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TMI Blog2011 (5) TMI 1101X X X X Extracts X X X X X X X X Extracts X X X X ..... ties in the trading in the shares of Adlabs Films Limited (the company) and the possible violation of the provisions of the Act and the Regulations made thereunder. The appellant is a shareholder and director of the company. He was holding 82,91,234 shares and was also classified as 'designated employee' under the Regulations. On 23-4-2006 the company held its board meeting to approve the audited accounts for the financial year ending 31-3-2006; to recommend dividend and to consider proposal for demerger of the company's FM radio business. The Board of Directors of the company approved the proposal for demerger of the FM radio business to a wholly owned subsidiary company (SPV) and also issuance of pro rata shares by SPV to the existing shareholders of the company in the ratio of two shares of the SPV for every one share of the company. The company also recommended a dividend of 45 per cent for the year ending 31-3-2006. 3. The company sent the information about the decision of the Board of Directors recommending dividend to the National Stock Exchange (NSE) on 24-4-2006 at 9.21 hours and the NSE disseminated the information on its website on the same day at 9: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and imposed a penalty of ₹ 1 crore under section 15HB of the Act. Hence this appeal. 4. For the purposes of model code of conduct for prevention of Insider Trading for listed companies, under Part A of Schedule I, the term 'designated employee' is defined to include :- (1) officers comprising of the top three tiers of company management; (2) the employees designated by the company to whom these trading restrictions shall be applicable keeping in mind the objective of the Code of conduct. Admittedly, the appellant is a shareholder and director of the company and classified as designated employee under the Regulations. Para 3.2-5 of Part A in Schedule I under the Regulations provide that all directors/officers/designated employees of the company shall conduct their dealings in the securities of the company only in a valid trading window and shall not deal in any transaction involving purchase or sale of the company's securities during the period when trading window is closed. It also provides that the trading window shall inter alia be closed at the time of declaration of financial results, declaration of dividend etc. The tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant cannot be proceeded against under section 15HB of the Act as it cannot be alleged that the appellant had violated any provisions of the Act or Regulations made thereunder which is a pre-requisite for invoking the said section. The appellant has neither violated any provisions of the Act nor of the Regulations and hence no penalty can be imposed under section 15HB of the Act. Assuming that there was any violation of the code of conduct framed by the company, as mandated by Regulation 12, it was for the company to take action against the appellant and not for the Board. Learned senior counsel also pointed out that a show-cause notice was issued to the company also in this case and the request for consent proceedings in respect of the company was accepted by the Board and the company was let off on payment of a sum of ₹ 15 lacs. The appellant also requested for consent proceedings but the Board has not agreed to the same and has imposed a penalty of ₹ 1 crore which is the maximum penalty prescribed under the Act which, in the facts and circumstances of the case, is excessive and uncalled for. Learned senior counsel reiterated that the model code of conduct pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for violation of the code of conduct. 6. Shri Darius Khambatta, learned Additional Solicitor General who appeared on behalf of the Board submitted that the undisputed fact is that the appellant sold 10,00,000 shares of the company on 24-4-2006 before the expiry of 24 hours of the outcome of the Board meeting of the company was made public. The Regulation mandates the company to formulate a code of conduct as near thereto the model code of conduct specified in Schedule I of the Regulations. Such a code was in existence which has been violated by the appellant by trading in shares of the company when the trading window was closed. The company had prepared its own internal code of conduct which prohibited the designated employees from selling or purchasing shares during trading period beginning one exclusive day before and concluding one exclusive day after certain enumerated corporate actions. In his two letters dated 22-7-2008 and 19-12-2008 the appellant himself had admitted his lapse stating that it was an inadvertent and technical error. The company did not take any action against the appellant because he had resigned as managing director. If it is held that the Board a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Regulation 12(1) read with clauses 3.2-3 and 3.2-5 of the code of conduct specified under Part A of Schedule I of the Regulations. In the impugned order, the appellant has been held to be guilty of violating the provisions of code of conduct only. There is no allegation of insider trading against the appellant. It is not in dispute that the appellant had sold shares within the period when trading window was closed and thus violated the code of conduct prescribed by the company in terms of the obligations imposed upon it under the Regulations. The case of the appellant is that such violation of code of conduct does not amount to violation of the provisions of the Act or the Regulations framed thereunder and hence not punishable by the Board. It is for the company alone to take action against the appellants. The question that needs to be answered, therefore, is whether violation of the code of conduct formulated by the company in compliance with the requirements of Regulations amounts to violation of Regulations. Let us have a look at the relevant provisions of the Regulations. The Regulations were framed by the Board in exercise of the powers conferred by section 30 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... All directors/officers and designated employees of the company shall be subject to trading restrictions as enumerated below. 3.2 Trading window. 3.2.1 The company shall specify a trading period, to be called trading window , for trading in the company's securities. The trading window shall be closed during the time the information referred to in para 3.2.3 is unpublished. 3.2.2 When the trading window is closed, the employees/directors shall not trade in the company's securities in such period. 3.2.3 The trading window shall be, inter alia, closed at the time : (a)Declaration of financial results (quarterly, half-yearly and annually). (b)Declaration of dividends (interim and final). (c)Issue of securities by way of public/rights/bonus etc. (d)Any major expansion plans or execution of new projects. (e)Amalgamation, mergers, takeovers and buy-back. (f)Disposal of whole or substantially whole of the undertaking. (g)Any changes in policies, plans or operations of the company. 3.2.3A The time for commencement of closing of trading window shall be decided by the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclude one exclusive day after the specified corporate actions which include declaration of financial results and declaration of dividends etc. The company had also issued another circular on 1-4-2006 in compliance with the revised corporate governance norms advised by the Board vide its circular dated 29-10-2004 laying down code of conduct for all board members and senior management of the company. A copy of this letter is addressed to the appellant also. The said instructions mandate that the designated persons should comply with the companies insider trading rules, follow the pre-clearance procedure for trading and trade only during the trading window. It also provides that any sale/purchase or acquisition of shares and securities by all directors/officers/designated employees shall not be allowed during a period of one exclusive day and conclude one exclusive day after the specified corporate action including declaration of financial results and declaration of dividends. 9. Having considered the submissions made by learned counsel for the parties and after going through the records and the provisions of the regulations referred to above, we are of the considered view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retation given by learned senior counsel for the appellant is accepted, it may lead to a situation where a person is not punished by the company for violating the code of conduct based on the model code of conduct prescribed in the Regulations and the Board finds itself unable to take action because the code of conduct is framed by the company. In fact this is what has precisely happened in this case. The company vide its letter dated 11-2-2008 has informed the Board that the appellant resigned from the office of the Managing Director and it was not possible to persue any action against him and the company decided to close the matter. We have given our thoughtful consideration to the judgments cited by learned senior counsel for the appellant and we are of the considered view that the ratio of those judgments is not applicable to the case in hand. The purpose of the insider trading regulations is to prohibit trading by which an insider gains advantages by virtue of his access to price sensitive information. The evil of insider trading is well recognized. A construction should be adopted that advance rather than suppress this object. To adopt the construction as suggested by learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board to treat the appellant's sale of shares as a substantive violation warranting the maximum penalty that can be imposed for violation of the insider trading regulations. We find merit in this argument of learned senior counsel for the appellant. The charge is not of violation of insider trading regulations but only of violation of the code of conduct by selling shares during the period when trading window was closed and after the decision of the Board was communicated to the stock exchanges and disseminated on their websites. The company has also settled the dispute with the Board on payment of settlement amount of ₹ 15 lacs. In the facts and circumstances of the case, we are of the considered view that the ends of justice would be met if the penalty under section 15HB of the Act is reduced to ₹ 25 lacs. We order accordingly. In the result, we uphold the finding of the adjudicating officer that the appellant had violated the provisions of the code of conduct framed under the Regulations and is liable to penalty under section 15HB of the Act. However, the amount of penalty is reduced to ₹ 25 lacs. There will be no order as to costs. Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X
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