Man Industries (India) Limited And ... vs Sebi

Date of order reserved: 07/07/2016 Date of decision: 26/07/2016

Appeal No.192 of 2014

J.C. Mansukhani Aadhya Building, 2nd Floor, Plot no.43, Juhu, 10th Road, Laxmikant Pyarelal Chowk, Juhu, Mumbai - 400 049. ... Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent

AND Appeal No.185 of 2014

1.

Man Industries (India) Limited MAN House, 101, S.V. Road, Vile Parle (West) Mumbai - 400 056.

2. Rameshchandra Mansukhani Aadhya Building, Plot no.43, Juhu, 10th Road, Laxmikant Pyarelal Chowk, Juhu, Mumbai - 400 049.

3. R. C. Jindal 30-A, Mansarovar Apartments, Sector -61, Noida - 201 301.

4. Sujal Sharma B-8, Asha Building, Dixit Road, Vile Parle (East), Mumbai - 400 057. ... Appellants

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No.C4-A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent -2-

Mr. Sharan Jagtiani a/w Mr. Amit Dey, Advocates i/b Mindspright Legal for the Appellant in Appeal No.192 of 2014.

Mr. Chirag Balsara a/w Mr. Satyam Israni, Mr. Vinit Mehta and Ms. K. Sovte, Advocates i/b SD Israni Law Chambers for Appellant in Appeal No.185 of 2014

Mr. Kumar Desai a/w Mr. Manish Acharya, Advocates i/b Vigil Juris for the Respondent.

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

Per : Dr. C.K.G. Nair

1. Appellants in these two Appeals are aggrieved by a common order

passed by the Adjudicating Officer ("AO" for short) of Securities and

Exchange Board of India ("SEBI" for short) on 28th March, 2014. Hence, both

theses Appeals are heard and disposed of by this common decision. The

impugned order, based on an investigation conducted by SEBI into the

dealings in the shares of Man Industries (India Limited) ("Company" for

convenience) for the period 15/4/2009 to 14/5/2009 imposed a penalty of Rs.25

lac jointly and severally on the Appellants (in both Appeal Nos. 185 and 192

of 2014) under Section 15-HB of Securities and Exchange Board of India Act,

1992 ("SEBI Act" for short) for violation of certain provisions of SEBI

(Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as

"PIT Regulations).

2. Man Industries Ltd. (Appellant No.1 in Appeal No.185 of 2014) is a

manufacturer of Aluminum Extruded products and Saw Pipes in India. It is a

leading manufacturer and exporter of Carbon Steel Line Pipes and listed on

the Bombay Stock Exchange ("BSE" for short) and National Stock Exchange

("NSE" for short). This Company was promoted by members belonging to

the Mansukhani family namely, Shri J.L. Mansukhani, Shri R.C. Mansukhani -3-

and Shri J.C. Mnasukhani. The Company and some of the Directors and

officials are Appellants in Appeal No.185 of 2014 while Shri J.C. Mansukhani

who was the Vice Chairman and Managing Director of the Company during

the relevant time preferred a separate Appeal (No.192 of 2014).

3. SEBI conducted an investigation into the dealings of shares of Man

Industries for the period from April 15, 2009 to May 14, 2009. It was revealed

that the Company and its Board of Directors delayed disseminating price

sensitive information relating to bagging/obtaining two substantive orders

received by the Company from two Iranian Companies.

4. Accordingly, AO was appointed by SEBI who issued a show-cause

notice to the Appellants, dated September 4, 2013. Based on personal hearing

and documents submitted by the Appellants, the impugned order was passed

by the AO on 28th March, 2014.

5. The impugned order relies on the chronology relating to two orders

bagged by the Company as follows:-

Sr.No. Contract Value of Date of Date of Delay in with:- Contract Contract information days to the exchange 1 Niroo 90 million March 01, April 29, 59 days Gustar euros 2009 2009 2 GRC 112 million April 22, April 29, 7 days euros 2009 2009

The issue of disclosure has emanated from two orders bagged by the

Company from Niroo Gustar Institute ("Niroo Gustar" for short) and Green

Refinement Company ("GRC" for short) - two Iranian Companies. The

contract with Niroo Gustar was signed on March 1, 2009 and with GRC was

signed on April 22, 2009. Details of the contract signed with these companies -4-

are on record. It is also on record that disclosure relating to bagging of both

these contracts was made on April 29, 2009 thereby leading to a delay of 59

days and 7 days respectively from the date of signing the contracts as per

interpretation of the provisions of "PIT" Regulations of immediate and

continuous disclosure of price sensitive information.

6. The findings of the AO based on the orders bagged by the Company

are as follows: -

i. These orders constituted more than 50% of the annual

order book of the Company for the relevant year and as

such they were not just normal business activity of a

manufacturing company.

ii. The information relating to such huge orders was price

sensitive meaning "any information which relates

directly or indirectly to a company and which if

published is likely to materially affect the price of

securities of company".

iii. Information becomes price sensitive irrespective of

whether actual price witnessed subsequent to the

disclosure of the information exhibits such sensitiveness

or not.

iv. Prices actually moved higher by 4.74% at closing of the

trading day compared to its opening price on April 29,

2009, the day of disclosure. This also proves that the

information was price sensitive.

v. The information should have been disclosed on the day

of signing the contract i.e. March 1, 2009 and April 22, -5-

2009. Since they were disclosed only on 29th April, 2009

there was a delay of 59 days in respect of the first order

and 7 days in respect of the second order.

7. The relevant provisions of the PIT Regulations are reproduced below:-

"PIT Regulations.

Regulation 12(1) All listed companies and organizations associated with securities markets including:

(a) the intermediaries as mentioned in section 12 of the Act, asset management company and trustees of mutual funds;

(b) the self-regulatory organizations recognized or authorized by the Board;

(c) the recognized stock exchanges and clearing house or corporations;

(d) the public financial institutions as defined in section 4A of the Companies Act, 1956; and

(e) the professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies.

shall frame a code of internal procedure and conduct as near thereto the Model Code specified in Schedule I of these regulations without diluting it in any manner and ensure compliance of the same.

(2) The entities mentioned in sub-regulation (1), shall abide by the code of Corporate Disclosure Practices as specified in Schedule II of these Regulations.

(3) All entities mentioned in sub-regulation (1), shall adopt appropriate mechanisms and procedures to enforce the codes specified under sub-regulations (1) and (2).

Part A of Schedule I to regulation 12(1) of PIT Regulations:

Clause 1.2 The compliance officer shall be responsible for setting forth policies and procedures and monitoring adherence to the rules for the preservation of "Price Sensitive Information, pre-clearing of all the designated employees and their dependants trades (directly or through respective department heads as decoded by the organization(firm), -6-

monitoring of trades and the implementation of the code of conduct under the overall supervision of the Board of the listed company.

Schedule II of regulation 12(1) of PIT Regulations:

Clause 2.1 Price sensitive information shall be given by listed companies to stock exchanges and disseminated on a continuous and immediate basis."

8. Two questions fall for consideration in these two Appeals; they are:-

(a) Whether on the facts and in the circumstances of the present case,

the AO of SEBI was justified in holding that the contracts for

supply of goods entered into by the Company with foreign

enterprises on 1/3/2009 and 22/4/2009 were price sensitive

information and disclosing the said price sensitive information

belatedly on 29/4/2009 was in violation of the PIT Regulations?

(b) Assuming that the said contracts dated 1/3/2009 and 22/4/2009

constituted price sensitive information, whether, on the facts of

present case, the AO of SEBI was justified in imposing a penalty of

Rs.25 lac against the Company as also on the Directors of the

Company?

9. The learned Counsel for the Appellants argued extensively as to when

the information relating to bagging of two orders became price sensitive and

needed to be disclosed to the Stock Exchanges. On the day of signing the

contract there was no certainty regarding the orders as it was only a

preliminary agreement. It is contended on behalf of the Appellants that the

information relating to signing of the contracts did not make the information

price sensitive. The date of commencement of the contract, as per the

provisions contained in Clause 7 of the contract, distinguishing between the -7-

date of effectiveness and date of commencement, is the relevant date.

Conditions under Clause 7 of the Contract, inter alia, include receipt of 25%

of advance payment by the supplier. Accordingly, it is argued that given the

international restrictions on trading with Iran prevailing at the relevant time,

it was only on receipt of the advance payment that the contract could be

taken as final and which becomes relevant to be disclosed. This advance was

received on 28th April, 2009 and disclosure was made on 29th April, 2009.

Therefore, the information became price sensitive only when the order was

finally confirmed with advance payment and the disclosure was made

immediately after that.

10. It was further argued by the Counsel for the Appellants that the

contract signed on 1st March, 2009 was not a final contract as several

modifications to that contract were made and as is evident on record. These

amendments to the contract including changes in the quantities and hence the

total value of the contract which are important considerations. There is no

dispute on these facts.

11. Though nothing is on record, this Tribunal specifically asked the

Counsel for the Appellants whether there is any evidence to show that as on

the date of contract (March 1, 2009) whether any amendments to the contract

signed on that date were being proposed. Counsel for the Appellants replied

in the negative stating that soon after signing the contract amendments were

thought of and entered into.

12. It was further argued that all big contracts are not necessarily price

sensitive as is evidenced by several judgments cited to which we shall come

to at a later stage. There is no allegation that the non-disclosed information -8-

was misused by the Appellants in any manner. Therefore, the PIT

Regulations are not the appropriate law to be invoked; it could have been at

best violative of Section 36 of the Listing Agreement. There was no delay in

informing the second order (Contract dated 22nd April, 2009) as this Contract

was fructified only on 28th April, 2009 and disclosure was made on 29th April,

2009. The show-cause notice does not distinguish between these two

contracts. Specific conditions were incorporated into the contracts because of

the restrictive international conditions of trading with Iran which needs to be

factored in while examining contracts with entities in Iran over and above

other standard contracts. It was further argued by Counsel for the Appellants

that in the case of the second contract, a consensus/confirmation from a third

party (PEDEC) was required and this was obtained only on 28th April 2009.

On the basis of the above arguments, learned Counsel for the Appellants

concluded that mere bagging of big sized contracts itself does not make them

price sensitive; they become price sensitive only from the date when they

become effective; there is a need for the distinguishing between the contract

date and effective date of commencement; the contract itself has given

provisions (Clause 7) specifying the conditions under which they become

effective and, therefore, when the information becomes price sensitive. These

factors are to be considered while deciding whether there is any delay or not

in disclosure. Given the circumstances of the case Counsel for the Appellants

argued that there was no delay in disclosing the information relating to both

the contracts. Counsel for the Appellants also took a contra-position and

argued further that disclosure of pre-mature information can be interpreted

as violating the relevant provisions of ICDR Regulations and hence liable for -9-

penal action and hence an entity disclosing information has to be careful

about the timing of disclosing the information.

13. The learned Counsel for the Respondent emphasized the contentions

in the impugned order. Quoting relevant provisions of the PIT Regulations,

he emphasized that disclosures should be made on an immediate and

continuous basis. Orders worth Rs.1340 crore out of total order book of

Rs.2000 crore in the relevant year are not like normal small value orders.

There is no reference to any proposed amendments to the Contract on the

date of signing the contracts. He further emphasized the point that Clause 7

of the contract relied by the Appellants to distinguish between the effective

and commencement date actually reads as follows:

"This contract shall become effective and binding upon signing of the contract by the parties."

And the first contract was signed on 1st March 2009 and the second on 22nd

April, 2009 and therefore the delay of 59 and 7 days respectively in disclosing

them. Conditions relating to opening of letter of credit, receipt of advance

payment, termination, etc. are part of any standard contract. Sub-clause 7.2

of the contract further provides for additional grace period of 120 days in the

event the commencement date has not happened within the agreed schedule

and asserted that disclosure cannot wait for such indefinite period if such

conditions in a contact are to be taken as condition precedent for

commencement of contract and such commencement date is to be taken as

the effective date. Similarly, it was argued that, all contracts are amenable to

certain amendments which are provided for in the contracts themselves and

as such disclosure cannot wait till all such amendments are made. That is

why disclosures under PIT Regulations are to be made immediately and on -10-

continuous basis. Which means that all major events relating to the contract

such as its initial signing and subsequent major amendments had to be

disclosed immediately and continuously. On the specific issue of a third

party involvement in the second contract, Counsel for the Respondent stated

that it should have been part of the contract itself, which is, however, not

found in the said contract.

14. We find no merit in the arguments advanced by the Counsel for the

Appellants. Their contention that the orders bagged by the Company became

price sensitive only on the date of receiving the advance cannot be sustained

in view of the fact that the orders constituted about 65% of the annual order

book of the Company; share prices did increase by 4.74% on the date of

announcement i.e. 29th April, 2009; the Company itself felt that the

information is important enough to be disclosed and hence it was aware of

the fact that this information was price sensitive and liable to be disclosed; the

contracts became "binding and effective" on the date of signing the contracts

as stated in the contract itself (Clause 7) irrespective of the other conditions

specified under the same clause. There was no evidence about any proposed

amendment to the contracts on the date of signing the contracts; third party

agreement (of PEDEC) as a condition for fulfilling the second contract (signed

on 22nd April 2009) was not stated in the contract itself. Constraints on trading

with Iran, if any, should also have been factored in either in the contracts or

otherwise before signing the contracts. In view of these reasons, the contracts

became binding and effective on the date of signing of the contract i.e. 1st

April 2009 and 22nd April 2009 and had to be disclosed without any delay. As

and when major changes to the contracts, if any, were effected the same also

had to be disclosed. Conditions given under Clause 7 of the contract relating -11-

to advance payment, commencement of the contract, conditions of

cancellation, etc. are part of any standard contract and cannot be taken as

ground for delay in disclosure of entering into contract as on the date of

signing the contracts. Since the information was liable to be disclosed under

PIT Regulations, the argument that they were at best liable to be disclosed

under Section 36 of the Listing Agreement only does not stand merit.

Accordingly argument set out by the A.O. in the impugned order that the

information was price sensitive and liable to be disclosed on the date of

signing the contracts cannot be faulted. The contra-position taken by the

Appellants that premature disclosure may invite penal action has no merit

since it is the responsibility of any entity to prove that they made the right

disclosures at the right time and if anything genuinely going wrong

subsequently can be proved with evidence to that effect. It is difficult to fine

tune the merit of disclosures in a disclosure based regulatory regime and as

such the ideal course of action is to disclose every material information on an

immediate and continuous basis. Changes in contract specifications and

conditions which are material also need to be disclosed in that spirit of a

disclosure based regulatory regime.

15. It was further argued by Counsel for the Appellant in Appeal No.192

of 2014 that the Vice Chairman and Managing Director of the Company

preferred a separate Appeal because he was not involved and responsible for

setting up of the Code of Conduct or disclosing information and therefore,

cannot be held liable for the same. Similarly, Counsel for the Appellants in

respect of Appeal No.185 of 2014 stated that Appellant Nos.2&3 in this

Appeal also did not have any role in disclosing information and as such are

not liable to be punished.

-12-

16. Counsel for the Appellants also cited a few judgments in their

contentions. Mr. Jagtiani, learned Counsel appearing on behalf of the

appellant in Appeal No. 192 of 2014 fairly stated that in the past (though it

was for a violation subsequent to the alleged violation in the present case) the

Company has been found guilty of violating the PIT Regulations for not

disclosing the contract entered into by the Company. However, it is

submitted by the Counsel for the Appellants that the said decision of this

Tribunal, namely Man Industries (India) Limited v/s SEBI (Appeal No. 208 of

2011 decided on 30.03.2012) is distinguishable on facts because, in that case

the company had conceded that entering into a contract therein for sale of

goods manufactured by the company was a price sensitive information under

the PIT Regulations. Since the aforesaid decision was based on the consensus

made by the company and the said consensus being contrary to various

decisions of this Tribunal, the said decision cannot be applied against the

Appellants herein.

17. In the context of the present case, Counsel for the Appellants relied on

the decisions of this Tribunal in the case of Gujarat NRE Mineral Resources

Ltd. v/s SEBI (Appeal No. 207 of 2010 decided on 18.11.2011) and Mr. Anil

Harish v/s SEBI (Appeal No. 217 of 2011 decided on 22.06.2012) and

submitted that earning profits by manufacture and sale of goods being the

normal activity of the company, mere entering into contracts for sale of goods

could not be said to be a price sensitive information so as to disclose the same

immediately on entering into such contracts. It is submitted that apart from

the fact that the contracts were subjected to further negotiation which

resulted in reduction of the quantum of sale and also amendment of the

contract disclosures were made immediately on deposit of initial amount of -13-

US $ 1.5 million and therefore, in the facts of present case, no penalty ought to

have been imposed against the Appellants.

18. We see no merit in the above contentions. As rightly contended by

learned Counsel for SEBI, in the present case, the contracts in question (even

after amendment) were for Rs.1340 crores, whereas, the total contracts for

which the Company had orders for the entire year were to the extent of

Rs.2,000 crores. Since the value of two contracts in question constituted nearly

65% of the total order book of the Company during the year, it is abundantly

clear that entering into such contracts constituted a price sensitive

information which ought to have been disclosed under Scheduled II of

regulation 12(1) of the PIT Regulations. Apart from the above, in the past, the

Company had conceded before SEBI that bagging orders worth about Rs.1200

crore in that year was a price sensitive information. In the present case, the

contracts bagged were to the tune of Rs.1340 crore. Therefore, in the present

case, it is not open to the Appellants to change their stand and argue to the

contrary. Moreover, in the earlier case, the Company had argued that the

communication received by the Company from a party to award contract was

only an intention to award contract and therefore such a communication

could not be said to be a concluded contract warranting disclosure under the

PIT Regulations. While rejecting the said contention of the Company this

Tribunal observed that in the absence of any further negotiation or discussion

or correspondence affecting the basis of the communication referred to

therein, the said communication constituted a concluded contract. In the

present case, the contracts are concluded contracts and the clauses in each

contract specifically provide that the respective contract shall be effective and

binding from the date of entering into the contract. Thus, it is evident that as -14-

in the earlier case, the Appellants were aware that entering into contracts was

a price sensitive information, however, the Appellants have failed to disclose

the same immediately.

19. Strong reliance was placed by the Counsel for the Appellant on the

decision of this Tribunal in case of Gujarat NRE Mineral Resources Ltd. That

decision is distinguishable on facts. In that case, the appellant therein, an

investment company, decided to acquire coal mining leases in Australia by

selling a part of its investments in order to arrange requisite funds. The

Appellant therein made corporate announcement regarding the acquisition of

coal mines. However, there was no corporate announcement regarding its

decision to dispose of its investment. Question raised therein was, whether

the information regarding the decision to dispose of its investment was price

sensitive. In that context it was held that earning income by an investment

company by buying and selling securities held by it as investments being the

normal activity of an investment company, every decision by it to buy or sell

its investments would have no effect, much less material, on the price of its

own securities. It was further held that if a manufacturing company were to

sell its products or buy raw materials, it would be a part of its normal

business activity which would not be price sensitive and not required to be

disclosed. That decision cannot be applied to the facts of present case, where

the two contracts entered into by the company constituted nearly 65% of the

total orders received by the company in that year. In other words, every

contract for supply of goods manufactured by a company may not be a price

sensitive information, however, in the facts of present case, the contracts to

supply 65% of the yearly contracts received by the company, constituted

price sensitive information which ought to have been disclosed. -15-

20. Strong reliance was also placed by the learned Counsel for the

Appellant on the decision of this Tribunal in case of Mr. Anil Harish v/s SEBI

(Appeal No. 217 of 2011 decided on 22.06.2012). In that case, it was found

that the Appellant therein had followed a consistent practice of informing the

stock exchange as and when orders of about Rs.100 crore are received and the

information which not disclosed were less than Rs.100 crore. In the present

case, there is no such practice followed by the Appellants. Moreover, in

relation to a similar contract entered into by the Company it is admitted that

information of such contract constituted price sensitive information.

Therefore, in the facts of present case, it is not open to the Appellants to rely

on the decision of this Tribunal in case of Mr. Anil Harish (supra) and

contend that entering into the contracts in question did not constitute price

sensitive information.

21. Relying on decisions of this Tribunal in case of M/s Alka India Ltd. v/s

SEBI (Appeal No. 44 of 2010 decided on 06.05.2010) and BPL Ltd. v/s SEBI

(Appeal No. 14 of 2001 decided on 21.05.2001) it is submitted that in the

absence of any specific finding regarding the involvement of any

Directors/Compliance Officer, the AO was not justified in imposing penalty

on all of them.

22. We see no merit in the above contention. It is relevant to note that the

penalty is imposed on the Company and the other Appellants after noticing

that in the past too, SEBI has found that the Company had committed similar

default for which the Company has been penalized. Since the violation is

found to be repeated, the decision of the AO to penalize the Company and

other Appellants cannot be faulted. Moreover, since the penalty is imposed -16-

jointly and severally, it is open for the Company to discharge the entire

penalty.

23. Given that the AO has considered the mitigating factors under Section

15-J of SEBI Act and thereafter imposed a penalty of Rs.25 lac under Section

15-HB of SEBI Act (maximum penalty provided for under this Section is

Rs.One crore), we do not find any merit in the contentions raised on behalf of

the Appellants.

24. Accordingly, both the appeals are dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member

26/07/2016 Prepared & compared by-ddg