SEBI Vs. DSQ BIOTECH LTD EARLIER KNOWN AS USHTA TE BIOTECH INDUSTRIES LTD
LAWS(SB)-2003-2-11
SECURITIES APPELLATE TRIBUNAL
Decided on February 27,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (1.) 1 DSQ Biotech Ltd., earlier known as Ushta Te Biotech Industries Ltd. was incorporated as a public limited company in the state of Tamil Nadu in 1987. Ushta Te Biotech Industries Ltd. was originally promoted by M/s K N D Engineering & Technologies Ltd. in joint association with Tamilnadu Industrial Development Corporation (TIDCO). 1.2 The initial public issue of Ushta Te Biotech Ltd. was made in December 1990. The company reportedly suffered from continuous losses since its inception and commercial production and as on July 31, 1994 the cumulative losses of Ushta Te Biotech Ltd. stood at Rs. 826.70 lakhs. In view of the consistent losses suffered by the company, the erstwhile management of Ushta Te Biotech decided to divest their holding in favour of the Square 'D' group promoted by Shri Dinesh Dalmia. Accordingly they entered into an agreement with the DSQ group on April 30, 1994. As per the said agreement, DSQ Holdings Ltd. (of the DSQ group) purchased 44,98,995 equity shares of Ushta Te Biotech Ltd. at the rate of Rs. 15.94 per share from the existing promoters. 1.3 The DSQ group also made an open offer in terms of Clause 40A & 40B of the Listing Agreement to acquire a further 17,66,400 equity shares from the existing share holders of the company (representing 20% of the paid up capital of the company). In the open offer, DSQ Holdings Ltd. only received 1600 shares only. Subsequent to the open offer and change in the management, the name of Ushta Te Biotech Industries Ltd. was changed to Square D Biotech Ltd. Thereafter it was changed to DSQ Biotech Ltd. (hereinafter called DSQB). 1.4 Immediately after the take over of the company the new management announced a rights issue in the ratio one share for every two shares held. The rights issue of DSQB was made for 44,16,000 equity shares of Rs. 10 each for cash at a premium of Rs. 35 per share. The said rights issue of DSQB opened for subscription on 03.07.95 and closed on 02.08.95. The total paid up capital of DSQB after the rights issue increased to Rs. 13.24 crores (represented by 1,32,48,000 equity shares of Rs. 10 each). As on the date of investigations, the paid up capital of DSQB was Rs. 22.50 crores (represented by 2,25,06,380 equity shares of Rs. 10 each). There were allegations that the price of the scrip was manipulated before the said issue. 1.5 The scrip of Ushta Te Biotech Ltd. prior to the takeover of the company by the DSQ group was not actively traded on the exchanges with the price hovering in the region between Rs. 12 to Rs. 18 during most part of 1993 and also during the first half of 1994. The scrip witnessed considerable movement both in terms of price and volume immediately after the DSQ group took over the company. 1.6 There was a steep jump in the scrip of DSQ Biotech both in terms of price and volume with effect from June 1994 which was sustained till December 1994. Thereafter, the rights issue of the company opened for subscription and immediately after the closure of the rights issue the scrip of DSQ Biotech Ltd. once again witnessed movement both in terms of both price and volume and this movement sustained till the first quarter of 1996.
(2.) 1 Detailed investigations in the scrip was therefore taken up for two periods i.e. June 1994 to December 1994 ( period prior to the rights issue) and June 1995 to March 1996 ( after the rights issue) 2.2 It was prima-facie found in the investigations that the price of DSQB scrip rose from Rs. 20 (during June 1994) to touch Rs. 91 / Rs. 92 by the end of September 1994. Similarly, during the month of July 1995, the scrip was hovering in the region between Rs. 40 to Rs. 44. It touched Rs. 112 by the end of November 1995 and the price movement sustained till April 1996. The volumes at MSE, CSE and BSE reported significant increase in volumes during the period. 2.3 After April 1996, the scrip of DSQB was not actively traded. During the whole of the calendar year 1997 only 14 trades in the scrip took place for 1600 shares. Again in the year 1998, only one trade for 100 shares was reported in the scrip. During the year 1998 the price of scrip of DSQB also touched a low of Rs. 8/-. 2.4 Investigations brought out that during the period June 1994 to December 1994 and also after the closure of the rights issue ( i.e. up to March/April 1996) large quantities of shares of DSQB were purchased from the market through group companies of DSQ management. 2.5 The general fundamentals of DSQ Biotech Ltd was also not very good for genuine investors to indulge in delivery based purchases in the scrip on such a large scale during the above periods. In the process, investigations came across the fact that the promoter group companies indulged in the insider trading in violation of the provisions of SEBI (Insider Trading) Regulations, 1992 (hereinafter referred to as the said Regulations). A substantial quantities of shares of the company were purchased by DSQ Holdings Ltd, (DSQH) one of the promoter group company, DSQH with knowledge of the impending rights issue of DSQB. The shares purchased by DSQH prior to the aforementioned rights issue also entitled them for rights in the rights issue. Therefore, it was prima facie found that DSQH violated the said Regulations. 2.6 The Letter of Offer of DSQB at the time of Rights issue indicated the following entities as under the same management : Square D Software Ltd. (now known as DSQ Software Ltd.) Square D Granites Ltd. Square D Beverages Ltd. Square D Holdings Ltd. (now known as DSQ Holdings Ltd) Lexus Exports Ltd. (now known as DSQ Industries Ltd.) Square D Cast and Forge Ltd. Square D Textiles Ltd. Pillayar Pattiyar Textiles Ltd. A show cause notice was issued to DSQH for the said insider trading under regulation 9 of SEBI (Prohibition of Insider Trading) Regulations, 1992 communicating the findings of investigations vide the letter - Ref: IES/SBM/30541/2001 June 13, 2001 The said show cause notice contained the following charges: 3.1 During the period June 1994 to September / October 1994 i.e. the period prior to the opening of the rights issue, substantial quantities in the scrip of DSQB were purchased by DSQH along with the three Calcutta based entities viz. M/s Swagatham Leafin Pvt. Ltd, M/s Snehil Exim India Ltd. and M/s Powerflow Holdings and Trading Pvt. Ltd. The purchases in the scrip of DSQB by the above mentioned three entities were funded in entirety from the account of DSQH. The said DSQH along with the three entities purchased approximately 13,03,800 shares from the market during the period June 1994 to September 1994. 3.2 The purchases of DSQH in the scrip of DSQB during the period June 1, 1994 to September 30, 1994 is indicated in the following table: JUDGEMENT_363_TLSB0_20030.htm Average cost of Acquisition worked out for purchases during the period August 01, 1994 to September 30, 1994 to approx. Rs. 51.15/- 3.2.1 The above includes 71,500 shares purchased by DSQH through M/s Riddhi Investments [sub brokers of Calcutta based broker M/s Kandoi Securities Pvt. Ltd. 3.2.2 It also includes purchases of M/s Swagatam Leafin Pvt. Ltd. [2 lac shares purchased on 16.8.94], M/s Powerflow Holdings and Trading Pvt. Ltd. [3 lac shares purchased on 16.8.94] and M/s Snehil Exim India Ltd. [2 lac shares purchased on 16.8.94]. These shares were purchased by the aforementioned entities through M/s Anush and Co, member, MSE and the payments towards these purchases were made directly from the account operated by Current Account 1736 maintained by DSQH with Canara Bank, Anna Salai, Chennai 2 branch. The details of payments made from the account of DSQH is described as under : a) Purchases of Powerflow Holdings Pvt. Ltd. paid by DSQH vide cheque No. 728471 dated 21.9.94 for Rs. 1.32 crores and cheque No. 735152 dated 19.10.94 for Rs. 75,000/-. b) Purchases of Swagatam Leafin Pvt. Ltd. paid by DSQH vide cheque No. 728470 dated 21.9.94 for Rs. 88 lacs. c) Purchases of Snehil Exim India Pvt. Ltd. paid by DSQH vide cheque No. 728469 dated 21.9.94 for Rs. 88 lacs. 3.2.3 Since, the said cheques were issued by DSQH from their current account, it has been construed that DSQH was directly interested in the transactions involving purchase of the entire 7 lakh shares mentioned above and the three entities named above merely acted in concert with DSQH in acquiring shares of DSQB from the market. The broker i.e. M/s Anush and Co through whom the transactions were executed confirmed to the investigating team that the three Calcutta based clients were introduced to them by DSQH (Shri Dinesh Dalmia) and further confirmed that they were introduced for the specific purpose of acquiring shares of DSQB from the market. The market records suggested that the three entities did not purchase any other shares from the market during the said period except shares of DSQB. 3.2.4 The above table includes 18,200 shares purchased by DSQH during the period June 1994 to September 1994 through M/s B M Gandhi and Sons of BSE, (now BM Gandhi and Sons Pvt. Ltd.). These purchases have been adjusted for each month separately according to the order of date. 3.2.5 It therefore appeared from the above facts that during the period June 1994 to September 1994, DSQH by enrolling as a 'common client' to various brokers across the country, purchased sizable quantities of shares of DSQB and squeezed the available floating stock in the scrip prior to the Rights issue. It can further be seen from the above table that maximum purchases in the scrip were made during the month of August 1994. 3.2.6 The information on the rights issue of DSQB became public knowledge as on 30.9.94 ( i.e. in the 7th Annual General Meeting of the shareholders held on 30.9.94). However, the matter regarding the rights issue of DSQB was first discussed in the 41st Board of Directors meeting of DSQB held on 30.07.94. The period between 01.08.94 to 30.09.94 is the period when the information on the rights issue was "unpublished and price sensitive". 3.2.7 In the above said Board meeting one of the topics discussed, as part of the expansion program was 'further issue of capital' to augment the resources of the company. A Resolution to this effect was passed in the said Board meeting regarding the decision to be taken on the terms and conditions of the issue, including the size, number, face value etc. In the 7th AGM of the shareholders held on 30.9.94, the approval of shareholders was obtained. Therefore, the purchases of DSQH of the shares of DSQB during the period between August 01, 1994 to September 30 1994 is considered as insider trading in violation of Insider Trading Regulation on the part of these entities as the price sensitive information on further issue/rights issue was not generally known to public during this period. 3.2.8 The rights issue was in the ratio of 2:1 and therefore DSQH were eligible for 6, 51,900 shares as rights. From the above it is clear that DSQH purchased maximum number of shares during the period from August 1994 to September 1994. This was apparently done on the basis of unpublished price sensitive information, which they were excessively privy to. DSQH renounced in favour of another DSQ group company the rights in respect of the purchases from the market. 3.2.9 The purchases during the period from August 01, 1994 and September 30, 1994 are on the basis of price sensitive information, which they were privy to. The Managing Director of DSQB, Shri K. Gopal Krishnan who was a director on the Board of both DSQH and DSQB at the time of Rights Issue confirmed the same in his sworn statement.
(3.) THE findings of the investigations were communicated to DSQH vide letter Ref: IES/ SBM/30541/2001 dated June 13, 2001. THE findings were communicated to DSQH in terms of Regulation 9 (1) of SEBI (Insider Trading) Regulations, 1992. An opportunity of personal hearing was also given to DSQH. In response to the above mentioned notice DSQH submitted their reply vide letter dated August 17, 2001 . In their reply DSQH stated the following : 4.1 By way of a preliminary objection, DSQH submitted that the scope of Regulation 9 (pursuant to which the Show Cause Notice dated June 13, 2001 has been issued) read with Regulation 11 of the Regulations is in the nature of an interim power pending the determination of facts and law in pursuance of the legal remedies provided for under the SEBI Act contained in section 15G and / or section 24 of the SEBI Act. If SEBI is satisfied that no directions under Regulation 11 can be issued on the basis of the facts of a case, SEBI is required to drop the proceedings initiated under Regulation 9. 4.2 THE only directions that can be issued by SEBI pursuant to Regulation 11 are - (a) directing the insider not to deal in securities in any particular manner; (b) prohibiting the insider from disposing off any of the securities acquired in violation of the regulations and (c) restraining the insider from communicating or counselling any person to deal in securities. THE Regulations can in no way impinge on the powers conferred under section 15G and section 24 of the Act, which powers are independent of powers and regulations under Regulation 9 and 11. 4.3 DSQH in their reply submitted that in the present case, the enquiry commenced only in January 1999, which is more than 4 years after the acquisition of the DSQB shares by the company during the period from August 01, 1994 and September 30, 1994. In view of the efflux of time, there is no scope for giving any direction under Regulation 11. THErefore, they pleaded that the proceedings are misconceived in fact and law and therefore be set aside in to. 4.4 DSQH in their reply confirmed the various important dates pertaining to the rights issue and in this regard there was no difference of opinion with the findings of the investigating team in respect of the dates when the matter on the rights issue first came up for discussion and also the date when the terms and conditions of the rights issue was decided. 4.5 DSQH confirmed in their reply that it was the objective of the DSQ group to increase their shareholding in DSQB, in view of their keenness to enter the agro-based industry. THErefore, as part of group philosophy DSQH continuously acquired shares of DSQB from the Secondary market from June 1994 onwards. THE activity of acquisition continued even after August 1994 and September 1994 and continued all the way through June 1995. 4.6 DSQH submitted in their reply that the acquisition of shares during the period when the information on rights issue was price sensitive and unpublished was in accordance with the publicly stated objective, consistent with the group's philosophy, of acquiring and holding in excess of 70% of the shares forming part of the DSQ group. According to DSQH the activity of acquisitions from August 01, 1994 to September 30, 1994 was not an isolated activity but was clearly in continuation of its acquisition of shares of DSQB, which commenced from April 30, 1994 (which was the date when the DSQ group signed an agreement with the erstwhile promoters of the company). 4.7 DSQH submitted that there was no attempt made by them to indulge in "Insider Trading" in the scrip of DSQB. 4.8 DSQH submitted that in order to establish a charge of "Insider Trading" under the Regulations, the following seven preconditions must be cumulatively satisfied : (a) THE person charged has to be a person who is connected with the Company or is deemed to have been connected with the Company; (b) Such a person is reasonably expected to have access to unpublished price sensitive information in respect of securities of the Company or should have actually received or have had access to such unpublished price sensitive information; (c) Such access to information or reasonable expectation of such access to the unpublished price sensitive information should be by virtue of such connection with the company; (d) THE information has to relate to matters covered by clauses (i) to (viii) of clause (k) of Regulation 2; (e) THE information should be such that is not generally known or published by the company for general information; (f) THE information should be such that if published or known, it is likely to materially affect the price of securities of the company in the market; and (g) THE person should deal in securities of the company listed on any stock exchange on the basis of such unpublished price sensitive information. 4.9 DSQH submitted that items (a) to (c) above arise out of the definition of "insider" as contained in Regulation 2 (e), items (d) to(f) arise out of the definition of "unpublished price sensitive information" as contained in Regulation 2 (k) and item (g) arises on the basis of the requirements of Regulation 3 (i) of the Regulations. 4.10 It was submitted that even if one of the seven elements or ingredients stated above is not conclusively established, the allegation or charge of "insider trading" would and must fail. DSQH submitted that in the facts and circumstances of the case, these ingredients were not satisfied and consequently the charge of Insider Trading against DSQH must fail. 4.11 DSQH maintained that the acquisition of DSQB shares was not on basis of the information relating to the rights issue of DSQB. 4.12 DSQH submitted that in order to contravene the regulations, it is not sufficient to establish only that an Insider has unpublished price sensitive information and separately, that he dealt in relevant securities. It has also to be established that the Insider dealt with the securities on the basis of the unpublished price sensitive information. It is further submitted that the same has not been established by SEBI. 4.13 DSQH maintained that the company and its associates (forming part of DSQ group) consistently acquired shares of DSQB during the period 1994-95, 1995-96 pursuant to the DSQ group's philosophy of consolidating its shareholding to certain levels in its group companies. Along with their reply they also submitted the extracts of the purchases and sales of DSQB shares by DSQH and its group companies during the period April 1994 to March 1996. 4.14 DSQH submitted that the acquisitions of shares of DSQB by the company during the period from June 1994 to September 1994 (which cannot be considered in isolation from the period before and after the aforesaid period, during which the DSQ group, continuously and consistently, acquired shares of DSQB) were not on the basis of the information relating to the proposed rights issue by DSQB and were with a view to consolidate the company's holdings in DSQB in keeping with the Groups philosophy, which intention to consolidate is clearly illustrated by the decision of the Board of Directors of the Company to make an open offer in the scrip of DSQB to acquire 20% of the share capital of the company on March 05, 1994. 4.15 DSQH stated that in respect of the market acquisitions, deliveries were taken and payments were made. None of the acquisitions were speculative in nature. It was stated that substantial part of the shares of DSQB acquired from the market were pledged as collateral security with the banks and financial institutions for loans taken by the DSQ group. 4.16 DSQH submitted that in respect of the impending rights issue they were not aware of the precise details with regard to the rights issue ratio, rights issue price, etc. and therefore they felt that this cannot be treated as "price sensitive information" within the meaning of the regulations. DSQH opined that the most essential ingredient for information relating to a rights issue to be considered price sensitive is the price of such rights issue. THE price of an issue determines the decision to invest in the scrip. According to DSQH the price of the rights issue along with the ratio, etc was decided only in the Board of directors meeting held on September 30, 1994 by which time the AGM of shareholders also approved the rights issue. 4.17 DSQH submitted in their reply that in respect of the rights issue the AGM notices were dispatched to the shareholders of DSQB immediately after the Board of Directors meeting of DSQB held on August 25, 1994. THErefore, according to DSQH the information relating to the proposed rights issue of DSQB remained unpublished and price sensitive information only until August 25, 1994 as the AGM notices were already dispatched by that time. THEy also opined that the relevant period for determining whether purchases by DSQH constituted Insider Trading should be taken from August 01, 1994 to August 25, 1994 instead of August 01, 1994 to September 30, 1994 as alleged by SEBI. 4.18 DSQH stated that the average cost of acquisition of shares of DSQB was much lesser than the rights issue price. DSQH stated that SEBI had calculated the average acquisition price on the basis of the price of the DSQB scrip during the period from August 01, 1994 to September 30, 1994. According to DSQH for calculating the average price the period from June 01, 1994 to July 31, 1994 should also be included which when taken will lower the average cost of acquisition. DSQH also felt that the acquisitions of DSQB shares made between August 25, 1994 to September 30, 1994 should be excluded for the purposes of computing the average price of acquisition as according to DSQH the information on the rights issue would have become public knowledge as on August 25, 1994 when the AGM notices were dispatched to the shareholders of DSQB. 4.19 THE acquisitions of DSQB shares by the three Calcutta based entities viz. Swagatam Leafin Pvt. Ltd., Snehil Exim India Ltd. and Powerflow Holdings and Tradings Pvt. Ltd. should not be taken into consideration. DSQH stated that these three entities were not acting in concert with them and that they were independent of the DSQ group. In respect of the allegation made that the purchases of 7 lakh shares of DSQB by the three Calcutta based entities on August 16, 1994 were funded from the account of DSQH, it was stated that loans were provided to the three entities by DSQH on an arms length basis, with such loans being subsequently repaid by the entities to DSQH. 4.20 Finally DSQH in their reply requested for a personal hearing to be granted before Chairman, SEBI and requested for all the charges to be dropped.;


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