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ADJUDICATION ORDER NO. - BS/AO-1/2007 ORDER UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT READ WITH RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST SHRI HEERACHAND SALECHA 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) has initiated adjudication proceedings against Shri Heerachand Salecha (hereinafter referred to as the ‘noticee’) for the alleged violation of the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as the ‘Insider Trading Regulations’) in respect of his dealings in the shares of Sun Infoways Ltd. (hereinafter referred as ‘SIL’). It is alleged that on account of the violation of Section 3 of the Insider Trading Regulations committed by the noticee, he is liable to the penalty prescribed under Section 15G of the SEBI Act. It is also alleged that the noticee failed to comply with the summons dated December 10, 2002 and January 17, 2003 issued by SEBI and on account of such failure, the noticee is liable to the penalty prescribed under Section 15A(a) of the SEBI Act. Initially, Shri. S.V. Krishnamohan was appointed as the Adjudicating Officer to conduct the Adjudication Proceedings. Subsequently, I was appointed as the Adjudicating Officer in the matter. SHOW CAUSE NOTICE 2. A show cause notice in terms of the provisions of Rule 4(1) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995 was issued to the noticee on March 11, 2005 alleging that the noticee had violated the provisions of Insider Trading Regulations and also failed to comply with the summons. It is alleged that the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information relating to the merger of the company Zap Infotech Ltd with SIL.
3. The unpublished price sensitive information was pertaining to the merger of SIL with Zap Infotech Ltd (hereinafter referred to as ZAP) in 2000. It is alleged that the noticee was aware of the said impending merger and executed many transactions on the basis of the said unpublished price sensitive information. On account of the above dealings, the noticee is alleged to have violated the provisions of Regulation 3 of the Insider Trading Regulations.
4. The noticee did not reply to the show cause notice, however, considering the facts of the case, it was decided to conduct an inquiry in the matter and the noticee was advised to attend the inquiry on June 28, 2005. It is noted that the said notice sent by registered post was duly received, however the noticee failed to attend the inquiry on the said date. Subsequently, the noticee was advised to attend the inquiry on July 19, 2005, August 23, 2005 and March 10, 2006. It is noted that the said notices were duly received but the noticee failed to attend the inquiry on the said dates.
5. As the noticee failed to reply to the show cause notice despite being granted sufficient time and opportunities to do so, the inquiry is proceeded on the basis of the facts and material available on record. CONSIDERATION OF EVIDENCE AND FINDINGS 6. The first issue for consideration in the matter is whether the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information and on account of the said dealings, whether the noticee contravened the provisions of the Insider Trading Regulations so as to be liable to the penalty under Section 15 G of the SEBI Act.
7. Regulation 3 of the Insider Trading Regulations as existing on the date of the impugned transactions provided the following : “No insider shall- (i) either on his own or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information ; or (ii) communicate, counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities:
8. Unpublished price sensitive information is defined in Regulation 2(k) which was substituted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20-2-2002. Prior to its substitution, clause (k) read as under : ‘(k) “unpublished price sensitive information” means any information which relates to the following matters or is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market— (i) financial results (both half-yearly and annual) of the company; (ii) intended declaration of dividends (both interim/final); (iii) issue of shares by way of public rights, bonus, etc.; (iv) any major expansion plans or execution of new projects; (v) amalgamation, mergers and takeovers; (vi) disposal of the whole or substantially the whole of the undertaking; (vii) the information as may affect the earnings of the company; (viii) Changes in policies, plans or operations of the company 9. The provisions of Regulation 2(e) of the Insider Trading Regulations at the relevant point of time defined the term ‘insider’ in the following manner : “2. In these regulations, unless the context otherwise requires :—
(e) “insider” means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access by virtue of such connection to unpublished price sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information;” Further, Regulation 2(c) reads as under: Connected person means “any person who i) is a director , as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956), of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act; or ii) Occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company and who may reasonably be expected to have access to unpublished price sensitive information in relation to that company.
10. As per the definition of insider in the said provisions, the noticee cannot be regarded as an insider as apparently no connection is seen between him and the company. However the definition of insider encompasses persons who received the unpublished price sensitive information. As held by the Honourable Securities Appellate Tribunal in Appeal No. 50/2003 DSQ Holdings Limited Vs. SEBI, the person who receives unpublished price sensitive information is clearly in an advantageous position ahead of other investors. The findings of the investigation indicate that the noticee may be part of a group of entities who traded in the scrip, the role played by the noticee have to be analysed to see whether such trades were on the basis of unpublished price sensitive information.
11. It is noted from the findings of investigation that the noticee had traded substantially in the scrip. The details of the trades executed by the noticee is as follows
12. Though the noticee had executed substantial quantity of trades in the scrip, apparently no connection is seen between the noticee and the company which indicate that the noticee had access to the unpublished price sensitive information. It is noted that the noticee was not an officer of the company and he was not connected to the company in any official capacity. Hence on the basis of the evidence available on record, no adverse inference can be drawn against the noticee in respect of the allegation that the noticee had executed trades in the scrip on the basis of unpublished price sensitive information. The evidence available on record do not indicate that the noticee had access to the price sensitive information or such information was communicated to the noticee by any insider. Hence on the basis of the evidence available on record it can not be concluded that the noticee executed the said trades on the basis of unpublished price sensitive information.
13. Investigation report suggests that large number of transactions were executed by many entities who appear to be connected and on the basis of such finding, it is alleged that the purpose of such transactions were for creation of artificial interest in the scrip. In view of the same, alleged violations of the provisions of SEBI (Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 1995 were also observed during the course of the investigation. However it is pertinent to note that the present adjudication proceedings have been instituted for the alleged violation of the provisions of Insider Trading Regulations.
14. On the basis of the facts and evidence available on record, it can not be concluded that the noticee violated the provisions of Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations. As the violations alleged to have been committed by the noticee are not established, no penalty is imposed on the noticee in terms of the provisions of Section 15G of the SEBI Act, 1992 in the present adjudication proceedings.
15. The second issue for consideration in the matter is whether the noticee failed to comply with the notices / summons dated December 10, 2002 and January 17, 2003 issued by SEBI and on account of such failure if any, whether the noticee is liable to the penalty prescribed under Section 15A(a) of the SEBI Act. In this regard, it is pertinent to note that Section 11C(3) of the SEBI Act empowers the Investigating Authority of SEBI to require any person associated with the securities market to furnish such information or to produce such records as may be required by the Investigating Authority. Further, Section 11C(5) empowers the Investigating Authority to examine such persons. Timely submission of information is very important for concluding investigation proceedings and non co-operation by an entity can be detrimental to the interests of investors and securities market on account of any delay in the investigation.
16. It is noted from the facts available on record that there is no proof of delivery of summons dated December 10, 2002, hence the same can not be deemed to be served on the noticee. However, the summons dated January 17, 2003 was duly received. It is noted from the records that the noticee did not appear before the investigating authority on January 23, 2003 as required in the said summons. It is also noted from the evidence available on record that the noticee did not seek any extension of time to appear before the authority or to submit the required details in response to the said summons. Hence it is concluded that the noticee failed to provide necessary information to SEBI. In view of the same, the failure on the part of the noticee to comply with the summons dated January 17, 2003 attract penalty under Section 15A(a) of the SEBI Act.
17. In this regard it is pertinent to note that the noticee failed to attend the inquiry in the present adjudication proceeding. This clearly indicates that the noticee is adopting a non co-operative attitude in the matter and is deliberately avoiding providing any information related to his dealings in the scrip of SIL.
18. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely; a. the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default b. the amount of loss caused to an investor or group of investors as a result of the default c. the repetitive nature of the default
19. It is noted from the details available on record that the noticee had executed substantial trades in the scrip. Investigation report suggest that large number of transactions were executed by many entities who appear to be connected and on the basis of which, it is alleged that the purpose of such transactions are for creation of artificial interest in the scrip. This resulted in increase in the price of the scrip from Rs.10 to Rs.700. Though it is not possible to quantify the gains made by the noticee or the loss caused to investors based on the available facts on record, it is evident from the fact that the price of the scrip increased manifold which would have resulted in loss to many genuine investors and benefit to those who manipulated the price of the scrip. The nexus of the noticee with the said group is evident from the fact that he not only traded in the scrip but also introduced other persons to the brokers for execution of trades in the scrip. Hence the failure on the part of the noticee in providing information to SEBI should be viewed in this context. As the noticee repeatedly failed to attend the inquiry as stated above, the facts and circumstances of the case indicate that the noticee is deliberately avoiding any query from regulatory authorities in respect of his dealings in the scrip of SIL. Hence the violation committed by the noticee has to be viewed seriously and attract maximum penalty prescribed by statute.
20. In this regard, It is pertinent to refer to the order of the Hon’ble Securities Appellate Tribunal in Appeal No.151/2004 in the matter of Rameshchandra Mansukhani NRI vs SEBI, wherein the Honourable Tribunal held that the penalty existing on the date of commission of the violation should be imposed and not enhanced penalty which came into being by way of subsequent amendment. The order passed by the Honourable Tribunal is relied upon in this case.
21. As detailed in the preceding paragraphs, the noticee failed to provide information to SEBI and the said failure attracts penalty under Section 15A(a) of the SEBI Act. In this regard, Section 15A(a) of the SEBI Act as it stood at the time of commission of the violations by the noticee provided the following : Penalty for failure to furnish information, return, etc.: If any person, who is required under this Act or any rules or regulations made thereunder, to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh fifty thousand for each such failure. ORDER 22. Considering the facts and circumstances of the case it is established that Shri Heerachand Salecha failed to provide necessary information to the Investigating Authority of SEBI in response to the summons issued by it. Considering the facts and circumstances of the case and the violation committed by the noticee, I impose a penalty of Rs One Lakh Fifty Thousand (Rs.1,50,000) on Shri Heerachand Salecha in terms of the provisions of Section 15 A (a) of the SEBI Act, 1992 for failure to provide necessary information to SEBI. In the facts and circumstances of the case, I am of the view that the said penalty is commensurate with the violation committed by Shri Heerachand Salecha.
23. The penalty shall be paid by way of demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to General Manager, Investigation Department (ID3), Securities and Exchange Board of India, Plot No. C4-A, ‘G’ Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
24. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to Shri Heerachand Salecha and also to Securities and Exchange Board of India.
PLACE: Mumbai Biju. S DATE: January 4, 2007 Adjudicating Officer |