NOT DESIGNATED EMPLOYEE – NOT RELEVANT FOR DISCLOSURE VIOLATION – Eshwars
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NOT DESIGNATED EMPLOYEE – NOT RELEVANT FOR DISCLOSURE VIOLATION

Authored by Vignesh Kumar

Date(s) of Order  27th November 2020
Purported contravention committed Delay in disclosure with respect to disposal of shares.
Provision breached Regulation 7(2)(a) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
Person charged and their designation Mr. P. Selvamani – Executive Vice President- Legal – Equitas Small Finance Bank Ltd
Company in respect of whom the adjudication order relates to Equitas Holdings Limited

INTRODUCTION: The Securities and Exchange Board of India (“SEBI”) had received references from Equitas Holdings Limited (hereinafter “the Company”) pertaining to dealing in scrip of the Company by certain officials of the company, including Mr. P. Selvamani (hereinafter “the Noticee”) during the month of October 2018, based on which an investigation was conducted by SEBI for violation of PIT Regulation.

BACKGROUND OF THE CASE:

1. The Noticee had availed a loan for exercising his ESOP (26,460 shares), and also a personal loan. The shares allotted under ESOP and free shares held in the demat account of the Noticee was pledged to the lender ( “the Pledgee”) as security.

2. The pledge agreement required the Noticee to maintain a margin of twice the loan outstanding, and if during the pendency of the loan the value of pledged securities fell below 1.9 times of the loan amount then the Noticee was required to prepay the loan immediately. The agreement further also stipulated that the Pledgee had the right to sell the pledged shares lying in Designated DP account without any further notice to the Noticee if the value of the pledged securities fall below 1.7 times of the loan obligations.

3. On October 26, 2018, the share prices of the Company fell, due to which the margin fell below 1.7 times of the loan, consequent to which the Pledgee had invoked the pledge and sold 36,325 shares aggregating to Rs. 32,45,275 to recover the shortfall in margin.

4. The Noticee disclosed to the Company, the sale on 7th November 2018.

5. On 19th November 2018, internal committee of the Company for Monitoring and Prevention of Insider Trading levied a penalty of Rs. 5000 on the Noticee for contravening PIT Regulations, and for breach of their Internal Code of Conduct for Prevention of Insider Trading.

6. After the same was reported to SEBI, it commenced adjudication proceedings on the Noticee.

DEFENCE OF THE NOTICEE:

1. The Noticee was not a designated person under PIT Regulations and was not in possession of any UPSI, the mistakes did not have any detrimental impact on the Company or its investors even in terms of the PIT Regulations.

2. On 26.10.2018, the representatives from office of the Pledgee had communicated the shortfall of margin to the Noticee and before the Noticee could arrange for funds, the Pledgee had sold 36,325 shares without consent of the Noticee and utilised the proceeds to prepay loan and maintain the required margin.

3. The Noticee received intimation from the Pledgee with respect to sale of shares only on 05.11.2018 and the same was intimated to the Company on 07.11.2018.

FINDINGS BY THE ADJUDICATING OFFICER (“AO”):

1. The Pledgee intimated the Noticee about the shortfall in the margin due to the fall in the price of the shares of the company pledged on October 26, 2018 and had asked the Noticee to recompense for the shortfall. This contradicts the stand of the Noticee that hardly any notice was given to the Noticee before the pledge was invoked and the shares were disposed of.

2. The Noticee was aware of the terms and conditions of the pledge agreement, and the disposal of shares from his account by invocation of the pledge, despite intimation him regarding shortfall of margin, prior to the invocation cannot be said to have happened without the consent of the Noticee.

3. When the pledge was invoked CDSL had sent SMS to the Noticee on the same at 13:20:26 hours.

4. The Noticee by his 15th November 2018 letter to the Company had stated that when the share price fell on 26/10/2018, the Pledgee had called him about the shortfall in margin, which contradicts with his stand that he came to know of the sale only after 7 days i.e. 2nd November 2018.

5. The AO took certain statements from the written submission to hold it against the Noticee for the delay in making disclosure under PIT Regulations:

a. His submission that he had inadvertently failed to look into the compliance requirements prescribed under the PIT Regulations.

b. He was under acute pressure and failed to calculate and keep track of exceeding the Rs. 10 lakh limit as prescribed under Reg. 7(2) of the PIT Regulations.

c. He was aware of the need to intimate the company about sale of shares, but completely missed his mind in view of the mental distress that he was undergoing.

d. Delay in intimation to the Company is solely attributable inadvertence and unintentional oversight.

e. Any act of imposing additional penalty for the technical mistake in delay in reporting to the company of such sale of shares would add further damage and put the Noticee into irreparable damage.

f. He has already been penalised by the internal committee and the same has been complied with.

6. From the submissions the AO observed that the Noticee had accepted the findings of the internal committee of the company holding him liable of violation of the norms of disclosure and had already paid the penalty levied by the company for the said violation.

7. The disclosure with respect to sale of shares of the Company held in the name of the Noticee was intimated to the company on 7th November 2018. This was clearly beyond the statutory time period of two working days from October 29, 2018, the date on which the Noticee had come to know of the sale transaction from the intimation received pursuant to the confiscation of shares from his demat account.

DECISION OF THE AO:

1. The AO concluded that the sale of shares took place with knowledge of the Noticee. He ought to have intimated the company within two working days of the same, and has violated Reg. [1]7(2)(a) of PIT Regulations.

2. No allegation of insider trading has indeed been levelled against the Noticee in the show cause notice. The question of deriving any profit or loss is wholly irrelevant to the violation committed in the present case as the question in the present case only pertains to the delay in disclosure of sale of shares of the Company held by the Noticee as required under PIT Regulations.

3. A penalty of Rs. 1,00,000/- was levied on the Noticee.

OBSERVATIONS FROM THE ORDERS OF AO:

a. In the present context of a disclosure-based regime of the securities market, any default in making requisite disclosures is not considered lightly.

b. Since the Noticee did not make any profit from the sale transaction was a mitigating factor in determining the quantum of penalty, but does not nullify the conduct of regulatory non-compliance on the part of the Noticee.

c. Employees need to exercise caution before borrowing for exercise of ESOPs, and should do the same based on the inherent strength of their company.

[1] Regulation 7(2)(a) of SEBI (PIT) Regulations – Every promoter, employee 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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