BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 207 of 2010
Date of decision : 18.11.2011 Gujarat NRE Mineral Resources Ltd
(on behalf of Marley Foods Pvt. Ltd. since
Merged with our company), a company duly
Incorporated under the provisions of the
Companies Act, 1956 and having its
Registered office at 22, Camac Street,
Block C, 5th floor,
Kolkata – 700 016. …… Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C-4A, ‘G’ Block,
Bandra Kurla Complex, Bandra (East),
Mumbai.
…… RespondentMr. Janak Dwarkadas, Senior Advocate with Mr. Zal Andhyarujina,
Mr. Kunal Dwarkadas, Advocates for the Appellant.
Mr. D. J. Khambatta, Additional Solicitor Ge neral with Mr. Shiraz Rustomjee, Senior
Counsel, Mr. Aditya Mehta, Mr. Kersi Dastoor, Advocates for the Respondent.
Coram : Justice N.K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S.S.N. Moorthy, Member
Per : Justice N.K. Sodhi, Presiding Officer
Whether the decision taken by a listed i nvestment company to dispose of a part
of its investment is “price sensitive informa tion” requiring mandatory disclosure to the
stock exchange(s) under clause 2.1 of the Code of Corporat e Disclosure Practices as
specified in Schedule II to the Securities and Exchange Board of India (Prohibition of
Insider Trading) Regulations, 1992 (hereina fter called the regulations) is the sole
question that arises for our consideration in these four Appeals no. 207 to 210 of 2010.
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All these appeals are dir ected against a common order dated October 29, 2010 passed
by the adjudicating officer imposing monetary penalties on the appellants for violating
regulations 3 and 4 of the re gulations and clause 2.1 in Sc hedule II to the regulations
and are being disposed of by this order. Si nce the main arguments were addressed in
Appeal no. 207 of 2010, the facts are being noticed from this appeal.
- FCGL Industries Ltd. is a public lim ited company whose shares are listed on
Bombay Stock Exchange Ltd., Mumbai (for short BSE) and Calcutta Stock Exchange,
Kolkata. It shall be referred to hereinafter as FCGL. It is a core investment company
having more than ninety per cent of its asse ts as investment in associated or group
companies. As on June 30, 2005, it was holding 1,67,09,824 shares of Gujarat NRE
Coke Ltd. (for short the Coke company) constituting 17.716 per cent of its total paid-up
equity capital. The board of directors of FC GL in their meeting held on July 4, 2005
decided to acquire coal mining leases in Australia through a special purpose vehicle
which was registered as a company in Aust ralia under the name a nd style of “Gujarat
NRE FCGL Pty Ltd.” It was a joint venture of FCGL and the Coke company. The cost
of acquisition and development of the mi nes was around 80 million Australian Dollars.
FCGL needed substantial funds for the ne w acquisition and its board of directors
discussed various options to raise funds for the purpose and finally decided to dispose
of a part of its investment in the Coke co mpany in order to arrange the requisite funds.
It was decided to sell the shar es of Coke company at suita ble time(s) and the funds so
raised could be parked in short term avenues, if so required. It would be relevant to refer
to the decision taken by FCGL in this regar d. The relevant extract from the minutes of
the meeting of the board of directors of FCGL held on July 4, 2005 is reproduced
hereunder for facility of reference:
“ACQUISITION OF COLLIERY BY M/S. GUJARAT NRE
FCGL PTY LTD. & SOURCING OF FUNDS
Mr. A K Jagatramka informed that the Company’s Australian Joint
Venture M/s. Gujarat NRE FCGL Pty Ltd., has entered into an
agreement to acquire the coal mining leases comprising the whole
of old Avondale colliery and pa rt of Huntley Colliery in the
Southern Coalfields of New South Wales, Australia. 3
The mining leases being transferred comprise of –
- Approximately 5,500 ha within the Illawara Coal
Measures of the Sydney basin. - Wangawilli and Tongarra seams both of which have
been mined previously in the adjoining leases,
producing high fluidity low phos good quality hard
coking coal. - Indicated recoverable reserv es totaling approximately
96 million tones.
The work has commenced on preparation of the development
application so that it can proceed to mining in the shortest possible
time frame. The acquisition and development of the mine will cost
about 80 million Australian Dollars.
He also informed that the Compa ny needs to take steps to arrange
funds to finance the aforesaid mine and considering that substantial
funds could be arranged from sale of investment made in shares of
Gujarat NRE Coke Ltd, it is proposed that the said investment may
be disposed.
Board discussed the matter including other options to raise funds in
this regard and it was decided to dispose of the investment in
Gujarat NRE Coke Limited at suita ble time(s) in order to arrange
the requisite funds well in advance and the funds so raised may be
parked in short term avenues, if so required.”
The aforesaid board meeting was attended, among others, by Shri G. L. Jagatramka and
Shri A. K. Jagatramka who are the chairm an and director respectively of FCGL. Soon
after the board meeting was over, FCGL made on the same day a corporate
announcement to BSE informing the latter about the agreement to acquire the coal
mining leases in Australia. BSE had also been informed that the cost of acquisition and
development of the mines would be around 80 million Australian Dollars. It is common
case of the parties that in pursuance to the board decision, FCGL sold 84,79,709 shares
of the Coke company between July 18, 2005 and September 29, 2005 for the purpose of
raising funds for acquiring coal mining leases in Australia. The corporate announcement
did not mention about the decision of FCGL to dispose of its investment in the Coke
company to raise funds for the acquisition. This non-disclosure has been taken by the
Securities and Exchange Board of India (for short Sebi) as a serious violation of the
regulations and also of clau se 2.1 of the Code of Corp orate Disclosure Practices
specified in Schedule II to the regulations. At this st age it would be relevant to 4
reproduce the press lease issued by the Coke company on behalf of FCGL being its
group company.
“ GUJARAT NRE COKE ACQUIRES 2nd COKING COAL
MINE IN AUSTRALIA
Gujarat NRE Coke Limited (“GNCL”) is pleased to announce that
their Australian joint venture company, Gujarat NRE FCGL Pty
Ltd., has entered into an agreemen t to acquire th e coal mining
leases comprising the whole of ol d Avondale colliery and part of
Huntley Colliery in the Southern Coalfields of New South Wales,
Australia. FCGL Industries Ltd. is also having substantial stake in
the Australian joint venture.
The acquisition subject to ministerial approval also proposes to re-
name the colliery, NRE No 2 Colliery.
The mining leases being transferred comprise of – - approximately 5,500 ha within the Illawara Coal
Measures of the Sydney basin; - Wangawilli and Tongarra seams both of which have
been mined previously in the adjoining leases, producing
high fluidity low phos good quality hard coking coal; - indicated recoverable reserves totaling approximately 96
million tones - In December, 2004, Gujarat NRE Coke completed the
acquisition of the NRE No.1 Colliery which is located in
close proximity to the proposed NRE No.2 colliery.
The Vice Chairman & Managing Di rector of Gujarat NRE Coke,
Mr Arun Jagatramka said “this strategic investment further
strengthens the position of our company in the Southern Coalfields
of New South Wales. The Southe rn Coalfields is renowned for
producing high quality hard coking coal and the investment makes
sense given its vicinity to our NRE No.1 Colliery and the potential
benefits of ownership in two nearby collieries.”
The Company has commenced work on preparation of the
development application so that it can proceed to mining in the
shortest possible timeframe. The acquisition and development of
the mine will cost about 80 million AUD.
Gujarat NRE Coke was advised by Ernst & Young Mergers &
Acquisitions Division as lead corporate finance advisors and Corrs
Chambers Westgarth as legal advisors.”
- Sebi carried out investigations in th e scrip of FCGL during the period from
September 5, 2005 to September 24, 2005 and found that Matangi Traders and Investors
Limited and Marley Foods Private Limited (hereinafter referred to as Matangi and
Marley, respectively) had bought the shares of FCGL during the investigation period on 5
the basis of unpublished price sensitive inform ation. Sebi further found that Shri G. L.
Jagatramka and Shri A. K. Jagatramka who attended the board meeting of FCGL on
July 4, 2005 were also the directors of Ma tangi and Marley which were persons acting
in concert with the promoters and directors of FCGL. Investigations further revealed
that Marley had purchased 3,00,000 shares of FCGL and Matang i purchased 50,000
shares of FCGL during the quarter endi ng September, 2005. This, according to Sebi,
was in violation of regulations 3 and 4 of th e regulations and clause 2.1 of the Code of
Corporate Disclosure Practices for prevention of insider trading as prescribed by the
regulations. Sebi decided to initiate adj udication proceedings against Matangi, Marley,
G. L. Jagatramka and A. K. Jagatramka alle ging that Matangi and Marley had violated
regulations 3 and 4 of the re gulations and the two Jagatramkas had violated clause 2.1
of Schedule II to the regulations in addition to violating regulations 3 and 4. Separate,
though identical, show cause notices all dated July 1, 2009 were issued to these four
persons calling upon them to show cause w hy monetary penalty be not imposed on
them under sections 15G and 15HB of the Secu rities and Exchange Board of India Act,
1992 (hereinafter called the Ac t). Separate replies were filed by all the four noticees
denying the allegations. They were also afforded a personal hearing and on a
consideration of the material collected durin g the course of the i nvestigations and the
enquiry and also taking note of the replies filed by the noticees, the adjudicating officer
by a common order dated October 29, 2010 found them guilty of the charges levelled
against them and imposed a penalty of Rs.1 crore and Rs.20 lacs on Marley and
Matangi respectively and a sum of Rs.40 lacs on each of the two Jagatramkas. Hence
these appeals. It may be mentioned that Marley has since merged with Gujarat NRE
Mineral Resources Ltd. which is the appellant in Appeal no. 207 of 2010. - We have heard the learned senior counsel on both sides and are of the view that
the appeals deserve to succeed. As already noti ced in the opening part of the order, the
question before us is whether the informa tion regarding the decision of FCGL to
dispose of its investment in the Coke company was price sensitive. The answer to this
question depends upon the interpretation of the term “price sensitive information” as 6
given in the regulations. We may now refer to the relevant provisions of the regulations
which have a bearing on the allegations made against the appellants. “Price sensitive
information” has been defined in regulat ion 2(ha) and the words ‘insider’ and
‘unpublished’ in clauses (e) and (k) of regulation 2. Regulations 3 and 4 prohibit insider
trading and all these provisions are reproduced hereunder for facility of reference:
“2. In these regulations, unless the context otherwise requires:-
(e) “insider” means any person who,
(i) is or was connected with the company or is deemed to have
been connected with the co mpany and who is reasonably
expected to have access to unpublished price sensitive
information in respect of securities of a company, or
(ii) has received or has had access to such unpublished price
sensitive information;
(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 substa ntial part of the undertaking;
and
(vii) significant changes in policies, plans or operations of the
company;
(i) ………………………………….
(j) ………………………………………………
(k) “unpublished” means information which is not published
by the company or its agents and is not specific in nature.
Explanation.- Speculative reports in print or electronic media shall
not be considered as published information;
(l) …………………………………………………………..
- 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 any
unpublished price sensitive information; or
(ii) communicate counsel or procur e 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:
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Provided that nothing contained above shall be applicable to any
communication required in the or dinary course of business or
under any law.
- Any insider who deals in secur ities in contravention of the
provisions of regulation 3 shall be guilty of insider trading.”
Regulation 3, among others, prohibits an insider either on his own behalf or on behalf of
any other person from dealing in securities of a company listed on any stock exchange
when he is in possession of any unpublished price sensitive information and any person
who deals in securities in contravention of regulation 3 is said to be guilty of insider
trading. In the case before us, it is not in dispute that FCGL in its board meeting had
decided to sell a part of its investment in the Coke company and actually sold 84,79,709
shares of the Coke company to raise funds fo r the aforesaid acquisitio n. It is also the
admitted case of the parties that both Shri G. L. Jagatramka and Shri A. K. Jagatramka
attended the board meeting. Th ese two directors of FCGL are also the directors of
Matangi and Marley who traded in the sc rip of FCGL during the quarter ending
September, 2005. The fact that FCGL had deci ded to dispose of its investment in the
Coke company had not been intimated to BS E and therefore this information remained
unpublished and the two Jagatramkas bein g common directors made Matangi and
Marley insiders which traded in the scrip of FCGL. In other words, Matangi and Marley
when in possession of unpublished information traded in the scrip. Regulation 3 of the
regulations would stand violated only if the unpublished information was price sensitive
in nature. A reading of the definition of “price sensitive information” as reproduced
above would make it clear that the informa tion which relates to a company and which
when published is likely to materially affect the price of its secu rities would be price
sensitive. FCGL is an investment company whose business is only to make investments
in the securities of other co mpanies. It earns income by buying and selling securities
held by it as investments. This being the normal activity of an investment company,
every decision by it to buy or sell its investments would have no effect, much less
material, on the price of its own securities. If that were so then no investment company
would be able to function because every tim e it would buy or sell securities held as
investments, it would have to make disclo sures to the stock exchange(s) where its
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securities are listed. Such d ecisions of an investment co mpany, in our opinion, do not
affect the price of its securities. The explan ation to the definition has seven clauses and
information in regard to all those matters is treated as price sensitive. The adjudicating
officer has placed strong reliance on clause (vi) thereof which deals with “disposal of
the whole or substantial part of the undert aking”. These words would mean when a
company decides to dispose of the whole or substantial part of its business activity or
project in which it is engaged. The wo rd ‘undertaking’ cannot possibly mean
investments held by an investment company which are its stock-in-trade. To illustrate, if
a manufacturing company were to dispose of the whole or a substantial part of its
manufacturing unit, it would be an event whic h would materially affect the price of its
securities and according to the explanation it would be price sensitive requiring the
company to make the necessary disclosures at the earliest. On the other hand, if a
manufacturing company were to sell its pr oducts or buy raw materials, it would be a
part of its normal business activity which w ould not be price sensitive and not required
to be disclosed. In our opinion, the adjudi cating officer has completely misdirected
himself in placing reliance on clause (vi) of the explanation to hold that the decision of
FCGL to dispose of a part of its investment in the Coke company was price sensitive in
nature. We have, therefore, no hesitation in holding that the decision taken by FCGL in
the board meeting on July 4, 2005 regarding the disposal of its investment in the Coke
company to raise funds for acquiring coal mi nes in Australia was not price sensitive
information within the meaning of the regulations. We are in agreement with the
learned senior counsel for the appellants that the non-disclosure in the press release was
only in regard to the source of funds thr ough which FCGL was to acquire the coal
mines and the decision meant only switching of investments which is a part of normal
business activity of an investment compa ny. Interestingly, the adjudicating officer in
para 34 of the impugned order has himsel f observed that the method of funding a
project is not per se price sensitive inform ation but nevertheless goes on to hold that
since the price of the scrip of FCGL had gone up, the decision of FCGL to dispose of
the investment in the Coke company was pr ice sensitive. The adjudicating officer has
missed the real point. The price of the sc rip of FCGL had gone up not because it
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decided to dispose of its investment in the C oke company but because of the fact that it
acquired coal mines in Australia which info rmation was price sens itive and had been
disclosed to the market. We cannot, theref ore, uphold the findings of the adjudicating
officer.
In the result, the appeals are allowe d and the impugned order set aside leaving
the parties to bear their own costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S.S.N. Moorthy
Member
18.11.2011
Prepared & compared by-ddg/-