2015 (3) TMI 899 - HC - Companies Law

Confidential and unpublished price sensitive information - Acquisition of shares - Insider trading - Regulation 3A of Securities and Exchange Board of India (Prohibition of) Insider Trading Regulations, 1992 - Board to investigate into the insider trading - Held that - In the present case, as noted above, the allegations of the petitioners are with regard to insider trading. Regulation 3-A states that no company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information. Regulation 4A empowers the Board to enquiry into the violations and provisions of the regulations. The procedure for investigation is contemplated from Regulations 6 to 11-A. Powers and functions of the Board and the Penalties are provided under the provisions of the Act. Therefore, from these provisions it is clear that the Act and the Regulations, provide for forum, procedure and penalty for investigating into the offences prohibited under the Act. In other words, under the above provisions, it is the Board, which is the competent authority to investigation into the alleged offence. Coming to the facts of the case, the allegations of the petitioners have been vehemently denied by the contesting respondents, and these disputed questions of fact cannot be gone into by this court under the writ jurisdiction. As noted in the preceding paragraph, the Act and the Regulations, provide for complete procedure for investigating the allegations of insider trading. Further the contesting respondents also referred to procedure contemplated under Clause 24(f) of the Listing Agreement, which the listed company has to follow before seeking approval for scheme of amalgamation, during which also the petitioners can file objections. The Act and the Regulations provide for forum for investigating into the alleged offence of insider trading. Therefore, in my considered view, the petitioners are not justified in approaching this court without availing the alternative and efficacious remedy. Further, under Sections 391 to 394 of the Companies Act, 1956, provide the procedure for amalgamation whereunder, the respective High Courts, where the registered head offices of the two companies are located, have to consider the amalgamation of companies and in the process, they are required to consider all the issues. In my considered view, as contended by the learned counsel appearing for the 6th respondent, the present interim order may come in the process of considering the amalgamation proceedings. Therefore, as the writ petitioners have alternative remedy under the provisions of the Act and the Regulations made thereunder and in according with the said provisions, the Board has already initiated proceedings and seized of the matter and having regard to the above facts and the circumstances, I am of the considered view, that it is not desirable to continue the interim order and the issue framed is answered in the negative. Accordingly the interim order 25.4.2014 in WPMP.No.16656/2014 in W.P.No.13309/2014 is vacated and the vacate petitions are allowed.

Issues Involved:
1. Allegations of insider trading by respondents 4 and 7.
2. Jurisdiction of the High Court of Andhra Pradesh.
3. The procedure for investigating insider trading under SEBI regulations.
4. Procedure for amalgamation under the Companies Act, 1956.
5. The interim order of status quo and its implications.

Issue-wise Detailed Analysis:

1. Allegations of Insider Trading by Respondents 4 and 7:
The petitioners alleged that respondents 4 and 7 engaged in insider trading by purchasing shares of respondent 5 before the public announcement of the amalgamation on 6.4.2014. They claimed this constituted a violation of Regulation 3A of the SEBI (Prohibition of Insider Trading) Regulations, 1992, which prohibits trading based on unpublished price-sensitive information. The petitioners argued that the 7th respondent, a subsidiary of the 4th respondent, had access to this sensitive information and traded shares to benefit from the impending amalgamation, causing a loss to retail investors.

2. Jurisdiction of the High Court of Andhra Pradesh:
The respondents contended that the High Court of Andhra Pradesh lacked territorial jurisdiction to entertain the writ petition. They argued that the registered offices of the contesting respondents were not located within Andhra Pradesh and that the alleged insider trading and amalgamation were to be dealt with under different legal frameworks and jurisdictions.

3. Procedure for Investigating Insider Trading under SEBI Regulations:
The court noted that SEBI, as the market regulator, is empowered under Section 11 of the SEBI Act to protect investors' interests and regulate the securities market. SEBI had already initiated an investigation into the alleged insider trading. The court emphasized that the SEBI Act and Regulations provide a complete procedure for such investigations, including penalties and adjudication processes.

4. Procedure for Amalgamation under the Companies Act, 1956:
The amalgamation process is governed by Sections 391 to 394 of the Companies Act, 1956, which requires approval from the respective High Courts where the companies' registered offices are located. The respondents argued that the issues of insider trading and amalgamation are independent and should be dealt with under their respective legal frameworks. The court agreed that the amalgamation process should not be stalled due to allegations of insider trading, which are to be investigated separately by SEBI.

5. The Interim Order of Status Quo and Its Implications:
The court had initially granted an interim order of status quo, preventing any application for clearance of the amalgamation scheme during the pendency of the writ petition. However, the Supreme Court directed the High Court to decide on the applications for vacating the stay order. Upon hearing the parties, the High Court vacated the interim order, noting that the petitioners had alternative remedies under the SEBI Act and Regulations, and SEBI had already initiated an investigation.

Conclusion:
The court concluded that the allegations of insider trading involve disputed questions of fact that cannot be resolved under writ jurisdiction. It emphasized that SEBI is the competent authority to investigate such allegations and that the amalgamation process should proceed under the Companies Act, 1956. The interim order was vacated, and the writ petition was disposed of, with SEBI continuing its investigation as per the prescribed procedure.

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