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TMI Blog2020 (8) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... e period of January 25, 2017 to April 05, 2017 (hereinafter referred to as 'Investigation Period'/'IP'). The Company is listed on NSE and Bombay Stock Exchange (BSE). It is observed that Mr. B Renganathan (hereinafter referred to as 'Noticee') was the compliance officer and Company Secretary of EFSL during IP. 2. During the course of investigation, it was observed by SEBI that Ecap Equities Limited (hereinafter referred to as 'Ecap'), a wholly owned subsidiary of EFSL, had acquired Alternative Investment Market Advisors Private Limited (hereinafter referred to as 'AIMIN'), a fintech company, on April 05, 2017 by entering into a share purchase agreement (SPA). The same was disclosed by EFSL to NSE and BSE on the same day. Further, a Term Sheet in respect of the said transaction was signed between Ecap and AIMIN on January 25, 2017. 3. Therefore, it was alleged that the acquisition of AIMIN by Ecap was a price sensitive information which had come into existence on January 25, 2017 upon signing of Term Sheet. Despite that, the Noticee, being the compliance officer of the company, failed to close the trading window during the period of January 25, 2017 to April 05, 2017. By his failu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd BSE "AIMIN is a fintech company for fixed income analytics with innovative trade protocols that aids bond market with efficient price discovery. FinTech is playing a vital role in transforming the financial industry worldwide as well as in India. Edelweiss is actively looking to adopt innovative FinTech Solutions to aid in matters related to illiquidity, accessibility and seed to improve offering to customers. This acquisition will help grow Edelweiss fixed income advisory business. The proposed acquisition is not with the promoter /Promoter Group and also does not fall under the related party transaction.'' iii. It is observed that the aforesaid transaction resulted in the acquisition of AIMIN by Ecap Equities Limited (Ecap), a wholly owned subsidiary of EFSL. It is further observed that the said disclosure was made in terms of Regulation 30 of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. Thus, in terms of PIT Regulations, the said announcement made by EFSL is the unpublished price sensitive information (UPSI) as per Regulation 2(1)(n)(iv) and 2(1)(n)(vi) of PIT Regulations, prior to the announcement dated April 05, 2017. iv. EFSL vide email dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 25, 2017 to April 05, 2017. vi. It is noted that Regulation 9 of PIT Regulations, casts a responsibility on the Company to frame its Code of Conduct to prevent Insider Trading. Further, in terms of Regulation 9(3) of PIT Regulations, the compliance officer of the Company is responsible for the administration of the said code of Conduct. In furtherance to that, as per Clause 4 of Model Code of Conduct under Schedule B to PIT Regulations, compliance officer of a listed entity is responsible for closing of the trading window when he determines that a designated person or class of designated persons can reasonably be expected to be in possession of unpublished price sensitive information. It is also directed in the said Clause that the Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. vii. Therefore, in terms of the UPSI in the present matter, it is alleged that the Noticee was required to close the trading window on or before January 25, 2017 to April 05, 2017, during when the UPSI was in existence. In this regard, it is alleged that the Noticee had failed to close the trading window during this period. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm Sheet. d. It is pertinent to note that during the course of such negotiations, only a handful of people were aware of the Proposed Acquisition and adequate measures were implemented to ensure strictest confidentiality with respect to the same. Given that this share purchase was more akin to a business - technology upgradation, the Compliance Officer was not a party to these discussions. The Compliance Officer informed the stock exchanges upon execution of the SPA (as defined hereinafter). The Noticee, thus being the compliance officer of EFSL, was included in the list of people involved in the Proposed Acquisition shared with SEBI through EFSL's letter dated January 29, 2019 (Annexure 3 of the Notice). e. Thereafter, a Share Purchase Agreement dated April 5, 2017 ("SPA") was signed between Ecap as the buyer, AIMIN as the target company and promoters of AIMIN as the selling shareholders, to acquire 100% shares of AIMIN for a purchase consideration of INR 4,00,00,000 (Rupees Four Crores Only). Pursuant to the SPA, AIMIN would become a wholly owned subsidiary of Ecap and indirect wholly owned subsidiary of EFSL. As evident, the purchase consideration for acquisition of AIMIN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of Term Sheet. j. In fact, the Hon'ble Supreme Court of India has, in the matter of B. Singh (Dr.) v. Union of India observed that: "It is too much to attribute authenticity or credibility to any information or fact merely because it found publication in a newspaper or journal or magazine or any other form of communication, as though it is gospel truth. It needs no reiteration that newspaper reports per se do not constitute legally acceptable evidence." (emphasis supplied) k. Further, it is pertinent to note that the Notice selectively relies on the said Article and ignores some crucial statements made therein. For instance, the article provides that 'A Term Sheet is a non-binding document which does not constitute an offer, an agreement, agreement in principle, agreement to agree or commitment to provide financing'. The Article further provides that signing of a Term Sheet is merely the first step in many steps before a transaction is consummated, i.e., due diligence, definitive agreements and closing. Therefore, the statements made in the Article shall be taken into consideration holistically and not in isolation. Thus, it is humbly submitted that the reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the Proposed Acquisition was not UPSI q. Regulation 2(1)(n) of the PIT Regulations defines "unpublished price sensitive information" as any information, relating to a company or its securities, directly or indirectly, which upon becoming generally available, is likely to materially affect the price of the securities". r. The note to Regulation 2(1)(n) of the PIT Regulations also highlights the fact that such information should be likely to materially affect the price upon coming into public domain. s. The term 'materially' has not been defined in the PIT Regulations and even the examples cited above are preceded by the term "ordinarily", thereby allowing parties to rebut any presumptions made about the price sensitivity. In this regard, it may be pertinent to refer to decision by Hon'ble SAT in the case of Mr. Anil Harish v. Securities and Exchange Board of India, wherein the Hon'ble SAT has observed that whether any information is price sensitive, and when it came into existence, is a mixed question of law and facts and will depend on background and circumstances of each case. t. For instance, in the matter of Man Industries (India) Limited, the Hon'ble AO, while ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viously disclosed to the market. w. In the present case, the Proposed Acquisition was not likely to, by any tangible metric, materially affect the price of securities of EFSL as per the definition of UPSI under Regulation 2(1)(n) of the PIT Regulations. This is amply evident from the following facts: i. Edelweiss Group, in its normal course of business, continued to evaluate opportunities for adopting innovative fintech products and upgrade its technology, in order to better serve its customers. Financial services providers such as the Edelweiss Group continuously seek avenues to improve their systems and the adoption of new technologies such as purchase of the software, systems, etc. to improve their operational efficiencies. ii. Instead of just purchasing the software from AIMIN (which would not have triggered any such disclosure under the Listing Regulations), the Edelweiss Group, over the course of discussions, decided to acquire AIMIN, which was determined to be in best interests of the Edelweiss Group. iii. The proposed purchaser in this case was Ecap, at that time a wholly owned non-material subsidiary of EFSL. In terms of the Listing Regulations (as per the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .25. After the announcement, the price of the scrip moved to INR 171.65, INR 181.4 and INR 178.85 on April 6, 2017, April 7, 2017 and April 10, 2017 respectively. Such movement cannot be deemed to be unusual or extraordinary, especially given various other factors that were in existence concomitantly, including: - i. The Insurance Regulatory & Development Authority of India ("IRDAI") had accepted the registration application form IRDA/R2 of Edelweiss General Insurance Company, a wholly owned subsidiary of EFSL, for carrying on business as a general insurance company in India ("IRDAI Approval"). ii. During the period from January 25, 2017 till April 5, 2017, quarterly results of EFSL were also announced, along with declaration of interim dividend which may have resulted in upward movement of prices of the securities. A copy of the announcement made on February 9, 2017 disclosing unaudited financial results for the third quarter and nine months period ended December 31, 2016 and declaration of interim dividend of Re. 1/-, made to BSE is enclosed as Annexure 6. z. Whilst the Notice itself does not make any observations or place any evidence for an impact on the price of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent closures mechanically to avoid liability, instead of focusing on the underlying substance and significance of the developments, which is core philosophy of the PIT Regulations. This is also the reason why this definition is prefixed by the term "ordinarily", so as to allow parties to adduce factual evidence to disprove and rebut the price sensitivity of certain corporate actions. Materiality under Regulation 30 of the Listing Regulations dd. Regulation 2(1)(n)(vi) of the PIT Regulations, prior to its omission by the Amendment, provided that any material events in accordance with the listing agreement shall be considered UPSI. Regulation 30(2) of the Listing Regulations provides that any event specified in Para A of the Part A of Schedule III of the Listing Regulations shall be disclosed without any application of guidelines of materiality. Specifically, a disclosure is required to be made despite the materiality of a transaction if a company, directly or indirectly, acquires or agrees to acquire more than 5% shares of another company. ee. In the present case, instead of merely purchasing the software (which may not have required any disclosure under the Listing Regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was executed to further discussion with AIMIN and finalise the terms and conditions with respect to the Proposed Acquisition. In view of the above, the statement in paragraph 6 of the Notice that the UPSI came into existence on January 25, 2017 and existed up until April 5, 2017 is entirely without basis. kk. As one of India's pre-eminent financial institutions, Edelweiss Group is constantly exploring avenues for overall growth of the organization, achieving better operational efficiencies and economies of scale, in order to better serve its clients. These activities are in normal course and cannot be deemed to be price sensitive information per se as the same do not have any impact on an industry level. Every discussion relating to such strategic corporate acquisitions does not itself become price sensitive information during the initial stages of discussion until there exists a certain degree of finality attached to it. ll. In the instant case, the discussions/negotiations pertaining to the Proposed Acquisition were spread out over a period of several months from September, 2016 to April 2017, during which period the representatives of Edelweiss Group and AIMIN discussed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooner than credible and concrete information comes into being in order to make such information generally available." rr. This is supported by the recommendations of the Sodhi Committee Report which are as follows: "85. The Committee believes that it is necessary to statutorily lay down the principles that every such code should conform to such as the need for prompt disclosure of material information that could impact price discovery no sooner than credible and concrete information comes into existence. Speculative disclosures or selective disclosures that could in fact have an adverse impact on the market and the price discovery process should be avoided". (emphasis supplied) ss. Without prejudice to the above, it is further respectfully submitted that all negotiations, discussions, etc. in connection with the Proposed Acquisition were carried out in strictest confidence. Except for certain specific individuals (who were identified as being privy to the Proposed Acquisition vide emails dated February 19, 2018 and September 18, 2019, from EFSL to SEBI), no one else was aware of the Proposed Acquisition, at any time, prior to the execution of SPA and until public announcem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without conceding the Noticee's primary position as set out above, it is submitted that the allegation is only of a technical nature. bbb. Based on the submissions set out above, it is our respectful submission that the allegation made against the Noticee does not warrant imposition of any penalty under Section 15HB of the SEBI Act read with Rule 5 of the Adjudication Rules. CONCLUSION ccc. In light of the submissions made above, it is manifestly evident that the Notice and the allegations made out therein are entirely without factual and legal basis or emanating from any underlying evidence. ddd. To summarize: i. The Notice primarily relies on the Article which forms the basis of when Alleged UPSI came into existence. The same cannot be treated to have any evidentiary value in the present proceedings. As the findings from the Article strike at the root this matter, the Notice should be set aside in entirety solely on this ground. ii. Edelweiss Group was exploring various options to upgrade its technology and identified AIMIN, a small fintech company, in order to serve its customers better. Instead of just acquiring the AIMIN's software (which would not have resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SL from January 25, 2017 to April 5, 2017. viii. Without prejudice to all the submissions on behalf of the Noticee, it is respectfully submitted that the Noticee or any designated persons as per the Code of Edelweiss did not gain any unfair advantage or make any profit due to the alleged violations in the Notice. ix. Further, the investors/ shareholders of EFSL made no losses due to the alleged violation in the Notice and no complaint has been received from the investors in this regard till date. x. The Noticee has complied with all SEBI laws at all times, including, in connection with the Proposed Acquisition. eee. In light of the submissions contained herein, we urge the Hon'ble Adjudicating Officer to discharge the Notice in its entirety. 8. Thereafter, vide Email dated July 02, 2020, the Noticee was advised to submit a copy each of Term Sheet dated January 25, 2017 and Share Purchase Agreement (SPA) dated April 05, 2017 signed between AIMIN and Ecap. The Noticee, vide his Email dated July 07, 2020 submitted copies of both the documents. 9. Further, in the interest of natural justice, an opportunity of hearing was provided to the Noticee on July 01, 2020 vide lett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se regulations, adopting the minimum standards set out in Schedule B to these regulations, without diluting the provisions of these regulations in any manner. SCHEDULE B Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders 4. Designated persons may execute trades subject to compliance with these regulations. Towards this end, a notional trading window shall be used as an instrument of monitoring trading by the designated persons. The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure shall be imposed in relation to such securities to which such unpublished price sensitive information relates. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. 12. On a preliminary note, I find that the Noticee has contended that he was not provided with the complete investigation report. I note from records that the Noticee was supplied with the relevant portion of the investigation report along with the SCN. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unpublished price sensitive information relates. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. 14. I note that the Noticee was the Company Secretary and Compliance Officer of EFSL during the investigation period. Therefore, in terms of Regulation 9(3) of PIT Regulations, 2015, it was the duty of the Noticee to administer the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders and other requirements under PIT Regulations, 2015. I find no dispute with respect to this factum. 15. Now I proceed to examine the allegations in light of the facts of the matter. I note that EFSL had made an announcement to BSE and NSE on April 05, 2017 regarding acquisition of AIMIN by its subsidiary in the following terms: "In accordance with Regulation 30 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations 2015, this is to inform you that Ecap Equities Limited (ECap), a wholly owned subsidiary of the Company, has today entered into a Share Purchase Agreement ('Agreement') for purchase of 100% stake in Alternative Investment Market Advisors Private Limited (AIMIN) from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income or the net profits of Ecap exceed 20% of the consolidated total income or net profits of EFSL. d) It is critical to note that AIMIN was not being acquired to foray into a new business line or materially alter/expand existing businesses of the Edelweiss Group. It was merely being brought within the fold as a captive service provider to improve operations of the Edelweiss Group itself. e) The net loss of AIMIN for the financial years ended 2015 and 2016 were Rs. 11,17,346 and Rs. 28,38,844 respectively, which was de minimus compared to the consolidated net income of EFSL. Therefore, it is evident that the Proposed Transaction did not have any material impact on the revenue and profitability of the Edelweiss Group. 18. In light of the contention of the Noticee that the announcement in question is not UPSI, it becomes imperative on me to note the definition of UPSI, as prescribed in Regulation 2(1)(n) of PIT Regulations, 2015 which reads as below: (n) "unpublished price sensitive information" means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subject acquisition keeping the above parameters in mind. Therefore, the Noticee, now handling the allegation by using the said undisclosed parameters as a tool in his hands and arguing for the first time during the present proceedings is not correct. 21. The Noticee has further submitted that EFSL had started discussion with AIMIN for use of its electronic platform (software) to help its customers (bond investors) find liquidity in scrips that are traditionally inactive. Therefore, the reason behind acquisition of AIMIN over taking license of software was commercial viability of acquisition over licensing and not to enter into a new business line or to materially alter/expand existing business of the company. However, on the contrary, I note from the disclosure that EFSL had mentioned that 'This acquisition will help grow Edelweiss's Fixed income advisory business.' (Emphasis supplied). This clearly suggests that the said acquisition would help Edelweiss to grow its fixed income advisory business; thus having direct impact on the revenue and profit of EFSL. Also, the corporate announcement nowhere indicates the quantum of addition to its revenue owing to the above acquisiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the argument of the Noticee to the effect that it was a mandatory disclosure without testing for materiality is misconceived and therefore has no appreciable merits. 23. I also that the Noticee has argued that clause (vi) of Regulation 2(1)(n) of PIT Regulations, 2015 has been subsequently deleted. In this regard I note that the clauses (i) to (vi) as mentioned in 2(1)(n) are not exhaustive in nature. In view of the same it becomes necessary to depend upon the "Note" to the said provision which enshrines the principle(s) to be followed while determining UPSI. From the Note to the provision I note that the guiding principle while determining UPSI is "if it is likely to materially affect the price upon coming into the public domain." In this regard I note from the reply of the Noticee that EFSL had initially planned to acquire certain software but had altered its plans paving way for acquisition of shares of AIMIN itself. I also that the Noticee has argued that the acquisition was an effort to upgrade quality of operations / service. In this regard I note that the Noticee, for certain commercial reasons, had redesigned its plans to the extent of acquiring another business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n announcement, per se, has to be viewed from the industry point of view. The object is to see whether the announcement will have any impact on the security to which it relates to. The announcement may or may not have any impact at an industry level. Thus, the argument of the Noticee is not appreciable. Again, in the present matter, I note that acquisition of a company cannot be said to be an ordinary course of business. 27. In view of the above discussions it stands to reason that the announcement in question was material, both in law and in spirit, at the relevant point of time. 28. Apart from the above, the Noticee has also contended that the UPSI had not come into existence on January 25, 2017, being the date of singing of Term Sheet. In this regard, I note that the Term Sheet in respect of acquisition of AIMIN by Ecap was signed on January 25, 2017. I have perused the contents of the said Term Sheet which was supplied by the Noticee during the course of the present proceedings. From a perusal of the said Term Sheet, I note that the major terms and conditions including consideration of the transactions were already given in the said Term Sheet. Further, the SPA refers to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, it seldom matters when the UPSI had actually begun. 31. In light of the above discussions and based on the materials made available to me, I am of the view that there was certainly a duty cast upon the Noticee to close the trading window in view of the existence of UPSI which the Noticee had admittedly failed to comply with. Therefore, I hold that the Noticee has violated the provision of Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of PIT Regulations, 2015. b. Whether the Noticee is liable for penalty? 32. As established in the pre-paragraphs, the Noticee has violated the provision of Clause 4 of Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders under Schedule B read with Regulation 9(1) of PIT Regulations, 2015.Therefore, the Noticee is liable for a penalty under Section 15HB of SEBI Act. The text of the said provision of law is being reproduced below: SEBI Act Penalty for contravention where no separate penalty has been provided. 15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I find that is not the position in the present matter. Also, I find the present matter to be different in terms of the repetition of violation which is discussed in the ensuing paragraphs. 37. I note that the Noticee has relied upon the decision of the Hon'ble Supreme Court of India in the matter of Siddharth Chaturvedi vs SEBI in support of its contentions. The Noticee has relied upon the ratio of the Hon'ble Supreme Court as reproduced below:- "In fact, the facts of the present case would go to show that where there is allegedly only a technical default, and the three parameters of Section 15J would allegedly be satisfied by the appellants, namely, that no disproportionate or unfair advantage has been made as a result of the default; no loss has been caused to an investor or group of investors as a result of the default; and there is in fact, no repetitive nature of default, no penalty at all ought to be imposed..." In view of the contentions of the Noticee regarding "technical violation" and mitigating factors as prescribed in Section 15J of the SEBI Act, 1992, it became necessary to understand the repetition, if any, of the violation committed by the Noticee. To ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de for Prohibition of Insider Trading of EFSL I note that the powers have been vested on the Compliance Officer to decide on the closure of trading window. Since the Noticee has confirmed closure of trading window only for occasions relating to declaration of financial results excluding other types of announcements, it became necessary to understand the practice followed by the Noticee. Thus, in order to further obtain clarity on the practices followed by the Noticee on the charge of trading window closure, the Noticee was again advised to confirm whether trading window was closed for other announcements. 40. I note from the email reply dated July 15, 2020, that in cases of any event based/specific transactions only the relevant employees have been made cognizant of their responsibilities under the PIT Regulations and the EFSL Code of Conduct, including the requirement to maintain confidentiality of information and refrain from trading in securities. 41. Thus, I note from the written submissions of the Noticee that the Noticee, as a practice (emphasis supplied), closes trading window only on select occasions in exclusion of other price sensitive corporate announcements. In this r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon me under Section 15-I of the SEBI Act read with Rule 5 of the Adjudication Rules, I, in exercise of the powers conferred upon me under Section 15-I of the SEBI Act read with Rule 5 of the Adjudication Rules, hereby impose a penalty of Rs. 5,00,000/- (Rupees Five Lakh only) on the Noticee. I am of the view that the said penalty is commensurate with the lapse/omission on the part of the Noticee. 46. The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the website of SEBI, i.e., www.sebi.gov.in on the following path, by clicking on the payment link: ENFORCEMENT → Orders → Orders of AO → PAY NOW. 47. In the event of failure to pay the said amount of penalty within 45 days of the receipt of this Order, recovery proceedings may be initiated under Section 28A of the SEBI Act for realization of the said amount of penalty along with interest thereon, inter alia, by attachment and sale of movable and immovable properties. 48. In terms of the provisions of Rule 6 of the Adjudication Rules, a copy of this order is being sent to the Noticee viz. Mr. B Renganathan and also to the Securi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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