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2021 (5) TMI 1020 - Board - SEBIInsider trading - Trading when in possession of unpublished price sensitive information - Noticee No.1 to 4 are alleged to have violated Section 12A(d) and (e) of the SEBI Act, 1992 and Regulations 4(1) read with 4(2) of the PIT Regulations, 2015 by trading in the shares of PC Jeweller when in possession of UPSI-II whereas Noticee No.5, is alleged to have violated Section 12A(e) of the SEBI Act, 1992 and Regulation 3(1) of PIT Regulations, 2015, by communicating UPSI-I and UPSI-II to Noticees No.1 to 4 - Whether there were UPSI-I and UPSI-II, as alleged in the SCNs? - HELD THAT - As buy-back involves purchasing of its own shares by the company which are extinguished, therefore, consequent to a buy-back by a company, its paid-up capital stands reduced which results into change in capital structure of the company. In terms of Regulation 2(1)(n)(iii) of the PIT Regulations, 2015, information pertaining to change in capital structure of a company is per se treated as UPSI. Thus, in the present case, information pertaining to the decision taken by the board of directors of the Company in its meeting held on May 10, 2018 regarding buy-back of the shares of the Company was a price sensitive information and before its disclosure to the stock exchanges on May 10, 2018 was UPSI-I, as alleged in the SCN. I note that ppreliminary discussion among MD, ED, COO and CFO in relation to the proposal for buyback of fully paid-up equity shares of the Company took place on April 25, 2018. Therefore, I find that UPSI-I came into existence on April 25, 2018. The said information remained UPSI-I till its disclosure to stock exchanges on May 10, 2018. In view of this, I find that the period from April 25 to May 10, 2018 is the period of UPSI-I, as alleged in the SCNs. Regarding UPSI-II in terms of the disclosure made by the Company on May 10, 2018, the general public was made aware that the Company was going to buy-back upto 1,21,14,285 fully paid-up equity shares of the Company of ₹ 10/- each at a price of ₹ 350/- per equity share which was an unpublished price sensitive information within the meaning of Regulation 2(1)(n)(iii), as discussed in the previous para, as the said information was pertaining to the change in the capital structure of the Company. As the said decision of buy-back of shares by the Company was abandoned by the Company on July 13, 2018 when its board of directors decided to withdraw the buy-back offer, therefore, as a corollary, find that the said information was also an unpublished price sensitive information within the meaning of Regulations 2(1)(n)(iii) of the PIT Regulations, 2015 as being an information pertaining to the change in capital structure of the Company. We find that as mentioned above, the said unpublished price sensitive information which has been identified as UPSI-II in the SCNs, came into existence on July 07, 2018 when the State Bank of India refused to give its NOC to the proposed buy-back of the Company and remained so till it was disclosed to the stock exchanges by the Company on July 13, 2018. Thus, I find that the period from July 07, 2018 to July 13, 2018 is the period of UPSI-II, as alleged in the SCNs. With regards to UPSI-I as well as UPSI-II, I note that the Noticees have not disputed the identification of the said information as unpublished price sensitive information by the SCNs. Whether Noticees are insider , as alleged in the SCNs? - Noticee no. 1 along with Noticee no. 2 and 3 (both of whom traded on behalf of Noticee no. 1) were in the know-how of the events taking place in the Company with regard to the buyback proposal and its withdrawal. Thus, I find that Noticee no. 1, 2 and 3 had possession of UPSI-I and UPSI-II and they were insiders in terms of Regulation 2(1)(g)(ii) of PIT Regulations, 2015. From the nature of transactions between the bank accounts of Noticee No. 3 and Noticee No. 4 and the fund utilisation thereof, coupled with the fact that Noticee no. 3 had placed the orders for the trades of Noticee no. 4 (through stock broker Karvy) during UPSI Period-II, I find that Noticee no. 4 was nothing but a front entity of Noticee no. 3 for trading in the securities market, including trading in the scrip of PC Jeweller. I note that Noticee no. 3 has completely downplayed the aforesaid fund transfers between him and Noticee no. 4, by calling them as an inconsequential and inconclusive evidence. However, from all the attendant facts and circumstances, I find that Noticee no. 4 was a wholly owned and controlled company of Noticee no. 3 and his family and Noticee no. 3 used Noticee no. 4 as a front entity for trading in the securities of PC Jeweller. The trading pattern and timing of trades of Noticee no. 4, the overarching influence and control of Noticee no. 3 over the affairs of Noticee no. 4, the proximity of Noticee no. 3 to the promoters (Prem Chand Gupta and Noticee no. 5), it is clear that trading by Noticee no. 4 in the futures contracts of PC Jeweller was due to the possession of UPSI-II. Thus, I find that Noticee no. 4 had possession of UPSI-II through Noticee no. 3 and thus, Noticee no. 4 was an insider in terms of Regulatio 2(1)(g)(ii) of PIT Regulations, 2015. We note that Noticee no. 5 was the MD of PC Jeweller. Thus, Noticee no. 5 is a connected person within the meaning of Regulation 2(1)(d)(i) of PIT Regulations, 2015. Therefore, Noticee no. 5 is an insider of PC Jeweller in terms of Reg. 2(1)(g)(i) PIT Regulations, 2015. The chronology of events which has been provided in the SCNs and also reproduced in the pre-paras of this order indicates that Noticee no. 5 was part of all the key discussions and was aware of the developments pertaining to buy-back offer, refusal of NOC from SBI and its subsequent withdrawal of buy-back offer. I also note that Noticee no. 5 has not disputed the findings of the SCNs with respect to the Chronology of Events and thereby, him having possession of UPSI-I as well as UPSI-II. Therefore, I find that Noticee no. 5 is an insider in terms of Regulations 2(1)(g)(i) being connected person and Regulation 2(1)(g)(ii) being in possession of UPSI-I and UPSI-II, of PIT Regulations, 2015. Whether Noticee no. 1 to 4 has traded in the securities of P C Jeweller when in possession UPSI- I and II and Noticee no. 5 communicated UPSI -I and II to Noticee no. 1 to 4, as alleged in the SCNs? - The summary of loss avoided/notional gains made in the trading accounts of Noticee no. 1 and Noticee no. 4 in aggregate (including interest) through trading in the scrip of PC Jeweller while being in possession of UPSI-II amounted to ₹ 6,17,60,184.13 and ₹ 2,13,23,161.64, respectively. I note that aforesaid amount has been impounded by SEBI by virtue of the Impounding Order. I also note that said Noticees i.e. Noticee no. 1, 2, 3 and 4 have not disputed the method used or the formula adopted for arriving at the aforesaid amount. I also note that none of the said Noticees have disputed the value of the alleged unlawful gain made or loss avoided by them alongwith calculation of interest that has been shown in the interim order. In view of the violation of the provisions of the PIT Regulations, 2015 and SEBI Act, 1992 by the Noticees, as noted above, I find that the Noticees are liable for issuance of appropriate directions for debarment from accessing the securities market and dealing in securities. Further, I find that directions under Section 11B(1) of the SEBI Act, 1992 be issued against Noticee no. 1, 2 and 3 to disgorge an amount of ₹ 6,17,60,184.13/-, jointly and severally, and against Noticee 3 and 4 to disgorge an amount of ₹ 2,13,23,161.64/-, jointly and severally. The unlawful gains made and unlawful loss avoided by Noticee no.1 and 4, for their impugned trades during UPSI Period-II appropriate directions of disgorgement of unlawful gains made/loss avoided along with penal interest are being issued. I note that material available on record does not bring out any loss caused to any specific investor or a group of investors, as a result of violations committed by Noticee no. 1 to 5 with respect to UPSI-I and UPSI-II. I note that there is no material available on record to indicate that the violations committed by Noticee no. 1 to 5 are repetitive in nature. In exercise of the powers conferred upon me under Sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) of SEBI Act, 1992 read with Section 19 of the SEBI Act, 1992 and SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, hereby direct as under (i) Noticee no. 1, 2, 3, 4 and 5 are restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year, from the date of this order; (ii) Noticee no. 1, 2, 3, 4 and 5 are restrained from buying, selling or dealing in the securities of PC Jeweller Ltd., directly or indirectly, in any manner whatsoever, for a period of two (2) years, from the date of this order; (iii) The Noticee no. 1, 2 and 3 are directed to disgorge, jointly and severally, a sum of ₹ 6,17,60,184.13/- which was impounded by Impounding Order passed in the present matter and the same shall be credited into the Investor Protection and Education Fund (IPEF) referred to in Section 11(5) of the SEBI Act, 1992; (iv) The Noticee no. 3 and 4 are directed to disgorge, jointly and severally, a sum of ₹ 2,13,23,161.64/- which was impounded by the Impounding Order passed in the present matter and the same shall be credited to the Investor Protection and Education Fund (IPEF) referred to in Section 11(5) of the SEBI Act, 1992; (v) Noticee no.1, 2, 3, 4 and 5 are hereby imposed with penalty of Rs. Twenty (20) Lakhs each, under Section 15G of the SEBI Act, 1992, and are directed to pay their respective penalties within a period of forty-five (45) days, from the date of receipt of this order; The restraints/ prohibition imposed in paras 43(i) and (ii), on the respective Noticees, shall run, concurrently. The obligation of the Noticees restrained/ prohibited by this Order, in respect of settlement of securities, if any, purchased or sold in the cash segment of the recognized stock exchange(s), as existing on the date of this Order, are allowed to be discharged irrespective of the restraint/ prohibition imposed by this Order. Further, all open positions, if any, of the Noticees, restrained/ prohibited in the present Order, in the F O segment of the recognised stock exchange(s), are permitted to be squared off, irrespective of the restraint/ prohibition imposed by this Order.
Issues Involved:
1. Identification of Unpublished Price Sensitive Information (UPSI) 2. Determination of Insider Status 3. Trading While in Possession of UPSI 4. Communication of UPSI 5. Calculation of Notional Gains and Loss Avoided 6. Issuance of Directions and Penalties Detailed Analysis: A. Identification of Unpublished Price Sensitive Information (UPSI): The judgment identifies two pieces of UPSI: - UPSI-I: Information regarding the proposed buyback of shares by PC Jeweller, which came into existence on April 25, 2018, and became public on May 10, 2018. - UPSI-II: Information regarding the withdrawal of the proposed buyback due to non-receipt of NOC from SBI, which came into existence on July 07, 2018, and became public on July 13, 2018. The court found that both pieces of information were price-sensitive and unpublished until their respective public disclosures. B. Determination of Insider Status: The court examined whether the Noticees were "insiders" under SEBI regulations: - Noticee No. 5: As the MD of PC Jeweller, was a connected person and insider under Regulations 2(1)(g)(i) and 2(1)(g)(ii). - Noticee No. 1, 2, 3, and 4: Although not connected persons under Regulation 2(1)(d)(i), they were found to be insiders under Regulation 2(1)(g)(ii) due to possession of UPSI. C. Trading While in Possession of UPSI: The court found that: - Noticee No. 1, 2, and 3: Traded in the scrip of PC Jeweller through the account of Noticee No. 1 during UPSI Period-II. - Noticee No. 4: Traded in the futures contracts of PC Jeweller during UPSI Period-II through Noticee No. 3, who was in possession of UPSI-II. The trading patterns indicated that the Noticees were in possession of UPSI and traded to avoid losses or make gains. D. Communication of UPSI: The court found that UPSI-I and UPSI-II were communicated to Noticee No. 1 to 4 by Noticee No. 5 and Late Shri Padam Chand Gupta. Despite the death of Shri Padam Chand Gupta, the court held Noticee No. 5 accountable for the communication of UPSI. E. Calculation of Notional Gains and Loss Avoided: The court calculated the notional gains and losses avoided as follows: - Noticee No. 1, 2, and 3: Avoided a loss of ?5,27,43,255.05. - Noticee No. 4: Avoided a loss of ?89,82,000.00 and made a gain of ?92,28,000.00, totaling ?1,82,10,000.00. Interest at the rate of 12% per annum was applied, resulting in: - Noticee No. 1, 2, and 3: ?6,17,60,184.13. - Noticee No. 4: ?2,13,23,161.64. F. Issuance of Directions and Penalties: The court issued the following directions: 1. Restraints: Noticee No. 1, 2, 3, 4, and 5 were restrained from accessing the securities market and dealing in securities for one year, and specifically from dealing in PC Jeweller's securities for two years. 2. Disgorgement: - Noticee No. 1, 2, and 3 were directed to disgorge ?6,17,60,184.13 jointly and severally. - Noticee No. 3 and 4 were directed to disgorge ?2,13,23,161.64 jointly and severally. 3. Penalties: - Each Noticee was imposed with a penalty of ?20 Lakhs under Section 15G of SEBI Act, 1992. The penalties were to be paid within 45 days, and the amounts were to be credited to the Investor Protection and Education Fund (IPEF). Conclusion: The court found the Noticees guilty of insider trading and imposed appropriate penalties and disgorgement orders to uphold the integrity of the securities market.
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