding the business prospect of DGL consequent to the proposed
merger with HP-ISO. �
Thereafter,
beginning May, 2003 i.e., one day after the independent valuer submitted the
valuation report to DGL, in four consecutive days, you off-loaded entire
shareholding in DGL. �
The
reasons recorded for the sale inter alia include �Event risk from tomorrow�s
announcement� which was supposedly the merger ratio which you perceived as
unfavourable to the minority holders of DGL. �
�
�
Shri
Som Mittal of DGL knew you for the past 5-6 years. �
You
and your analysts made regular visits and interaction with the management and
senior officials and discussed the performance and future plans of the
companies in which they invest. �
The
funds managed by you wee the single larger shareholder group of DGL after
Compaq Computer Holdings Ltd.� The funds
were holding nearly 10% of the total paid up equity capital of DGL for several
months and therefore ACM had a special interest in DGL and vice versa. �
The
senior management team of DGL who were interacting with the valuer could easily
estimate the likely de-merger ratio which is a price sensitive information. �
The
fact that the board meeting of DGL on May 12, 2003 was scheduled to discuss the
de-merger ratio recommended by the valuer is itself an unpublished price
sensitive information as the agenda papers / notices given by DGL to the stock
exchanges did not mention this.� 61. ����� From the above sequence it will be seen
that it has been alleged that the funds managed by the appellant held 4..45% of
the paid up equity capital of DGL on April 10,2003 and that there was no
trading of the shares by him for a period of about one month between April 11,
2003 and May 8, 2003.� The imputation
here seems to be that the trading in the shares, which were otherwise dormant,
was taken up on May 8, 2003 only because of the insider information. That,
however, does not seem to be the case. The same show cause notice mentioned in
para 7.0 that �the fund�s combined holding reached up to 9.5% of the paid up
capital of DGL in September, 2002�.�
Obviously, therefore these shares were sold by the funds managed by the
appellant in substantial quantities between September, 2002 and April, 2003 and
these shares were certainly not dormant. The interview to the Business Standard
and the reasons recorded on different dates for sale of shares between May 8,
2003 and May 12, 2003 have already been discussed above. The new fact that
emerges from the next 2-3 sub-paras of the quote above is that one of these
sub-paras (A) itself stated that the agenda papers for the Board meeting did
not mention any discussion about the de-merger ratio while in the very next
sub-para (B) above it is mentioned that �the hurry shown by ACMF to dispose off
its holdings by May 12, 2003 is significant considering that DGL�s Board
meeting was to be held on May 12, 2003 and one of the agenda items was
�Integration Related Items��. Apart from the contradiction inherent in the
positions taken in the show cause notice in these two sub-paras, what is
significant is that �Integration Related Items� was very much on the agenda of
the Board meeting and that this agenda was very much in the public domain, having
been statutorily filed with the Stock Exchanges.� Seen in this context, the reasons recorded
about the appellant�s nervousness arising from the �event risk from tomorrow�s
announcement� and the bipolarity of the situation become quite
understandable.� It is conceded in para
9.20 of the impugned order reproduced above at page 76 that there is no direct
evidence and that this aspect about his having traded while in possession of
unpublished price sensitive information is �fairly borne out of preponderance
of the circumstantial evidence available in this case.�� The circumstantial evidence comprises:
(a)� Shri Bansi Mehta having signed and
sealed and dispatched his recommendation to Mr. Soonawala for taking it to San
Francisco on May 7, 2003; and (b) the appellant having liquidated his entire
stock in DGL during the period May 8 � 12, 2003 for the reasons recorded on
each of these dates.� With SEBI being
completely satisfied about Shri Bansi Mehta having fully safeguarded the
information which he himself had generated and with the reasons recorded by the
appellant being held by us as rational and truthful in the context of agenda
papers filed with the Stock Exchanges, we have no hesitation whatsoever in
holding that the trading by the appellant between May 8 and May 12, 2003 was
not on the basis of any price sensitive insider information. We have reached
this conclusion entirely on the assessment of the facts and circumstances of
the case and we have not gone into the interpretation of the Regulation on which
there were wide differences during the hearing between learned counsel on both
sides.� While arriving at this finding we
have examined evidence by accepting, for argument�s sake, Shri Rafique Dada�s
interpretation on behalf of the respondents about the terms �insider� and
�price sensitive information�. Thus, on the basis of SEBI�s version about the
meaning of these terms, we have accepted the appellant was an �insider� as per
the definition of the term �deemed to be connected person�, that there was
unpublished price sensitive information, and that there was trading between
March 8-12, 2003. However, there is absolutely no connecting link between these
three aspects.� The unpublished price
sensitive information remained a closely guarded secret because SEBI has
gathered no evidence whatsoever to show how it reached the appellant and in
fact the impugned order claims, rather arrogantly (according to the appellant),
or at least mistakenly, that there is no need for it to show how it reached the
appellant.� Because, even if the
appellant is indeed considered as an �insider� by accepting SEBI�s
interpretation of the definition, he was not a person who was �reasonably
expected to have access to unpublished price sensitive information in respect
of securities� of DGL and therefore there was a requirement for SEBI to show on
the basis of evidence that he had in fact received such unpublished price
sensitive information. SEBI has completely failed in discharging this
burden.� The learned counsel for the
respondent Shri Rafique Dada argued at the time of the hearing that in matters
relating to insider trading, there can never be any direct evidence and that
one had to go on the basis of the facts which speak for themselves.� Agreeing entirely with Shri Rafique Dada, the
learned Senior Counsel, we have done exactly that, but unfortunately for the
respondents, we have come to conclusions entirely different from the ones drawn
by the respondent.� We find that there
were good reasons for the appellant to sell the DGL stock even after his
interview to Business Standard due to subsequent events. These events were (a)
downgrading of the stock by his own equity analyst and CLSA; (b) appointment of
Bansi Mehta to suggest merger ratio and (c) the forthcoming meeting of Board of
Directors in USA on May 12, 2003 slated to discuss, inter alia, �integration
related issues�. These events were sufficient to induce nervousness about the
emerging bipolar risk situation as correctly recorded by the appellant.� We also find his action of liquidating his
entire holding in DGL to be in conformity with the same action taken by him in
respect of some other stocks even during the same month of May 2003 as also in
conformity with similar action contemporaneously taken by some other prominent
mutual funds.� It is, therefore not
possible to hold the charge of insider trading as proved by drawing inference
merely from the fact of his liquidation of his entire stock. We have already
held that there is no collateral evidence in support of the charge that can
withstand even elementary scrutiny.� We
also note that the supposedly insider information about on impending merger
announcement did not materialize.� We
were also supplied with uncontested figures to show that even after the
announcement of the merger in June, 2003, while the price did dip initially, it
started rising again within two months and the scrip was selling at as high as
Rs. 842/- at the time of its de-listing in April, 2004 as against Rs. 510/- to
Rs. 573/- recovered by the appellant for his sale during May 2003. 62.������ The learned Senior Counsel for the
appellant, Shri C.A. Sundaram, also stated that SEBI was adopting different
standards in different cases of insider trading and invited our attention to
SEBI�s findings in the order passed by SEBI exonerating Reliance Industries
Limited of the charge of insider trading in respect of its holding in Larsen
and Toubro.� The learned Senior Counsel
in particular brought the following extracts from this order to our notice. �The above facts and events suggested prima facie that there had been some exercise by RIL and GIL independently before entering into the said transaction on November 18, 2001.� Therefore, the stand taken by RIL and GIL that the entire discussion regarding sale and purchase had taken place only on the 16th of November and the entire share purchase agreement for transaction of Rs. 766 crore was prepared and signed on 18th November does not appear to be convincing or borne out of facts.� The chronology of purchase/events as per the investigation report are worth noting in this regard.
From the above chronology, it is difficult to believe that no exercise whatsoever was undertaken by RIL and GIL before the transaction date i.e. 18.11.2001.� In the light of the facts and findings it is found that before the transaction date i.e. 18.11.2001, GIL was arranging for funds and other necessary for entering into an agreement.� These are sufficient circumstances to conclude that RIL was aware that GIL was interested in buying RIL�s stake in L&T before 16.11.2001 and that there were conditions precedent for that sale such as RIL exiting L&T�s Board.� The Committee is therefore of the view that RIL acted on the basis of the information.� However, the basic issue that emerges for consideration before the Committee is whether RIL was acting based on any unpublished price sensitive information. ������... a)�������� As per Regulation 2(k) of the said Regulations, the unpublished price sensitive information must be such information which is of concern, directly or indirectly to the company and is not generally known or published by such company for general information and which relate to matters as in sub-clause (i) to (viii) under clause (k) of Regulation 2 of the said Regulations.� The matters relating to the information have been exhaustively provided in sub-clauses (i) to (viii).� The issue that emerges for consideration is as to whether the knowledge or understanding of RIL that GIL was interest in buying shares of L&T from RIL could be regarded as falling under any of the categories stated in sub-clause (i) to (viii).� Committee is of the considered view that subject to the compliance of other requirements of regulation 2 (k) this cold be covered by sub clause (vii) if it had affected the earnings of the company but the record shows that there was no significant fluctuation in the market price of shares of L & T post information of the sale of L & T shares by RIL to GIL becoming known to the public.� Another point that had been strongly emphasized by RIL before the Committee was that the said information did not emanate from L & T. It has been submitted by RIL that the information of the impending sale was with RIL not because it was �connected� with L & T, but because it was a potential seller.� The Ambanis also had information of this by virtue of being Managing Directors of RIL, and not by virtue of their being Directors of L & T. RIL has submitted that it is not even stated as to how this information came to RIL or to the Ambanis by virtue of their connection with L & T. That no enquiries were made as to whether L & T was aware of any of these transactions and it was just not possible for L&T to be aware of the same in view of the nature of the transactions. In this connection, Committee also noted the argument of RIL that the alleged information was self-generated information of the notices and arising out of their own decision �making and that the alleged information did not concern or belong to L & T. �b)������ The Committee also considered as to whether the knowledge of directors L&T (Ambanis) about the proposed sale of L&T�s shares by RIL to GIL could be deemed as knowledge of the company (L&T) applying the principle to this effect laid down in English case El Ajou Vs Dollar Land Holdings plc. (1993) BCLC 735: (1993) 2 All ER 717 (CL.D) and followed by the Hon�ble Supreme Court of India in Barium Chemicals Ltd Vs Company Law Board (AIR 1967 SC 295). On careful analysis of the factual position Committee is of the view that Ambanis were not �directing mind and will� of L&T as they were two ordinary directors out of 17 directors constituting Board of L&T and they were under no legal obligation to disclose the aforesaid information to L&T in view of this, Committee does not hold the knowledge of Ambanis about the deal as knowledge of the company (L&T). �c)������ The fact is that unpublished price sensitive information must come to insider by being an insider. Having held so the Committee finds that in the present facts and circumstances of the case there is nothing to suggest that L & T was even aware of the developments relating to the said transaction between RIL and GIL before 18.11.03 and that �unpublished price sensitive information� was received by RIL or Ambanis from L&T as an insider.� The Committee further agrees with RIL�s submission that the information is RIL�s self generated information not emanating from L & T in terms of sub clauses (i) to (viii) of clause (k) of Regulation 2 of the said Regulations and the noticees did not get the information by virtue of being insiders. Therefore, in the present case the testing ground that �unpublished price sensitive information� was received by insider as an insider is missing thereby taking the said transaction out of the purview of the said Regulations.� 63.� We have carefully gone into the facts of the
above case.� The matter pertains to the
charge of insider trading leveled against RIL in respect of the securities of
L&T Ltd.� As is clear from the
chronology and the other facts quoted above, RIL purchased 2.5 crore shares of
L&T in a short span of time between 5.11.2001 and 12.11.2001 in the
secondary market at prices ranging between Rs. 167 to Rs. 209 per share and
sold them to GIL, a Birla group company at a price of Rs. 306.60 per share
involving a total consideration of Rs. 766.50 crore.� The charge against RIL was that the company
was aware of the intended purchase by GIL and it therefore acted on the basis
of this price sensitive information which was not available to the shareholders
of L&T, who sold their shares to RIL in the secondary market.� As is seen from the extracts quoted above, a
three member bench of SEBI had held that while RIL had indeed acted on the
price sensitive information, this information was available to RIL not by
virtue of being insiders qua L&T � the company whose shares were bought and
sold � but as directors of RIL.� This was
the view taken despite the fact that Shri Mukesh Ambani and Shri Anil Ambani
were also directors of L&T.� To put
it in SEBI�s own words, �the Committee had taken the view that Ambanis were not
�directing� mind and will� of L&T as
they were two ordinary directors out of 17 directors constituting the Board of
L&T and they were under no legal obligation to disclose the aforesaid
information to L&T.�� We appreciate
this fine distinction made by the respondent, SEBI in this case because the
charge as serious as insider trading should not be made against any person
without a deep examination of the issues involved.� We would nevertheless like SEBI to apply the
same ratio to all other cases handled by it in respect of insider trading.� In the present case before us, the appellant,
though we have treated him to be an insider as per SEBI�s interpretation of the
definition, was not a director nor an employee of DGL and was not even
rendering any professional service to that company.� He thus had absolutely no access to any price
sensitive information relating to DGL.�
The price sensitive information in the present case, namely, the merger
ratio was available with only one person namely Shri Bansi Mehta.� No scrap of evidence has been placed before
the Tribunal to establish that Mr. Bansi Mehta who was the sole repository of
this information had leaked the same to any person, much less to the
appellant.�� It was fairly submitted by
Shri Rafique Dada, the learned senior counsel for SEBI, that Mr. Bansi Mehta
was a man of great integrity and was extremely careful in writing the merger
ratio in his own hand writing and that he had sealed the envelope himself and
it was handed over to one of the directors Mr. Soonawala who took it personally
to the USA.� Nobody could thus have known
what was contained in the envelope. 64.� The learned Senior Counsel for the appellant
also relied on the following observations of the U.S. Supreme Court in Dirks
Vs. SEC 463 U.S. 646 (1983) �In
effect, the SEC�s theory of tippee liability in both cases appears rooted in the
idea that the antifraud provisions require equal information among all traders.
This conflicts with the principle set forth in Chiarella that only some
persons, under some circumstances, will be barred from trading while in
possession of material nonpublic information.�
16 Judge Wright correctly read our opinion in Chiarella as repudiating
any notion that all traders must enjoy equal information before trading:� �[T]he �information� theory is rejected.
Because the disclose-or-refrain duty is extraordinary, it attaches only when a
party has legal obligations other than a mere duty to comply with the general
antifraud proscriptions in the federal securities law� 220 U.S. App. D.C., at
322, 681 F.2d, at 837.� See Chiarella,
445 U.S., at 235, n. 20. We reaffirm
today that �[a] duty [to disclose] [463 U.S. 646, 658] arises from the
relationship between parties ��.. and not merely from one�s ability to acquire
information because of his position in the market.�� Id., at 231-232, n.14.� (emphasis
supplied) Relying on
this citation the learned Counsel Shri C.A. Sundaram argued that the appellant
had no relationship whatsoever with DGL and that he was not under any fiduciary
obligation to the shareholders of DGL.�
As against this the learned Senior Counsel for the respondent Shri
Rafique Dada referred to the U.S. decision in the matter of Cady
Roberts & Company �1961 SEC LEXIS
385; 40 SEC 907 to invite our attention to the famous �disclose or abstain�
proposition emerging from this case. Shri Rafique Dada also cited the judgment
in the case of SEC Vs. David E. Libson [U.S. Court of Law (7 Circuit) Docket No.
01-1226] �to illustrate the point that in USA, even
though bonafides/motive was required to be proved in order to make out the
charge of insider trading, the US Court had nevertheless held: �If the
existence of an alternative legitimate purpose were a defense to a charge of
insider trading, any insider who wanted to be able to engage in such trading
with impunity would establish a estate plan that required him to trade in his
company�s stock from time to time.� He
could then trade on the basis of inside information yet defend on the ground
that he was also trading in implementation of his estate plan. He would be
doing both.� Yet, even to regard the good
and the bad purpose as alternative is to sugarcoat the pill.� In
the case just put, the insider would be using insider information to implement
his estate plan more effectively.� He
would be like someone who robbed a bank with the intention of giving the money
to charity.� The noble end would not
immunise the ignoble means of achieving that end from legal punishment.�
(emphasise supplied) It was
common ground during the hearing that the U.S. case law was relevant to the
situations in India only to the extent that the concept of insider trading had
been well established in that country through voluminous case law but that the
matters arising in India had to be considered within the framework of SEBI�s
Insider Trading Regulations which were very specific in nature. The Insider
Trading law in the USA is part of the general law relating to frauds whereas in
India insider trading regulations have been promulgated under the SEBI Act,
1992.� However, the US case law helped
better appreciation of the circumstances wherein certain types of trading could
amount to insider trading. Thus while Dirks Vs. SEC emphasizes the
fiduciary responsibility of the insider to the shareholders of that particular
security as a primary ingredient of the charge, SEC Vs. David E. Libson, stresses
that the noble end would not immunize the ignoble means from legal punishment.
However, as we have already observed, in the present case, we have come to a
finding based entirely on an examination of the evidence in support of the
charge of insider trading against the appellant. And we have done that in the
frame work of SEBI�s own interpretations of various definitions and other
provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992. We have
not considered it necessary to say anything conclusive about the correctness of
these interpretations because it has been possible for us to arrive at the
finding purely on the basis of the facts of the case, and the facts are that
(a) the price sensitive information was not within the knowledge of any person
except Shri Bansi Mehta (b) Shri Bansi Mehta is a person of impeccable
integrity (c) the exit from DGL was on the basis of the down grading of scrip
by CLSA as well as the exit advice of his own analyst (d) and that some other
prominent funds like SBI Magnum Multiplier Plus 1993� and Tata Pure Equity Fund had also made a
complete exit while other equally prominent ones like HDFC Equity Fund,
Franklin India Prim Plus and Deutsche Alpha Equity Fund also sold substantial
percentage of their holdings during the same month.� In these circumstances, the appellant would
have failed in his duty if he did not exit contrary to the advice of CLSA and
his own analyst.� In the order rendered
by the three member board of SEBI, SEBI has been careful to point out, and rightly
so, that there is no doctrine of res ipsa loquitur �or the concept of strict liability and that
there must be proof that the person had actually access to price sensitive
information.� The logic adopted by SEBI
in the Reliance � Birla case is, in our view, sound and based on good legal
reasoning.� In view of all these facts
therefore we have no hesitation in holding the charge of insider trading as not
proved against the appellant. 65.� The learned Senior Counsel Shri C.A. Sundaram
also raised the question of availability of Section 11 of SEBI Act, 1992 to the
respondent for passing orders of this nature even after the amendment of the
Act in 2002. It was the contention of the learned Senior Counsel that Section
11 of the SEBI Act related to powers and functions of the Board and it
conferred the power on the Board only to issue appropriate directions in
emergent situations in the interest of investors in securities and the
securities market.� According to the learned
Senior Counsel, this clause enabling issue of appropriate directions can never
be interpreted as a power to impose punishments for violation of provisions of
the Act, Rules and the Regulations for the simple reason that such power has
been specifically conferred under Chapter VIA dealing with penalties and
adjudication. Chapter VIA comprising various sub-sections of Section 15,
according to the learned Senior Counsel Shri C.A. Sundaram, enumerates all
possible violations including insider trading and fraudulent and unfair trade
practices and prescribes only monetary penalties after a proper adjudication
procedure thereby establishing the legislature�s intention to deal with
defaults and violations of securities regulations only through imposition of
stiff monetary penalties which can even go as high as Rs. 25 crore or 3 times
the amounts of profits unfairly made. It was Shri Sundaram�s contention that
Section 11, even after the introduction of sub-section 4 was available to SEBI
only for taking interim or emergency measures pending investigations and not
for taking away the right of livelihood of persons associated with the
securities market by bypassing the provisions of Chapter VIA. The learned
Senior Counsel for the respondent Shri Rafique Dada, however, pointed out that
somewhat similar view was taken by this Tribunal earlier and that appeals were
pending against those orders in the Hon�ble Bombay High Court and the Hon�ble
Supreme Court of India.� Shri Rafique
Dada further pointed that sub-section 11(4) had been introduced after the view
taken by this Tribunal in Videocon International Ltd., and Sterlite
Industries (India) Ltd. among other cases.� In view of this position we would not like to
comment any further on this issue and for the purpose of the present
appeal,� we have gone by the position
that SEBI had the relevant powers to pass the impugned orders under Section 11. 66.������ The appellant has drawn our attention to
the interview of Shri G.N. Bajpai, Chairman, SEBI to the media on September 30,
2003, stating that �SEBI was confident about nailing Alliance Capital�s former
Chief Investment Officer Samir Arora on insider trading charges�.� The appellant contended that this was even
before SEBI had taken a final view in the matter and just after the interim
order had been passed while the matter was pending enquiry.� According to the appellant, SEBI has
continued to give wide spread publicity to its actions against the appellant
and has tried to create prejudice and negative publicity prospective against the
appellant even after the appeal proceedings had been initiated before this
Tribunal. In support of this contention the appellant has produced a copy of
the interview given by Shri G.N. Bajpai to Business Standard on September 30,
2003. This interview according to the appellant was totally uncalled for since
it emanated from the Regulator himself pending enquiry.� The learned Senior Counsel relied on an order
of the Supreme Court reported in (1987) (4) SCC 611 Ranjit Thaker Vs. Union
of India & Others. Justice Venkatachaliah, as he then was, speaking for
the bench held: �It is the
essence of a judgment that it is made after due observance of the judicial
process, that the court or tribunal passing it observe at least the minimal
requirements of natural justice and is composed of impartial persons acting
fairly and without bias and in good faith.�
A judgment which is the result of bias or want of impartiality is a
nullity and the trial �coram non-judice�. The test of real likelihood of bias
is whether a reasonable person, in possession of relevant information, would
have thought that bias was likely and whether the authority concerned was
likely to be disposed to decide the matter only in a particular way.� What is relevant is the reasonableness of the
apprehension in that regard in the mind of the party. The proper approach for
the judge is not to look at his own mind and ask himself, however honestly, �Am
I biased?�; but to look at the mind of the party before him.� In the present case having regard to the antecedent
events, the participation of the officer concerned (respondent 4) in the
court-martial rendered the proceedings coram non-judice.� (All Italics by
Court) 67.�� During the arguments the learned Senior
Counsel for the respondent pointed out that all orders in the case of the
appellant had been passed by the learned Member of the Board in exercise of
independent quasi-judicial powers. While the learned Senior Counsel for the
appellant Shri C.A.Sundaram stated that he was not pressing this issue, it was
fairly conceded by the learned Senior Counsel on both sides that such
interviews on matters pending adjudication were best avoided in the interest of
fairplay. In view of this position we are refraining from saying anything
further on this aspect of the matter. 68.� (I)����������� To
sum up therefore we conclude as follows: i.
The
first charge relating to the aborted sale of ACAML is based on the fact of the
appellant having made a bid for its purchase along with Henderson Global
Investors and subsequently not having contradicted rumours pertaining to his exit
from ACAML in the event of ACAML being sold to any entity other than Henderson
Global Investors along with the appellant.�
Needless to say that a person cannot be punished unless some law, rule
or regulation has been violated.� No such
violation of any Regulation has been pointed to us by the respondent to show
that a fund manager cannot make an open and transparent offer for buying a fund
in which he is employed as a fund manager.�
In fact the impugned order itself concedes that management buy out is not
uncommon.� The appellant was also in no
position to contradict any rumours about his exit because such talk was based
on facts. He would have continued with the fund only if it had been sold to him
along with Henderson Global Investors because otherwise he would have had to
revert to his employment in Singapore with ACM. His bid for the purchase of
ACAML had been placed on record much before any other bids were received. The
fact of his having made a bid had also been published in the financial press. There
was no unusual fall in NAV and the fall in AUM was also in accordance with what
normally happens when mutual funds are sold and in any case there is no
evidence whatsoever to attribute any such fall to him.� There was thus nothing secretive or sinister
about this entire transaction.� The
charge therefore fails. ii.
The
second charge pertains to violation of Regulations 4 and 5 of SEBI (Prohibition
of Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 1995. These regulations forbid a person from entering into
transactions in securities with the intention of artificially affecting the
prices of securities or indulging in acts calculated to create a false or
misleading appearance of trading or any non-genuine transactions not intended
to effect transfer of beneficial ownership.�
The evidence cited in support of the charge does not even attempt to
bring out any of these ingredients. In respect of the transactions cited in
support of this charge there is nothing artificial or non-genuine or intended
or calculated to create a false or misleading appearance of trading and there
was transfer of beneficial ownership in respect of every single transaction.
Similarly, in respect of the appellant�s statement alleged to be in violation
of Regulation 5, there is nothing that can be treated as misleading in any
material particular. Since Regulation 5 forbids only statements misleading in
any material particular, there is therefore no substance in this charge. iii.
In
respect of the third charge of insider trading we have come to the conclusion
that even the price sensitive information which the appellant is alleged to
have somehow accessed did not turn out to be correct information because the
merger was not announced on May 12, 2003.�
Information which finally turns out to be false or at least uncertain
cannot even be labelled as information.�
The sale of securities prior to the board meeting therefore, can only be
considered as based on his analysis and assessment of the information available
in the public domain.� Besides there is
not even an attempt by SEBI to show how the information generated by Shri Bansi
Mehta personally and signed, sealed and delivered by him to Shri Soonawala and
opened only in the board meeting on May 12, 2003 could have reached the
appellant, particularly when SEBI has nowhere doubted the credentials of S/Shri
Bansi Mehta and Soonawala. We have also found that there were assessments by
independent analysts on May 8, 2003 recommending downgrading and sale of the
DGL scrip.� We have also noticed that
several other funds had also sold the same scrip in the same month in
substantial numbers as also the fact that the appellant himself had also
disposed of his entire holding in some other renowned companies, some of them in the same month as per his assessment of the conditions prevailing in the market.� The list of such companies includes names as famous as Infosys, Satyam, MTNL and Century Textiles.� Liquidation of the entire stock in DGL there does not by itself, make a case of insider trading.� There has to be independent evidence in support of this charge.� There is none of that in the impugned order.� We therefore hold this charge as not proved.� (II) ����� In
view of our findings above it is sad that the appellant has already suffered
needlessly for more than one year without there being any worthwhile evidence
against him.� It was argued before us on
behalf of the respondent that it is very difficult to gather adequate evidence
in respect of charges relating to conflict of interest, market manipulation and
insider trading. While we appreciate the difficulty it is not possible for us
to let mere suspicions, conjectures and hypothesis take the place of evidence
as described in the Indian Evidence Act.��
It is unfortunate that the appellant has had to answer for almost each
and every professional decision taken by him during the last few years. These
are presumably the professional hazards for those entrusted with the management
of investors� funds. But he comes out well at the end of this all. We have
therefore no hesitation in exonerating him honourably of all the charges. We
are not even blaming SEBI for all this. The question SEBI asked were all
legitimate though we do feel that the replies which SEBI received were
thorough, forthright and spontaneous and could have been considered with a more
open mind. 69.�� We have in this appeal dealt with a fund
manager of ACMF and our findings are confined to the facts of this case as
presented by SEBI.� If any action is to
be taken against the sponsors or the trustees, this order will not preclude
SEBI from doing so in accordance with law. 70.�� Resultantly and for the reasons stated
herein in the order, the appeal is allowed and the impugned order set aside.
There shall be no order as to costs. 71.�� The Tribunal places on record the valuable
assistance rendered by Shri Rafique Dada, the learned senior counsel for
SEBI.� We feel that there is a great
responsibility cast on a counsel for the Regulator to be always fair to the
Court and to act as amicus curiae on occasions to make sure that justice
never fails as this Tribunal has to deal with contentious questions of fact and
law and that the Regulator acts as an initiator of disciplinary proceedings and
at the same time is a respondent before the Tribunal.� That is�
why� we� commend�
the� role� played�
by� Mr.� Rafique Dada, the learned senior counsel for
the Regulator in this case, for drawing�
the right balance between the interest of the regulator and in assisting
the Tribunal in search of the truth.
Place: Mumbai Date:
15.10.2004 */as//sr |
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