2021 (1) TMI 390 - AT - SEBI

Violation of Equity Listing Agreement clauses - whether the information relating to signing of a Binding Implementation Agreement ('Binding Agreement' for short) by an Authorized Executive Director of the appellant with the dominant Shareholders of the Bank of Rajasthan was liable to be disclosed on an immediate basis under clause 36 of the Listing Agreement and Regulation 12(2) of the PIT Regulations, 1992? - Penalty imposed of ₹ 5 lakh each on the appellant - contentions of the appellant on the inordinate delay in issuing the show cause notice and in passing the impugned order by respondent SEBI - HELD THAT - The signed Binding Agreement in question was price sensitive and admittedly material to the performance of the appellant and needed to be disclosed on an immediate basis which was not done. On the basis of interpretation given in the impugned order itself the finding that signing of the Binding Agreement was a material and price sensitive information and hence there was a delay of a trading day in making the disclosure to the Stock Exchanges cannot be faulted. It was a PSI is also clear from the fact that the investigation revealed insider trading by entities connected with the dominant Shareholders in the shares of Bank of Rajasthan on the day of the Binding Agreement. Submission that insider trading did not happen in the shares of the Appellant does not dilute the issue since it is the same Binding Agreement which triggered the alleged violation of insider trading. Therefore, the appeal fails on merit. We agree with the contentions of the learned Senior Counsel for the appellant on the inordinate delay in issuing the show cause notice and in passing the impugned order by respondent SEBI. After all the charge against the appellant is one trading day's delay in disclosure, but the delay on the part of SEBI to show cause is 2955 days from the date of the event and about 2130 days from the date of the preliminary investigation report, which is too wide a gap to be ignored. Several years' delay in show-causing and concluding proceedings in such known incidence of violation/alleged violations is a failure in effectively performing the behavior modification function of a market regulator. Laches is a mixed question of fact and law. The facts in the instant case indicate delay in issuing the show cause notice. However, the plea of laches though not raised before the AO was specifically raised in the appeal before this Tribunal. We however, find that undue delay in initiating the proceedings by the respondent by itself causes prejudice and would ultimately attach a stigma pursuant to any adverse order that may be passed. Thus, in the instant case, though there are laches, that by itself in the peculiar circumstances of the case, will not vitiate the proceedings but definitely the penalty amount of ₹ 10 lakh imposed on the appellant cannot be sustained and deserves to be substituted by a lesser penalty. In the result, while upholding the impugned order on merits, we modify the penalty imposed on the appellant to only a warning which will meet the ends of justice in the given facts and circumstances of the matter. Appeal is thereby partly allowed.

Summary

Issues Involved:
1. Whether the signing of the Binding Implementation Agreement was liable to be disclosed immediately under clause 36 of the Listing Agreement and Regulation 12(2) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.
2. Whether the Binding Agreement constituted Price Sensitive Information (PSI).
3. The impact of the delay in issuing the Show Cause Notice and passing the impugned order on the appellant.

Issue-Wise Detailed Analysis:

1. Disclosure Obligation under Listing Agreement and PIT Regulations:
The central question was whether the information about the signing of the Binding Implementation Agreement by an Authorized Executive Director of the appellant with the dominant shareholders of the Bank of Rajasthan required immediate disclosure under clause 36 of the Listing Agreement and Regulation 12(2) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. The appellant argued that the Binding Agreement was not between the amalgamating parties but only with the dominant shareholders, making it premature for disclosure. The appellant emphasized that the agreement had conditions precedent, including the power of attorney from the dominant shareholders and board approvals from both banks, which were not fulfilled until later in the day. The Tribunal, however, found that the Binding Agreement was signed by a Board Authorized Executive Director of the appellant bank and representatives of the dominant shareholders, making it a material event. The Tribunal noted that the agreement contained provisions relating to the swap ratio and the time limits for completing the necessary steps. Therefore, the Tribunal held that the Binding Agreement was a material event that required immediate disclosure.

2. Price Sensitive Information (PSI):
The appellant contended that the Binding Agreement did not constitute Price Sensitive Information (PSI) as defined under Regulation 2(ha) of the PIT Regulations, 1992, arguing that only a certain amalgamation becomes PSI. The Tribunal disagreed, stating that the materiality of an event is what is tested in disclosure, not its certainty. The Tribunal highlighted that the Binding Agreement was a material event regarding the performance of the appellant, as evidenced by the appellant's own disclosure, which stated the potential impact of the proposed amalgamation on its branch network and capital base. The Tribunal concluded that the Binding Agreement was both material and price sensitive information that needed to be disclosed immediately.

3. Delay in Issuing Show Cause Notice and Passing the Impugned Order:
The appellant argued that there was an inordinate delay of 8 years in issuing the Show Cause Notice and 9 years in passing the impugned order, causing prejudice to the appellant. The Tribunal agreed with the appellant on this point, noting that SEBI was aware of the developments at the relevant time and had conducted a preliminary investigation by August 2012. Despite this, SEBI issued the Show Cause Notice only in June 2018 and passed the impugned order in September 2019. The Tribunal held that such a delay caused prejudice to the appellant and that corrective actions relating to market violations should be taken by the regulator as early as possible. The Tribunal concluded that while the impugned order was upheld on merits, the penalty imposed on the appellant could not be sustained due to the undue delay and was substituted by a warning.

Conclusion:
The Tribunal upheld the impugned order on merits, finding that the Binding Agreement was a material and price sensitive information that required immediate disclosure. However, due to the inordinate delay in issuing the Show Cause Notice and passing the impugned order, the Tribunal modified the penalty imposed on the appellant to a warning, thereby partly allowing the appeal.