TMI Blog2022 (4) TMI 945X X X X Extracts X X X X X X X X Extracts X X X X ..... ere dependent financially on appellant Balram Garg or consult Balram Garg in taking decisions relating to trading in securities . However, SEBI failed to do so as has been already recorded by the WTM in its order dated 11.05.2021. The said appellants were not immediate relatives and were completely financially independent of the appellant Balram Garg and had nothing to do with the said Balram Garg in any decision making process relating to securities or even otherwise. In the context of appellant no. namely Quick Developers Pvt. Ltd., the record clearly reveals that it is neither a holding company or an associate company or a subsidiary company of PCJ nor the appellant Balram Garg has ever been the Director of Quick Developers Pvt. Ltd. Therefore, Quick Developers Pvt. Ltd. cannot be held to be a connected person vis vis the appellant Balram Garg. Reliance of the Respondent/SEBI on transactions between appellant Sachin Gupta and PCJ and the subsequent payments of rent by PCJ is against the principles of natural justice as these allegations were not part of the Show Cause Notices There is no material on record for the WTM and the SAT to arrive at the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jeweller Ltd. (for short PCJ ) and a fresh certificate of incorporation was issued. 3. The genesis of the present dispute is rooted in the action of Respondent/SEBI against the appellants vide an impounding order dated 17.12.2019 and a showcause notice dated 24.04.2020. The crux of the allegations of the impounding order and the showcause notice are as follows: i. Padam Chand Gupta (P.C. Gupta) was the Chairman of PCJ during the relevant period and was a connected person in terms of Regulation 2(1)(d)(i) and an insider under Regulation 2(1)(g) of the SEBI (Prevention of Insider Trading Regulations), 2015 (for short PIT Regulations ). ii. Balram Garg, who is the brother of P.C. Gupta and the Managing Director of PCJ is also a connected person in terms of Regulation 2(1)(d)(i) and an insider under Regulation 2(1)(g) of the PIT Regulations. iii. That allegedly, the appellants in C.A. No.7590/2021, namely, Sachin Gupta, Smt. Shivani Gupta and Amit Garg traded on the basis of Unpublished Price Sensitive Information (for short UPSI ) received by them on account of their alleged proximity to P.C. Gupta and Balram Garg between the period from 01.04.2018 to 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SAT. The Tribunal, vide its common judgement and order dated 21.10.2021, dismissed the Appeals preferred by the Appellants and held that: Upon hearing both the sides, in our view, the reasoning of the Ld. WTM cannot be faulted with. The facts as highlighted by the Ld. WTM would show that though there was a family arrangement within the family on two occasions, there was no estrangement, as can be seen from the facts highlighted by the Ld. WTM (supra). Additionally, in our view, the very fact that appellant Shivani had authorized her cousin brotherinlaw i.e. appellant Amit to trade on her behalf, would belie the case of the appellants that family settlements means family estrangement. It cannot be gainsaid that the appellants are residing at the same address and even appellant Mr. Balram Garg s address is the front side of the premise. The trading pattern of the concerned appellant i.e. withholding of the selling of trade once buy back talk started within the company and again selling spree the shares by them once the buy back offer was made public till the rejection of the proposal by the State Bank of India was made known to the public, would clearly show that the conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mediate relative is provided in the Regulations to ensure that relatives who are financially or otherwise under the complete control of a connected person are not used for insider trading. However, in this case, no such possibility existed in relation to the appellant Mr. Balram Garg and the other appellants in C.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta and Amit Garg. 10. The learned Senior Counsel further contented that the reliance of the respondent on the transactions between appellant Sachin Gupta and the Company (PCJ) is against the principles of natural justice as these allegations were not part of the show cause notices. It was also submitted that the name of the appellant Balram Garg has been used interchangeably with that of late P.C.Gupta and there is no material on record for the WTM and the SAT to arrive at the finding that both late P.C.Gupta and the appellant Balram Garg communicated the UPSI to the appellants in C.A. No.7590 of 2021. 11. Mr. V. Giri, learned Senior Counsel for the appellants in C.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta, Amit Garg and Quick Developers Pvt. Ltd., has contended that the entire case of insi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od from April 25, 2018 to May 10, 2018 has been taken as the period of UPSI1. 15. It was further submitted that on July 7, 2018, the lead Banker of PCJ, State Bank of India (for short SBI ), refused to give No Objection Certificate (for short NOC ) for the buyback of equity shares. Hence, on July 13,2018, the Board approved the withdrawal of the buyback offer and the same was informed to the Exchanges after market hours. It was submitted that this information has been considered as Unpublished Price Sensitive Information2 (for short UPSI2 ) as the same was likely to materially affect the price of the shares of the company. Moreover, the information pertaining to proposed buyback of equity shares of the company came into existence on July 7, 2018 and became public on July 13, 2018. Accordingly, the period from July 7, 2018 to July 13, 2018 has been taken as period of UPSI2. 16. It has been contended that appellant Balram Garg contravened Regulation 3(1) of the PIT Regulations and Section 12A(c) of the SEBI Act,1992, by communicating the UPSI to the appellants in C.A. No.7590 of 2021, by being an insider and connected person within the meaning of PIT Regulations, and by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd son relationship was estranged. iii. Appellant Balram Garg and the Appellants No. 1,2, and 3 in C.A. No.7590 of 2021 i.e. Mrs. Shivani Gupta, Sachin Gupta and Amit Garg share the same residential address. 20. Reliance was placed on the SAT order in Utsav Pathak vs. SEBI (order dated 12.07.2020 in Appeal No. 430 of 2019) wherein the SAT had laid down the following ratio by relying upon the judgement of this court in SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368] and US District Court s order in United States of America vs. Raj Rajaratnam and Danielle Chiesi [09 Cr 1184 (RJH)]: From the aforesaid foundational facts, the circumstantial evidence or on a preponderance of probability by a logical process of reasoning from the totality of the attending facts and circumstances as stated aforesaid, an irresistible inference can be drawn that the appellant had passed on the price sensitive information regarding the open offer to the Tippees. Such inference taken from the immediate and proximate facts and circumstances surrounding the events is reasonable and logical which any prudent man would arrive at such a conclusion. The Supreme Court in Kanhaiyalal Patel (supra) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action which is under investigation; (e) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder: Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached; (f) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: Provided that the Board may, without prejudice to the provisions contained in subsection (2) or subsection (2A), take any of the measures specified in clause (d) or clause (e) or clause (f), in respect of any listed public company or a public company (not being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a body corporate listed on any stock exchange on the basis of any unpublished pricesensitive information; or (ii) communicates any unpublished pricesensitive 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 any body corporate on the basis of unpublished pricesensitive information, shall be liable to a penalty 81[which shall not be less than ten lakh rupees but which may extend to twentyfive crore rupees or three times the amount of profits made out of insider trading, whichever is higher]. (emphasis supplied) Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 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: (a) Act means the Securities and Exchange Board of India Act, 1992 (15 of 1992); (b) Board means the Securities and Exchange Board of India; (c) compliance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnised or authorized by the Board; or (i) a banker of the company; or (j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest; NOTE : It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives and other categories of persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company s operations. It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information. (e) generall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade shall be construed accordingly; NOTE :Under the parliamentary mandate, since the Section 12A (e) and Section 15G of the Act employs the term 'dealing in securities', it is intended to widely define the term trading to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc when in possession of unpublished price sensitive information. (m) trading day (n) unpublished price sensitive information means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, demergers, acquisitions, delistings, disposals and expansion of business and such other transactions; (v) changes in key managerial personnel. (vi) material events in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and discharge of obligations would be illegal under this provision. (3) Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would: (i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the 9[listed] company is of informed opinion that 10[sharing of such information] is in the best interests of the company; NOTE:It is intended to acknowledge the necessity of communicating, providing, allowing access to or procuring UPSI for substantial transactions such as takeovers, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. In an open offer under the takeover regulations, not only would the same price be made available to all shareholders of the company but also all information necessary to enable an informed divestment or retention decision by the public shareholders is required to be made available to all shareholders in the letter of offer under those regulations. (ii) not attract the obligation to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation when they took the decision to trade; and b. appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached; (iii) the trades were pursuant to a trading plan set up in accordance with regulation 5. NOTE: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the regulation. He traded when in possession of unpublished price sensitive information is what would need to be demonstrated at the outset to bring a charge. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is no direct evidence which suggests as to who had disseminated the insider information to the appellants in C.A. No.7590 of 2021, it concluded on mere preponderance of probability that it was late P.C. Gupta as well as appellant Balram Garg who disseminated both UPSI to the appellants in C.A. No.7590 of 2021. 26. Importantly, the WTM arrived at the finding that the appellants in C.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta, Amit Garg and Quick Developers Pvt. Ltd. were not connected persons qua the appellant Balram Garg. The WTM held that: I also note that it is not the case in the SCN that Noticee no.1, 2 and 3 were in any contractual, fiduciary or employment relationship with the company, or were the director or officer of the company, during the past 6 months of the alleged act of insider trading. Noticee No. 1 and 2 seem to be in the employment of the company but that was way back in 2015. I also note that the SCN has also not identified that Noticee no. 1,2,3 or 4 had any professional or business relationship with the company, that allows the said Noticees, directly or indirectly, access to unpublished price sensitive information. In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ni Gupta (1st Appellant in C.A. No.7590 of 2021 and wife of Sachin Gupta) also resigned from her post of Senior Assistant Manager, Karol Bagh Store of PCJ. Importantly, both Sachin Gupta and Smt. Shivani Gupta were, at no point of time, Directors of PCJ. 30. Subsequently, late P.C. Gupta and his son Sachin Gupta entered into another family arrangement dated 10.04.2015 whereby P.C. Gupta and his wife agreed to transfer at least 1,60,00,000 shares of the company to Sachin Gupta and his family, and in lieu thereof Sachin Gupta and his family agreed not to have any right whatsoever in the immovable and movable property of P.C. Gupta and his wife. However, Sachin Gupta and his wife Smt. Shivani Gupta were permitted to use the property at 1C, Court Road, Civil Lines, Delhi for residential purposes only. It is pertinent to note here that the said plot of land is a large tract of land and separate buildings were constructed thereon. P.C. Gupta and Sachin Gupta, along with their families, resided in separate floors of the same building, whereas Amit Garg and Balram Garg resided in separate buildings. 31. Post the agreed transfer of shares by P.C. Gupta and his wife, Sachin Gupta and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge after which the person who has traded when in possession of or having access to unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances. 33. The second question before us is that could the appellants in C.A. No.7590 of 2021, be rightly held to be insiders in terms of regulation 2(1)(g)(ii) of the PIT Regulations, only and entirely on the basis of circumstantial evidence? 34. In this context, it is important to highlight that the two major Corporate Announcements, purportedly related to a change in company s capital structure, which were: i. UPSI1 [Period between 25.04.2018 to 10.05.2018]: The announcement of the Company on 10.05.2018 to buy back up to 1,21,14,285 fully paid up equity shares of ₹ 10/each at a price of ₹ 350/per equity share. ii. UPSI2 [Period between 07.07.2018 to 13.07.2018 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice than the price at which the shares were sold earlier. On the date on which these shares were sold, the UPSI2 had not even come into existence. If the arguments of the respondent hold any water, the Appellants should have waited till UPSI2 and would only have subsequently offloaded maximum number of shares during the said period to avoid any notional loss. However, the records undercut the logic adopted by the respondent/SEBI for the reason that the appellants were not in possession of the UPSI2 and hence the appellants started selling the shares even before the UPSI2 came into existence. 38. PhaseIII [07.07.2018 to 13.07.2018 i.e. UPSIII Period]: The Appellant Mrs. Shivani Gupta sold only 15,00,000 shares during this period as opposed to the 74,35,071 shares that were sold at an earlier point of time (PreUPSI1 Period). Importantly, notwithstanding the fact that the appellant Mrs. Shivani Gupta sold 15,00,000 shares, she continued to hold 12,84,111 shares of the company, out of the total that were transferred to her by way of the family arrangement. These above factors undercut the argument of SEBI that the appellants sold huge number of shares during UPSI2 period because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication to have happened owing to the alleged proximity between the parties. In this context, even the showcause notices do not allege any communication between the Appellant Balram Garg and the other appellants in C.A. No.7590 of 2021. This is evident from the following extract of the order of the WTM: A perusal of the SCNs shows that allegations of Noticees no. 1 to 4 being connected person under Regulation 2(1)(d)(i) seems to have been proceeded on the basis of inference drawn that Noticees no. 1 to 3 being relatives of Late Shri Padam Chand Gupta who was promotor and chairman of PC Jewellers, and Noticee no. 5 who was the MD of PC Jewellers, would be having frequent communication with Late Shri Gupta and Noticee No. 5. However, here I note that as per Regulation 2(1)(d)(i) , association by virtue of frequent communication with the officer of the company must be arising in the discharge of his/her duty towards the company. The SCNs does not allege that there was any communication between Noticee no. 5 and Noticee no. 1 to 4, arising out discharge of any duty owed by Noticee no. 1,2,3 or 4 to the compoany. [emphasis supplied] 41. This Court in Hanumant vs. State of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lderson in the above mentioned case. [emphasis supplied] 42. This Court in Chintalapati Srinivasa Raju vs Securities and Exchange Board of India [(2018) 7 SCC 443] has further held that: Further, under the second part of Regulation 2(e) (i), the connected person must be reasonably expected to have access to unpublished price sensitive information. The expression reasonably expected cannot be a mere ipse dixit there must be material to show that such person can reasonably be so expected to have access to unpublished price sensitive information. ... We have already demonstrated that the minority judgment is much more detailed and correct than the majority judgment of the Appellant Tribunal. We accept Shri Singh s submission that in cases like the present, a reasonable expectation to be in the know of things can only be based on reasonable inferences drawn from foundational facts. This Court in SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368 at 383, stated: 26. It is a fundamental principle of law that proof of an allegation leveled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place on record any material to prove that the appellants in C.A. No.7590/2021 were connected persons to Balram Garg as required by Regulation 2(1)(d)(ii)(a) read with Regulation 2(1)(f) of the PIT Regulations as none of the appellants C.A. No.7590/2021 were financially dependent on Balram Garg or even alleged to have consulted Balram Garg in any decision related to trading in securities. 44. In light of the above principles of law laid down by this Court, it was imperative on the Respondent/SEBI to place on record relevant material to prove that the appellants in C.A. No.7590 of 2021, namely, Mrs. Shivani Gupta, Sachin Gupta, Amit Garg and Quick Developers Pvt. Ltd. were immediate relatives who were dependent financially on appellant Balram Garg or consult Balram Garg in taking decisions relating to trading in securities . However, SEBI failed to do so as has been already recorded by the WTM in its order dated 11.05.2021. The said appellants in C.A. No.7590 of 2021 were not immediate relatives and were completely financially independent of the appellant Balram Garg and had nothing to do with the said Balram Garg in any decision making process relating to securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her been held that merely because a person was related to the connected person cannot by itself be a foundational fact to draw an inference. 48. To conclude, the entire case of the Respondents was premised on two important propositions, that firstly, there existed a close relationship between the appellants herein; and secondly, that based on the circumstantial evidence (trading pattern and timing of trading), it could be reasonably concluded that the appellants in C.A. No.7590 of 2021 were insiders in terms of Regulation 2(1)(g)(ii) of the PIT Regulations. However, as the discussion above would reveal, the WTM and SAT wrongly rejected the claim of estrangement of the Appellants in C.A. No.7590 of 2021, without appreciating the facts and evidence as was produced before them. The records and facts adequately establish that the there was a breakdown of ties between the parties, both at personal and professional level and that the said estrangement happened much prior to the two UPSI. Secondly, as has already been discussed, the SAT erred in holding the appellants in C.A. No.7590 of 2021 to be insiders in terms of regulation 2(1)(g)(ii) of the PIT Regulations on the basis of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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