MANMOHAN SHETTY Vs. SECURITIES AND EXCHANGE BOARD OF
LAWS(SB)-2011-5-1
SECURITIES APPELLATE TRIBUNAL
Decided on May 27,2011

Appellant
VERSUS
Respondents

JUDGEMENT

P.K.Malhotra, Member - (1.) THIS appeal has been filed by the appellant against the order dated June 9, 2010 passed by the adjudicating officer of the Securities and Exchange Board of India (for short the Board) holding the appellant guilty of violating the provisions of the code of conduct prescribed under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (for short the Regulations) and imposing a monetary penalty of Rs.1,00,00,000 (Rupees one crore only) under section 15HB of the Securities and Exchange Board of India Act, 1992 (for short the Act).
(2.) THE facts of the case, in brief, are that the Board conducted investigations into the alleged irregularities in the trading in the shares of Adlabs Films Limited (for short the company) and the possible violation of the provisions of the Act and the Regulations made thereunder. The appellant is a shareholder and director of the company. He was holding 82,91,234 shares and was also classified as designated employee under the Regulations. On April 23, 2006 the company held its board meeting to approve the audited accounts for the financial year ending March 31, 2006; to recommend dividend and to consider proposal for demerger of the companys FM radio business. The Board of Directors of the company approved the proposal for demerger of the FM radio business to a wholly owned subsidiary company (SPV) and also issuance of pro rata shares by SPV to the existing shareholders of the company in the ratio of two shares of the SPV for every one share of the company. The company also recommended a dividend of 45 per cent for the year ending March 31, 2006.
(3.) THE company sent the information about the decision of the Board of Directors recommending dividend to the National Stock Exchange (NSE) on April 24, 2006 at 09.21 hours and the NSE disseminated the information on its website on the same day at 09:40:44 hours. The required information was also sent by the company to the Bombay Stock Exchange (BSE) on April 23, 2006 (Sunday) at 10:47 hours and the BSE disseminated the said information on its website on April 24, 2006 at 09:53:25 hours. The decision regarding demerger of FM radio business was also sent by the company to NSE on April 24, 2006 at 09.21 hours which was disseminated by NSE on its website at 09:40:44 hours. The same information was sent by the company to BSE on April 23, 2006 at 10:46 hours which was disseminated by BSE on its website at 09:56:35 hours on April 24, 2006. It was noted by the Board from the trade logs and order logs of April 24, 2006 that the appellant had sold 10,00,000 shares of the company. 7,50,000 shares were sold between 10:11:30 hours to 10:12:34 hours and 2,50,000 shares were sold at 15:16:44 hours. The sale of 10,00,000 shares was reported to BSE under bulk deal. The Board observed that the appellant had sold these shares of the company before the expiry of 24 hours of the outcome of the Board being made public and thus violated Regulation 12(1) read with clauses 3.2 -3 and 3.2 -5 of the code of conduct prescribed under Part A of Schedule I of the Regulations. Adjudication proceedings were initiated and a show cause notice was issued to the appellant on February 21, 2008. The appellant responded to the same by his letter dated April 10, 2008 denying the allegation and stating that the sale of shares was a normal market transaction. The outcome of the Board meeting held on April 23, 2006 had no impact on the stock price of the company and by selling the shares on April 24, 2006 he had not made any financial gain. It was submitted by him that the sale was not based on any insider information since the decision of the Board had already been sent to the stock exchanges and was disseminated on the website of the stock exchanges. It was further submitted that the sale of shares before expiry of 24 hours of the outcome of the Board meeting being made public was purely an inadvertent and technical error and there was no malafide intention. The appellant also desired to avail the facility of consent order in the proceedings. It seems that the consent proceedings failed. The adjudicating officer, by his impugned order, found the appellant guilty of violating Regulation 12(1) read with Clause 3.2 -3 and 3.2 -5 of the code of conduct specified under Part A of Schedule I of the Regulations and imposed a penalty of Rs.1 crore under section 15HB of the Act. Hence this appeal. For the purposes of model code of conduct for prevention of Insider Trading for listed companies, under Part A of Schedule I, the term designated employee is defined to include: - (1) officers comprising of the top three tiers of company management; (2) the employees designated by the company to whom these trading restrictions shall be applicable keeping in mind the objective of the Code of conduct. Admittedly, the appellant is a shareholder and director of the company and classified as designated employee under the Regulations. Para 3.2 -5 of Part A in Schedule I under the Regulations provide that all directors/officers/designated employees of the company shall conduct their dealings in the securities of the company only in a valid trading window and shall not deal in any transaction involving purchase or sale of the companys securities during the period when trading window is closed. It also provides that the trading window shall inter alia be closed at the time of declaration of financial results, declaration of dividend etc. The trading window shall be opened 24 hours after the information regarding the Board decisions is made public. The company can penalize and take appropriate action against an employee for contravention of the code of conduct. Such an action by the company does not preclude the Board from taking any action in case of violation of the Regulations. It may also be relevant to state that Regulation 12 of the Regulations mandates all listed companies to frame a code of conduct of internal proceedings and conduct as near thereto the model code specified in Schedule I of the Regulations. The company, in compliance with the revised corporate governance norms advised by the Board, laid down a code of conduct for all Board members and senior management of the company. The said code of conduct mandated its employees to comply with the companys insider trading rules and follow the pre -clearance procedure for trading and trade only when the trading window is open.;


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