Securities and Exchange Board of India

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No: 83/2004

Last Date of Hearing	01/09/2004
Date of Decision	15.10.2004

In the matter of:

		*Appellant – Represented by:*
Samir C. Arora	Shri C.A. Sundaram, Sr. Advocate with Shri Somasekhar Sundaresan, Advocate and Shri H. Chandoke, Advocate
Versus
Securities and Exchange Board of India			*Respondent- Represented by*
		Shri Rafique Dada, Sr. Advocate with Shri Kumar Desai, Advocate

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 31/03/2004, the operative portion of which reads as follows:

“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 August 9, 2003 will be included in the above period. However, if, in the meantime Shri Samir C. Arora desires to sell the securities, if any, currently held by him he may do so only after obtaining prior written permission of SEBI.”

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 Delaware, USA, whose parent company is Alliance Capital Management LP (ACM), USA. Alliance Capital Asset Management (India) Limited (ACAML) is the asset management company of ACMF. ACAML is the subsidiary of Alliance Capital (Mauritius) P. Ltd. (ACMPL) whose parent company is also ACM. It seems that towards the later half of the year 2002 ACM decided to sell its India business. The appellant Samir C. Arora who was then working as Head, Asian Emerging Markets with Alliance Singapore – an affiliate of ACM – was managing equity funds of several affiliates of ACM group companies including ACMF. He was also incharge of ACM investments in India through the Foreign Institutional Investments (FII) route. When the appellant came to know about ACM’s intention to sell its India business, he prepared a report recommending that the India business should not be sold. However, news about the intended sale appeared in various newspapers in India during October-November, 2002 and the appellant received the final copy of the confidential information memorandum (CIM) prepared by the merchant banker Blackstone Group for the proposed sale of ACAML the asset management company for the Indian Fund ACMF. The appellant again protested in writing but it seems that ACM had made up its mind to sell. It is thus common ground that ACM’s decision to sell its India business was taken despite strong and continued protest by the appellant. The appellant then entered into a indicative memorandum of understanding with Henderson Global Investors on November 28, 2002 and informed the ACM management that since their decision to sell Indian business appeared to be final, despite his opposition to this proposal, he would also be bidding for the Indian Fund along with Henderson Global Investors. The news about this bid from Mr. Samir Arora also appeared in Indian newspapers including the Economic Times dated December 17, 2002. Negotiations started with various bidders from January 13, 2003 onwards and even while negotiations were on, Housing Development Finance Corporation (HDFC) made a pre-emptive bid and asked ACM to stop the further process of bidding. While this process was on, there was redemption pressure on the Fund as a result of which the assets under management (AUM) of ACAML came down very substantially. Finally because of withdrawal of most bidders and because of the bids not matching ACM’s expectations the sale did not go through and ACM announced on February 3, 2003 that it had given up the idea of selling its India business. The redemption pressure ceased thereafter and things came back to normal. SEBI ordered an investigation on June 6, 2003 and came to the prima facie conclusion that the conduct of Shri Samir Arora, the appellant in this whole episode was not in accordance with the standards of integrity, fairness and professionalism expected of a Fund Manager. SEBI thereafter invoked its extraordinary powers under Section 11 of the SEBI Act and directed the appellant, Shri Samir Arora, on August 9, 2003 not to buy, sell or deal in securities in any manner directly or indirectly till further orders. As required under Section 11(4)(b) of SEBI Act, the appellant was given a post decisional hearing and the ad-interim orders passed on August 9, 2003 were confirmed by orders dated 24/09/2003. Shri Samir Arora filed an appeal before this Tribunal which resulted in orders dated January 12, 2004 directing SEBI to pass final orders on or before March 31, 2004. A show cause notice was thereafter served by SEBI on the appellant on 20/02/2004 detailing specific charges based on investigations and after receiving the reply and after giving him a hearing the respondent passed the impugned orders debarring him from accessing the securities market in any manner whatsoever for a period of five years. Being aggrieved by the impugned order, the appellant has filed the present appeal.

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, Singapore, he was also incharge of investment of ACM’s funds in India through the FII route. SEBI found during investigations that the joint shareholding of ACMF and ACM along with its FII sub-accounts in the equity structure of some Indian companies taken together were beyond the threshold limits prescribed in SEBI (Substantial Acquisition of Shares) Regulations, 1997 and thus required proper disclosures. Since such disclosures had not been made, ACM and ACMF were considered guilty of violating the Takeover Regulations, 1997 and Shri Samir C. Arora had thus displayed unprofessional conduct because he was incharge of investments on behalf of both ACM as well as ACMF. Finally, Shri Samir C. Arora has been accused in the order as having aided and abetted the trustees and the asset management company of ACMF in violating the provisions of SEBI Mutual Funds Regulations, 1996, which inter alia prescribe a Code of Conduct for the Mutual Funds, the asset management company and the trustees. It is alleged that while managing the equity portfolios of ACMF as well as the Indian allocation of FII /sub-accounts belonging to ACM he managed the portfolio of securities in the interest of sponsors and to the detriment of the unit holders of ACMF thereby aiding and abetting the violation of Clause (1) of the Code of Conduct prescribed under the 5^th Schedule of the SEBI (Mutual Funds) Regulations, 1996, by the Trustees and the asset management company of ACMF. Clause 4 of 5^th Schedule of the Code of Conduct states that the Trustees and asset management companies must avoid conflict of interest in managing the affairs of the schemes and keep the interest of all unit holders paramount in all maters. In bidding for the stock of ACAML in collaboration with Henderson Global Shri Samir C. Arora is alleged to have placed himself in a position of conflict of interest thereby aiding and abetting violation of Clause 4 of the Code of Conduct by ACAML and ACM Trust Company Limited.

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 India business in collaboration with Henderson Global. Not only that, he also submitted his bid to ACM ahead of others so that he could not be accused of basing his bid on insider information. According to him when the presentations were made to the prospective buyers of the India business he consciously stayed away from these presentations precisely because he was also one of the bidders. According to him any mutual fund confronted with change of management and control faces redemption pressure because the investors do not like uncertainties associated with the change. He managed this redemption pressure by selling the company’s investments in certain stocks to the satisfaction of ACM and the Indian investors. According to him while the AUM came down significantly by about Rs. 187 crore in equity schemes (the appellant was incharge of only equity schemes and not the debt portion of the Fund) and Rs. 644 crore in the debt schemes, it was due to the uncertainty in the likely change of management and ownership. However, even so the appellant had taken care while meeting the redemption pressure as fund manager to see that the Net Asset Value (NAV) did not fall appreciably because of his timely action in meeting the redemption pressure. According to him the fund manager’s main objective always is to safeguard the NAV to the extent possible and to see that the NAV is not affected by depreciation of the assets under management (AUM). It is further submitted that it is a gross misrepresentation of facts to state that he increased his bid when the others were reducing theirs because this so called increase in the bid amount was on December 25, 2003 while the pre-emptive bid of HDFC was made on January 14, 2003. This so called increase in bid amount was, in fact a clarification in response to a specific query from the Blackstone group as to whether the bid of $32 to $33 million included the cash available with the asset management company. According to him Henderson had merely clarified on December 25, 2002, i.e., before any other bids had been received, that if the cash was not going to be stripped before the actual sale, his bid should be treated as $32 to $35 million. On the contrary the appellant has argued that he and Henderson Global had stood firm on their bid amount throughout even while the other bidders were increasing or decreasing their bid amounts in accordance with the fluctuations in the AUM. According to him it was a measure of faith the company had in him that despite being bidder himself he was allowed to handle the situation arising out of the redemption pressure by liquidating the assets in the best interests of the company, the fund and the investors. He has argued that there was indeed some fall in the NAV also but that it was not occasioned by his being a bidder but because of the proposed sale of ACMF and also because of a general decline in the market during the relevant time. He has in fact cited figures to show that the decline in the NAV of the Funds managed by him was much less than the decline in the NAV of other comparable Funds or even the decline in the benchmark market indices against which SEBI compares the performance of different Funds. Regarding the fact of Funds managed by him exceeding the threshold limit prescribed in the Takeover Regulations and non-reporting of that situation to SEBI, he submitted that it was the duty of the compliance officer and not part of his responsibilities; and that in any case the issue whether such holding was to be considered on aggregated basis or not was not free from doubt.

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 5^th schedule to this regulations prescribed a code of conduct. Para 4 of this code of conduct prescribes that:

“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 5^th 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 5^th 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 Henderson (emphasis supplied).

“7.45 ………………..

“7.46 The parallel sought to be drawn between Shri Arora’s bid (along with Henderson) for acquiring ACAML and “Employees’ Stock Option”/ ‘Management Buy Out” smacks of perversity, designed to distract. While the Employees Stock Option is an option granted to employees of a company to buy its shares as a part of incentive scheme to align the interest of employees with those of the shareholders, ‘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. Viewed in the light of the facts of the instant case, Shri Arora’s bid to buy ACMF, in terms of motive and intent, is, in my view, incomparable either to the exercise of Employees’ Stock Option or to management buy out plan. In any case, I find that Shri Arora’s bid for acquiring ACAML is itself 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.” (Emphasis supplied)

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 Henderson was a step taken by him in the interest of the unit holders of the funds who like nothing better than stability and continuity in management and control. That was also the reason, according to the learned Senior Counsel, why ACM too encouraged the appellant and short listed his bid for due diligence rather than frowning upon the initiative taken by him. The learned Senior Counsel also pointed out that this bid was made in broad day light in as transparent a manner as possible and not in any surreptitious or secretive manner. In this context the learned Senior Counsel invited our attention to the e-mail sent by the appellant to John Carifa of ACM on 06/12/2002 which speaks of the highest standards of decency and transparency exhibited by the appellant in this entire episode. The full text of this e-mail dated 06/12/2002 (Exhibit M) is reproduced below:

“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 India business. After careful deliberations and discussions, I have arrived at an agreement with Henderson Global Investors to jointly bid for Alliance India.

“In pursuing this option, my first priority was to avoid any actual or perceived conflicts of interest with my current role and with Alliance Capital. I have clearly expressed my opposition to Alliance’s plans to sell our India business in the past but since Alliance remains unconvinced it is only fair if I can organize a bid for it myself. Not only am I thus putting my personal money and future career where my mouth is, but I also help Alliance in unlocking value that it seeks in a business which I myself created for Alliance. Furthermore, we have consciously decided to put our bid ahead of time and before bids from other buyers are even received by you. (Emphasis supplied)

“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 Alliance India. From Alliance’s point of view, this is important as the value of the company can fall significantly if any of the key employees in India (Piyush Surana, Deepak Mungla, Amitabh Mohanty or the equity analysts) quit in the wake of the uncertainties caused by the proposed sale. As Ajai Kaul can confirm to you, many employees of our India office are already currently (and openly) in the job market. Given the paucity of finding good jobs in the Indian financial sector and the extremely difficult financial climate, the employees will not wait for the sale to be concluded – particularly – if it is clear to them that the sale may happen to another domestic fund. The probability of our employees losing their jobs rises exponentially if the bidder is another existing domestic mutual fund. It is extremely important for protection of the value of Alliance India that key employees continue with the business.

“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. December 02^nd, 2002).

“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 India (Dinshaw Irani and Dhawal Mehta) be part of the transaction. Alliance Capital can negotiate directly with the respective analysts and we will accept whatever decision the 2 make regarding working for Emerging Markets or for India.

“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 Mauritius company owning the shares of Alliance India which would, in my view, be a far more efficient transaction for Alliance Capital than a sale to a domestic buyer.

“If this deal if concluded, I will move back to India and lead the new company. I cannot show any higher commitment to the company that I helped create. Above all, this deal will greatly assist Alliance in maintaining its credibility with the investors/employees and other stakeholders.

“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 9^th 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 December 16, 2002 with report to management buy out and which is reproduced below and submitted offer of the appellant was within the knowledge of the public including SEBI:

“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 India, and this is the second such bid in the country after Deepak Roy’s personal bid for Gilbey’s range of domestic whisky brands in May this year.

“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 India, with five to six people in its top management team.

“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 Singapore to India. However, if the bid is not accepted, Mr. Arora’s departure from the Fund is imminent.

“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 India.

“Alliance MF manages over Rs. 3,600 crore assets.”

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 Alliance equity schemes out performed their bench mark indices during this period. For the same reason we are not impressed by the computation of the loss of Rs. 12 crore to the unit holders of Alliance New Millennium fund and Rs. 2.36 crore by those of Alliance Buy India Fund in para 7.40 of the impugned order. If this notional loss were attributed to Shri Arora the corresponding gain to the unit holders of Funds like Alliance Basic Industries, Alliance Frontline Equity, Alliance Capital Tax Relief 1996, etc. would also have to be attributed to him. We are of the view that change in NAV is as much a function of several externalities such as market sentiment, relative availability of comparable investment avenues, regulatory environment as of the brand equity and efficient management of the fund itself. Unless, therefore, there has been any precipitous fall in the NAV and it is linked by direct or at least circumstantial evidence to actions / inactions of any individual or any corporate entity, we find it very difficult to accept any such linkages or motives. The impugned order does not cite a single disinvestment resorted to during this period for meeting the redemption pressure which was calculated to bring down the NAV.

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 March 31, 2003 because after the agreement was signed there was no question of any uncertainty. According to the learned Senior Counsel the AUM of Zurich MF witnessed a decline of Rs. 1815 crore during this period preceding March 31, 2003, which was much higher than the decline in AUM of ACMF. These figures filed along with the affidavit have not been challenged by the respondents. Although we would not like to place one set of figures on a higher pedestal as compared to the other set of figures for the simple reason that the statistics can be used to prove or disprove either hypothesis we would definitely like to conclude that during the relevant period November, 2002 to February 2003, either the market was in a general decline leading to depreciation in AUM of both these funds or that the uncertainty about the change in management usually leads to depreciation of assets. We are, however, not happy at the period chosen in the impugned order for rejecting the appellant’s argument about the fall in AUM during the period of uncertainty.

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 23^rd/24^th 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,

(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 2^nd 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:

Date	No. of Shares		Minutes recorded by the appellant on file
May 8,2003	ACMF	1,19,000	Price has rallied nicely – Taking profits
May 8,2003	ACM	2,18,400	Price has rallied nicely – Taking profits
May 9, 2003	ACMF	3,34,562	Event risk in Digital too high – Getting nervous – reducing exposure
May 9, 2003	ACM	2,50,000
May 12,2003	ACMF	3,34,562	Event risk from tomorrow’s announcements/results is too high. Bipolar situation but we do not like to take such risks post very high volatility in technology stocks around results/corporate issues.
May 12,2003	ACM	2,50,000
May 13, 2003	ACM	2,11,478	---------- (No reasons available from the impugned order.)

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 30^th 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 8^th 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:

“Sell

Digital Globalsoft Ltd. -

1,25,000 Proportionately for all funds

Price has rallied nicely – Taking profits.”

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:

“Sell Digital Globalsoft - Proportionately	2,00,000 for all funds
Event risk in Digital is too high Getting nervous – Reducing exposure”

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:

“Sell Digital Globalsoft - ALL		From all funds
“Event risk from tomorrow’s announcements/results is too high. Bipolar situation but we do not like to take such risks post very high volatility in technology stocks around results / corporate issues.”

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.

(A)

The agenda papers for the board meeting on May 12, 2003 did not have any mention of the discussion the de-merger ratio. The intimation given by DGL to the stock exchanges regarding the proposed board meting did not indicate that the issue of de-merger ratio is likely to be taken up at the board meeting on may 12, 2003; while the valuer had indicated that the sealed envelope containing the de-merger ratio should be opened only at the board meeting of the company scheduled to discuss the de-merger ratio.

(B)

The commencement of sale since May 8, 2003 is significant considering that the valuer submitted their valuation report on May 7, 2003. Also, the hurry shown by ACMF to dispose off its holdings by May 12, 2003 is significant considering that DGL’s board meeting was held on May 12, 2003 and one of the agenda items was ‘Integration Related Items’.

· 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 16^th of November and the entire share purchase agreement for transaction of Rs. 766 crore was prepared and signed on 18^th 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.

Date	Chronology of Purchase/event
1.10.2001	Holding of RIL Group in L&T was 4.38%
31.10.2001	Holding of RIL Group in L&T was 4.80%
5.11.2001	RIL Group purchases 1289000 shares of L&T raising its holding to 5.32%
6.11.2001	a) As per the statement JMMS approaches Grasim to acquire stake of RIL in L&T b) RIL Group purchased 2154687 L&T shares raising its holding to 6.02%
7.11.2001	a) Grasim constituted an internal task team to evaluate the proposal received from JMMS. (Please see statement of DD Rathi) b) RIL Group purchased 486174 L&T shares raising its holding to 6.21%
8.11.2001	a) RIL Group purchased 3740518 L&T shares raising its holding to 7.69%
9.11.2001	RIL Group purchased 5173173 L&T shares raising its holding to 9.53%
12.11.2001	a) RIL Group purchased 1500206 L&T shares raising its holding to 10.14 % b) Arrangements for major parts of the funds was made on 12.11.2001. A short term loan for Rs. 150 crore was sanctioned by HDFC Bank on 12.11.2001. An amount of Rs. 250 crore were raised through five negotiable commercial papers. Stamp duty of Rs. 12.5 lakhs i.e., Rs. 2.5 lakhs on each negotiable commercial paper was paid on 12.11.2001 to the General Stamp office. Rs. 200 crore was raised from Bank of America, Nariman Point Branch, offer letter in this regard for the loan was issued by the Bank of America on 12.11.2002. An amount of Rs. 600 crore was raised by Grasim on 12.11.2001. c) Stamp paper on which the share purchase agreement was entered into was procured.
13.11.2001	RIL consolidated its group holdings in L&T on 13.11.2001, which were held in the name of RIL, RIIHL, RCL and Shreenath Enterprises.
16.11.2001	a) Shri Nimesh Kampani of JMMS approached RIL for sale of L&T shares for a maximum price of Rs. 315/- b) RIL responded on the same day to sell 2.5 crore shares of L&T at around 50% premium. c) Deal between RIL and GIL finalized by 16^th evening subject to approval of the respective boards. d) GIL issued notice for urgent Board meeting to be held on 18.11.2001.
18.11.2001	a) RIL Board Committee approves the deal b) Grasim Board approves the deal c) Stock exchanges were informed about the deal by Grasim d) Covenant – Share sale/purchase agreement entered into by RIL and GIL, with AD Ambani and MD Ambani agreeing to step down and RIL agreeing not to deal in the shares of L&T for a minimum period of 5 years
20/21.11.2001	Payment to RIL made by GIL for the deal. The total amount is Rs. 766.5 crore for 2.5 crore shares.
22.11.2001	a) Shri MD Ambani & AD Ambani resigned from L&T Board b) Grasim recommends names of Kumaramangalam Birla and Rajshree Birla for appointment in the board of L&T.
23.11.2001	Shri Kumar Mangalam Birla and Ms. Rajshree Birla were appointed as directors of L&T.

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

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