Il & Fs Engineering And Construction ... vs Sebi

Date of Decision: 22.06.2018

Appeal No. 450 of 2015

IL&FS Engineering and Construction Company Limited (Formerly known as Maytas Infra Limited) D. No. 8-2-120/113/3/4F, Sanali Info Park, Cyber Towers Road No. 2, Banjara Hills Hyderabad- 500 033 ...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. Iqbal Chagla, Senior Advocate with Mr. Shahezad Kazi, Ms. Misha Chandna, Mr. Nutash Kotwal, Advocates i/b S&R Associates and Mr. K. K. Sastry, Representative for the Appellant.

Mr. Mustafa Doctor, Senior Advocate with Mr. Pulkit Sukhramani, Ms. Vidhi Jhawar and Mr. Nikhil Ratti Kapoor, Advocates i/b The Law Point for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar (Oral)

1.

This appeal is filed to challenge the order passed by the Whole

Time Member ("WTM" for short) of Securities and Exchange Board of

India ("SEBI" for short) on 10.09.2015. By that order several entities

including the appellant are held to have made unlawful gain on account 2

of sale/ transfer of shares of Satyam Computer Services Limited

("Satyam" for convenience) while in possession of 'Unpublished Price

Sensitive Information' ('UPSI') with complicity and involvement of

Mr. B. Ramalinga Raju and Mr. B. Rama Raju (Ex- Chairman and

Managing Director respectively of Satyam). Accordingly, the entities set

out in the impugned order are directed to disgorge the amounts

mentioned against their respective names jointly and severally with

Mr. B. Ramalinga Raju and Mr. B. Rama Raju. Total amount directed to

be disgorged under the impugned order is ` 543.93 crore, out of which

` 59,16,49,091/- is directed to be disgorged by Maytas Infra Limited

("MIL" for convenience) the management of which is taken over by the

appellant in the peculiar facts of present case.

2. Prior to the impugned order dated 10.09.2015, the WTM of SEBI

had passed an order on 15.07.2014 against Mr. B. Ramalinga Raju,

Mr. B. Rama Raju and 3 other officials of Satyam. By that order it was

held that Mr. B. Ramalinga Raju, Mr. B. Rama Raju and 3 other officials

were responsible for manipulating the books of Satyam during the years

2001 to 2008 in violation of Securities and Exchange Board of India Act,

1992 ("SEBI Act" for short) and SEBI (Prohibition of Insider Trading)

Regulations, 1992 ("PIT Regulations" for short). By that order, Mr. B.

Ramalinga Raju and Mr. B. Rama Raju were directed to disgorge the

unlawful gain of ` 543.93 crore arising on account of shares of Satyam

sold by Mr. B. Ramalinga Raju, Mr. B. Rama Raju and their connected

entities, while in possession of UPSI relating to the inflated financial

results of Satyam. By the impugned order dated 10.09.2015 not only 3

Mr. B. Ramalinga Raju/ Mr. B. Rama Raju but also each of the

connected entities are directed to disgorge the unlawful gain specified

against their name on account of selling shares of Satyam (in all

amounting to ` 543.93 crore) while in possession of UPSI, jointly and

severally with Mr. B. Ramalinga Raju and Mr. B. Rama Raju.

3. MIL is held liable to disgorge the unlawful gain of

` 59,16,49,091/- basically on ground that its promoter Mr. B. Ramalinga

Raju and director Mr. B. Teja Raju were privy to the UPSI.

4. It is significant to note that in para 60 of the impugned order the

WTM of SEBI has held thus:-

"60. In this case, the charge is against MIL on account of its insider trading while being in possession of the 'unpublished price sensitive information' due to insiders viz., Mr. B. Ramalinga Raju being its promoter and Mr. B. Teja Raju. Under the facts and circumstances of this case, I am of the view that the charge against MIL is personal for which its directors/insiders including Mr. B. Teja Raju could be held vicariously responsible. However, in the instant case the SCN has not been issued to them with regard to the insider trading of MIL though for his own insider trading the instant proceedings have been initiated against Mr. B. Teja Raju and for the insider trading of Mr. B. Ramalinga Raju the order dated July 15, 2014 has been passed. IL&FS was neither an insider in Satyam Computers and MIL nor did it have access to the 'unpublished price sensitive information'. In fact it did not have any role or 4

involvement in the insider trading of MIL. It had stepped in as a promoter of MIL under special circumstances much after the impugned insider trading by MIL. Considering the special facts and circumstances as of the present matter, I am of the view that any direction by way of restraint/debarment against IECCL at this stage is not necessary. However, the unlawful gains made on account of insider trading by MIL and lying with IECCL cannot be allowed to be retained by it as it would amount to unjust/unlawful enrichment."

5. Thus, it is not the case of SEBI that the appellant is involved in any

violations, but the appellant is held liable to disgorge the unlawful gain

made by MIL which is now taken over by the appellant.

6. Challenging the impugned order dated 10.09.2015 various entities

connected/ deemed to be connected/ related to Mr. B. Ramalinga Raju

and Mr. B. Rama Raju including Mr. B. Teja Raju (Son of Mr. B.

Ramalinga Raju) had filed appeals before this Tribunal. By a majority

decision dated 11.08.2017 this Tribunal disposed of those appeals by

upholding the decision of SEBI that the said connected/ deemed to be

connected/ related entities including Mr. B. Teja Raju were reasonably

expected to be privy to the UPSI through Mr. B. Ramalinga Raju/ Mr. B.

Rama Raju.

7. On further appeals filed by those connected/ deemed to be

connected/ related entities, the Apex Court by its order dated 14.05.2018

has set aside the majority view of this Tribunal by holding that most of 5

the entities connected/ deemed to be connected/ related to Mr. B.

Ramalinga Raju could not be said to be reasonably expected to have

access to the UPSI. In case of Mr. B. Teja Raju (Son of Mr. B.

Ramalinga Raju) it is held that since there is no evidence of his

complicity in the fraud committed by his father and since he was not a

director or promoter of Satyam and had sold the shares for business

purposes at a price much less than the peak price at which Mr. B.

Ramalinga Raju sold the shares of Satyam in 2006, he cannot be said to

be privy to the UPSI. Thus, the order passed by the WTM of SEBI

directing Mr. B. Teja Raju to disgorge the unlawful gain arising on

account of selling Satyam shares in his individual capacity has been set

aside by the Apex Court.

8. As noted earlier, MIL is held to be an 'insider', inter alia on

ground that its director Mr. B. Teja Raju (Son of Mr. B. Ramalinga Raju)

was reasonably expected to be privy to the UPSI relating to the fraud

committed by his father Mr. B. Ramalinga Raju in the financial

statements of Satyam during the period from 2001 to 2008. Since the

Apex Court has held that Mr. B. Teja Raju (Son of Mr. B. Ramalinga

Raju) cannot be said to be reasonably expected to be privy to the UPSI,

decision of SEBI that MIL was an 'insider' on account of its director

Mr. B. Teja Raju (Son of Mr. B. Ramalinga Raju) was reasonably

expected to be privy to the UPSI cannot be sustained.

9. Counsel for SEBI, however, submitted that the charge against MIL

would still be sustainable in view of the finding recorded by the WTM of 6

SEBI that Mr. B. Ramalinga Raju was a promoter of MIL and hence MIL

was reasonably expected to be privy to the UPSI.

10. We see no merit in the above contention, because, firstly, there is

nothing on record to suggest that Mr. B. Ramalinga Raju was a promoter

of MIL. Secondly, in para 33 of the impugned order, the WTM has

himself recorded that MIL was promoted by Mr. B. Teja Raju (Son of

Mr. B. Ramalinga Raju) along with SNR Investments Private Limited

and Veeyes Investments Private Limited. Thus, the decision of WTM

recorded in para 60 of the impugned order is mutually contradictory to

what is stated in para 33 of the impugned order. In these circumstances,

decision of the WTM of SEBI is that Mr. B. Ramalinga Raju was a

promoter of MIL cannot be sustained.

11. Thus, in the facts of present case, although argument of SEBI that

during the period from 2001 to 2008 Mr. B. Ramalinga Raju/ Mr. B.

Rama Raju on one hand inflated financial statements of Satyam so as to

lure the investors to invest in the shares of Satyam and on the other hand,

they along with the entities connected/ deemed to be connected/ related

to them sold the shares of Satyam while in possession of UPSI and made

unlawful gain to the extent of ` 543.93 crore in violation of SEBI Act

and PIT Regulations appear to be attractive, in view of the decision of the

Apex Court dated 14.05.2018 wherein it is held that several entities

including Mr. B. Teja Raju (Son of Mr. B. Ramalinga Raju) could not be

considered as an 'insider', impugned decision which holds that MIL was 7

an 'insider' on account of its director Mr. Teja Raju (Son of Mr. B.

Ramalinga Rju) was an 'insider' cannot be sustained.

12. In the result, appeal is allowed and the impugned order dated

10.09.2015 is quashed and set aside qua the appellant with no order as to

costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 22.06.2018 Prepared & Compared By: PK