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TMI Blog2025 (1) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... with the resulting impact on demand and liquidity, that is likely to influence the price trends. Instances of three cases of stock split brought out by the respondent show that it resulted in price rise on the day of split, compared to the previous day. In our view the appellant s argument that there was insignificant price rise of 1.46% on BSE and of 1.25% on NSE on June 27, 2016 upon disclosure of the information compared to the previous trading day, is not relevant as it is the likelihood of materially affecting the price of the securities, which is the main factor to determine price sensitivity of information and not actual price rise. Lastly, in appellant s own admission, the information regarding stock split was UPSI, which in their view, came into existence on June 26, 2017 and was hence disclosed on the same date. If it were not a price sensitive information, there was no need to close the trading window. On which day UPSI commenced ? - It is evident that in the meeting held on November 22, 2016, the discussion was in the nature of a general briefing on the concept of stock split, without any specific reference to securities of IAL. Hence it cannot be held that the UPSI per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of this, there is no merit in the allegations that appellants traded in IAL based on knowledge of UPSI in their possession. Appeal allowed. - Justice P. S. Dinesh Kumar, Presiding Officer , Ms. Meera Swarup, Technical Member And Dr. Dheeraj Bhatnagar, Technical Member Mr. P. N. Modi, Senior Advocate with Mr. Kunal Katariya, Mr. Sahebrao Wamanrao Buktare, Ms. Ashmita Goradia, Mr. Shubham Sawant, Advocates and Mr. Shardul Shah, Chartered Accountant i/b Shah Ramaiya, Chartered Accountants for the Appellants Mr. Sumit Rai, Advocate with Mr. Manish Chhangani, Mr. Atul Kumar Agrawal, Mr. Abhay Chauhan, Mr. D Kalyan Reddy, Advocates i/b The Law Point for the Respondent ORDER Per : Dr. Dheeraj Bhatnagar , Technical Member This appeal has been jointly filed by M/s. Affluence Fincon Services Pvt. Ltd. (Appellant no. 1), Mrs. Amee Dhiren Shah (Appellant no. 2) and Dhiren Mahendrakumar Shah HUF through its Karta, Mr. Dhiren Shah (Appellant no. 3), against the order dated April 27, 2021 passed by the WTM WTM Whole Time Member , SEBI SEBI Securities and Exchange Board of India under Section 11(1), 11(4) 11B (1) and (2) of the SEBI Act, 1992 SEBI Act, 1992 (Securities and Exchange Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group entities were connected to the promoters/ directors/ KMPs of IAL and had access to UPSI, while trading in the scrip of IAL during the investigation period. Vide the aforesaid ex-parte interim order dated August 24, 2020, the respondent issued directions for impounding notional unlawful gains of Rs. 2.61 Crore and restrained the Appellants from disposing of any assets. 2.5 The appellants challenged the aforesaid ex-parte interim order in Appeal 269 of 2020 before this Tribunal and vide order dated September 7, 2020, this Tribunal has a) set aside the said ad interim ex-parte order; b) directed the Appellants to- 1. file reply before SEBI; and 2. make an FD for Rs. 2.61 Cr; and c) directed the SEBI not to encash the FD till 3 months after the passing of the final order. 2.6. Subsequently, the Ld. WTM passed the final order on April 27, 2021, whereby Appellants were held to have violated PIT Regulations and Section 12A(d) and (e) of the SEBI Act, 1992, and in view of this, were: a) restrained from accessing securities market for 1 year; b) restrained from dealing in scrips of IAL for 2 years; c) levied penalty of Rs. 15 Lakhs (separately on each appellant); and d) directed to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through Mr. Dhiren Shah, appellants had access to the above-mentioned UPSI, while they traded in the scrip of IAL. This finding was based on the following reasoning:- (i) Mr. Dhiren Shah and Mrs. Amee Dhiren Shah (appellant no. 2) each were allotted 5,88,235 preferential shares in IAL, by the promoters of IAL during pre-IPO preferential allotment made in 2014. As confirmed by the Company Secretary, Mr. Shyamal Trivedi in his statement, such an allotment is made when promoters reach out to the allottees or vice versa and Mr. Vishal Mehta had personally reached out to some of the investors, though no specific reference was made with regard to Mr Dhiren Shah and Mrs. Amee Shah in the statement of Mr. Trivedi. (ii) The other Mehta group company, i.e. IMGPL was a client of ASSPL (another Dhiren shah company engaged in share broking and advisory services). [Though the SCN incorrectly mentions the name of Appellant no. 1 in place of ASSPL, the same has been amended in the final order passed by the WTM]. (iii) The appellants did not deal in the shares of IAL in the pre-UPSI period. (iv) Considering appellant s trading pattern, it was held that the appellant s investment decisions were gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SI period. 4. Before us, the appellants raised following grounds of appeal:- a) Appellants were supplied with redacted version of the investigation report, in violation of principle of natural justice. b) Appellants are not insiders in terms of the PIT Regulations. c) Connection cannot be established in 2016-17, on the basis of the preferential allotment done in 2014. d) Connection cannot be established on the basis of IMGPL being a client of Affluence (Appellant no. 1). e) Respondent has not discharged its burden to prove nor shown the preponderance of probabilities that the appellants were connected persons or insiders in terms of the PIT Regulations, 2015. f) A stock split cannot be said to be UPSI. g) Direction for disgorgement cannot be made on the basis of notional gains (as significant number of IAL shares acquired by the appellants have not been sold). 4.1 On the merits of the case, the Learned Senior Advocate for the appellants vehemently argued that the possibility of stock split was only an idea under discussion on November 22, 2016, when CFO made a presentation to the MD. The same was not discussed before the Board of directors nor was any decision taken in the matter. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price of IAL, which increased by 1.46% on BSE and 1.25% on NSE with an increase in trading volume by 11.71% on BSE and decline of 9.61% on NSE. It was argued that such a price movement is normal, irrespective of any UPSI. The learned senior Advocate urged that during 2016 and 2017 on BSE NSE, there were 48 instances when change in price of IAL shares was more than 1.46% and 54 instances when price change was more than 1.25%, which implies that the said UPSI had insignificant effect on the price, after the same was made available to public. Furthermore, countering the allegation with the rise in price of IAL shares was more than the movement in SENSEX and NIFTY on June 27, 2017, it was argued that this is an untenable argument with unnecessary emphasis on movement of price in any scrip to be in line with the index, which are derivatives of all scrips traded. 4.4 Further, refuting the examples of post stock split price rise in other cases relied upon in the impugned order, i.e. HDFC bank, Eicher Motors, Britannia Industries, etc., it was argued that in such companies, the rise was after actual implementation of the stock split and not at the time of making the information available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/promoters of the company IAL. 4.8 It was submitted that in the impugned order, it is alleged that after the disclosure of the UPSI, the market rate reached to Rs. 1049.85, which was higher by 1.46% compared with the last closing price on BSE. 4.9. The Ld. Senior Advocate drew our attention to the details of trades made by the appellants [Table 1 at para 3.3(iv)], which was also reproduced in the impugned order and submitted that Affluence had sold off 3 lakh shares during the alleged UPSI period and made significant profit, much before the said UPSI was made public and that bulk of shares are still being held by the appellants as on date. 4.10 It was submitted that the appellants started trading in IAL only in April 2017, since in the last week of March 2017, the market prices had fallen by approximately 35% and, therefore, it was considered a good opportunity to buy additional shares of IAL and additional shares were brought in tranches to average the cost. With regard to the directions in the impugned order for disgorgement of notional profit and gains made by the appellants, it was argued that 2,77,020 shares were still held by the appellants, and hence the appellants had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such information. The impugned order shows that three days prior to the announcement of stock-split i.e. on June 27, 2024, the price of the scrip had decreased, even though the Market indices had increased. Such downward trend in the scrip of IAL had reversed immediately on the day of announcement when price of the scrip increased even though the market index had decreased. 5.1 We have heard both sides at length and considered the facts of the case and perused the records. 5.2 The respondent has held appellants no. 1, 2 and 3 (of Dhiren Shah group) as insiders qua the IAL Ltd (a public company promoted by Mehta group) under Sec. 2(g)(ii) of the PIT Regulations; and held that their dealings in the scrip of IAL during the UPSI period (from 22.11.2016 till 27th June, 2017), were guided by their access to the UPSI. In the light of rival contentions, following points arise for our consideration. A. Whether the information of stock split could be inferred as UPSI in nature? If so, on which day UPSI commenced? B. Whether the appellants can be held as insiders within the meaning of PIT regulations? Reg. - A. Whether the information of stock split could be inferred as UPSI in nature? 5.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was insignificant price rise of 1.46% on BSE and of 1.25% on NSE on June 27, 2016 upon disclosure of the information compared to the previous trading day, is not relevant as it is the likelihood of materially affecting the price of the securities, which is the main factor to determine price sensitivity of information and not actual price rise. In holding so, we are guided by this Tribunal s decision in the case of ICICI Bank Ltd. Vs. SEBI ICICI Bank Ltd. Vs. SEBI (Appeal No. 583 of 2019 decided on July 8, 2020 ) wherein it is held as under :- What is relevant for disclosure is the materiality and the ex-ante possibility of impacting prices of the securities, which may not come true ex-post due to several other factors affecting the company concerned or/and the securities market in general . Lastly, in appellant s own admission, the information regarding stock split was UPSI, which in their view, came into existence on June 26, 2017 and was hence disclosed on the same date. If it were not a price sensitive information, there was no need to close the trading window. On which day UPSI commenced ? The next question that falls for consideration is on which date UPSI period started ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and covered impact of stock split, advantages/disadvantages, etc. without any specific analysis of impact of stock split of IAL. The term Unpublished Price sensitive Information as per Section 2(n) of PIT Regulations is defined as- .. 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 materially affect the price of the securities .. . It is evident that in the meeting held on November 22, 2016, the discussion was in the nature of a general briefing on the concept of stock split, without any specific reference to securities of IAL. Hence it cannot be held that the UPSI period started from November 22, 2016. Nevertheless, in subsequent one to one meeting between the MD and CFO held March 20, 2017, the discussion specifically included analysis of budget for next fiscal, along with sensitivity analysis to many scenarios including but not limited to impact of demonetization, GST, share split, dividends, etc. . Since this discussion was specifically with regard to the stock split for company IAL, it may be construed that the UPSI period started from March 20, 2017. Reg. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to have access to UPSI. The fulcrum of the aforesaid connection was alleged to be Mr. Dhiren Shah, director of ASSPL, a company engaged in providing share broking and advisory services, which was alleged to have provided such services to IMGPL, a group company of IAL. The second reasoning for alleging the said connection was significant investment of Rs 49.99 Crore by Mr. Dhiren Shah and Mrs. Amee Shah in IAL in 2014, in pre-IPO allocation of its preferential shares. 6.4 It was urged on behalf of the appellants that preferential allotment in IAL was made in 2014 and that IMGPL traded only in the scrip of IAL through ASSPL on October 19, 2017 and hence keeping in view the definition of connected person as in Regulation 2(1) (d) of PIT Regulations, they cannot be held as connected person with IAL. Under the said regulation, connected person means, - (i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected persons , unless otherwise provided in the regulation. Further, in establishing the connection, the Ld. WTM presumes that a relationship is developed between the company/promoters with preferential allottees, since such subscription was through personal reach. However, such an undefined relationship cannot be construed to be in the nature of connection within the meaning of Regulation 2(1)(d). It is generally seen that prior to listing, subscription to its capital comes through reaching out to potential investors, directly or indirectly, since till the company remains unlisted, the benefit of the faceless digital platform of Stock exchange is not available to it. The assumption that in that process relationship is built among the investors, which may make them insiders is only an assumption and lacks credence. 6.7 The Second reasoning that IMGPL was a client of ASSPL- a share broking firm of Dhiren Shah group- also falls flat, as the only transaction ASSPL carried out for IMGPL in IAL shares was in October 2017, nearly four month after UPSI period was over. This fact was not rebutted by the respondent at any stage. Moreover, merely because ASSPL served as share broking agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as required by Regulation 2(1)(d)(ii)(a) read with Regulation 2(1)(f) of the PIT Regulations as none of the appellants C. A. No. 7590/2021 were financially dependent on Balram Garg or even alleged to have consulted Balram Garg or even alleged to have consulted Balram Garg in any decision related to trading in securities. 6.9 The respondent s case is built on preponderance of probabilities produces in the case of Chintalapati Srinivasa Raju vs. SEBI Chintalapati Srinivasa Raju vs. SEBI [ ( 2018 ) SCC Online SC 586 ] , Hon ble Apex Court held that,- A reasonable expectation to be in the know of things can only be based on reasonable inferences drawn from fundamental facts. It was further held that merely because a person was related to the connected person cannot by itself be a foundational fact to draw an inference. 6.10 To substantiate that appellants had access to UPSI, learned WTM has relied on the following observations as circumstantial evidences suggesting that the trades in the IAL scrip by the appellants were guided by their access to UPSI: (a) The appellants did not make trades in IAL during the pre-UPSI period; and (b) Trades in IAL scrip in significant volume and value w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gravity of this wrong doing, higher must be the preponderance of probabilities in establishing the same. In Mousam Singha Roy v. State of West Bengal (2003) 12 SCC 377, the learned judges of the Supreme Court in the context of the administration of criminal justice observed that, It is also a settled principle of criminal jurisprudence that the more serious the offence, the stricter the degree of proof, since a higher degree of assurance is required to convict the accused. This principle applies to civil cases as well where the charge is to be established not beyond reasonable doubt but on the preponderance of probabilities. The measure of proof in civil or criminal cases is not an absolute standard and within each standard there are degrees of probability. In Hornal v. Neuberger Products Ltd. (1956) 3 All E.R.970 Hodson, L.J. observed as under: Just as in civil cases the balance of probability may be more readily tilted in one case than in another, so in criminal cases proof beyond reasonable doubt may more readily be attained in some cases than in others. We are also tempted to refer to what Denning, L.J. observed in Bater v. Bater (1950) 2 All E.R. 458 wherein he was resolv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of this, there is no merit in the allegations that appellants traded in IAL based on knowledge of UPSI in their possession. 7.2 On careful consideration of facts and circumstances, we hold as under :- (a) It is not denied by the respondent that Mr. Dhiren Shah has significant experience in share trading and investment and his Company M/s ASSPL provides share broking and investment advisory service to more than 4500 clients. (b) It needs deeper analysis of the company, sector, macro-economic trends, etc. to make decision for equity investment. The scrip of IAL is not new for Dhiren Shah (and Ms. Amee Shah), and he made significant investment of Rs. 49.99 Crore in IAL, a company engaged in e-commerce, in its preferential issue way back in 2014, when the company was still unlisted. They are still holding this investment. Even the equity investment in IAL, 40,016 shares purchased by Appellant No. 3 and 2,46,000 shares purchased by Appellant No. 1 during the alleged UPSI period, continue to be held in the post-UPSI period. Hence, there is no reason not to assume that the impugned subscription in IAL scrip and its sale / holding decision were based on domain knowledge of Dhiren Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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