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2018 (5) TMI 931 - SC - Companies LawSatyam Scam - Penalty for insider trading - Prohibition of Insider Trading Regulations, 1992 - appellant was roped in by the Whole Time Member of the SEBI as well as the Appellate Tribunal as he happened to be an executive director of SCSL from 1993 upto 31.8.2000 and a non-executive director from 1.9.2000 to 23.1.2003. He also happens to be the co-brother of B. Ramalinga Raju as the two of them have married two sisters - Held that - We are of the view that 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 B. Ramalinga Raju, 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 us anywhere. Shri Viswanathan has shown us that two other independent non-executive directors were appointed in his place on and from 23.1.2003. What is clear is 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. Having regard to the findings contained in the minority judgment and the aforestated discussion, we are clearly of the opinion that this view is correct both in law and on facts and deserves our acceptance. Therefore, this appeal is allowed and the majority judgment of the Appellate Tribunal is set aside. 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 of the matter, this appeal also stands allowed. Consequently, the majority judgment of the Appellate Tribunal judgment is set aside. Appellant was neither a director nor a promoter of SCSL. The shares that were owned by this appellant in SCSL were sold by him from 5.2.2001 to 18.11.2004 - Held that - 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 B. Ramalinga Raju, in that the SFIO s report as well as the aforesaid 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, we uphold the majority judgment of the Appellate Tribunal and dismiss this appeal.
Issues Involved:
1. Determination of whether the appellant was a promoter and insider under SEBI regulations. 2. The appellant's liability for insider trading based on possession of unpublished price-sensitive information (UPSI). 3. Validity of the SEBI Whole Time Member's (WTM) and Appellate Tribunal's findings. 4. Relevance of the appellant's relationship with the primary accused in the Satyam scam. 5. The impact of other legal and investigative findings on the appellant's case. 6. The appropriate period for assessing the appellant's liability and gains from insider trading. 7. The role of non-executive directors in insider trading cases. 8. The appellant company's involvement and liability in the Satyam scam. Detailed Analysis: 1. Determination of Promoter and Insider Status: The appellant, a former executive and non-executive director of Satyam Computer Services Limited (SCSL), was implicated as a promoter and insider. The SEBI WTM and the Appellate Tribunal held that the appellant was an insider under Regulation 2(e) of the SEBI (Prohibition of Insider Trading Regulations), 1992, due to his directorship and familial relationship with B. Ramalinga Raju. The Tribunal's majority judgment emphasized that being a director until January 2003, the appellant was reasonably expected to have access to UPSI. 2. Liability for Insider Trading: The appellant was accused of selling shares while in possession of UPSI, which allegedly led to unlawful gains. The minority judgment of the Appellate Tribunal, however, found that the appellant was not in possession of UPSI, as the manipulation of financial statements was concealed from the board of directors, including the appellant. 3. Validity of SEBI WTM and Appellate Tribunal Findings: The Supreme Court found that the majority judgment of the Appellate Tribunal incorrectly interpreted Regulation 2(e)(i) by not considering the conjunctive requirement that a connected person must also be reasonably expected to have access to UPSI. The minority judgment was preferred, which correctly applied the conjunctive interpretation and concluded that the appellant was not in possession of UPSI. 4. Relationship with Primary Accused: The appellant's relationship with B. Ramalinga Raju as a co-brother was considered by the SEBI WTM and the majority judgment of the Appellate Tribunal as a factor for his insider status. However, the Supreme Court found that mere familial relationship without more substantial evidence does not suffice to establish insider status. 5. Impact of Other Legal and Investigative Findings: The findings of the Special Court, Enforcement Directorate, and SFIO, which indicated that only B. Ramalinga Raju and his cohorts were involved in the fraud, were significant. The minority judgment of the Appellate Tribunal relied on these findings to exonerate the appellant, which the Supreme Court upheld. 6. Appropriate Period for Assessing Liability: The majority judgment of the Appellate Tribunal limited the appellant's liability to six months beyond his resignation as a director, i.e., up to July 2003. The Supreme Court found this approach correct, as the appellant could not be held liable for periods beyond his directorship without evidence of possession of UPSI. 7. Role of Non-Executive Directors: The Supreme Court emphasized the distinction between executive and non-executive directors, noting that non-executive directors are not involved in the day-to-day affairs of the company and are not responsible for its business conduct. The appellant's role as a non-executive director post-2000 was not sufficient to establish insider trading liability. 8. Appellant Company's Involvement: In the case of the appellant company, which was closely held by the appellant and his wife, the Supreme Court found that the inclusion of 24,00,000 shares in the disgorgement order by the SEBI WTM was incorrect, as these shares were never sold. The Supreme Court upheld the minority judgment of the Appellate Tribunal, which correctly assessed the appellant company's liability based on the actual sale of 8,00,000 shares before the occurrence of UPSI. Conclusion: The Supreme Court allowed the appeals of the appellant and other family members, setting aside the majority judgment of the Appellate Tribunal. The Court upheld the minority judgment, which found that the appellant and other family members were not in possession of UPSI and, therefore, not liable for insider trading under the SEBI regulations. The appeal of the appellant company was also allowed, correcting the erroneous inclusion of unsold shares in the disgorgement order.
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