MERE DENIAL THAT NOT IN POSSESSION OF UPSI – NOT SUFFICIENT DEFENCE – Eshwars
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MERE DENIAL THAT NOT IN POSSESSION OF UPSI – NOT SUFFICIENT DEFENCE

Authored by Padma Akila

Date(s) of Order  11th December 2020
Purported contravention committed Noticee bought Futures of the Company hours before announcement of PSI, and charged for violation of Reg 4(1) of PIT Regulations, 2015; (ii) Non-obtaining of pre-clearance of the trade and was charged with violation of Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B r/w Reg 9(1) of PIT Regulations, 2015; and (iii) Did not make disclosure for trade value that exceeded Rs. 10 lakhs and was charged to have violated Reg 7(2)(a) of PIT Regulations, 2015.
Person charged and who is he Mr. Srinivas Maddineni [Assistant General Manager, Designated Person in the Company who directly reported to the whole time director of the Company] “Noticee
Companies in which insider trading and fraud had been committed Divi’s Laboratories Limited

BACKGROUND OF THE CASE:

1. Pursuant to an investigation by SEBI, it was observed that the Company had made announcement to stock exchanges on July 10, 2017 around 11:50 am, as a material event under [1]Regulation 30 of SEBI (LODR) Regulations, 2015 titled “USFDA to Lift Import Alert 99-32 on the company’s Unit-II at Visakhapatnam”, which had material impact on the price of the scrip of the Company. This announcement was construed as UPSI by the investigation.

2. Investigation revealed that the whole time director (to whom the Noticee reported) was aware of UPSI, and that the Noticee was not only an Assistant General Manager (AGM) and a Designated Person in the Company, but also reported directly to the whole time director. Therefore, it was alleged in the SCN that the Noticee was a connected person who had reasonable access to the UPSI, and had traded only on the scrip of the Company during the UPSI period thereby indulging in “insider trading”, in terms of Regulation 4(1) of PIT Regulations, 2015.

3. It was also observed from the submission of the Company that the Noticee did not obtain pre-clearance for his aforementioned trade. Further, the Noticee vide email dated September 04, 2019 had accepted that he did not take any pre-clearance from the Company for the aforementioned trade. Hence, according to the SCN, the Noticee had allegedly violated [2]Clause 6 of the Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders as specified in Schedule B read with [3]Regulation 9(1) of PIT Regulations, 2015.

CONTENTION OF THE NOTICEE:

1. The Noticee submitted that there was no internal communication or information regarding UPSI to him through any means and that he had not received any sort of information on the UPSI from the whole time director.

2. The trades were executed by the Noticee without knowing about the UPSI and thus said trade was purely co-incidental and not because of knowledge of the UPSI.

FINDINGS BY THE WOLE TIME MEMBER (“WTM”):

1. The Noticee was an ‘insider’ in terms of Regulation 2(1)(g)(i) and Regulation 2(1)(g)(ii) and a ‘Connected Person’ in terms of Regulation 2(1)(d)(i) of PIT Regulations, 2015. The Noticee was in employment with the Company since 1995, and was an AGM in the Environment, Health and Safety Department at the Company, during the UPSI Period. Thus, the Noticee was directly associated with the Company and thus a ‘Connected Person’ in terms of Regulation 2(1)(d)(i) of PIT Regulations, 2015

2. Under Regulation 4(2) of PIT Regulations, 2015, the burden of proof to establish that a ‘Connected Person’ is not in possession of UPSI lies on the ‘Connected Person’, as trades by Connected Person in the securities of that company when there was a UPSI, gives rise to a reasonable inference that such person has traded when in possession of UPSI.

3. The Noticee in this matter had merely made a bald statement that he was not in possession of and did not have access to any UPSI without providing any corroborating evidence. By virtue of being a ‘Connected Person’ coupled with his conduct, he had taken positions in the futures contracts of the Company approximately 2.5 hours before the UPSI becoming public and thereafter squared off his position on UPSI becoming public, a strong presumption was created that the Noticee, by virtue of his association with the Company was reasonably expected to have access to UPSI. Hence, it was concluded that the Noticee being an insider of the Company and on being connected person, has traded in the scrip of the Company when there was UPSI.

4. In addition the Noticee had not disputed his reporting relationship with the whole time director (who was in receipt of the UPSI), and he had also not presented any reliable explanation supported by cogent evidence of not having any access to the UPSI. Therefore, from the trading pattern of the Noticee, coupled with his direct and frequent relationship with the whole time director, who had access to UPSI, it was concluded that the Noticee was in possession of UPSI when he traded in the scrip of the Company before it was disclosed to stock exchanges and became public.

5. The Noticee, being a Designated Person and having executed trades in the scrip of the Company over a value of Rs. 10 Lacs, was required to disclose to the Company the number of such securities acquired or disposed of within two trading days of such transactions. However, the Noticee has failed to do so and in his reply had acknowledged his failure to make the required disclosure in terms of[1]Regulation 7(2)(a) of PIT Regulations, 2015.

6. As regards, pre-clearance, the order reasoned that the question of pre-clearance of trades did not arise when the designated person possess of UPSI as there is a prohibition from trading in the scrip of the company under Reg 4(1) of PIT Regulations, 2015. In this case, the Noticee had been found to have violated Reg 4(1) of PIT Regulations, 2015 for trading in the scrip of the Company when in possession of UPSI. Thus, the question of obtaining pre-clearance for the impugned trades does not arise.

DECISION OF THE WTM:

Having concluded that the Noticee  had indulged in ‘insider trading’, and had also not  disclosed the transaction, taking note of his wrongful gain of Rs.1,83,000, the same was ordered to be disgorged and a penalty of Rs. 1 lakh levied, and was also debarred from the securities market for a specified period.

[1] Regulation 30 of SEBI (LODR) Regulations, 2015 states “Every listed entity shall make disclosures of any events or information which, in the opinion of the board of directors of the listed company, is material…..”

[2] No designated person shall apply for pre-clearance of any proposed trade if such designated person is in possession of UPSI even if the trading window is not closed.

[3] Regulation (1) mandates a company to formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons, in compliance with PIT Regulations, 2015.

[1] 7(2)(a)- Disclosures by certain persons:

(2) Continual Disclosures.

(a) Every promoter, member of the promoter group, designated person and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified;

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