Order against Apurva Shah in the matter of Hitech Drilling Services Ltd

1. Securities and Exchange Board of India (hereinafter referred to as SEBI) conduced an investigation into the affairs relating to the acquisition of Hitech Drilling Services India Limited (hereinafter referred to as the company) by Aban Lloyd Chiles Offshore Limited (hereinafter referred to as Aban) during March 2001 and the trading in the shares of the company. SEBI investigation revealed that DSP Merryll Lynch Limited (hereinafter referred to as DSPML) acted as the buy side advisers to Aban in respect of the acquisition of the company during 2000-01. The shares of the company were inter alia listed on Bombay Stock Exchange Limited (hereinafter referred to as BSE) and were also permitted to be traded at the National Stock Exchange of India Limited (hereinafter referred to as NSE). As per the details submitted by DSPML, the share price in respect of the above mentioned acquisition of the company was fixed at Rs. 92/- per share, on the evening of March 13, 2001. It was noticed that the shares of the company which were being traded in the range of Rs. 32/- to Rs. 40/- between March 1, 2001 and March 13, 2001, touched the upper circuit limit prices continuously from March 14,

2001 till March 16, 2001. DSPML also informed SEBI that, it had conducted an internal inquiry in respect of the involvement of its employees and found that Mr. Apurva Shah (hereinafter referred to as the noticee), Assistant Vice President, Mergers & Acquisitions had divulged the information regarding the acquisition of the company, to Mr. Ramamurthy Srinivasan, another employee of the company, but was not a part of the core team. DSPML also stated that, it had terminated the services of the noticee in August 2001 for breach of its policies relating to confidentiality and trading in securities by its employees. The investigation conducted by SEBI observed that on March 13, 2001, Mr. Ramamurthy Srinivasan spoke to one Paresh Thakkar many times and appears to have passed on the unpublished price sensitive information in respect of the said acquisition, to him. Further, it was alleged that Mr. Paresh Thakkar, with the help of his uncle Mr. Bharat Palan and M/s Vinayak Investments, whose proprietor is Mr. Naresh Thakkar, a relative of Mr. Bharat Palan, bought around 2,00,000 shares of the company between March 14 and 16, 2001 based on the above unpublished price sensitive information and made a profit to the tune of about Rs.1,00,00,000/- from the said transactions.

It was alleged that Mr. Paresh Thakkar along with Mr. Bharat Palan and M/s Vinayak Investments bought the shares of the company through one Ishita Investments (proprietor, Mr. Ashish Dhirawani), which had traded through certain stock brokers of NSE and BSE. In his statement to SEBI on June 25, 2001, Mr. Ashish Dhirawani stated that he had dealt in the shares of the company for Mr. Paresh Thakkar and Mr. Bharat Palan. Further, in his subsequent statement on August 17, 2001, Mr. Ashish Dhirawani stated that he made payments to Mr. Bharat Palan by way of cash/cheques/demand drafts. It was observed that on March 15 and 16, 2001 days, Mr. Ashish Dhirawani purchased nearly 2,26,000 shares of the company based on the orders placed by Mr. Paresh Thakkar and Mr. Bharat Palan. In view of the above, it is alleged that the noticee facilitated the trading in the shares of the company by divulging unpublished price sensitive information, in violation of Regulation 3(ii) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as the said Regulations).

In view of the above, SEBI issued a notice dated June 8, 2006 to the noticee advising him to show cause as to why action should not be taken against him under Regulation 11(a) of the said Regulations. Subsequently, as requested by the noticee, copies of the documents relied upon were furnished to him by SEBI. Thereafter, SEBI, vide letters dated September 14, 2006 and April 30, 2007 advised the noticee to submit his reply to the show cause notice, as all the documents were already furnished to him. Pursuant to the same, the noticee was also granted an opportunity of hearing by SEBI on May 29, 2007. Meanwhile, the noticee, vide letter dated May 17, 2007 had filed his reply to the show cause notice. The noticee had also availed the opportunity of hearing and appeared before my predecessor and made submissions through Mr. Mustafa S. Doctor, Advocate. Subsequently, written submissions dated June 13, 2007 were also filed on behalf of the noticee. Thereafter, another opportunity of personal hearing was granted to the noticee on January 6, 2009 before me, when Mr. Mustafa S. Doctor, advocate as authorized by the noticee appeared and made submissions.

The noticee was also present during the time of the personal hearing. The learned counsel made his submissions on the lines of the reply of the noticee dated May 17,2007.

2. I have considered the show cause notice issued to the noticee, the oral as well as written submissions made on his behalf and other material available on record. The allegation leveled against the noticee was that he had divulged the unpublished price sensitive information (in respect of the acquisition of the company by Aban) to his colleague at DSPML, Mr. Ramamurthy Srinivasan in violation of Regulation 3(ii) of the said Regulations. The provisions of Regulation 3(ii) of the said Regulations (as on the date of alleged violation) is extracted below:

“3. No insider shall (i)… (ii) communicate any unpublished price sensitive information to any person, with or without his request for such information, except as required in the ordinary course of business or under any law; or …………”

3. Thus, in the context of this proceedings, what is prohibited under Regulation 3(ii), inter alia is the communication of unpublished price sensitive information to any person, with or without his request for such information, except as required in the ordinary course of business or under any law. Admittedly, DSPML was acting as investment advisors to Aban in respect of the acquisition of the company during March 2001. It is not in dispute before me that the noticee was an employee of DSPML and was a member of its core team which was advising Aban in respect of the said acquisition. The chronology of events provided by DSPML to SEBI clearly indicate that the noticee was a part of the team which held discussions on March 13, 2001 for reviewing the draft purchase agreement in respect of the acquisition of the company by Aban. These facts are undisputed before me. However, the noticee contended that, he was not involved in the sensitive price discussion in respect of the said acquisition. It was submitted before me that, in the absence of participation in the ‘price discussion’, the information with regard to the acquisition of the company by Aban by itself cannot be said to be price sensitive information. I am unable to accept such contention. The term ‘unpublished price sensitive information’ is defined under Regulation 2(k) of the said Regulations, as follows:

“(k) “unpublished price sensitive information” means any information which relates to the following matters or is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market – (i)… (ii)… (iii)… (iv)… (v) amalgamation, mergers and takeovers; (vi)… (vii)… (viii)…”

Thus, participation in the ‘sensitive price’ discussion is not material to ascertain whether information is unpublished price sensitive information or not, if it is otherwise covered under the aforesaid definition. The very information with regard to the takeover of a company is unpublished ‘price sensitive information’ in terms of Regulation 2(k) of the said Regulations, if it is not generally known or published by such company for general information, and, if published or known, is likely to materially affect the price of securities of that company in the market. The acquisition deal (share price) was finalized on the evening of March 13, 2001. Obviously, the noticee was in possession of the information pertaining to the acquisition of the company by Aban and the same was not published at the relevant point of time. This was notified to the stock exchange only on March 18, 2001. Till such time (i.e March 13, 2001 to March 18, 2001), the information with regard to the acquisition of the company by Aban was unpublished. Further, the noticee did not dispute the fact that he was aware of the acquisition of the company by Aban. Therefore, indubitably, the noticee was an ‘insider’ at the relevant point of time, in terms of Regulation 2(e) of the said Regulations.

4. In view of the above findings, the only issue remained to be examined in so far as this proceeding is concerned is whether the noticee had divulged the said unpublished price sensitive information to Mr. Ramamurthy Srinivasan, as alleged in the show cause notice. During the course of the hearing, the learned counsel for the noticee vehemently contended that the only basis for the impugned show cause notice was an alleged internal inquiry conducted by DSPML. I also note that the show cause notice dated June 8, 2006 indicates an inquiry by DSPML as mentioned therein, which is reproduced herein below:

“…….DSPML also informed SEBI that they have conducted an internal inquiry regarding the involvement of the employees of DSPML in insider trading in the shares of the company, and found that you have divulged the information regarding the acquisition of the company to Shri Ramamurthy Srinivasan, who was your colleague at DSPML at that time, but was not a part of the core team. DSPML also informed SEBI that they have terminated your services in August 2001 for breach of company’s policies relating to confidentiality and trading in securities by employees of DSPML.”

5. According to the noticee, even the extracts of SEBI investigation report (Page 9 and 10) provided to him entirely thrust upon such alleged internal inquiry of DSPML. He also brought my attention to certain observations at page 10, which are reproduced hereinbelow:

“Nevertheless, it is noted that Apurva Shah was part of the DSPML core team which handled the Hitech takeover and was privy to the unpublished price sensitive information. Also, DSPML communicated to SEBI that in its internal enquiry it found out that Apurva Shah breached the company's policies relating to confidentiality of information. Based on this evidence, it is found that Apurva Shah divulged information about Hitech takeover to Ramamurthy Srinivasan”

6. However, the learned counsel contended that, no formal inquiry was conducted by DSPML. In support of his claim, he placed reliance on para 5 of the letter dated March 10, 2006 of DSPML to SEBI, wherein it was stated “No formal inquiry report was prepared of the investigation and hence are unable to provide the same.” This letter was in reply to the request of the noticee (to SEBI) for the copy of the alleged internal inquiry conducted by DSPML. Thus, admittedly no formal inquiry was conducted by DSPML. In the absence of any formal inquiry, it has to be examined whether the available documents (submitted by DSPML) would indicate the culpability of the noticee as alleged in the show cause notice. In this regard the learned counsel drew my attention to certain letters of DSPML (either addressed to SEBI or the noticee) and the statements of other employees of DSPML, in respect of the alleged violation of the internal policy of DSPML. In one such letter of DSPML dated July 29, 2004 (addressed to SEBI) it is stated “from the statement provided by Mr. Dinesh Krishnan and interviews of employees, it is apparent that certain employees misused the information contrary to the policies and systems which were in place at DSPML.” According to the learned counsel, the basis of DSPML’s findings in respect of the alleged violations was the statement of Mr. Dinesh Krishnan and the interviews of employees.

The learned counsel submitted that the allegation against the noticee was that he had divulged unpublished price sensitive information to Mr. Ramamurthy Srinivasan. He contended that there was nothing in the statement of Mr. Ramamurthy Srinivasan to support the fact that the noticee had communicated certain information to him. I find merit in the submission of the learned counsel for the reason that there was nothing in the statement of Mr. Ramamurthy Srinivasan to show that the noticee had passed on the information to him. I also note that, in his statement to SEBI, Mr. Ramamurthy Srinivasan inter alia stated …….I did not discuss about the Hitech Drilling takeover issue with Apurva Shah.” Besides, I note that Mr. Dinesh Krishnan in his statement (to DSPML) dated July 24, 2001 stated “……..sometime in mid-March 2001, Paresh Thakkar got in touch with me stating that he had some information on some deal being done by DSP and asked for confirmation which I said I was not aware. He told me that the price at which the deal is being done is probably much higher than what the then ruling price was and said that it was a good money making opportunity.

I tried to resist a couple of times but he persisted by saying that there was not much risk. I finally agreed and extended an amount of Rs.7.50 lacs via a cheque in favour of Paresh Thakkar. ”

Thus, DSPML had taken the statement from Mr. Dinesh Krishnan in respect of the alleged insider trading violation committed by its employees, before terminating him from its services. However, no such statement admittedly was taken by DSPML from the noticee, in this regard. DSPML does not have a case that the noticee failed to co-operate with them. On one hand DSPML was in possession of documents such as written statements, proof of receipt of dismissal letter in so far as Mr. Dinesh Krishnan was concerned, but on the other hand they do not have any such documents from the noticee. No plausible explanation is available in respect of the same. Though, in one of its letters dated August 13, 2001, claimed to have been delivered to the noticee, DSPML stated that the noticee admitted that he had divulged sensitive and confidential information in respect of the acquisition of the company to Mr. Ramamurthy Srinivasan, they could not produce any admission/written statement made by the noticee in this regard. The noticee denied making such a statement. According to the noticee, the work station of Mr. Ramamurthy Srinivasan in the office was next to him and both of them were on the same side of the ‘Chinese Wall’ and subject to the same information protection obligations.

7. Having found that there was no formal inquiry by DSPML, one has to ascertain whether the documents provided by DSPML and otherwise obtained by SEBI during the course of investigation would prove the complicity of the noticee in the alleged violation. This is also in the negative. The available records do not indicate anything to implicate the noticee. Further, the noticee contended that he had not received the letter of DSPML dated August 13, 2001 (termination letter). However, the crucial issue is not whether he had received/not received the termination letter from DSPML, as claimed by him. For the present proceedings, the issue is whether he had divulged the price sensitive information or not. I note that, in the said letter dated August 13, 2001, DSPML stated that “Pursuant to an investigation made into allegation of insider trading in the shares of Hitech Drilling Services Limited by certain persons you were required to make a statement on oath to SEBI on July 18, 2001. Further, during the meeting held with you on July 23, 2001, when Mr. Shitin Desai, Mr. Amit Chandra, Mr. Sanjay Sharma and Mr. P.C.Singh were present, you admitted having advances monies to an outsider to trade in the shares of HItech Drilling Services Limited for your benefit, despite the fact that the Company’s employee trading policy binding on you, prohibited you from doing so.

Further at a meeting held with you on July 24, 2001, when Ms. Vijaylakshmi Srinivasan and Mr.P.C. Singh were present, you admitted having advanced an amount of Rs.7,50,000 – in favour of one Paresh Thakkar to buy, for your benefit, shares of Hitech Drilling Services Limited in mid March 2001 before the public announcement for acquisition of the said shares. You also expressed extreme regrets for your action and undertook not to repeat the same. You also furnished your handwritten statement containing the aforesaid admissions to Ms. Vijayalakshmi Srinivasan and Mr.P.C.Singh at the conclusion of the said meeting.” However, the noticee denied that he had communicated the information pertaining to the acquisition of the company to Mr. Ramamurthy Srinivasan. I note that DSPML issued a similar letter dated August 13, 2001 to Mr. Dinesh Krishnan. In the said letter there was a reference regarding the admission made by him in respect of his giving an amount to Mr. Paresh Thakkar. It was supported by the statement of Mr. Dinesh Krishnan in writing. However, no such statement was taken in respect of the noticee.

Even the statement of Mr. Ramamurthy Srinivasan is also silent about the involvement of the noticee. These factors weaken the allegation that the noticee had divulged information to Mr. Ramamurthy Srinivasan.

8. It is not in dispute that the share price of the company witnessed a sharp increase during the period March 14 – 16, 2001. Admittedly, the deal of acquisition of the company by Aban was finalized on March 13, 2001 evening and the same was informed to the stock exchanges on March 18, 2001. Thus, it cannot be ruled out that the said spurt in price in the shares of the company during March 14-16, 2001 was the outcome of some foul play by certain entities including those who were in possession of such unpublished price sensitive information. However, the show cause notice could not sufficiently prove the allegation that the noticee had facilitated the trading in the shares of the company by divulging the unpublished price sensitive information. Therefore, I am of the considered view that he is entitled to a benefit of doubt. In the facts and circumstances, I dispose of the present proceedings as ordered hereinunder.

9. In view of the foregoing, in exercise of the powers conferred upon me under Sections 11 and 11B of Securities and Exchange Board of India Act, 1992 read with Section 19 thereof and Regulations 11 and 13 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, I, hereby dispose of the show cause notice dated June 8, 2006, issued to Mr. Apurva Shah in the matter of Hitech Drilling Services India Limited, without any directions.

DR. K.M.ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: FEBRUARY 15, 2010