INDULGENCE IN INSIDER TRADING CREATES AN UNEQUAL ADVANTAGEOUS POSITION TO THE INSIDER- SEBI – Eshwars
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INDULGENCE IN INSIDER TRADING CREATES AN UNEQUAL ADVANTAGEOUS POSITION TO THE INSIDER- SEBI

Authored by Padma Akila

Securities and Exchange Board of India (SEBI) vide order dated 24th May 2021, barred the Promoters  [Mr. Rajesh Doulatram Bhatia (“Noticee 1”) the Managing Director and Mrs. Geeta Rajesh Bhatia (“Noticee 2”) the Non-Executive Director] of Tree House Education and Accessories Ltd (“THEAL/Company”), Mumbai based pre-school chain, from accessing the securities market for one year and levied a fine of ₹28 lakh for indulging in insider trading during the company’s merger with Zee Learn Ltd (“ZLL”) in 2015.

Findings based on the investigation by SEBI:

1. On 30th November 2015, a discussion on the merger between THEAL and ZLL took place. Further, the Company vide its letter dated 11th March 2017 to the BSE has, inter alia, submitted that Noticee 1 during November 2015 had a meeting with the Chairman of ZLL and had discussed the possibility of merger of ZLL with THEAL with a share exchange ratio of 53 shares of Re. 1/ each of ZLL for every 10 shares of THEAL.

2. On 4th December 2015, before market hours, the Company made a corporate announcement relating to merger between THEAL and ZLL. The price of the scrip of the Company witnessed a rise from a closing price of INR 202.40 on 3rd December 2015 to the closing price of INR 222.60 on 4th December 2015 i.e., an increase by 9.98% in one trading day.

3. In terms of regulation 2 (1) (n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), prior to its disclosure to the stock exchanges, the aforesaid corporate announcement by the Company was an Unpublished Price Sensitive Information (“UPSI”).

4. The Noticees were alleged as insiders in terms of regulation 2 (1) (g) (i) of the PIT Regulations, as Noticee 1 being the Managing Director and the Noticee 2 being a Director of the Company were connected persons, in terms of regulation 2 (1) (d) (i) of the PIT Regulations and the Noticee 2 being the spouse of the Noticee 1, was also deemed to be a connected person as per regulation 2 (1) (d) (ii) (a) of the PIT Regulations.

5. Prior to its disclosure of the PSI to the stock exchanges, it was noticed that both the Noticees being insiders had traded in the scrip of the Company while in possession of UPSI.

Weak defences thrown by the Noticees:

The Noticees contended that the SCN has been issued with an inordinate delay of almost 4 years and is merely an afterthought. They also claimed that the copy of the Investigation Report was not furnished to them and the same was denied despite a specific request made in this regard. In a trying by failing argument, they contended that the sale of 40 lakh shares of the company was altogether a different transaction unrelated to the merger talks for which appropriate disclosure on the stock exchanges was made. Further, they claimed that the said sale was made only with the purpose to repay the loan due to the banks. They claimed that the Proposal of merger was mooted by the Chairman of ZLL only after ZLL and the Chairman acquired about 9% stake in the Company and thus there was no UPSI in existence either on 2nd December 2015 or 3rd December 2015 when shares were sold under the block deals. The Noticees also tried to imply that the allegations were only based on remote possibilities and are not backed by any concrete documentary evidence which supports or even suggest any insider trading.

SEBI’s counterarguments and holdings

The Whole Time Member (WTM) of SEBI stated that there was no provision in the SEBI Act, 1992 which provides a limitation period for taking action against the violation of the provisions of the Act or the Regulations made thereunder. As regards the Noticees’ averment that 40 lakh shares were sold to repay loans, SEBI noted that out of 4 lenders, 2 lenders had asked that the margin shortfall in the credit extended by them can either be made up by pledging additional shares, while the remaining 2 lenders had called upon the outstanding amount to be paid immediately. It was also noted that the 2 lenders which provided an option to the Noticees to make up the margin shortfall through pledge of additional securities had asked the Noticees to do the same on or before 1st December 2015, whereas the Noticees were found to have sold their shares on 3rd December 2015. Further, the replies filed by the Noticees, the total outstanding amounts payable to the 4 lenders was aggregating to INR 64 Crore, out of which the total loan amount demanded for immediate repayment by the 2 lenders referred to above was to the tune of INR 32.75 Crore only. In this regard, the WTM stated that under the circumstances assuming that the Noticees had to sell their shares to repay their outstanding loans being demanded by the lenders, at the best the Noticees could have sold only as many shares that would have fetched sales proceeds to the extent of around INR 32.75 Crore and pledged additional shares with the other two lenders who wanted the Noticees only to recoup the margin shortfall in the loan amount outstanding against the Noticees. The Noticees, however, had not put forward any justification as to why they sold 40 lakh shares to the tune realizing sales proceeds of INR 80 Crore which was far in excess of the actual amount recalled by the 2 lenders referred to above and even far in excess of the total liability of INR 64 Crore outstanding towards all the 4 lenders.

The WTM stated that indulgence in insider trading is considered a very serious charge inter alia for the reason that it creates an advantageous position to person who is an insider and is connected to a company so as to be aware of the true and correctness of information vis-a-vis others, who have no connection with the company and thereby are deprived of inside information. Further, knowing inside information creates opportunities to take advantage, as the person who is aware of such inside information cannot claim to be enjoying level playing field as far as the person not having connection with the company is concerned. Knowing more than anybody else about a company being an insider further creates opportunity to indulge in fraudulent activities.

The fact that the Noticees were not able to justify their indulgence in selling of shares of the company further leads to an irresistible conclusion that the same was done under the influence of unpublished price sensitive information, said the WTM. In conclusion, the Noticees were barred from accessing the securities market and further prohibited from dealing in securities in any manner for one year and bore a fine of ₹28 lakh.

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