2011 (11) TMI 781 - AT - Companies Law

Whether the decision taken by a listed investment company to dispose of a part of its investment is price sensitive information requiring mandatory disclosure to the stock exchange(s) under clause 2.1 of the Code of Corporate Disclosure Practices as specified in Schedule II to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 1992? Held that - 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 through 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 company. Interestingly the adjudicating officer in para 34 of the impugned order has himself observed that the method of funding a project is not per se price sensitive information 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 price sensitive. The adjudicating officer has missed the real point. The price of the scrip of FCGL had gone up not because it decided to dispose of its investment in the Coke company but because of the fact that it acquired coal mines in Australia which information was price sensitive and had been disclosed to the market. We cannot therefore uphold the findings of the adjudicating officer.

Issues Involved:
1. Whether the decision to dispose of a part of its investment by a listed investment company constitutes "price sensitive information" requiring mandatory disclosure under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992.
2. Whether there was a violation of regulations 3 and 4 of the SEBI regulations and clause 2.1 in Schedule II to the regulations by the appellants.
3. Determination of the penalties imposed on the appellants for the alleged violations.

Issue-wise Detailed Analysis:

1. Price Sensitive Information:
The primary question was whether the decision by FCGL Industries Ltd. (FCGL) to dispose of a part of its investment in Gujarat NRE Coke Ltd. (the Coke company) was "price sensitive information" as per the SEBI regulations. The definition of "price sensitive information" under regulation 2(ha) includes any information likely to materially affect the price of securities if published. The adjudicating officer had concluded that the decision to sell shares of the Coke company was price sensitive, relying on clause (vi) of the explanation to the definition, which includes the "disposal of the whole or substantial part of the undertaking."

However, the Tribunal found that FCGL, being an investment company, regularly buys and sells securities as part of its normal business activity. It was determined that such decisions by an investment company do not materially affect the price of its securities. The Tribunal clarified that the term "undertaking" refers to the business activity or project of a company, not the investments held by an investment company. Therefore, the decision to dispose of a part of its investment was not considered price sensitive information.

2. Violation of Regulations:
The Securities and Exchange Board of India (SEBI) alleged that Matangi Traders and Investors Limited and Marley Foods Private Limited had bought shares of FCGL based on unpublished price sensitive information. The Tribunal noted that both Shri G. L. Jagatramka and Shri A. K. Jagatramka, who attended the FCGL board meeting, were also directors of Matangi and Marley. These entities traded in FCGL shares during the investigation period, and SEBI argued that this was a violation of regulations 3 and 4 of the SEBI regulations, which prohibit insider trading.

However, since the Tribunal concluded that the decision to dispose of the investment was not price sensitive information, the basis for alleging insider trading was invalidated. The Tribunal emphasized that the increase in FCGL's share price was due to the acquisition of coal mines in Australia, which was disclosed to the market and was indeed price sensitive information.

3. Penalties Imposed:
The adjudicating officer had imposed monetary penalties on the appellants: Rs. 1 crore on Marley, Rs. 20 lacs on Matangi, and Rs. 40 lacs each on the two Jagatramkas. These penalties were based on the alleged violations of the SEBI regulations and clause 2.1 of the Code of Corporate Disclosure Practices.

Given the Tribunal's finding that the decision to sell shares was not price sensitive, the basis for imposing these penalties was undermined. The Tribunal concluded that the non-disclosure of the source of funds was part of the normal business activity of an investment company and did not constitute a violation of the regulations.

Conclusion:
The appeals were allowed, and the impugned order was set aside. The Tribunal found that the decision taken by FCGL to dispose of its investment in the Coke company was not price sensitive information, and therefore, there was no violation of the SEBI regulations by the appellants. Consequently, the penalties imposed were invalidated, and the parties were left to bear their own costs.

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