BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.138 of 2011
Date of Decision: 16.12.2011
Shri E. Sudhir Reddy
Vice Chairman of Hindustan Dorr Oliver Ltd.
Dorr Oliver House, Chakala,
Andheri(East), Mumbai – 400 099.
….. Appellant 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 and Mr. Bharat Merchant,
Advocates for Appellant.
Mr. Shiraz Rustomjee, Senior Advocate with Mr. Ajay Khaire and Ms. Amrita Joshi,
Advocates for the Respondent.
CORAM : P.K. Malhotra, Member
S.S.N. Moorthy, Member
Per : P.K. Malhotra, Member
This appeal is directed against th e order dated June 30, 2011 passed by the
adjudicating officer of the Securities and Exch ange Board of India (for short the Board)
holding the appellant guilty of violating sec tion 12A (d) and (e) of the Securities and
Exchange Board of India Act, 1992 (for short the Sebi Act) read with Regulation 3(i) and
4 of the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992 (for short the Inside r Trading Regulations) and imposing a penalty of
` 3 lacs on the appellant.
- The facts of the case, in brief, are that the Board carried out investigation into the
trading of the scrip of Hindustan Dorr Oliver Limited (the company) for the period from
February 2, 2009 to March 25, 2009 and found that Mr. E. Sudhir Reddy, the appellant
before us, who was also the non executive Vice Chairman and Director of the company,
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traded in the scrip of the company while he was in possession of unpublished price
sensitive information. Investigations also re vealed that the appellant traded through CIL
Securities Ltd and bought 40,000 sh ares during the investigation period. The company
bagged a contract for uranium ore processing plan t from Uranium Corporation of
India Limited (UCIL) worth ` 441 crores and informed about the same to the
stock exchanges on February 25, 2009. Howeve r, before providing this information to
the stock exchanges, the appellant bought 19,721 shares of the company on February
9/10, 2009 when information regarding award of the contract was still unpublished.
Being an insider and being in possession of unpublished pri ce sensitive information, the
appellant dealt with the shares of the comp any and hence allegedly violated section 12A
of the Sebi Act read with regulation 3(i) and 4 of the Insider Trading Regulations.
- A show cause notice dated February 17, 2011 was issued to the appellant
requiring him to show cause as to why an en quiry should not be held against him and
why penalty should not be imposed on him und er Section 15G of the SEBI Act. The
appellant replied to the show cause notice de nying the allegations. After affording an
opportunity of hearing to the appellant, the adjudicating officer held him guilty of the
charges and, vide his order date d June 30, 2011, imposed a penalty of ` 3 lacs. Hence
this appeal. - We have heard the learned senior couns el for the parties who have taken us
through the records. The term ‘insider trading’ is generally used in the negative sense as
it is perceived that the persons having access to the price sensitive and unpublished
information use the same for their personal gain. Section 12 A of the Sebi Act makes
provision for prohibition of manipulative or deceptive devices, insider trading and
substantial acquisition of securities and, inter-a lia, provides that no person shall directly
or indirectly engage in insider trading or deal in securities while in possession of material
or non-public information. Regulation 4 of the Insider Trading Regulations provides that
any insider who deals in securities in contravention of the provisions of regulation 3 and
3A shall be guilty of insider trading. Regulation 3(i) of the said Regulations provides that
no insider shall either on his own behalf or on behalf of any other person, deal in
securities of a company listed in any stock exchange when in possession of any
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unpublished price sensitive information. Regulation 2(ha) defines ‘price sensitive
information’ to mean any information which relates directly or indirectly to a company
and which if published is likely to materially affect the price of the securities of the
company. Regulation 2(k) defi nes ‘unpublished’ to mean information which is not
published by the company or its agents and is not specific in nature. Section 2(e) defines
‘insider’ to mean any person who is or was co nnected 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 resp ect of securities of a company or has
received or had access to such unpublished price sensitive information.
- When we look at the facts of the pres ent case with reference to the legal
provisions discussed above, we find that the appellant being the Vice-Chairman and also
on the Board of Directors of the company was a person who is deemed to be a connected
person and falls within the definition of ‘insider’ under Regulation 2(e) of the
Regulations. It is also not in dispute that the appellant purchased 19,721 shares of the
company on February 9/10, 2009 i.e. before the intimation of award of contract was
furnished to the stock exchanges on Febr uary 25, 2009. It was argued by the learned
senior counsel for the appellant that the contract was awarded to the company after a long
drawn process of inviting tende rs, submission of technical bi ds, submission of financial
bids, issue of LOI etc and, therefore, it was already in public domain and hence the
information was not price sensitive. The pr ice sensitive information was the award of
contract on February 24, 2009 and this in formation was disseminated to the stock
exchanges on February 25, 2009. Prior to the award of the contract to the company by
UCIL, the appellant was not in possession of any unpublished price sensitive information
and, therefore, by purchasing 19,721 shares on February 9/10, 2009, the appellant has not
violated the provisions of the SEBI Act or the Insider Trading Regulations. It was further
argued by him that bagging of order from UCIL worth ` 441 crores is not covered under
‘any major expansion plans or execution of ne w projects’ referred to in clause (iv) of
explanation to regulation 2(ha) because the contract was awarded to the company in the
ordinary course of its business and was not expansion or execution of its own project. He
drew our attention to the order dated October 19, 2011 of this Tribunal in Appeal no. 107
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of 2011 in the case of the company involving the same transaction where a view has been
taken that any major expansion plan or executi on of new project necessarily has to be in
relation to the company and not of a contract awarded by a third party in the normal
course of the business activity of the comp any. Therefore, according to the learned
senior counsel, the adjudicating officer has misdirected himself in concluding that any
‘major expansion plan or execution of new pr oject’ referred to in the definition of price
sensitive information under regulation 2(ha) will include a contract awarded to the
company and, therefore, findings arrived at by the adjudicating officer on the basis of the
said observations cannot be sustained.
- Learned senior counsel for the responde nt supported the order passed by the
adjudicating officer and submitted that when appeal of the company involving the same
transaction was argued, the appellant had admitted that the information regarding bagging
of the contract for uranium ore processing plant from UCIL was price sensitive
information. Being a director of the compa ny, he was privy to the developments taking
place. The company was declared the lowest bidder as early as on January 27, 2009 and
final meeting of UCIL and the company o fficials took place on February 9, 2009 and on
the same day the appellant placed order for purchase of the shares. The appellant being an
insider had traded in the scrip of the company while possessing/holding unpublished
price sensitive information. It was submitted by the learned counsel for the respondent
that the order passed by the adjudicating officer calls for no interference. - We have given our thoughtful considera tion to the submissions made by learned
counsel for the parties and have also cons idered the material placed on record. A
shareholder becomes an owner of the company to the extent of the value of shares held
by him. He is therefore, entitled to his share in the profits earned by the company.
Therefore, performance of a company is of primary importance to the investors as well as
to the general public who mi ght be interested in investing in the company. The
shareholders and general public get informa tion about the company either through the
annual report or during the annual general meeting. However, persons in the company or
otherwise concerned with the affairs of the company are in possession of such
information before it is actually made public. The directors of the company or for that
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matter even professionals like Chartered Accountants and Advocates advising the
company on its business related activities ar e privy to the performance of the company
and come in possession of information which is not in public domain. Knowledge of
such unpublished price sensitive information in the hands of persons connected to the
company puts them in an advantageous posi tion over the ordinary shareholders and the
general public. Such information can be used to make gains by buying shares
anticipating rise in the price of the scrip or it can also be used to protect themselves
against losses by selling the shares before the price falls. Such trading by the insider is
not based on level playing fiel d and is detrimental to the interest of the ordinary
shareholders of the company and general public. It is with a view to curb such practices
that section 12A of the Sebi Act makes provi sions for prohibiting insider trading and the
Board also framed the Insider Trading Regulations to curb such practice.
- Examined in this background, we find that the appellant being one of the directors
of the company, was a connected person with the company and falls within the definition
of ‘insider’ contained in regulation 2(e) of the Insider Trading Regulations. It is also not
in dispute that he purchased 19,721 shares as on February 9/10, 2009 when in possession
of information that the company was declar ed the lowest bidder for the project in
question. Accepting the argument of the learned senior counsel for the appellant that it is
the award of contract on February 25, 2009 alone that was unpublished price sensitive
information and the information prior to that with regard to the appellant having been
declared lowest bidder was not unpublished price sensitive information as it was in public
domain, will defeat the purpose of Insider Trading Regulations. No doubt, the tendering
process is a long procedure i nvolving various stages and it may be difficult to lay down
any parameter as to at which stage the info rmation in a tendering process will become
price sensitive for the purpose of Insider Trading Regulations. It will depend on the facts
and circumstances of each case. In the cas e in hand, when the appellant purchased the
shares from the market, he had knowledge th at the tendering proc ess is complete and
only award of contract remains. Being an insider it was incumbent upon him not to deal
in the scrip of the company when this information was still unpublished from the point of
view of ordinary shareholders. The term ‘unpublished’ has a definite connotation under
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the Insider Trading Regulations and it has to be interpreted in the way as stated in the
said regulations. Regulation 2(k) defines ‘unpublished’ to mean information which is not
published by the company or its agents and is not specific in nature. Admittedly, such
publication took place only when the informati on of award of contract was disseminated
to the public through stock exchanges on Fe bruary 25, 2009. There is no doubt that the
appellant was privy to the information even before it was put in public domain by way of
the above publication. That being so, we do not find any infirmity in the order passed by
the adjudicating officer holding the appellant guilty of violating Section 12A (d) and (e)
of the Sebi Act read with regulation 3(i) a nd (4) of the Insider Tr ading Regulations. In
Appeal no.107 of 2011 in the case of the company involving same transactions and
decided by us on October 19, 2011, the charge against the company was different. In that
case the charge against the co mpany was of violating the model code of conduct by not
closing its trading window for pr evention of insider trading. In that case, we have held
that the company has not violated the mode l code of conduct when it did not close the
trading window on bagging the contract in question and till the information with regard to
award of the contract was made public. The definition of price sensitive information for
the purpose of closing the trading window by the company under its code of conduct is
much narrower than the definition of price sensitive information as given in section 2(ha)
of the Insider Trading Regulations.
- We may note another argument of the lear ned senior counsel for the appellant. It
was argued by him that the adjudicating officer has held the appellant guilty of insider
trading because the award of contract by UC IL to the company has been held to be
covered under clause (iv) of the explanati on under regulation 2(ha ) which provides that
‘any major expansion or execution of new project s’ to be price sensitive information. In
view of the fact that in the case of the company, this Tribunal has held that any expansion
plans or execution of new proj ects necessarily has to be in relation to the company and
that when a construction company is awarded a contract by a third party for execution of
new projects, such execution of project is in the normal course of its business activity, the
impugned order needs to be set aside. We are unable to agree with this argument as well.
The order passed by the adjudicating officer can be sustained for the reasons other than
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the reasons given by him on the same set of facts. In the earlier part of this order we have
already held that when the appellant, as an insider, traded in the shares of the company on
February 9/10, 2009 he was in possession of unpublished price sensitive information.
Therefore the charge can be upheld for the reasons recorded by us.
In the result, we are not inclined to interfere with the order passed by the
adjudicating officer. The appeal fails and the same is dismissed with no order as to costs.
Sd/-
P.K. Malhotra
Member
Sd/- S.S.N. Moorthy
Member
16.12.2011
Prepared and compared by
RHN