TMI Blog2018 (5) TMI 931X X X X Extracts X X X X X X X X Extracts X X X X ..... owledge of confidential information can be formed. The fact that the appellant was to be continued as a director till replacement again does not take us anywhere. Shri Viswanathan has shown us that two other independent non-executive directors were appointed in his place on and from 23.1.2003. What is clear is that the appellant devoted all his energies to the businesses he was running, on and after resigning as an executive director of SCSL, as a result of which the salary he was being paid by SCSL was discontinued. Having regard to the findings contained in the minority judgment and the aforestated discussion, we are clearly of the opinion that this view is correct both in law and on facts and deserves our acceptance. Therefore, this appeal is allowed and the majority judgment of the Appellate Tribunal is set aside. The appellant company does not have persons who are relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) – under these sub-clauses, a person is deemed to be a connected person if such person is a relative of persons in clauses (i) to (v); or is a banker of the company; or is a relative of a connected person. Since none of these clauses are att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v., Ms. Bina Madhavan, Adv., Mr. Krishna Kumar Singh, Adv., Ms. Swati Bhardwaj, Adv., Mr. Laxmi Shankar, Adv., M/S. Lawyer S Knit Co, AOR, Ms. Supriya Juneja, AOR For the Respondent(s) : Mr. Pratap Venugopal, Adv., Ms. Surekha Raman, Adv., Mr. Anuj Sarma, Adv., Ms. Niharika, Adv., Ms. Kanika Kalaiyarasan, Adv., M/S. K J John And Co, AOR JUDGMENT R.F. NARIMAN, J. 1. The present appeals have their genesis in what is popularly known as the Satyam scam . By a letter dated 7.1.2009, one B. Ramalinga Raju, former Chairman of Satyam Computer Services Limited (hereinafter referred to as SCSL ) sent a letter to various stock exchanges and the SEBI stating that the financial statements of SCSL had been grossly overstated and did not reflect the true and fair view of the financial position of SCSL. Civil Appeal No.16805 of 2017 2. In the present appeal, the appellant was roped in by the Whole Time Member of the SEBI as well as the Appellate Tribunal as he happened to be an executive director of SCSL from 1993 upto 31.8.2000 and a non-executive director from 1.9.2000 to 23.1.2003. He also happens to be the co-brother of B. Ramalinga Raju as the two of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider Trading Regulations), 1992 (hereinafter referred to as the 1992 Regulations ). By an order dated 10.9.2015, the Whole Time Member of the SEBI, after extracting relevant sections of the SEBI Act, 1992 and the relevant regulations referred to in the show cause notice, held that given Annexure 15 to the show cause notice, the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of B. Ramalinga Raju would also rope the appellant in. After referring to Regulations 2(c) and 2(e) of the 1992 Regulations, the Whole Time Member held that being a director of SCSL, the appellant was a connected person under Regulation 2(c) and, therefore, an insider under Regulation 2(e). The Whole Time Member went on to hold that the fact that the books of accounts of SCSL were fabricated and manipulated since 2001 remains within the knowledge and possession of insiders who were reasonably expected to have access to them. When it was sought to be contended that the Special Court, Enforcement Directorate and Serious Frauds Investigation Office (SFIO) have given findings that only B. Ramalinga Raju and his cohorts wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Appellate Tribunal that given Annexure 15 to the show cause notice, the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of Ramalinga Raju would also rope the appellant in. However, the appellant was given relief to the extent that under the Explanation to Regulation 2(e) of the 1992 Regulations, the appellant could only be held liable for a period of six months beyond his resignation as a director i.e. upto July, 2003. A remand order, therefore, was made to assess the quantum of unlawful gains that the appellant had made upto July, 2003. 5. Shri K.V. Viswanathan, learned senior counsel appearing on behalf of the present appellant, has argued that the basis of the show cause notice is that the appellant as a promoter made illegal gains contrary to the 1992 Regulations. Once it is demonstrated that he is not a promoter, the findings of the Whole Time Member and the majority view of the Appellate Tribunal must be set aside as they go beyond the show cause notice. He further argued that a fundamental error made by the Whole Time Member as well as the majority judgment of the Appellate Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns ), which definition is incorporated in the Listing Agreement. This definition clearly shows that a promoter means a person who is in control of the company, directly or indirectly, whether as shareholder, director or otherwise. According to Shri Singh, the appellant, by virtue of being an executive director from 1993, was, therefore, clearly a promoter within the meaning of the aforesaid definition. He also referred to and relied upon Section 159 of the Companies Act, 1956, which requires certain particulars to be furnished by companies in their annual return. What is conspicuous by its absence is the fact that there is no requirement to disclose who the promoters of a company are. This has since been changed, for in the Companies Act, 2013, Section 92(1)(e) now requires disclosures in the annual return as to who the promoters of the company are. This being the case, according to the learned senior counsel, the annual returns filed by the company did not, in law, need to disclose who were the promoters of the company and for this reason, SCSL did not disclose the appellant as a promoter. According to Shri Singh, this aspect is adverted to in the majority judgment of the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; (d) engage in insider trading; (e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; (f) acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected person , if such person- (i) is a company under the same management or group, or any subsidiary company thereof within the meaning of sub-section (1B) of section 370, or sub-section (11) of section 372, of the Companies Act, 1956 (1 of 1956) or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case may be; or (ii) is an intermediary as specified in section 12 of the Act, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation; (iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or is member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company; (iv) is a Member of the Board of Directors or an employee of a public financial institution as defined in section 4A of the Companies Act, 1956; or (v) is an offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the change in the definition of insider with effect from 2015. Regulation 2(1) (g) of the 2015 Regulations reads as under: Definitions. 2. (1) In these regulations, unless the context otherwise requires, the following words, expressions and derivations therefrom shall have the meanings assigned to them as under: (g) insider means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information; 9. By Regulation 12 of the said regulations, the 1992 Regulations were repealed with an inbuilt Section 6 of the General Clauses Act contained in clause 2 of Regulation 12. 10.It is important to note that Regulation 2(e)(i) is in two parts. The first part has reference to any person who is connected with the company or is deemed to be connected with the company. There can be no doubt that the definition of connected person contained in Regulation 2(c) would rope in the appellant under sub-clause (i) thereof, as the appellant was undoubtedly a director of SCSL upto 2003. However, the second limb of clause 2(e)(i) also has to be satisfied, which is that such person must reasonably be expected to have access t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suppressed from the board of directors, which would include the appellant as a member of such board. In a significant paragraph, the minority holds: 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 the charge of PFUTP violation for lack of evidence. This clearly shows that the appellant CSR was never in possession of UPSI. In view of this, the finding of the WTM that the Appellant violated PIT Regulations during this period is held to be not legally sustainable. 13.The said judgment went on to hold that the appellant cannot be described as a promoter inasmuch as the annual reports, which contained his signatures as a director, did not show him as a promoter. What was done behind his back was that B. Ramalinga Raju and B. Rama Raju described him as a promoter onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck of possession of UPSI. Another important point is that the last transaction of sale of shares by the appellant on 22.12.2008, which was a substantial chunk of shares, was made by the appellant just like any other shareholder of SCSL. News had got out into the market that the merger proposal of SCSL with Maytas Infra Limited and Maytas Properties was not going ahead. The hysteria in the share market resulted in a steep drop in the price of shares of SCSL. The fact that the appellant disposed of a huge chunk of his shareholding on 22.12.2008 to avail of the price on that date completely negates the inference that there was any information flow between B. Ramalinga Raju, B. Rama Raju and the appellant. It was also pointed out that the appellant had no professional or business relationship with his co-brother and had no connection with any of the entities floated by his co-brother. The fact that the appellant was not involved with fraudulent manipulation is clear from the fact that he ceased to be an executive director in the year 2000. Fraudulent manipulation began only from 2001 onwards. It was also considered significant by the minority judgment that the appellant was not a nomin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Director (arrayed as an accused) is in charge of and responsible to the company for the conduct of the business of the company without anything more as to the role of the Director . But the complaint should spell out as to how and in what manner Respondent 1 was in charge of or was responsible to the accused Company for the conduct of its business. This is in consonance with strict interpretation of penal statutes, especially, where such statutes create vicarious liability. 14 . A company may have a number of Directors and to make any or all the Directors as accused in a complaint merely on the basis of a statement that they are in charge of and responsible for the conduct of the business of the company without anything more is not a sufficient or adequate fulfilment of the requirements under Section 141. Non-executive directors are, therefore, persons who are not involved in the day to day affairs of the running of the company and are not in charge of and not responsible for the conduct of the business of the company. 17.An instructive judgment of Lord Halsbury is contained in Dovey and the Metropolitan Bank v. John Cory [1901] AC 477. The Lord Chancellor put it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of the evidence, my Lords, I ask whether the course of business at the board meetings, as described by the respondent, was a reasonable course to be pursued by the respondent and other directors, or whether the knowledge which might have been derived from a careful and comparative examination of the weekly states and quarterly returns from the different branches of the bank ought to be imputed to the respondent, or (alternatively) whether he was guilty of such neglect of his duty as a director as would render him liable to damages. I do not think that it is made out that either of the two latter questions should be answered in the affirmative. I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill, and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark s Case, and by Chitty J. in In re Denham Co., that dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, in the impugned order, has held as under: All the wholesale dealers and all the wholesale buyers in the whole of the country would not be taken to form a single class of buyers. M/s SACI and SCIL were related persons. M/s SACI sold their goods in the State of U.P. through SCIL and no direct sales were effected by SACI in the State of U.P. Seen in the light of the Tribunal s decision in the case of Goramal Hari Ram Ltd. , the prices at which SCIL were disposing of the goods of SACI in the State of U.P. had been correctly taken as the normal price for determining the duty liability of SACI under Section 4 of the Act. 16. Thus according to the Appellate Tribunal, since the dealers in Uttar Pradesh who purchased the goods from Syndet, and independent dealers in other parts of the country to whom the appellants directly sold the goods are different class of buyers, the appellants price to the independent dealers cannot be taken as the basis for assessing the appellants sales to Syndet in Uttar Pradesh. This finding of the Appellate Tribunal is based on first proviso to Section 4(1)( a ) of the Act. While the show-cause notice and the order of the Collector proceeded on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; Explanation. (i) Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management: PROVIDED that the transfer from joint control to sole control is effected in accordance with clause (e) of sub-regulation (1) of regulation 3. (ii) If consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a change in control. Even though the definition of control in the 1997 Regulations is an inclusive one, yet the definition shows that control must mean a right to appoint majority of directors as a shareholder or to control management o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, without more, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed. The fact that the appellant was to be continued as a director till replacement again does not take us anywhere. Shri Viswanathan has shown us that two other independent non-executive directors were appointed in his place on and from 23.1.2003. What is clear is that the appellant devoted all his energies to the businesses he was running, on and after resigning as an executive director of SCSL, as a result of which the salary he was being paid by SCSL was discontinued. 22.Having regard to the findings contained in the minority judgment and the aforestated discussion, we are clearly of the opinion that this view is correct both in law and on facts and deserves our acceptance. Therefore, this appeal is allowed and the majority judgment of the Appellate Tribunal is set aside. CIVIL APPEAL NO.19494 of 2017 23.The appellant in this appeal is a closely held private company of Chintalapati Srinivasa Raju and his wife, each holding 50% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: Definitions. 2. In these regulations, unless the context otherwise requires:- (h) person is deemed to be a connected person , if such person- (ix) a concern, firm, trust, Hindu undivided family, company, association of persons wherein the relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) has more than 10 per cent of the holding or interest. 27.Obviously, the appellant company does not have persons who are relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) under these sub-clauses, a person is deemed to be a connected person if such person is a relative of persons in clauses (i) to (v); or is a banker of the company; or is a relative of a connected person. Since none of these clauses are attracted, it is obvious that Section 2(h)(ix) would also, as a matter of law, not be attracted in the facts of this case. In this view of the matter, this appeal also stands allowed. Consequently, the majority judgment of the Appellate Tribunal judgment is set aside. DIARY NO.37202 OF 2017 28.In this civil appeal, Shri Subramonium Prasad, learned senior counsel appearing on behalf of the appellant, contends that the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and his cohorts. He referred to the judgment of the Whole Time Member and to the majority judgment of the Appellate Tribunal holding that all that has been found against his client is that she is a close relative of B. Ramalinga Raju and by virtue of this close relationship, it, therefore, must be presumed that she had access to UPSI. Indeed, this is the basis of both the Whole Time Member s judgment as well as the majority judgment of the Appellate Tribunal. Given the fact that this lady was not proceeded against by the CBI or by the Enforcement Directorate and that the SFIO s report does not, in any manner, refer to her, and given the fact that she was neither promoter nor director of SCSL, it is obvious that the test of the second part of clause 2(e)(i) is not met in the facts of this appeal. Also, it must be remembered that had she been in possession of UPSI, she would also have sold shares at their peak price instead of selling them at a depressed price in the year 2003. For all these reasons, this appeal is also allowed, and the majority judgment of the Appellate Tribunal is set aside. CIVIL APPEAL NOs.17313 of 2017 and 17978 of 2017 31.Shri Neeraj Kishan Kaul, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to him, his company owned 6,28,83,317 shares of SCSL, which were pledged as security for obtaining a loan amount of ₹ 1258.88 crores. The said amount was borrowed to provide funds to 10 independent companies. Inasmuch as ₹ 1255 crores out of this sum have admittedly been repaid, partly through sale of the pledged shares, according to the learned senior counsel, this transaction of pledge cannot possibly drag his client into any violation of the 1992 Regulations. 33.Shri C.U. Singh, learned senior counsel appearing on behalf of the SEBI, has read to us the majority judgment of the Appellate Tribunal, in which it has been held that the amount that was borrowed was utilised to provide funds to 10 private limited companies, which were owned by the Raju family. Equally, the shareholding pattern of the appellant company, as it stood on and from 18.9.2006, made it clear that B. Ramalinga Raju and his wife Nandini Raju held 33.11% and 40.52% respectively, whereas the balance was held by his brother B. Rama Raju and his wife B. Radha. Obviously, therefore, as B. Ramalinga Raju and B. Rama Raju individually held more than 10% interest in the appellant company, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the learned Appellate Tribunal and, therefore, dismiss this appeal. CIVIL APPEAL NO.17383 of 2017 35.Shri Luthra, learned senior counsel appearing on behalf of the appellant, brought to our notice that the said appellant was neither a director nor a promoter of SCSL. The shares that were owned by this appellant in SCSL were sold by him from 5.2.2001 to 18.11.2004. According to the learned senior counsel, his case would be like the case of other family members of B. Ramalinga Raju, and any facts that are beyond the show cause notice cannot be looked at. According to the learned senior counsel, even though it is true that his client was indicted along with B. Ramalinga Raju and his brother B. Rama Raju in the SFIO s report, such report and the judgment of the Special Court, Hyderabad cannot be looked at as they are not relied upon in the show cause notice. Also, according to the learned senior counsel, they are not at all relevant under Sections 40 to 44 of the Indian Evidence Act, 1872 and, therefore, cannot be looked at. According to the learned senior counsel, adjudication proceedings and criminal proceedings are separate and distinct, and one cannot rely upon cri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing: 4.7.39. Shri Suryanarayana Raju is the younger brother of Shri B. Ramalinga Raju, Chairman and elder brother of Shri B. Rama Raju, Managing Director of SCSL. He has been adding, abetting and facilitating pledge, transfer, sale and management of funds for Shri B. Ramalinga Raju and Shri B. Rama Raju. He has been independently managing the affairs of SRSRHPL. In their statement given on oath, Shri B. Ramalinga Raju, Shri B Rama Raju, Smt. B. Nandini Raju and Smt. B. Radha Raju have confirmed that Shri Suryanarayana Raju has been helping them to fulfill various statutory formalities and meeting administrative exigencies. Shri Ramalinga Raju considered him as a trustworthy person to look after the statutory requirement of SRSRHPL. Shri B. Rama Raju in his statement dated 02.04.2009 (Annexure E-2.4) , could not state reasons for appointment of Shri B. Suryanarayana Raju but stated that there was no restriction to appoint a director without holdings shares in the company. Smt. B. Nandini Raju in her statement dated 24.03.2009 (Annexure E-41.1) , stated that Shri Suryanarayana Raju was made as director of SRSRHPL as a family member and trust worthy person. Smt. B. Radha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCSL. xxx xxx xxx 4.7.47. Shri Suryanarayana Raju was a Power of Attorney holder on behalf of the core-promoters and other family members of the core-promoters for sale/pledge of their shares at manipulated prices. The agreement here for doing any legal act was in the form of Power of Attorney giving him all powers to deal with the shares in SRSRHPL, a company promoted by the core-promoters. The act of facilitating sale and consequent pledge of shares was an illegal act which was carried out with deceptive motive for cheating the unsuspecting investors based on dishonest concealment of facts. By this dishonest and willful misrepresentation, investors were induced to purchase the shares of SCSL at highly manipulated prices. By this act of deception, Shri B. Suryanarayana Raju caused damage and harm to the investing public and hence committed the offence of cheating under Section 417, 420 read with Section 120B of the IPC, 1860 and make himself liable for prosecution under the above provisions of the Indian Penal Code, 1860. 39.Also, the judgment of the Special Court at Hyderabad, which was delivered only on 9.4.2015 i.e. long after the show cause notice, has concluded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are relevant if they relate to matters of a public nature relevant to the enquiry; but such judgments, orders or decrees are not conclusive proof of that which they state. This Court in K.G. Premshanker v. Inspector of Police , (2002) 8 SCC 87 at 94 stated: 22. In the facts of the present case, Section 42 would have some bearing and the judgment and decree passed in a civil court would be relevant if it relates to a matter of public nature relevant to the enquiry but such judgment and decree is not a conclusive proof of that which it states. While it is true that adjudication proceedings and criminal proceedings are separate proceedings, the relevance of the Special Court s judgment is only for the purpose of showing that the second part of the definition of an insider is made out in the appellant s case, for, if the appellant, along with his brothers, was party to the fraud practiced on the public, it is obvious that he was reasonably expected to have access to UPSI in respect of the securities of SCSL. This appellant s case, therefore, stands apart from the other family members of B. Ramalinga Raju, in that the SFIO s report as well as the aforesaid judgment clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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