BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 107 of 2011
Date of decision: 19.10.2011 1) Hindustan Dorr Oliver Limited
2) Shri Prabhakar Ram
Chairman
3) Shri E. Sudhir Reddy,
Vice Chairman
4) Shri E. Sunil Reddy,
Managing Director
5) Shri S. C. Sekaran
Executive Director
6) Shri R. Balarami Reddy,
Non-Executive Director
7) Shri K. H. K. Prasad,
Independent Director
8) Shri T. N. Chaturvedi,
Independent Director
9) Shri S. K. Tamotia
Independent Director
10) Ms. Pragya Sahal,
Compliance Officer
Dorr Oliver House,
Chakala, Andheri (East),
Mumbai – 400 099.
……Appellants Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…… Respondent Mr. J. J. Bhatt, Senior Advocate with Mr . Neerav Merchant, Mr. Bharat Merchant,
Advocates for Appellants.
Mr. Shiraz Rustomjee, Senior Advocate w ith Mr. Ajay Khaire, Advocate for the
Respondent.
CORAM : Justice N. K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : P. K. Malhotra, Member
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The short question that arises for our c onsideration in this appeal is whether
the appellants have violated Clauses 1.2, 3.2( 1) and 3.2(3)(d) of the Model Code of
Conduct for prevention of insider trad ing for listed companies under Regulation
12(1) of the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992 (for short the Regulations).
- The appellants before us are a public limited company, its Chairman, Vice-
Chairman, Managing Director, Directors a nd Compliance Officer. The company is
listed on the National Stock Exchange and on the Bombay Stock Exchange. The
company is into the business of contracti ng and executing engineering contracts. It
receives orders for project execution in vari ous fields and is said to have a dominant
presence in the Pulp and Paper, Chemicals, Food and Pharmaceuticals, Breweries
and Distilleries, Refineries and Petroche mical Sectors, Oil and Gas, Phosphatic
Fertilizers, Industrial and Water Management Solution a nd manufacturing contracts
like setting up of plants for the clients. The appellant company also offers service on
lumpsum turn key basis to its clients. - The Securities and Exchange Board of India (for short the Board) carried out
investigations into the affairs of the company dur ing the period from
February 2, 2009 to March 25, 2009 and noted that the company had informed the
stock exchanges on February 25, 2009 about its having been awarded an order for
Uranium Ore Processing Plant from Uranium Corporation of India Limited worth441 crores for their Greenfield Ore Mining and Processing facility in Andhra Pradesh. The company had also bagged another order worth24 crores from
HPCL – Mittal Energy Limited for detailed engineering, shop and site fabrication,
transportation and supply of Process Pressure Vessels and has informed the stock
exchanges about the same on March 2, 2009. However, on both the occasions it is
alleged that the company had failed to clos e the trading window, as required under
Clauses 1.2, 3.2(1) and 3.2.(3)(d) of the m odel code of conduct, for prevention of
insider trading for listed companies mandated under Regulation 12(1) of the
Regulations. The Board issued separate but identical show cause notices dated
January 24, 2011 to the company, its Chairman, Vice Chairman, Managing Director, 3
Executive Director, four Independent Directors and Compliance Officer asking them
to show cause as to why enquiry should not be held against them in terms of Rule 4
of the Securities and Exchange Board of India (Procedure for Holding Enquiry and
Imposing Penalties by Adjudicating Offi cer) Regulations, 1995 and why penalty
should not be imposed for the aforesaid violations. The noticees submitted their
replies and denied the allegations levelled against them. It was submitted that the
projects in question were undertaken by the company in the course of its normal
business activity of setting up projects for third party which is the primary business
of the company. The company, being an engi neering contractor, sets up projects for
other parties in the ordinary course of its business. The company is not involved in
the expansion or execution of a new projec t for itself as contemplated by Clause
3.2(3)(d) of the model code of conduct and, therefore, it was not obliged to close the
trading window. However, bagging of the project itself being price sensitive
information within the meaning of the regul ations, intimation was given to the stock
exchanges as per rules. The explanation furnished by the company was not accepted
by the adjudicating officer. According to him, bagging of a new contract for any
major expansion plan or execution of ne w project for third party is also price
sensitive information and the company should have closed the trading window when
it bagged an order for441 crores and till the information was published. He analyzed the price and volume of trade in the scrip of the company and concluded that there was a volume jump of more than 10 times and a jump of more than 25 per cent in price after the company informed the stock exchanges about the receipt of
441 crores order. Therefore, according to the ad judicating officer, the trading
window should have been closed as required under the code of conduct for
prevention of insider trading in equity shares and other listed securities of the
company. The same not having been done, the appellants have not complied with
clauses 1.2, 3.2.(1) and 3.2.(3)(d) of the model code of conduct under Regulation
12(1) of the regulations. By the impugned order dated April 29, 2011, the
adjudicating officer imposed a penalty of ` 2,50,000/- on all the appellants under
Section 15HB of the Act. It is against this order that the appellants are in appeal
before us. 4 - We have heard learned counsel for the parties who have taken us through the
records. The award of two contracts, one from Uranium Corporation of India worth441 crores and another from HPCL-Mittal Energy Limited worth24 crores is
not in dispute. It is al so not disputed by the parties that the information about the
award of these contracts was price sensitive within the meaning of the Regulations.
It is for this reason that the company had intimated th e stock exchanges about the
award of these contracts which information was disseminated by the stock exchanges
for the information of the investors. Th e appellants have been found guilty of not
closing the trading window during the peri od when this price sensitive information
was not within the public domain. - Regulation 3 of the Regulations prohibits an insider from dealing in securities
of a listed company on any stoc k exchange either on his ow n behalf or on behalf of
any other person when in possession of a ny unpublished price sensitive information.
Regulation 2(ha) of the Regulations defines price sensitive information as under:-
“2(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:”
Similar embargo is placed on the compa ny under Regulation 3A of the Regulations
also. Regulation 12 of the Regulations pl aces an obligation on all listed companies
and organizations associated with the securities market to frame the code of internal
procedures and conduct as near to the M odel Code specified in Schedule I of the
Regulations, without diluting it in any manner, and mandates them to ensure
compliance of the same. Part A of Sche dule I of the Regulations prescribes the
model code of conduct for prevention of insider trading for listed companies and
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provides that the employees/directors shall maintain confidentiality of all price
sensitive information and they shall not pass on such information to any person
directly or indirectly by way of making recommendation fo r the purchase or sale of
the securities. Para 3 thereof deals with prevention or misuse of price sensitive
information and the relevant portion thereof reads as under:-
“3.0 Prevention of misuse of “Price Sensitive Information”
3.1 All directors/officers and designated employees of the
company shall be subject to trading restrictions as
enumerated below.
3.2 Trading window
3.2.1 The company shall specify a trading period, to be called
“trading window”, for trading in the company’s securities.
The trading window shall be closed during the time the
information referred to in para 3.2-3 is unpublished.
3.2.2 When the trading window is closed, the employees/directors
shall not trade in the company’s securities in such period.
3.2.3 The trading window shall be, inter alia, closed at the time :-
(a) Declaration of financial results (quarterly, half-yearly and
annually).
(b) Declaration of dividends (interim and final).
(c) Issue of securities by way of public/rights/bonus etc.
(d) Any major expansion plans or execution of new projects.
(e) Amalgamation, mergers, takeovers and buy-back.
(f) Disposal of whole or substantially whole of the undertaking.
(g) Any changes in policies, plans or operations of the company.
(h) Any changes in policies, plans or operations of the company.
3.2-3A the time for commencement of closing of trading window
shall be decided by the company.
3.2.-4 The trading window shal l be opened 24 hours after the
information referred to in para 3.2-3 is made public.
3.2-5 All directors /officers/desi gnated employees of the company
shall conduct all their dealings in the securities of the
Company only in a valid trading window and shall not deal in
any transaction involving the purchase or sale of the
company’s securities during the periods when trading
window is closed, as referred to in para 3.2-3 or during any
other period as may be specifi ed by the Company from time
to time.”
In compliance with the above mandate, as prescribed in the regulations, the company
had framed its code of conduct for prevention of insider trading in equity shares and
other listed securities of the company. Para 9 of the said code of conduct makes
provision for the closure of trading window and reads as under:-
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“9. TRADING WINDOW – The Comp any shall specify a trading
period called “Trading Window” of tr ading in the securities of the
Company. The directors/officer s/designated employees of the
Company are prohibited from trad ing in the securities of the
Company where the Trading Window is closed. The Trading
Window shall be closed during the time the information referred
below is unpublished.
The Trading Window, shall be inter alia closed at the time of:
- Declaration of Financial result s (quarterly, half yearly and
annually) - Declaration of dividend (interim or final)
- Issue of securities by way of Public / Rights / Bonus etc.
- Any major expansion plans or execution of new products
- Amalgamation, mergers, takeovers and buyback
- Disposal of the whole or substantially the whole of the
Company’s Undertaking - Any changes in policies, pl ans or operations of the
Company.
When the trading window is cl osed, the Direct ors / Officers /
Designated Employees shall not trad e in the Company’s securities
in such period.”
Learned senior counsel for the appellant , referring to the a bove provisions, has
submitted that there is no dispute that the information with regard to the award of
two contracts is price sensitive. Therefore, this information was furnished to the
stock exchanges. He further stated that every price sensitive information does not
mandate closing of trading window and it is only the information which is mentioned
in clause (a) to (g) of clause 3.2.3 read with para 9 of the code of conduct referred to
above that mandates closure of trading window. In respect of any other price
sensitive information, trading window is not required to be closed. For the purpose
of closing the trading window in the case in hand the information must fall within
para 3.2(3)(d) of the model code of conduct as adopted by the company which
provides for closing of the trading window during the time the information relating
to “any major expansion plan or execution of new projects” is unpublished.
According to learned senior counsel, the in formation with regard to these projects
cannot be said to be unpublished as award of contract is already in the public domain
due to long tendering process involved right from the time of inviting of tenders to
the award of contract. He also submitted that the new projects referred to in the said
clause are projects undertak en by the company concerne d for carrying out its own
expansion or setting up of new project for itself and cannot include the project
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undertaken by the company in the course of its normal business, or setting up of
projects for third party which is its primar y business. By setting up the projects for
its customers in the ordinary course of business, the company would not achieve any
expansion or will not be setting up a new project for itself. Therefore, when a
construction company is awarded a project by a third party for ex ecution, it will not
fall within the said clause.
- Learned counsel for the Board submitted that the trading window is required
to be closed during the time when all price sensitive information falling under
regulation 2(ha) of the Regul ations is in possession of the company and it remains
unpublished. The intention of the Regulati ons, of which the model code of conduct
is a part, is to prevent trading by a pers on while in possession of unpublished price
sensitive information. It, therefore, cannot be said that the provisions of the model
code of conduct regarding closing of the trading window operate in a different sphere
as compared to the Regulations. - Having considered the facts of th e case, submissions made by learned
counsel for the parties and the relevant pr ovision, we find merit in the submissions
made by learned senior counsel for the appellant. The company in question is an
engineering company which undertakes c onstruction projects on behalf of other
companies. The award of tw o contracts through tendering process is not in dispute.
The information relating to award of cont ract is price sensitive and the same was
furnished to the stock exchanges is also not in dispute. The model code of conduct
for prevention of insider trading for listed companies mandates closing of trading
window only when an insider is in possession of any of the information mentioned in
clause (a) to (g) of clause 3.2.3 of the model code of conduct. Sub-clause (d) thereof
provides for closure of trading window at the time of, “any major expansion plans or
execution of new projects” . This sub-clause has to be read in the context of the
meaning assigned to other sub-clauses of the said clause which talk of declaration of
financial results, declarati on of dividend, issue of s ecurities, amalgamation and
mergers etc. All these activities relate to “the company”. Therefore, any major
expansion plans or execution of new projects also necessarily has to be in relation to
“the company”. When a construction company is awarded a contract by a third party 8
for expansion plan or execution of new pr ojects, such expansion or execution of
project is in the normal cour se of its business activity a nd cannot be brought within
the purview of sub-clause (d) of clause 3.2.3 of the model code of conduct. The
definition of ‘price sensitive information’ as given in regulation 2(ha) of the
Regulations is much wider. However, for the purpose of closing the trading window,
the model code of conduct, prescribed in the regulations, has listed only seven
specific contingencies relating to “the company” only. It does not require closing of
the trading window in respect of other price sensitive information. The company,
while framing its code of conduct has list ed all the seven contingencies and these
contingencies relate to the company. Theref ore, we are of the considered view that
the company has not violated the model c ode of conduct when it did not close the
trading window on bagging two contracts in question and till the information with
regard to award of these contracts was made public. We answer the issue formulated
in para 1 above in the negative.
In the result, the appeal is allowed, the impugned order set aside with no
order as to costs. Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
19.10.2011
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