Chintalapati Srinivasa Raju vs Securities and Exchange Board of India

Regn 2(e)(i) – Insider – Connected person – Satyam scam – Mother of the Chairman, though relative, yet made off market transactions way back in 2003 – Whole time member and majority judgment of the appellate tribunal holding that mother being the close relative, thus, must be presumed that she had access to UPSI – On appeal, held: CBI or the Enforcement Directorate did not proceed against the mother nor was referred to by the SFIO’s report – She was neither promoter nor director of SCSL – Thus, the test of the second part of clause 2(e)(i) not met with – Furthermore, had she been in possession of UPSI, she would also have sold shares at their peak price instead of selling them at a depressed price in 2003 – Thus, the majority judgment set aside.

Regn 2(e)(i) – Insider – Satyam scam – Chairman’s sons roped in by the Whole time member and the appellate tribunal – On appeal, held: Second limb of clause 2(e)(i) cannot be put against either of the sons – There was no evidence of any complicity in the fraud committed by their father – Given the fact that they were expressly exonerated of the said fraud by the appellate tribunal, and that they were running independent businesses and were neither directors nor promoters of SCSL, and that they sold their shares for business purposes at a price much less than the peak price at which their father sold shares of SCSL in 2006, no case made out against them.

Regn 2(h)(ix) – Insider – Person deemed to be connected person – Satyam scam – Appellant-private limited company owned shares of Satyam company which were pledged as security for obtaining a loan amount, that was borrowed to provide funds to ten independent companies, owned by the family of the Chairman – Majority judgment of the appellate tribunal held the appellant company as deemed to be a connected person u/Regn 2(h)(ix) – On appeal, held: Shareholding pattern of the appellant company, made it clear that Chairman and his brother individually held more than 10% interest in the appellant company, thus, the appellant company is deemed to be a connected person u/Regn 2(h)(ix) – Further, the appellant company was an ‘insider’ under the Regulations – It had pledged and got the shares of Satyam belonging to the Chairman and his brother and their spouses sold when in possession of UPSI and thus, violated SEBI Act and the Regulations – Thus, the finding of the majority judgment upheld.

Regn 2(e)(i) and (ii) – Insider trading – Unpublished Price Sensitive Information (UPSI) – Satyam scam – Appellant-younger brother of the Chairman, roped in by the appellate tribunal – On appeal, held: From s. 246 it is clear that the SFIO’s report can be used as evidence in any other proceeding – By virtue of s. 246, it is possible to appreciate the role of the appellant in the so-called Satyam scam – Also, the judgment of the Special Court, delivered long after the show cause notice, proved that the appellant also played active role in the criminal conspiracy and cheating of SCSL, its share holders and investors – While it is true that adjudication proceedings and criminal proceedings are separate proceedings, the relevance of the Special Court’s judgment is only for the purpose of showing that the second part of the definition of an “insider” is made out in the appellant’s case – He was reasonably expected to have access to UPSI in respect of the securities of SCSL – Thus, SFIO’s report as well as the Special court judgment clearly and unmistakably points to the complicity of appellant, unlike that of the other family members, in the fraud committed – Majority judgment of the appellate tribunal upheld – Companies Act, 1956 – s. 246. Disposing of the appeals, the Court

HELD:

Civil Appeal No. 16805 of 2017

1.1 Regulation 2(e)(i) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 is in two parts. The first part has reference to any person who is connected with the company or is deemed to be connected with the company. There can be no doubt that the definition of “connected person” contained in Regulation 2(c) would rope in the appellant under sub-clause (i) thereof, as the appellant was undoubtedly a director of SCSL upto 2003. However, the second limb of clause 2(e)(i) also has to be satisfied, which is that such person must reasonably be expected to have access to unpublished price sensitive information by virtue of such connection in respect of securities of a company. It has been held that the word “and” should be given its ordinary meaning and should be understood in a conjunctive sense, unless it would lead to an absurd situation or an unintelligible result. [Para 10] [806-F-H; 807-A]

Maharaja Sir Pateshwari Prasad Singh v. State of U.P. (1963) 50 ITR 731 ; M. Satyanarayana v. State of Karnataka, (1986) 2 SCC 512 ; Union of India v. Justice S. S. Sandhawalia [1994] 1 SCR 83 : (1994) 2 SCC

240 ; Spentex Industries Ltd. v. CCE [2015] 11 SCR

487 : (2016) 1 SCC 780 – referred to.

1.2 In the instant case, the SEBI (Prohibition of Insider Trading) Regulations, 2015 throw considerable light on the definition of “insider”, as an insider is now defined to mean only a person who is a connected person or a person who is in possession of or having access to unpublished price sensitive information. Obviously, post 2015, an “insider” need not satisfy the second test of the 1992 Regulations and it is enough that such person be a “connected person” as defined. The disjunctive “or” contained in the 2015 Regulations must be contrasted with the expression “and” contained in the 1992 Regulations. Therefore, it is clear that the majority view of the appellate tribunal, in giving effect to only the first part of Regulation 2(e)(i) of the 1992 Regulations, cannot be sustained in law. Further, under the second part of Regulation 2(e)(i), the connected person must be “reasonably expected” to have access to unpublished price sensitive information. The expression “reasonably expected” cannot be a mere ipse dixit – there must be material to show that such person can reasonably be so expected to have access to unpublished price sensitive information. [Paras 10, 11] [807-B-E]

1.3 The minority judgment of the appellate tribunal correctly brings out the role of the expression “and” contained in Regulation 2(e)(i). The judgment also correctly appreciates the difference in language in Regulation 3 before and after it was amended in 2002, and contrasts the expression “on the basis of” with the expression “when in possession of”. The minority judgment then goes on to refer and rely upon the SFIO’s report, which found that the manipulation of financial statements was done by the Chairman and his cohorts, and was suppressed from the board of directors, which would include the appellant as a member of such board. The said judgment went on to hold that the appellant cannot be described as a promoter inasmuch as the annual reports, which contained his signatures as a director, did not show him as a promoter. What was done behind his back was that the Chairman and his brother described him as a promoter only to various stock exchanges in letters written to those exchanges without the knowledge or consent of the appellant. The minority judgment also refers to the fact that the appellant’s shares were not subject to a lock-in period at the time of merger of SES into SCSL, which lock-in period was mandated by law for promoters. In fact, the appellant was one of the persons duped by them and was, therefore, a victim of the fraud perpetrated by the former Chairman of SCSL. [Paras 12, 13] [807-F-G; 808-C-D]

1.4 It was also found that by the year 2006, all the actual promoters disposed of their shareholding in SCSL because they were aware of the credit crunch faced by SCSL. The fact that the appellant continued to retain substantial shareholding in SCSL right till the end of 2008 clearly points to lack of possession of UPSI. Another important point is that the last transaction of sale of shares by the appellant on 22.12.2008, which was a substantial chunk of shares, was made by the appellant just like any other shareholder of SCSL. News had got out into the market that the merger proposal of SCSL with MI Limited and M Properties was not going ahead. The hysteria in the share market resulted in a steep drop in the price of shares of SCSL. The fact that the appellant disposed of a huge chunk of his shareholding on 22.12.2008 to avail of the price on that date completely negates the inference that there was any information flow between the Chairman, his brother and the appellant. It was also pointed out that the appellant had no professional or business relationship with his co-brother and had no connection with any of the entities floated by his co-brother. The fact that the appellant was not involved with fraudulent manipulation is clear from the fact that he ceased to be an executive director in the year 2000. Fraudulent manipulation began only from 2001 onwards. It was also considered significant by the minority judgment that the appellant was not a nominee of SCSL on the board of directors of SL Company, but of another third party investor. [Para 14] [809-CG]

1.5 Non-executive directors are, therefore, persons who are not involved in the day to day affairs of the running of the company and are not in charge of and not responsible for the conduct of the business of the company. It is also important to note that the appellant attended only six out of ten board meetings of SCSL for the period that he was a non-executive director. The appellant was not involved in any business development, diversification plans and advise on new ventures of SCSL post 1999. It was also held by the minority judgment that the findings of the Whole Time Member and the majority went clearly beyond the show cause notice, which, when read with Annexure 15 thereof, makes it clear that the appellant is only sought to be roped in as a promoter. Once it is found that he is not a promoter, then the basis of the show cause notice goes as also the basis of the impugned judgment. [Paras 16, 18] [811-C; 813-D-E]

1.6 Even though the definition of “control” in the 1997 Regulations is an inclusive one, yet the definition shows that control must mean a right to appoint majority of directors as a shareholder or to control management or policy decisions exercisable by persons in any manner. The appellant was an executive director on a fixed monthly salary, which was roughly in the range of Rs.1,00,000/- per month, when he stepped down as an executive director in 2000. After stepping down, the salary was stopped, and he was paid only for board meetings which he attended. Nothing has been shown to indicate that, on facts, such executive salaried director was in any manner in control of SCSL directly or indirectly. The absence of the word “independent” in the annual report also does not take us very far, inasmuch as it is admitted that he was a non-executive director from 2000 to 2003, who only attended six board meetings and received salary therefor. It has not been shown how the appellant was in any manner responsible for actions taken by those in the management of SCSL. It is demonstrated that the minority judgment is much more detailed and correct than the majority judgment of the appellant tribunal. The submission that in cases like the present, a reasonable expectation to be in the know of things can only be based on reasonable inferences drawn from foundational facts is accepted. [Para 20] [816-C-G]

1.7 From the mere fact that the appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of the Chairman, without more, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed. The fact that the appellant was to be continued as a director till replacement again does not take anywhere. Two other independent non-executive directors were appointed in his place on and from 23.1.2003. It is clear that the appellant devoted all his energies to the businesses he was running, on and after resigning as an executive director of SCSL, as a result of which the salary he was being paid by SCSL was discontinued. [Para 21] [817-C-D]

1.8 Having regard to the findings contained in the minority judgment and the discussion, the minority view is correct both in law and on facts and is accepted. Therefore, the majority judgment of the appellate tribunal is set aside. [Para 22] [817-E-F] Pooja Ravinder Devidasani v. State of Maharashtra (2014) 16 SCC 1 ; Godrej Industries Ltd. v. CCE (2008) 17 SCC 471 ; SACI Allied Products Ltd. v. CCE [2005] 3 SCR 881 : (2005) 7 SCC 159 ; SEBI v. Kishore R. Ajmera [2016] 1 SCR 1118 : (2016) 6 SCC 368 – referred to.

Dovey and the Metropolitan Bank v. John Cory

[1901] AC 477 – referred to.

Civil Appeal No. 19494 of 2017

2.1 On facts, the appellant sold 8,00,000 shares from 4.1.2001 to 14.3.2001. The occurrence of the UPSI was only from 31.3.2001 and inasmuch as these sales were made prior to this date, obviously, the 1992 Regulations would not get attracted. The minority judgment of the appellate tribunal referred to this and stated that the result would be the same as the result in Appeal No.462 of 2015. In that case also, shares had been sold prior to the occurrence of the UPSI and on the self-same ground, appeal had been allowed by the majority judgment of the appellate tribunal with the minority concurring. The minority judgment further went on to state that 24,00,000 shares also, which were never sold but were merely returned to ‘CS’, could not form the basis of any disgorgement order. The same is concurred with. [Para 25] [818-C-E]

2.2 The appellant company does not have persons who are relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) – under these sub-clauses, a person is deemed to be a connected person if such person is a relative of persons in clauses (i) to (v); or is a banker of the company; or is a relative of a connected person. Since none of these clauses are attracted, it is obvious that Section 2(h)(ix) would also, as a matter of law, not be attracted in the facts of this case. In this view, the majority judgment of the appellate tribunal judgment is set aside. [Para 27] [819-A-B]

DIARY NO. 37202 of 2017

3. Appellant, father of ‘CSR’, was neither a promoter nor a director of SCSL and had died on 3.12.2007. He was a connected person to ‘CSR’, being his father, but as the shares which stood in his name were sold in August, 2005, he could not possibly be a relative of a connected person as ‘CSR’ himself ceased to be a connected person on and from July, 2003. The minority judgment of the appellate tribunal correctly appreciated the said position. [Para 28] [819-C-D]

Civil Appeal No. 17303 of 2017

4. It was submitted that there was no evidence whatsoever of any complicity of the mother with the fraud perpetrated by her son and his cohorts; and that all that has been found against his client is that she is a close relative of the Chairman and by virtue of this close relationship, it, therefore, must be presumed that she had access to UPSI. Indeed, this was the basis of both the Whole Time Member’s judgment as well as the majority judgment of the appellate tribunal. Given the fact that this lady was not proceeded against by the CBI or by the Enforcement Directorate and that the SFIO’s report does not, in any manner, refer to her, and given the fact that she was neither promoter nor director of SCSL, it is obvious that the test of the second part of clause 2(e)(i) is not met with. Also, had she been in possession of UPSI, she would also have sold shares at their peak price instead of selling them at a depressed price in the year 2003. Thus, the majority judgment of the Appellate Tribunal is set aside. [Para 30] [820-C-F]

Civil Appeal No. 17313 of 2017 and 17978 of 2017

5. Given the fact that the second limb of clause 2(e)(i) cannot be put against either of these appellants-sons of the Chairman, in that there is no evidence of any complicity in the fraud committed by their father; given the fact that they were expressly exonerated of the said fraud by appellate tribunal; and given the fact that they were running independent businesses and were neither directors nor promoters of SCSL, and that they sold their shares for business purposes at a price much less than the peak price at which their father sold shares of SCSL in 2006, no case has been made against them. The appellate tribunal judgment is set aside in this behalf. [Para 31] [821-C-D]

Civil Appeal No. 17997 of 2017

6. It has been held that in the majority judgment of the appellate tribunal, the amount that was borrowed by the appellant company was utilised to provide funds to 10 private limited companies, which were owned by the Chairman’s family. Equally, the shareholding pattern of the appellant company, as it stood on and from 18.9.2006, made it clear that the Chairman and his wife held 33.11% and 40.52% respectively, whereas the balance was held by his brother and his wife. Obviously, therefore, as the Chairman and his brother individually held more than 10% interest in the appellant company, the appellant company is deemed to be a connected person under Regulation 2(h)(ix) of the 1992 Regulations. The decision of the WTM of SEBI that appellant company was an ‘insider’ under the PIT Regulations and that the appellant company pledged and got the shares of Satyam belonging to Chairman and his brother and their spouses sold when in possession of UPSI and thus SRSR violated SEBI Act and the PIT Regulations cannot be faulted. This finding of the majority judgment of the appellate tribunal is concurred with. [Para 33] [821-G-H; 822-A-B, E; 823-C]

Civil Appeal No. 17383 of 2017

7.1 From Section 246 of the Companies Act, it is clear that the report can be used as evidence in any other proceeding. Even though it is correct to state that this report was delivered on 13.4.2009, i.e. before the show cause notice was issued on 19.6.2009, the mere fact that this was not put against the appellant in the show cause notice cannot be any reason for this Court not to independently view the same. The appellant has not chosen to assail the findings contained in this report in a writ petition filed before the High Court. Under Section 246, this Court is empowered to look at the same as evidence of the opinion of the inspector concerned in relation to any matter contained in the report. By virtue of Section 246, therefore, it is possible to appreciate the role of the appellant in the so-called Satyam scam. Also, the judgment of the Special Court, which was delivered only on 9.4.2015 i.e. long after the show cause notice, proved that the accused also played active role in the criminal conspiracy and cheating of M/s. SCSL, its share holders and investors. [Paras 38, 39] [824-D-F; 826-G; 827-G]

7.2 While it is true that adjudication proceedings and criminal proceedings are separate proceedings, the relevance of the Special Court’s judgment is only for the purpose of showing that the second part of the definition of an “insider” is made out in the appellant’s case, for, if the appellant, along with his brothers, was party to the fraud practiced on the public, it is obvious that he was reasonably expected to have access to UPSI in respect of the securities of SCSL. This appellant’s case, therefore, stands apart from the other family members of the Chairman in that the SFIO’s report as well as the said judgment clearly and unmistakably point to his complicity, unlike that of the other family members, in the fraud committed from 2001 onwards. This being the case, though for different reasons, the majority judgment of the appellate tribunal is upheld. [Para 40] [828-C-E] Radheshyam Kejriwal v. State of W.B. [2011] 4 SCR

889 : (2011) 3 SCC 581 ; Videocon Industries Ltd. v. State of Maharashtra [2016] 2 SCR 741: (2016) 12 SCC 315; K.G. Premshanker v. Inspector of Police [2002] 2 Suppl. SCR 350 : (2002) 8 SCC 87 – referred to.