TMI Blog2017 (8) TMI 1495X X X X Extracts X X X X X X X X Extracts X X X X ..... stence, the Board of RPIL had authorized investments in the shares of Indian Petrochemical Corporation Ltd. (“IPCL) and therefore, it cannot be said that the shares of IPCL were purchased when in possession of UPSI. In the present case, Chintalapati group sold the shares of Satyam during the period when UPSI was existing. Therefore, the decision of SEBI in case of RPIL has no relevance to the facts of present case. In the result, decision of the WTM that Chintalapati group were insiders under the PIT Regulations and that they had sold the shares of Satyam when in possession of UPSI in violation of PIT Regulations cannot be faulted. The Scheme of PIT Regulations of 1992 makes it evident that these dual requirements need to be satisfied before a person can be called an “insider” under the PIT Regulations of 1992. The conjunctive “And” is, therefore, significant and cannot be ignored. As far as the second category of “insider” is concerned (Regulation 2(e)(ii)), it clearly refers to a person who “has received or has had access to such unpublished price sensitive information”. Thus, to fall under the second category of insiders, one must either have actually received the UPSI or act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enior Advocate with Mr. Sumeet Patni, Mr. KRCV Seshachalam, Mr. A. Rama Rao, Ms. Sabeena Mahadik, Mr. Pankaj Uttaradhi and Mr. Sagar Hate, Advocates i/b Visesha Law Services for the Appellant. Mr. Fredun DeVitre, Senior Advocate with Dr. Mrs. Poornima Advani, Mr. Pulkit Sukhramani, Mr. Siddha Pamecha and Ms. Vidhi Jhawar, Advocates i/b The Law Point for the Respondent. Majority View J.P. Devadhar (Dr. C.K.G. Nair, Member-II Concurring) 1. Appellants in all these appeals are aggrieved by the common order passed by the Whole Time Member ( WTM for short) of Securities and Exchange Board of India ( SEBI for short) on September 10, 2015. By the said order, the WTM of SEBI has restrained the appellants from accessing the securities market and prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly being associated with the securities market in any manner whatsoever for a period of 7 years. Further, the WTM of SEBI has directed the appellants to disgorge the unlawful gains made by each appellant as more particularly set out in para 65 of the impugned order jointly and severally with Mr. B. Ramalinga Raju and Mr. B. Rama Raj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the PIT Regulations, whether the WTM of SEBI is justified in uniformly restraining the appellants from accessing the securities market for 7 years and whether, the quantum of unlawful gain directed to be disgorged by each appellant jointly and severally with Mr. B. Ramalinga Raju and Mr. Rama Raju with interest at the rate of 12% per annum from 07.01.2009 till payment, is in accordance with law. 5. Uncontroverted facts set out in the impugned order based on which the impugned directions have been issued against each appellant may be summarized as follows:- a) The relation/ connection of the appellants with the Chairman and Managing Director of Satyam is set out in para 7 of the impugned order as follows:- Sl. no. Name Relation/connection 1. Mr. B. Ramalinga Raju Chairman, Satyam Computers 2. Mr. B. Rama Raju Managing Director, Satyam Computers and brother of Mr. B Ramalinga Raju and Mr. B Suryanarayana Raju 3. Mr. B. Suryanarayana Raju Brother of Mr. B. Ramalinga Raju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleging that each appellant was an insider under the PIT Regulations and each appellant had sold/ pledged the shares of Satyam when in possession of UPSI along with Ramalinga Raju and Rama Raju and made unlawful gains in contravention of SEBI Act, PFUTP Regulations PIT Regulations, 1992. f) By an order dated July 15, 2014 the WTM of SEBI disposed of the show cause notices issued to Mr. B. Ramalinga Raju, Mr. B. Rama Raju, Mr. V. Srinivas, Mr. G Ramakrishna and Mr. V. S. Prabhakara Gupta, by holding that they are guilty of violating SEBI Act, PFUTP Regulations PIT Regulations, 1992. By the said order Mr. Ramalinga Raju Mr. B. Rama Raju were, inter alia, directed to disgorge unlawful gain of ₹ 543.93 crore made on sale of Satyam shares (which included the sale of Satyam shares by the appellants) and disgorge unlawful gain of ₹ 1258.88 crore made by pledging the Satyam shares through SRSR Holdings Private Limited. g) Challenging the order passed by the WTM of SEBI dated July 15, 2014 Mr. B. Ramalinga Raju Mr. B. Rama Raju filed appeals before this Tribunal. By order dated May 12, 2017, this Tribunal inter alia upheld the decision of SEBI that Mr. B. Ramali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr. No. Names of the noticees in the present matter Unlawful Gain 1. Ms. B. Appalanarasamma Rs.8,00,43,125 2. Ms. B. Jhansi Rani Rs.8,50,63,350 3. Mr. B. Rama Raju Jr. Rs.46,00,17,218 4. Mr. B. Suryanarayana Raju Rs.89,71,70,765 5. Mr. B. Teja Raju Rs.49,31,43,762 6. Mr. Anjiraju Chintalapati (since deceased) Rs.7,92,13,750 7. Mr. Chintalapati Srinivasa Raju Rs.136,64,01,742 8. Chintalapati Holdings Pvt. Ltd Rs.82,49,37,875 9. Maytas India Limited (now known as IL FS Engineering and Construction Company Limited) Rs.59,16,49,091 Grand Total Rs.543,93,25,874 Thus, by order dated 15.07.2014 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undivided family, company or association of persons wherein any of the connected persons mentioned in sub-clause (i) of clause (c), of this regulation or any of the persons mentioned in sub-clause (vi), (vii) or (viii) of this clause have more than 10 per cent of the holding or interest; (ha) (i) relative means a person, as defined in Section 6 of the Companies Act, 1956 (1 of 1956) Prohibition on dealing, communicating or counselling on matters relating to insider trading. 3. No insider shall- (i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or (ii) communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities: Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law. Companies Act, 1956 Section 6. A person shall be deemed to be a relative of another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholding pattern of SRSR was changed as follows:- i) R. Ramalinga Raju 33.11% ii) B. Rama Raju 38.47% iii) Nandini Raju 40.52% (Wife of Ramalinga Raju) iv) B. Radha 13.90% (Wife of B. Rama Raju) d) On 18.09.2006 B. Ramalinga Raju, B. Rama Raju and their respective spouses who were the promoters of Satyam, transferred their shareholding in Satyam to SRSR. On the very same day, B. Teja Raju B. Rama Raju (Jr) demitted their office as directors of SRSR. e) Investigation carried out by SEBI revealed that between October 11, 2007 and September 26, 2008, SRSR pledged 6,28,83,317 shares of Satyam as security for obtaining loan amounting to ₹ 1258.88 crore. The said amount was borrowed to provide funds to 10 private limited companies which were owned by Raju family. f) In the impugned order (para 33) the WTM of SEBI has recorded a finding that SRSR was under the same management or group and therefore SRSR was a deemed to be a connected person defined under regulation 2(h)(i) of the PIT Regulations. It is not in dispute that Ramalinga Raju and Rama Raju (Chairman Managing Director respectively of Satyam) were also the directors of SRSR and in fact entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and the pledged amounts were utilized, leave no manner of doubt that SRSR was a front entity established by Ramalinga Raju and Rama Raju for off loading their shareholding in Satyam when the market value of Satyam shares were higher on account of fictitious bank balances shown in the books of Satyam. Therefore, argument that SRSR was not an insider and had not pledged the shares of Satyam when in possession of UPSI cannot be accepted. j) Argument advanced by Mr. Kadam, learned Senior Advocate appearing on behalf of SRSR that pledging shares of Satyam by SRSR would not amount to dealing in securities is without any merit. Expression dealing in securities as defined under regulation 2(d) of the PIT Regulations is not restricted to any particular type of dealing but is wide enough to cover all types of dealing in securities including the activity of pledging the securities. Although pledging of securities is not per se illegal under the PIT Regulations, regulation 3 of the PIT Regulations prohibits an insider from pledging the securities when in possession of UPSI. Thus, the prohibition contained in the PIT Regulations do not apply to bonafide pledge of securities, but app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. b) In the year 1993 CSR became executive director of Satyam. In the year 1996, Satyam Enterprise Solutions Pvt. Ltd. ( SESPL for short) was formed as a joint venture between Satyam and CSR in which Satyam held 80% shares and CSR held 20% shares. Pursuant to a scheme of arrangement approved by Andhra Pradesh High Court, SESPL merged with Satyam with effect from 01.04.1999 and in lieu of holding 20% shares of SESPL, CSR was issued 8,00,000 shares of Satyam. Due to bonus and stock split (reducing face value of shares from ₹ 10 to ₹ 2) announced by Satyam, the shareholding of CSR in Satyam rose within a period of one year from 8,00,000 shares to 76,50,000 shares. c) On 20.01.2000 CHPL was incorporated by CSR and during the course of arguments counsel for CSR fairly stated that CSR and his wife held 50% shares each in CHPL and that they were the only two Directors of CHPL. CSR transferred some shares of Satyam to CHPL and some shares of Satyam to Anjiraju. Thereafter, CHPL retained some shares of Satyam and returned balance shares of Satyam to CSR. d) From 1993 till August 2000, CSR continued as Executive Director of Satyam. In August 2000 CSR disclosed to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither CSR nor Chintalapati group were the promoters of Satyam at any point of time and even the internet news report referred to by SEBI does not suggest that the Chintalapati group entities were the promoters of Satyam and therefore, the impugned order passed solely on the basis of unsubstantiated internet news report is liable to be quashed and set aside. We see no merit in the above argument, because, in the impugned order, CSR is held to be a promoter of Satyam not on the basis of internet news report but basically on the basis of periodic disclosures filed by Satyam from time to time with the stock exchanges, (para 44 of the impugned order) wherein, CSR has been shown as promoter of Satyam till 2008. The internet news report was in fact relied only to establish the relationship between CSR and Ramalinga Raju. b) Extensive arguments were advanced by counsel on both sides on the question as to whether CSR/Chintalapati group could be considered as promoters of Satyam on the basis of the declarations made by Satyam in their periodic filings before the stock exchanges. In our opinion, correctness of the impugned order can be decided without going into the controversy as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CSR fairly stated that CSR and his wife held 50% shares each in CHPL and that they were the only two Directors in CHPL. Regulation 2(h)(i) of the PIT Regulations provide that a company which is under the same management or group would be deemed to be a connected person. Since CSR was a person connected with Satyam and since CSR and his wife each holding 50% shares of CHPL were also managing CHPL as the only two Directors, CHPL was a deemed connected person under regulation 2(h)(i) of the PIT Regulations. Apart from the above, CSR who is a connected person with Satyam under regulation 2(c) (i) of the PIT Regulations admittedly held more than 10% of the shareholding or interest in CHPL and therefore, even under regulation 2(h)(ix) of the PIT Regulations, CHPL was liable to be considered as a deemed to be connected person . Although, the impugned order does not consider CHPL to be a deemed connected person under regulation 2(h)(ix) of the PIT Regulations, uncontroverted facts on record conclusively establish that CHPL was a deemed to be connected person under regulation 2(h)(ix) of the PIT Regulations. Thus, CSR as a connected person and CHPL as a deemed to be a connected person mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue till a suitable replacement was found, CSR agreed and continued as Non-Executive Director of Satyam till 23.01.2003. There is nothing on record to suggest that the duties of CSR as a Non-Executive Director were different from the duties discharged by him as an Executive Director of Satyam. Admittedly, CSR was attending the Board Meeting of Satyam till his retirement on 23.01.2003. i) Investigation carried out by SEBI revealed that the books of Satyam were manipulated during the years 2001-2008 and it is seen that in the year 2001 2002 the inflated bank balances in the deposit account and current account of Satyam with the Bank of Baroda, New York Branch was to the tune of ₹ 120.29 crore and ₹ 995.01 crore respectively. Since CSR was involved in business development, diversification plans and advise on new ventures of Satyam during the year 2001 and 2002, inference drawn by the WTM of SEBI that CSR was reasonably expected to have access to the fictitious bank balances shown in the books of Satyam during the period 2001-2002 cannot be faulted. In other words, it is impossible to believe that business development, diversification plans and advise on new ventures c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SI and made profits in violation of the PIT Regulations. Since that question was not considered by any of the authorities, the WTM of SEBI was justified in not relying on the reports of those agencies. l) Relying on the decisions of the Apex Court in case of Canara Bank v/s Debasis Das reported in (2003) 4 SCC 557 and in the case of Nasir Ahmad v/s Assistant Custodian General reported in (1980) 3 SCC 1 it was strongly contended by counsel for Chintalapati group that while the show cause notice alleges that Chintalapati group as promoters of Satyam were reasonably expected to be privy to UPSI, in the impugned order it is held for the first time that CSR was related to Ramalinga Raju and was closely connected with Satyam and therefore it is reasonable to believe that Chintalapati group was privy to UPSI. Thus, it is submitted that the impugned decision which travels beyond the show cause notice is liable to be quashed and set aside as having been passed without jurisdiction. m) We see no merit in the above argument. In the annexures to the show cause notice issued to CSR/ Chintalapati group it was specifically stated that CSR was the Executive Director of Satyam up to 31.08.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be a connected person till 23.07.2003 i.e. six months post his resignation deserves acceptance. Explanation inserted to regulation 2(c) of the PIT Regulations with effect from 20.02.2002 clearly stipulates that where a connected person ceases to be a connected person then, in respect of the insider trading of that person, action can be taken up to a period of six months from the date of a person ceasing to be a connected person. In view of the specific provision to the above effect inserted in the PIT Regulations with effect from 20.02.2002 in our opinion, the WTM of SEBI was not justified in initiating action beyond the period of six months stipulated in the Explanation to regulation 2(c) of the PIT Regulations. p) Counsel for SEBI, however, submitted that subscribing to the above view would defeat the purpose with which the law was enacted, because in all such cases no action could be taken against any person/ entity who had indulged in insider trading, after six months of his ceasing to be a connected person. It is submitted by counsel for SEBI that the term was connected with the company under regulation 2(e) would mean that a person would continue to be a connect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ceasing to be a connected person. Although the above prima facie belief is belied in the present case, till the law is amended it would have to be held that explanation to regulation 2(c) restricts action for insider trading up to a period of six months from the date on which the connected person ceases to be a connected person. r) To hold that the Explanation inserted to regulation 2(c) with effect from 20.02.2002 is not restricted to the act of insider trading up to six months and to extend the same beyond the period of six months would amount to violating the clear mandate contained in the newly inserted Explanation. Since the language used in the Explanation to regulation 2(c) is clear and unambiguous, it would be improper to give an extended meaning to the words used in the Explanation to regulation 2(c) of the PIT Regulations. Reliance placed by the counsel for SEBI on the Apex Court decision in case of Ajay Kumar Agarwal (supra) is misplaced. In that case while considering the question as to whether Section 11B of SEBI Act can be applied retrospectively or not, the Apex Court held that while interpreting the provisions of a social welfare legislation the purpose of enac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etalvad learned Senior Advocate, B. Jhansi Rani had sold shares of Satyam in off-market on 22.01.2001 and on 05.02.2001. Regulation 2(h)(viii) which applies to relatives of the connected person was inserted to the PIT Regulations with effect from 20.02.2002. Therefore, the WTM of SEBI could not have applied regulation 2(h)(viii) of the PIT Regulations to the case of B. Jhansi Rani, because that provision was not in existence when B. Jhansi Rani sold the shares of Satyam on 22.01.2001 and on 05.02.2001. 14. Similarly, in para 65 of the impugned order it is held that Jhansi Rani sold shares of Satyam when in possession of UPSI and therefore she has violated regulation 3 of the PIT Regulation. It is relevant to note that Jhansi Rani sold the shares of Satyam prior to the amendment of regulation 3 on 20.02.2002. On the date on which Jhansi Rani sold the shares of Satyam, the prohibition under regulation 3 was that no insider shall trade in the shares of the company on the basis of UPSI. The words on the basis was substituted by the words when in possession with effect from 20.02.2002. Thus, sales effected by Jhansi Rani could be said to be violative of regulation 3, only b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal relied upon by the counsel for SEBI wherein it is held that once an insider trades in the securities of company, it is presumed that such trades were done on the basis of UPSI would have no relevance to the case of B. Jhansi Rani. 17. In the result, the directions issued against Jhansi Rani are quashed and set aside and the Appeal filed by Jhansi Rani is allowed with no order as to costs. B. Appalanarasamma (Appeal No. 458 of 2015) B. Teja Raju (Appeal No. 459 of 2015) B. Rama Raju (Jr.) (Appeal No. 460 of 2015) B. Suryanarayana Raju (Appeal No. 461 of 2015) 18. It is not in dispute that the appellants in all these appeals are family members of Ramalinga Raju and Rama Raju and are covered under the Expression deemed to be connected person as defined under regulations 2(h) of the PIT Regulations. However, Mr. Mohan Parasaran, Mr. J. J. Bhatt, Mr. Dhakephalkar, learned Senior Advocates and Mr. Andhyarujina learned Advocate appearing on behalf of their respective clients have argued that the WTM of SEBI is not justified in holding that the appellants had sold the shares of Satyam when in possession of UPSI. 19. We see no merit in the above contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... race Investments which were all group concerns of Raju family. B. Suryanarayana Raju made off-market transfers of his entire shareholding of 27,89,000 shares of Satyam to Elem Investments, Fincity Investments and Higrace Investments between 05.02.2001 to 19.11.2004 and made profit of ₹ 89,71,70,765/-. f) Till the accounting fraud of Satyam was revealed by Ramalinga Raju on 07.01.2009 Satyam was a promising and rising company. In such a case, ordinarily the appellants who were closely associated with Ramalinga Raju and Rama Raju would have resorted to consolidating their shareholding in Satyam. However, strangely, not only Ramalinga Raju Rama Raju, but also all their family members including all the appellants herein who were deemed to be connected persons have resorted to selling the shares of Satyam during the years 2001-2008. It is relevant to note that the appellants not merely sold the shares of Satyam but virtually liquidated their shareholding in Satyam during the period from 2001 to 2008 and during the said period the investors were made to believe that Satyam is achieving greater heights year after year. None of the appellants have placed any material on record t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellants herein were insiders and that they had sold shares of Satyam when in possession of UPSI and hence violated PIT Regulations cannot be faulted. Whether the WTM is justified in passing uniform restraint order against all the appellants and directing each appellant to disgorge the unlawful gain jointly and severally with B. Ramalinga Raju and Rama Raju. 20. There can be no dispute that the role played by SRSR, Chintalapati group and other appellants in facilitating and liquidating the shares of Satyam when in possession of UPSI differ substantially. In such a case, without considering the merits of each case the WTM of SEBI could not have imposed uniform restraint order against all the appellants. 21. Apart from the above, having held in his order dated 15.07.2014 that the gains arising on sale/ pledge of Satyam shares by the appellants were the unlawful gains made by Ramalinga Raju and Rama Raju, and having directed them to disgorge the said unlawful gain, the WTM could not have held in the impugned order that the very same gains were the unlawful gains made by the appellants and direct each appellant to disgorge that unlawful gain jointly and severally with Ramali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in case of B. Jhansi Rani, Appellant in Appeal No. 462 of 2015) is upheld to the extent that the appellants were insiders under the PIT Regulations and that the appellants had pledged/sold the shares of Satyam when in possession of UPSI and thus, they have violated the SEBI Act and the PIT Regulations. However, the uniform restraint order passed against the appellants and the quantum of unlawful gain determined against each appellant and the direction to disgorge the same jointly and severally with Ramalinga Raju Rama Raju are quashed and set aside and restored to the file of the WTM of SEBI for fresh decision on merits and in accordance with law as expeditiously as possible and preferably within a period of four months from today. Till fresh order is passed by the WTM of SEBI on the aforesaid issues, the appellants shall not deal in securities or access the securities market in any manner whatsoever. d) Appeal No. 462 of 2015 filed by B. Jhansi Rani is allowed and directions issued against her in the impugned order are quashed and set aside. 24. All the Appeals are disposed of in the aforesaid terms with no order as to costs. In view of the disposal of the Appeals, Misc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . B. Ramalinga Raju. She is the wife of his real brother, Mr. Suryanarayana Raju, but her case has been allowed, therefore, I restrict myself to the four relatives and SRSR Holdings Pvt. Ltd. The ostensible reason for remand given in the majority order is to recalculate the amount of disgorgement directed to be paid by these five entities ultimately to be refunded to public shareholders who lost their hard earned money due to the colossal fraud. 29. Restoration to the file of WTM of SEBI has been done after quashing and setting aside the impugned order by which these entities have been directed to disgorge various amounts, detailed below, on the ground that the cost of acquisition/intrinsic value of shares was not taken into account by SEBI while making the disgorgement and imposing a ban of seven years on entering the market on each entity. Sl.No. Appeal No. Name of Appellant No. of share sold Shares sold for(Unlawful gain)/amount to be disgorged. Cost of acquisition of shares 1. 458/2015 Ms.B.Appalanarasamma 2,25,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is specifically mentioned that Mr. B. Ramalinga Raju, the Chairman and his real brother, Mr. B. Rama Raju, the Managing Director of the Company, were only responsible for the manipulation of accounts which seems to have been done by them for their own personal greed. It was further categorically stated by Shri B. Ramalinga Raju that no other Director/Executive Director, past or present, was responsible for the falsification and fabrication of the records. 31. Various Government of India agencies sprung into action for prosecuting the perpetrators of the Scam for violating the law. Ministry of Corporate Affairs, Government of India, immediately constituted Multi- Disciplinary Investigation Team ( MDIT ) comprising of officers of the SEBI, the Serious Fraud Investigation Office ( SFIO ), the Central Bureau of Intelligence ( CBI ), the Enforcement Directorate ( ED ), the Reserve Bank of India ( RBI ) and the Income Tax Department ( IT ). The underlining objective in forming MDIT, as reflected at page 35 of the SFIO Report, seems to be to avoid inconsistencies among the aforementioned agencies while investigating the same set of facts which led to the Satyam scam in the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] in which the Hon ble High Court had remanded the matter for retrial to the lower court. The Hon ble Supreme Court testing the validity of remand in that case aptly remarked that the High Court was to examine whether such finding of the trial court was sustainable or not in law and on facts. Even otherwise, the question could have been gone into by the High Court and a finding could have been recorded on the available material inasmuch as the High Court being the court of first appeal, all the questions of fact and law arising in the case were open before it for consideration and decision. 35. From the abovesaid judgment of the Hon ble Supreme Court it is borne out that a court or tribunal should remand a matter in extremely rare cases where the discrepancy before that court or tribunal is such that cannot be remedied by way of deciding an Appeal. It cannot be denied that remanding a matter, sets it back many months or even years in some cases and prevents the matter from reaching judicial finality, which is extremely disheartening in a country like India with a very serious issue of a vast backlog of cases. Of course, it goes without saying that in cases where remand is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This huge amount has to be disgorged at once to be distributed by SEBI to the victim investors of Satyam who had bought shares at an artificial price, which was the result of falsification and fabrication of accounts of Satyam and sold at a meagre amount of ₹ 40/- to ₹ 50/-, not even at 1/10th of the price they would have paid for acquisition of shares out of their hard earned money. Thus, keeping in view the facts and circumstances and the legal position in mind, I dismiss all the five appeals, namely Appeals 458/2015, 459/2015, 460/2015, 461/2015 and 463/2015, and uphold the action of the SEBI in passing the impugned order and directing the five appellants to disgorge the amount with interest. 40. The remaining four appeals pertaining to Ms. B. Jhansi Rani (Appeal 462/2015) and C.S.R., CHPL and Late Shri Anjiraju Chintalapati (Appeal 451/2015, 452/2015 and 453/2015), require a careful examination of the relevant PIT Regulations and jurisprudence in respect thereof. At the outset, I would like to first reproduce the relevant PIT regulations herein below: PIT Regulations of 1992 2 (c) connected person means any person who - (i) is a director, as def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry body; or (vi) is a relative of any of the aforementioned persons; (vii) is a banker of the company. (viii) relatives of the connected person; or [(ix) is a concern, firm, trust, Hindu undivided family, company or association of persons wherein any of the connected persons mentioned in sub-clause (i) of clause (c), of this regulation or any of the persons mentioned in sub-clause (vi), (vii) or (viii) of this clause have more than 10 per cent of the holding or interest;] (ha) price sensitive information means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company. Explanation.-The following shall be deemed to be price sensitive information :- (i) periodical financial results of the company; (ii) intended declaration of dividends (both interim and final); (iii) issue of securities or buy-back of securities; (iv) any major expansion plans or execution of new projects. (v) amalgamation, mergers or takeovers; (vi) disposal of the whole or substantial part of the undertaking; (vii) and significant changes in policies, plans or operations of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rules or the regulations made thereunder; (f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act.] Penalty for insider trading. 15G. If any insider who (i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or (ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or (iii) counsels or procures for any other person to deal in any securities of anybody corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. 41. In applying these PIT Regulations, the following question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich culminated into the PIT Regulations of 1992. 44. Before the drafting of the PIT Regulations of 1992, SEBI prepared an approach paper on the orderly development and regulation of the securities market to ensure sufficient investor protection. A Consultative Paper was issued in December 1991 by SEBI suggesting strict measure to control insider trading in the market. On August 1992, SEBI issued a Press Release declaring that an internal code of conduct for corporates be put into place to check insider trading. 45. On a perusal of the PIT Regulations of 1992, it appears that the objective with which they were framed was primarily to ensure that the damaging consequences of insider trading could be kept at bay in the Indian securities market as the phenomenon of insider-trading leads to baseless speculation in the market and due to artificial price-hike of the shares of the company in question, gullible investors are tempted to invest or deal in those shares with a view to making profits. 46. Further, Regulation 3 serves a purpose which is two-fold inasmuch as on one hand it forbids the dealing in securities of a listed company by an insider in possession of UPSI; and on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was an insider; AND b. such Insider Dealt in securities of a company listed on the stock exchange when in possession of UPSI. 51. The definition of Insider has also undergone several amendments. The relevant amendment for the present appeal is the 2002 Amendment. Prior to the 2002 Amendment, the definition of Insider reads as follows: (e) insider means any person who, (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information by virtue of such connection in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information. 52. The 2002 Amendment amended the definition of Insider and deleted the phrase by virtue of such connection . Regulation 2(e) defines Insider to mean: (e) insider means any person who, (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of the company, or (ii) has received or has had acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EBI must establish that he was reasonably expected to have access to UPSI. 57. After careful consideration of the PIT Regulations and the clarifications from the two learned senior counsels, it is evident from the definition of Insider that two categories of insiders have been created by the aforementioned definition. A person will fall into the first category as an insider if he fulfills both the ingredients of the first category cumulatively. 58. For the first category, if a person is a connected person, that itself satisfies half the component of the first category of insiders. However, it is pertinent to note that in order to fall under the first category, the term connected person must be read with the second ingredient viz., reasonably expected to have access to unpublished price sensitive information . Therefore, not only does a person need to be a connected person to be an insider, but there must also be some reliable and convincing material to show such a connected person is reasonably expected to have access to the UPSI. The Scheme of PIT Regulations of 1992 makes it evident that these dual requirements need to be satisfied before a person can be called an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues by SEBI states that there were a difference between the conformation received directly from the bank and the balance in the books for each year leading back to the year ending March 2001 (para 3.1.3.3) 63. The UPSI as identified by the WTM relates to the fabrication of the financial statements. The financial statements of a listed company are necessarily prepared at the end of the quarter and at the end of year. March 31, 2001 is the end of the quarter and the end of the financial year. Therefore any fabrication of the financial statements (which is the UPSI herein) would happen only when the financial statements have been prepared, approved by the Board and published. Since the financial statements are prepared only after 31.03.2001 and in light of the statement of senior counsel of SEBI, it would be appropriate to take 31.03.2001 as the date on which the UPSI was generated. D. Whether the SFIO Report is admissible in an adjudication under the PIT Regulations 64. The SFIO was set up by the Government of India by way of a resolution dated July 02, 2003, and it carried out investigations within the then existing legal framework under sections 235 to 247 of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.21 of SFIO Report at page 16) 68. When confronted with the SFIO Report, the WTM in the Impugned Order refused to take in account the SFIO Report by observing that SEBI s investigation is independent and separate from that of other investigating agencies. 69. This finding is unfortunate and rather absurd. As a matter of law, the Companies Act, 2013 (and prior Companies Act, 1956) stipulates that the SFIO Report is admissible as evidence in any legal proceeding. S.246 of the Companies Act, 1956 states : 246. Inspectors' report to be evidence. A copy of any report of any inspector or inspectors appointed under section 235 or 237 authenticated in such manner, if any, as may be prescribed, shall be admissible in any legal proceeding as evidence of the opinion of the inspector or inspectors in relation to any matter contained in the report. (A similar provision is there in S.223(4) of the Companies Act, 2013) 70. When a statute expressly mandates that the SFIO Report (which is Report of the Inspector) is admissible in any legal proceeding as evidence, the WTM ought to have carefully considered the findings of the SFIO Report as well. 71. Even though SEBI is a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, SEBI in its submissions has placed extensive reliance on the CBI Charge Sheet. 75. The CBI derives its powers from the Delhi Special Police Establishment Act, 1946 ( DSPE ). The DSPE acquired its popular current name, Central Bureau of Investigation, through a Home Ministry resolution dated April 01, 1963. Initially the offences that were notified by the Central Government related only to corruption by Central Government servants. In due course, with the setting up of a large number of public sector undertakings, the employees of these undertakings were also brought under the purview of the CBI. Similarly, with the nationalization of the banks in 1969, the Public Sector Banks and their employees also came within the ambit of the CBI. CBI has grown into a multi-disciplinary investigation agency over a period of more than 5 decades, during which it has dealt with numerous cases of national and international importance. Today it has the following three divisions for investigation of crimes:- (i) Anti-Corruption Division - for investigation of cases under the Prevention of Corruption Act, 1988 against Public officials and the employees of Central Government, Public Sector Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The judgment of CBI Court has been delivered by a Ld. Court of Law, presided over by an experienced Ld. Judge, duly taking into consideration the pleadings, including the documents filed before it and evidence adduced by the parties which would undoubtedly include examination and cross-examination of the witnesses. Therefore, this judgment of the Ld. CBI Court would at least have some persuasive value, if not binding. Therefore, the exclusion of such a relevant judgment, involving same facts will not lay down a good precedent. Appeal No. 462/2015 (Ms. B. Jhansi Rani Vs. SEBI) 79. In allowing Appeal No. 462/2015 the majority order has taken into consideration the fact that Ms. B. Jhansi Rani sold shares of Satyam between January 22 February 05, 2001. The provisions of the then PIT Regulations particularly provided that a person could be held guilty of insider trading only if it was proved that he or she sold the shares on the basis of UPSI . This was the prevailing law at that time. As discussed above, the law was changed by the 2002 Amendment by amending the regulation 2 (h)(viii) of the PIT Regulations so as to delete the concept of on the basis of UPSI and by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res over this extended period. 84. Since CSR sold shares over a long period of time, it is appropriate to divide the periods into various categories taking into account the amendments to the PIT Regulations of 1992. A. Sale of shares from 28.12.1999 to 31.03.2001 (prior to UPSI coming into existence); B. Sale of shares from 01.04.2001 to 19.02.2002 (prior to the 2002 Amendment to the PIT Regulations; C. Sale of shares from 20.02.2002 to 23.07.2003 (from date of 2002 Amendment to Appellant ceasing to be a Non-Executive Director plus 6 months); and D. Sale of shares from 24.07.2003 to 22.12.2008 (after Appellant ceased to be a Non-Executive Director plus 6 months) 85. For the sake of convenience, I deal with the first and last category at the outset. 86. The shares sold from 28.12.1999 to 31.03.2001 would not be covered by the PIT Regulations. As discussed above, the UPSI in the form of manipulation of financial statements came into existence after 31.03.2001. Consequently the sale of shares during this period cannot be considered. Since the order against Ms. B. Jhansi Rani has been quashed on this ground, the same will apply to CSR. 87. The sale of shares fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... briefly analyse an order of SEBI dated March 2016 in the case of Reliance Petroinvestment Limited [ RPL ] which is brought to our notice after the conclusion of the argument by way of written submission. In this case, the concept of Insider as well as the expression access to UPSI were also examined in detail and appellants therein were exonerated. In the case of RPL, SEBI, by an Adjudication Order dated 2nd May, 2013, imposed a penalty of ₹ 11 Crore on RPL under Section 15 G of the SEBI Act, 1992, for violation of Regulation 3 of the PIT Regulations. The said order was challenged by the RPL before this Tribunal by way of Appeal No. 122 of 2013, which was quashed by this Tribunal by order dated 7th December, 2015, mainly on the ground that the said impugned order was merely based on presumption of the appellant being in possession of UPSI at the time of purchase of shares. After quashing the said order, SEBI was called upon to pass fresh order on merit and in accordance with law. After remand, the AO of SEBI by an Order dated 08.03.2016 has exonerated the Noticees therein specifically holding that definition of insider under Reg 2(e) required SEBI to provide evidence sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disclosure of this fact made by the then Chairman of SCSL it resulted in inflation of profits and creation of nonexistent reserves which was adjusted in the books in the form of false current account balances and fixed deposit balances with banks. However this fact was in the knowledge of the then Chairman, the then CFO and Shri G. Ramakrishna and D. Venktapathi Raju and Shri C. Sriselam and Statutory Auditors but was never revealed to the Company or to the Board of Directors SCSL and by doing so, these persons concealed this fact of falsification of accounts from the company, the body of shareholders of SCSL as well as the Board of Directors of SCSL and thereby these persons practiced deception upon the company. 97. If the fabrication of the financial results (which is the UPSI herein) was suppressed from the Board of Directors of Satyam, it will be difficult to hold that the Appellant was even in possession of UPSI, leave alone trading on the basis of UPSI. If the Appellant as a director had knowledge of the fabrication of the financial statements (which is UPSI herein), he must be held to have violated the PFUTP Regulations. However, in the Impugned Order, the WTM drops t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors. In the Annual Report of 2002-2003 the report on Corporate Governance dealing with the Board of Directors is extracted below: Name of the Director Category Designation No. of Meetings held during the last financial year No. of Meetings attended No. of membership in boards of other Companies Attendance of each director in the last AGM Mr. B. Ramalinga Raju Promoter Executive Director Chairman 4 4 2 Yes Mr. B. Rama Raju Promoter Executive Director Managing Director 4 4 3 Yes Mr. C. Srinivasa Raju Non-Executive Director Director 4 2 - Yes Mr. P.V. Rama Rao Independent and Non-Executive Director Director 4 4 5 No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexure (Annexure D-23). This is in violation of the requirement of clause 35 of the listing agreement with the stock exchanges. The persons who were in the knowledge of this incorrect filing have thus violated provisions of SC (R) Act and SEBI Act and are liable for prosecution according to the relevant Acts. This matter may therefore be brought to the notice of SEBI . Para 4.7.21-22. 104. Instead of taking action based on the correct promoter holdings, SEBI has, beyond my understanding, chosen to place reliance on the factually incorrect filings clearly held to be so by SFIO. Further, SEBI has done so without giving any reason as to why, if at all, the findings of SFIO can be faulted with. Moreover, one of the biggest indications of the fact that Appellant was not a promoter of Satyam is that his shares were not subject to a lock-in period at the time of merger of SES into Satyam, as the law required promoters shares to be subjected to lock-in. 105. Further, the SFIO Report recounts the interrogation of the noticees in its Investigation Report. While questioning Mr. B. Rama Raju in question no. 83, the SFIO makes certain observations which make it abundantly clear that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders who were not promoters in any sense of the term. I therefore agree with Ld. Sr. Counsel Mr. Khambatta that the CSR was a victim of the fraud perpetrated by the former management. It is also ironical that SEBI having found that filings on financial statements prepared by Satyam under the control of B. Ramalinga Raju were fabricated now chooses to place reliance on the same fabricated promoter filings made by the former management which committed the fraudulent activities in the first place, merely because it wrongly bolsters SEBI s case against CSR. Further, even the promoter filings do not appear to be conclusive. In their Convenience Compilation, the Appellants have extracted the Annexure to the SFIO Report which contains the filings made by the former management under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. These filings disclose the list of promoters and their shareholding from March, 2003 to 19.11.2008. The name of the Appellant is missing from this as well. It is, therefore, evident that the conclusions are inconsistent and do not speak in the same voice. Therefore, no reliance can be placed on the promoter filings made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... husband. 14. Daughter's husband. 15. Daughter's son. 16. Daughter's son's wife. 17. Daughter's daughter. 18. Daughter's daughter's husband. 19. Brother (including step-brothers). 20. Brother's wife. 21. Sister (including step-sister). 22. Sister's husband. 111. From a perusal of section 6 of Companies Act, 1956 read with Schedule IA, it becomes evident that the term co-brother is not used anywhere to depict a relative. In fact, even the wife s brother has not been considered as a relative as per Schedule IA. Therefore, to consider a wife s sister s husband, which is an even distant relation, as a relative, is not tenable on the Respondent s part. It is important to note that S.6 uses the phrase if, and only, if . This means only those listed can be considered as a Relative. In the Impugned Order, the WTM at Para 35 places extensive reliance on the definition of Relative for other Appellants, but chooses to completely disregard the same when it comes to the case of CSR. 112. The only logical conclusion that emanates from a simple reading of the law in existence at the relevant time is that CSR was not, legally s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s trading pattern clearly demonstrates that trades were not undertaken while in possession of UPSI, and that shares were disposed of as and when the Appellant s independent business ventures required an inflow of capital. This is evident from the SFIO Report. A review of the SFIO Report and the CBI Judgment shows that 2005-06 was a crucial year. By this year all the actual Promoters disposed of their shareholding in Satyam because they were aware of the credit crunch faced by Satyam, which was not reflected in the published financial statements. The Appellant was only person who continued to retain a substantial shareholding in the Satyam. I find that this clearly points to the lack of possession of UPSI. The relevant extract of the SFIO Report is extracted below : .. As the scrip price [was] dropped in June 2006, it appears that the company in order to boost the sentiment announced bonus issue and issued bonus shares in October 2006. Thereafter, price of the scrip was range bound between ₹ 400- ₹ 520 till September 2008. This could be the trigger point to the promoters of SCSL, as almost all members of the promoters group (except Shri B Ramalinga Raju, Smt B N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by B. Ramalinga Raju and others. Specifically, the Appellant highlights that a. he was neither a promoter or owner or director or shareholder of any of the 327 companies floated by B. Ramalinga Raju and others; b. he was not a promoter or owner or director or shareholder of any of the 3 investment companies of the Promoter Group of Satyam i.e. - Elm, Fincity and Hi Grace; c. he was not promoter or owner or director or shareholder of SRSR, nor did he transfer any shares of Satyam to SRSR. 119. All these factors do not support the inference drawn by WTM that there was a close connection between the Appellant and B. Ramalinga Raju. This is also supported by the SFIO Report which found that the Appellant had no connection with any entities floated by B. Ramalinga Raju, unlike other Appellants. .. During the course of investigation it was found out that the Promoters of SCSL and their family members had incorporated about 374 companies over a period of past 8 to 10 years for the purposes of venturing into infrastructure development business including eight investment companies. The profiles of these companies included the names of directors, paid-up share capital, loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by any stretch of the imagination. 125. However, SEBI in its oral and written submissions raised several new arguments which were neither in the SCN or the Impugned Order to suggest that CSR s role and responsibilities as an Executive Director in Satyam upto 31.08.2000 continued even after he ceased to be an Executive Director and became a Non-Executive Director from 01.9.2000 to 23.01.2003. 126. The Majority opinion has relied on these submissions which are not present either in the Show Cause Notice or in the Impugned Order. Specifically the Majority opinion refers to CSR s association with Satyam s management from 1993 to August 2000. In my view these events have no relevance since they were outside the relevant period and even before UPSI came into existence on 31.03.2001. The WTM has rightly not considered these facts as they are irrelevant for a determination of violation of PIT Regulations. 127. The majority opinion refers to CSR being a Director of Satyam Infoway till 2005 which was one of the companies floated by Ramalinga Raju and his family members. Based on these circumstances, the Majority opinion concludes that the Appellant was closely connected with several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order to this effect. Neither WTM in the Impugned Order nor SEBI in its submissions before this Tribunal has produced any material to show that the Appellant was involved in business development, diversification plans of Satyam during the year 2001 and 2002. On the contrary, the Appeal Memo and the List of Dates submitted by CSR during the hearing depict that he was involved in the said activities during 1992-1993 and not during 2001 or 2002. This was almost a decade before the UPSI came into existence. 131. The Majority opinion holds that on account of close relationship with Ramalinga Raju, the Appellant was made as a Joint Venture Partner of various group companies floated by Ramalinga Raju and his family members. In fact on account of merger of one joint venture with Satyam, Chintalapati Srinivas Raju got 8,00,000 shares of Satyam which eventually became 76,50,000 shares on account of bonus and stock split within a period of one year. 132. I have scanned the entire Show Cause Notice and the impugned Order to see, if there was any such mention of CSR becoming a director of Joint Venture Partner of various group companies floated by Ramalinga Raju on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re addressed and must be construed objectively with reference to the language used in the order itself. Orders are not like old wine becoming better as they grow older. 135. CSR cannot be condemned as an insider, once he has been held neither to be a promoter nor a relative on fact and law. Further, the Appellant has been absolved of all blame by SEBI itself with respect to the conspiracy, contrived primarily by the Byrraju brothers, while holding that the Appellant had nothing to do with the fabrication and manipulation of accounts of Satyam. Appeal No. 452/2015 (Chintalapati Holdings Pvt Ltd Vs. SEBI) 136. This Appeal can be disposed of on a short point. The Appellant here is in the same position as the Appellant in Appeal No. 462 of 2015 (Jhansi Rani). Consequently this Appeal can be disposed on the same grounds. 137. The Appellant sold 8 lakh shares from 04-01-2001 to 14-03-2001. After 31-03-2001, there was no dealing in securities by the Appellant, but Appellant only retuned 24 lakh shares which were never sold, but were merely returned to CSR. These shares which were returned were sold by CSR subsequently and were included in the Impugned Order against CSR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cability of Reg. 2(h)(ix). 141. This Appeal is essentially consequent to the determination of the Appeal of CSR. Since I have held herein above that CSR himself was not an insider because SEBI has failed to establish reasonable access to UPSI. When CSR is not an Insider, this Appellant CHPL cannot be considered as a person deemed to be connected. In view of the above, the Appeal filed by CHPL is allowed and the Order of WTM is set aside. Appeal No.453/2015 (Late Anjiraju Chintalapati Vs. SEBI) 142. The Appellant was the father of CSR. The Appellant sold 2,50,000 shares on 04.08.2005. Appellant expired on 03.12.2007. The Impugned Order holds the Appellant to be a person deemed to be connected under Regulation 2(h)(viii), since he was a relative of a connected person (CSR) (Para 37). However, as discussed above, CSR ceased to be a connected person on 22.07.2003. Consequently, when the Appellant sold the shares on 04.08.2005, he could not be a deemed to be connected person since CSR himself ceased to be a connected person. On this short point alone, the order of the WTM is liable to be quashed and set aside. 143. However, this appeal raises important questions of la ..... X X X X Extracts X X X X X X X X Extracts X X X X
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