Aptech Ltd. vs Sebi

Order Reserved on: 27.07.2022

Date of Decision : 04.01.2023

Appeal No. 467 of 2021

Aptech Ltd. Aptech House, A-65, MIDC, Marol, Andheri (East), Mumbai - 400 093. ..... Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mr. Somasekhar Sundaresan, Advocate with Mr. Ravichandra S. Hegde, Mr. Paras Parekh, Mr. Samyak Pati, Advocates i/b Parinam Law Associates for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Aditi Palnitkar, Ms. Moksha Kothari, Advocates i/b Vidhii Partners for the Respondent

CORAM : Justice Tarun Agarwala, Presiding Officer Justice M.T. Joshi, Judicial Member Ms. Meera Swarup, Technical Member

Per : Justice M.T. Joshi, Judicial Member 2

1. Aggrieved by the order of learned Adjudicating Officer

(„AO‟ for short) of the Securities and Exchange Board of

India („SEBI‟ for short) dated April 28, 2021 directing the

appellant to pay a penalty of Rs. 1 crore under Section 15HB

of the Securities and Exchange Board of India Act, 1992

(„SEBI Act‟ for short) the present appeal is filed.

2. The penalty was imposed for violation of Regulation 9

of Securities and Exchange Board of India (Prohibition of

Insider Trading) Regulation, 2015 (hereinafter referred to as

„PIT Regulations‟) for non-adhering to the prescribed code of

conduct.

3. We have heard Shri Somasekhar Sundaresan, the

learned counsel for the appellant and Shri Mustafa Doctor, the

learned senior counsel for the respondent.

4. The appellant had entered into a non-disclosure

agreement (a confidentiality agreement) with one Montana

International Pre-School Pvt. Ltd. („Montana‟ for short) on

March 14, 2016. Thereafter, on September 7, 2016 after

5.00 p.m. made an announcement on the platform of the Stock

Exchanges in the following manner:- 3

"Mumbai, 7 September: Aptech Ltd, a global education and training company today announced its foray into preschool education, through a strategic alliance with Montana International Preschool, Branded Montana International Preschool powered by Aptech (MIPA), the alliance intends to set up 1000 preschools in India over the next two years, MIPA aims to stimulate young children‟s curiosity and provide positive learning experiences through active learning. In addition to world-class pedagogy, internationally, live view of child‟s activity in class, on-demand child video conferencing, along with host of other features.........."

5. It was alleged by respondent SEBI that the above

information was Unpublished Price Sensitive Information

(„UPSI‟ for short) in terms of PIT Regulations and therefore

as per the code of conduct the appellant was required to close

its trading window for trading by the designated persons of

the appellant. This was not, however, done. Some of the

directors had traded when it was UPSI. The proceedings were

initiated against them for insider trading. They had, however,

settled the case with respondent SEBI without admitting the

guilt. However, as the appellant Company failed to adhere to

the code of conduct the present proceedings was launched.

6. Regulation 9 of the PIT Regulations provides for code

of conduct, the same is as under:- 4

PIT Regulations

Code of Conduct.

"9(1). The board of directors of every listed company and market intermediary shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B to these regulations, without diluting the provisions of these regulations in any manner."

NOTE: It intended that every company whose securities are listed on stock exchanges and every market intermediary registered with SEBI is mandatorily required to formulate a code of conduct governing trading by its employees. The standards set out in the schedules are required to be addressed by such code of conduct."

SCHEDULE B [See sub-regulation (1) and sub-regulation (2) of regulation 9] Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders

1. ...... ........ 4. Designated persons may execute trades subject to compliance with these regulations. Towards end, a notional trading window shall be used as an instrument of monitoring trading by the designated persons. The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure shall be imposed in relation to such securities to which such unpublished price sensitive information relates. Designated person and their immediate relatives shall not trade in securities when the trading window is closed." 5

7. The essence of the submissions of the appellant before

the respondent SEBI as well as before us is that the event was

not at all material in terms of SEBI (Listing Obligations and

Disclosure Requirements) Regulations, 2015 („LODR

Regulations‟ for short). The Board of Directors of Aptech had

framed a „Policy on Determination of Materiality of Events

and Information for Disclosure to the Stock Exchanges‟

(„Materiality Policy‟). As per this policy only a major

expansion was to be considered to be material. In the present

case the appellant Aptech itself was in the business of global

education and training since 1986. The collaboration with

Montana was also in the same field of education and was

therefore an activity in the regular course of business.

Therefore, there was no expansion of business which is a

deemed UPSI under Regulation 2(1)(n)(vi) of PIT

Regulations.

8. It was further contended that, the likely turnover and

profit, if any, from the new alliance was likely to be

insignificant in the overall context and was certainly not

material. If operations undertaken in the normal course of

business are considered as UPSI, the listed entity would be

expected to close its trading window all throughout the year, 6

which clearly is not intent of the PIT Regulations. Further, the

non-disclosure agreement was signed by only two out of three

directors and on May 19, 2016 the authorized signatory of

Aptech e-mailed Montana to keep the agreement on hold as

there was change in its top management. Thus, there were

many piecemeal discussions with respect to the collaboration

with Montana. In the circumstances, such uncertain

information cannot be the basis of alleging UPSI.

9. It was further submitted that in 2016 Montana was very

small entity having only 10 pre-schools in entire county. Its

paid-up capital was only Rs. 1 lakh and turnover during the

relevant period was Rs. 44 lakh with a loss of Rs. 76 lakh.

Further, the appellant did not make any investment in

Montana at the time of execution of agreement. The bulk of

the investment was to be borne by the franchisees under the

alliance and major share of collection by the center was to go

to the franchisees and not Aptech.

10. It was submitted that the price movement in the scrip of

the appellant would show that there was a steady and

consistent rise in the price even prior to the present event. The

price rise on September 8, 2016 considered in the SCN 7

ignores this fact. In the circumstances, it was submitted that

the appeal be allowed.

11. On the other hand, the learned counsel for the

respondent submitted that the very press release would show

that the appellant was "foraying" into pre-school segment

where under it was announced that the plan was to open 1000

pre-schools in the next two years. The provisions of

Regulation 2(1)(n)(iv) of PIT Regulations provides that

„expansion of business‟ was deemed to be an UPSI.

Therefore, the issue of materiality or the fact as to whether

event was major or not is immaterial.

12. Upon hearing both sides, in our view the appeal is liable

to be dismissed for the following reasons:-

(i) The information disclosed by the appellant on the

Stock Exchanges platform would show that the

appellant was foraying in the new venture by

opening 1000 pre-schools in collaboration with

Montana. Regulation 2(1)(n) of the PIT

Regulations defines UPSI as under:-

"2(1)(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 8

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; and (vi) material events in accordance with the listing agreement.

NOTE : It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information."

(ii) Sub-clause (iv) of this Regulation provides

„expansion of business‟ would be deemed as

UPSI.

(iii) Thus, clearly though the information was UPSI the

appellant failed to close the trading window for the

designated persons including the directors etc. in

trading the scrip of the appellant Company.

(iv) The information was definite as the non-disclosure

agreement was executed. 9

(v) Further, the appellant did not disclose as to on

which date, the information became concrete and

vaguely stated that one e-mail was sent for

keeping the agreement on hold as top management

was changed.

(vi) In view of this fact the following order:-

ORDER

13. The appeal is hereby dismissed without any order as to

costs.

14. This order will be digitally signed by the Private

Secretary on behalf of the bench and all concerned parties are

directed to act on the digitally signed copy of this order.

Certified copy of this order is also available from the Registry

on payment of usual charges.

Justice Tarun Agarwala Presiding Officer

Justice M.T. Joshi Judicial Member

Ms. Meera Swarup Technical Member Digitally MADHUK signed by 04.01.2023 AR MADHUKAR SHAMRAO SHAMRA BHALBAR Date:

O 2023.01.06

msb BHALBAR 16:54:36 +05'30'