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2017 (8) TMI 1495 - AT - Companies LawInsider under the PIT Regulations - proceedings under PIT regulations abatement upon the death of a person who is alleged to have committed insider trading - WTM of SEBI justification in holding that each appellant was an insider under the PIT Regulations and that the appellants pledged/ sold shares of Satyam when in possession of UPSI, and therefore the appellants are guilty of violating SEBI Act and the PIT Regulations? - whether the WTM of SEBI is justified in uniformly restraining the appellants from accessing the securities market for 7 years and whether, the quantum of unlawful gain directed to be disgorged by each appellant jointly and severally with Mr. B. Ramalinga Raju and Mr. Rama Raju with interest at the rate of 12% per annum from 07.01.2009 till payment, is in accordance with law? Held that - One month prior to the UPSI came into existence, the Board of RPIL had authorized investments in the shares of Indian Petrochemical Corporation Ltd. ( IPCL) and therefore, it cannot be said that the shares of IPCL were purchased when in possession of UPSI. In the present case, Chintalapati group sold the shares of Satyam during the period when UPSI was existing. Therefore, the decision of SEBI in case of RPIL has no relevance to the facts of present case. In the result, decision of the WTM that Chintalapati group were insiders under the PIT Regulations and that they had sold the shares of Satyam when in possession of UPSI in violation of PIT Regulations cannot be faulted. The Scheme of PIT Regulations of 1992 makes it evident that these dual requirements need to be satisfied before a person can be called an insider under the PIT Regulations of 1992. The conjunctive And is, therefore, significant and cannot be ignored. As far as the second category of insider is concerned (Regulation 2(e)(ii)), it clearly refers to a person who has received or has had access to such unpublished price sensitive information . Thus, to fall under the second category of insiders, one must either have actually received the UPSI or actually had access to such UPSI in any manner without being a connected person. In these appeals, we are not concerned with this category of persons as SEBI has not invoked the second category. There is also no finding to that effect in the Impugned Order. First, when an alleged offender dies after SEBI has made a determination of violation of the PIT Regulations. In this category, SEBI can subject to the provisions of SEBI Act and the PIT Regulations can recover the unlawful gain from the legal heirs, if it is found that the unlawful gains accrued to the estate. Second, an alleged offender dies before proceedings under the PIT Regulations are initiated or during proceedings under PIT Regulations. This is more difficult case, because the determination under PIT Regulations cannot be done in the absence of a person. Without given a hearing to a person, SEBI cannot make a determination that the person had reasonable access to UPSI and was in possession of UPSI when he sold the shares. The finding of insider trading can only be done in the presence of the person concerned since these proceedings are personal to the alleged offender. The legal heir may not be in a position to represent the alleged offender. However, we do not intend to say more and reserve this matter for further consideration in an appropriate matter. In light of the abovesaid, I allow this appeal and hereby set aside the WTM Order.
Issues Involved:
1. Whether the appellants were 'insiders' under the SEBI (Prohibition of Insider Trading Regulations) 1992. 2. Whether the appellants sold/pledged shares of Satyam when in possession of Unpublished Price Sensitive Information (UPSI). 3. Whether the WTM of SEBI was justified in restraining the appellants from accessing the securities market for 7 years. 4. Whether the quantum of unlawful gain directed to be disgorged by each appellant was in accordance with law. 5. The relevance and admissibility of the SFIO Report and CBI Court findings in adjudicating the violation under the PIT Regulations. Detailed Analysis: 1. Whether the appellants were 'insiders' under the SEBI (Prohibition of Insider Trading Regulations) 1992: The WTM of SEBI held that the appellants, as promoters and connected/deemed connected persons of Satyam, were 'insiders' under the PIT Regulations. The appellants were reasonably expected to have access to UPSI relating to Satyam. This was based on their close relationship with the key figures in Satyam and their roles within the company. The definition of 'insider' under Regulation 2(e) of the PIT Regulations requires a person to be connected with the company and reasonably expected to have access to UPSI. The majority view upheld this interpretation, while the minority view emphasized the need for SEBI to demonstrate reasonable access to UPSI by virtue of such connection. 2. Whether the appellants sold/pledged shares of Satyam when in possession of UPSI: The WTM concluded that the appellants sold/pledged shares of Satyam when in possession of UPSI, thereby violating Regulation 3 of the PIT Regulations. The UPSI in question was the manipulation of financial statements by Satyam, which came into existence after March 31, 2001. The majority view upheld this finding, emphasizing the circumstantial evidence and trading patterns of the appellants. The minority view, however, found that SEBI failed to establish that the appellants had reasonable access to UPSI or were in possession of UPSI while trading. 3. Whether the WTM of SEBI was justified in restraining the appellants from accessing the securities market for 7 years: The WTM imposed a uniform restraint order against all appellants, prohibiting them from accessing the securities market for 7 years. The majority view found this restraint justified based on the severity of the insider trading violations. However, the minority view argued that the roles and actions of the appellants differed significantly, and a uniform restraint order was not appropriate. The minority view also highlighted the need for individual consideration of each case's merits. 4. Whether the quantum of unlawful gain directed to be disgorged by each appellant was in accordance with law: The WTM directed the appellants to disgorge the unlawful gains made from the sale/pledge of Satyam shares. The majority view upheld this direction, emphasizing the need to return the gains to the investors who suffered due to the fraudulent activities. The minority view, however, found inconsistencies in the determination of unlawful gains and the methodology used by the WTM. The minority view called for a reassessment of the gains, considering the cost of acquisition and other relevant factors. 5. The relevance and admissibility of the SFIO Report and CBI Court findings in adjudicating the violation under the PIT Regulations: The SFIO Report and CBI Court findings were deemed relevant and admissible by the minority view. The SFIO Report provided detailed insights into the manipulation of financial statements and the involvement of key figures in Satyam. The CBI Court findings further corroborated the fraudulent activities. The majority view, however, did not place significant reliance on these reports, focusing instead on the evidence presented by SEBI. Conclusion: The majority view upheld the WTM's findings that the appellants were insiders, sold/pledged shares while in possession of UPSI, and justified the restraint order and disgorgement of unlawful gains. The minority view called for a reassessment of the cases, emphasizing the need for individual consideration and the relevance of the SFIO Report and CBI Court findings. The appeals were disposed of in terms of the majority view, with specific directions for fresh consideration by the WTM of SEBI for certain appellants.
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