Order in the matter of Polaris Software Lab Limited presently known as Polaris Consulting and Services Limited

WTM/GM/EFD/109/2017-18 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under Sections 11(1), 11(4) and 11B of Securities and Exchange Board of India Act, 1992, in respect of Interim Order cum show cause notice dated November 24, 2015 in the matter of Polaris Software Lab Limited (presently known as Polaris Consulting and Services Limited). In respect of: SR. NO. NOTICEES PAN 1. ARUN JAIN AAHPJ6020E 2. R. SRIKANTH AAUPS6235R

1. SEBI, pursuant to an investigation, had passed an interim order cum show cause notice dated November 24, 2015 (“interim order”) against the abovementioned Noticees, namely Shri Arun Jain and Shri R. Srikanth, in respect of their trading in the scrip of Polaris Software Lab Limited (presently known as Polaris Consulting and Services Limited) (hereinafter also referred to as “Polaris” or “the company”) during July 02, 2008 to July 08, 2008 while allegedly being in possession of unpublished price sensitive information (UPSI), in violation of the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as ‘PIT Regulations’).

2. The details of violations, as set out in the interim order, are as follows:

i. Shri Arun Jain, CMD of Polaris, and Shri R. Srikanth, ex-Chief Financial Officer (CFO) of Polaris, while trading in the scrip, were allegedly in possession of UPSI pertaining to (a) declaration of quarterly results of the company on July 17, 2008; and (b) commencement of real estate business activity by the company. The details of the two UPSI are as follows:

(a) Declaration of quarterly results of the company on July 17, 2008:  The financial results of the Company were discussed in the Board Meeting and the Audit Committee meeting held on July 17, 2008. Subsequently, the financial results

Order in the matter of Polaris Software Lab Limited were declared to the Stock Exchanges on July 17, 2008 whereby it was disclosed that Polaris had recorded a growth of 87% in the net profit as compared to the corresponding quarter last year.

 The chronology of the details regarding declaration of financial results are as follows:

Date Event June 26, 2008 Polaris informed NSE that its Board shall meet on July 17, 2008 to discuss, consider and approve the quarterly financial results of the Company for the quarter ended June 30, 2008. July 01, 2008 Polaris initiated preparation of quarterly financials for the quarter ended June 30, 2008. July 07, 2008 The draft quarterly results of Polaris for the quarter ended June 30, 2008 was submitted to the auditors for their review and report thereon. July 17, 2008 a. Mr. R. Srikanth, CFO made a presentation of the audited quarterly financial results to the Audit Committee. b. The Board Meeting was held and the quarterly financial results of Polaris were discussed and approved. c. The Company declared the quarterly financial results as under:

 Pursuant to the dissemination of the said information, the price of Polaris’ scrip had closed at ₹81.75 on July 18, 2008.  As per the procedure followed for the Statutory Audit of the company’s accounts, the preparation of the books of accounts was done on monthly basis by its internal finance department. The standalone results are audited on a quarterly basis and the consolidated results are audited annually. Further, the Statutory Auditors commenced audit during the last week of the quarter and used to complete the same by the first week of the succeeding month of the next quarter.  Mr. Arun Jain, CMD of the Company, had stated to SEBI that on monthly basis, he used to review the unaudited financial results of all the 10 business units of Polaris. According to him, such review used to happen between 10th and 20th of every month with the CFO and Chief Operating Officer (COO). He also said that “The results are aggregated by the CFO and COO. There is no such thing as sequential reporting of results – draft results put to me and then approved by the auditors. The auditors typically start in the last week of the quarter…”.

 The draft quarterly financial results of the Company for the quarter ended June 30, 2008, were submitted to the auditors of the Company for review and report thereon on July 07, 2008. As per the statement of Shri Arun Jain, the aggregated draft quarterly results of Polaris (before putting up the same to the Auditors on July 07, 2008) were put up to him first. In other words, the same was put up to Shri Arun Jain on or before July 07, 2008 and therefore, he would have been in possession of the financial numbers of Polaris at least few days before July 07, 2008.

 The UPSI regarding the draft quarterly results had definitely originated on July 07, 2008 (i.e. the date on which the draft quarterly results of Polaris for the quarter ended June 30, 2008, was submitted to the Auditors for review) and the same remained unpublished till July 17, 2008 at 14:51 hrs. Further, in terms of the Regulation 2(ha)(i) of the PIT Regulations, the periodical financial results of the Company are price sensitive information. As per the discussion above, Shri Arun Jain, CMD of Polaris and Shri R. Srikanth, ex-CFO of Polaris (also ‘Head of Finance wing of Polaris’ and primarily responsible for the preparation of the financial statements of Polaris) were privy to the said UPSI between July 07, 2008 till July 17, 2008 (till the same was made public at 14:51 hrs.).

(b) Commencement of Real Estate business activity:

 The Board of Polaris in its meeting dated July 17, 2008, had also discussed and approved the entry of Polaris into the real estate business activity subject to the regulatory proceedings.

 From the minutes of the Board Meeting dated July 17, 2008, it is noted that the Board had constituted a Committee at the previous Board Meeting (held on April 23, 2008), ‘to look into the possibilities of monetisation of real estate investment by the Company’.

 The chronology of the details regarding the ‘real estate business’ of Polaris are as follows:

Date Event April 21, 2008 Spark Capital Advisors, the Merchant Banker, presented a concept note recommending the demerger of the non-core assets of Polaris, more particularly the land bank, in order to maximise the Company shareholders’ value by creation of two separate listed entities. An e-mail was sent by Mr. R. Srikanth, CFO to Mr. Arun Jain, CMD discussing the demerger process mentioning that ‘it is completely right as per their earlier understanding’. Apart from the demerger, the buyback programme was also mentioned in the email. April 23, 2008 Meeting of Board of Directors of Polaris was held on this date. The Board of Polaris had inter alia discussed and decided to explore the best options to maximise the shareholder value from the real estate investments made by the Company. For the same, the Board had constituted a Committee comprising of various directors of Polaris including Mr. R. Srikanth, CFO, as a core member to make a study on the real estate investments made by the Company so as to maximize shareholders returns. Immediately after the Board meeting on April 23, 2008, Polaris had also held a conference call with the stakeholders and informed one of the stakeholders that Polaris had deferred the buy-back of its shares till the newly appointed committee makes its recommendation regarding leveraging of the Company's real estate investment and maximising shareholders value. June 09, 2008 An e-mail was sent by Mr. R. Srikanth to Spark Capital Advisors, on the demerger process (a copy of the same was also marked to Mr. Arun Jain), wherein it was mentioned that Polaris has to act fast on the demerger decision and they are ready to release the mandate in this regard. The e-mail also specifically mentioned the demerger proposal as regards the real estate business of the Company and instructing/ advising Spark Capital to hasten the matter as the Company is ready to release the mandate in this regard. June 30, 2008 An e-mail was sent by Mr. R. Srikanth to the Board of Directors of Polaris communicating the dates of the next Board and Audit Committee meetings.

July 10, 2008 An e-mail was sent by Mr. R. Srikanth to Mr. Arun Jain mentioning about the committee meeting held in Delhi on monetisation of real estate business. July 17, 2008 Board Meeting of Polaris, wherein it was inter alia decided to foray into the Real Estate business activity, subject to amendment of object clauses of the Memorandum of Association to enable real estate business as an independent activity within Polaris and other regulatory aspects/process.  The relevant extract of the press release issued by the Company after the Board Meeting dated April 23, 2008 is as under: “The Board of Polaris Software Lab Ltd considered a proposal of buy-back of its equity shares and had discussions on this subject. In the course of the discussions, Members of the Board drew attention to the real estate investments made by the Company and suggested that the best options to maximize shareholder value from these investments should also be explored. The Board accordingly decided to defer its decision on the buy-back of equity shares and appointed a committee of the Board to give recommendations to enable the Board to take a decision at its next meeting.”

 A reading of the above press release suggested that the Company in the press release had mentioned about its real estate investments and to explore the best options available to maximize the shareholder value from these investments.

 The Committee constituted for monetizing real estate investment had deliberations and decided to refer and obtain opinions on the legal and procedural issues before commencing the real estate business activity as an independent business within Polaris. Mr. R. Srikanth, CFO (at the relevant point of time) who was also a member of such Committee was authorized for taking opinions and placing the same before the Board. The Committee then recommended the proposal of commencing real estate business activity within Polaris subject to the regulatory process.

 It was found during the course of investigation that Mr. R. Srikanth had sent an e-mail dated June 09, 2008 to the Merchant Banker, Spark Capital Advisors with a copy marked to Mr. Arun Jain mentioning specifically about the demerger process on the ‘real estate business’ activity and the need to expedite the decision on the demerger. The said email shows that there was a move on the part of the Company to take forward the demerger process on the ‘real estate business’ activity and there was also a sense of urgency to expedite the process. As the e-mail was marked to Mr. Arun Jain, it can be said that Mr. Arun Jain was also aware of the complete process/ plans/ proposal of the Company to venture into the ‘real estate business’ activity as an independent activity within Polaris.

 The discussed e-mail was not in the public domain and the same was an internal communication about the prospective plans of the Company on their monetisation project and demerger process. Therefore, prima facie it appears that the UPSI regarding the decision of Polaris to foray into ‘real estate business’ came into existence on June 09, 2008.

 It was noted from the investigation that the recommendation of the Committee got crystallized into a concrete decision on July 17, 2008, when the Board in its meeting held on July 17, 2008, had approved the suitable amendments to the object clause in the Memorandum of Association of the Company.

 Foraying into the real estate sector was clearly a major expansion plan as the Company had decided to expand beyond the information technology (IT) sector. The same was a UPSI till it was declared on July 17, 2008, at 14:51 hrs, in terms of the Regulation 2(ha)(iv) of the PIT Regulations. The period of such UPSI was definitely from June 09, 2008 till July 17, 2008 i.e. from the date of the email to Spark Capital Advisors with a copy to Mr. Arun Jain.

 As per the discussion above, Mr. Arun Jain and Mr. R. Srikanth were privy to the said UPSI during June 09, 2008 till July 17, 2008 (till the same was made public at 14:51 hrs.)

(c) Polaris had mentioned to SEBI that for the purposes of the Board Meeting held on July 17, 2008, the Company had closed the trading window from July 11, 2008 to July 18, 2008. Mr. Arun Jain, being the Promoter and CMD of the Company during the relevant period, being the connected person within the meaning of Regulation 2(c)(i) of the PIT Regulations and having access to the UPSI, as detailed above, is alleged to be an ‘insider’ in terms of the Regulation 2(e) of the PIT Regulations read with Regulation 2(c) thereof. Further, Mr. R. Srikanth, being the CFO of the Company during the relevant period (resigned from the services of Polaris since October 31, 2011) was a ‘connected person’ within the meaning of Regulation 2(c) (ii) of the PIT Regulations and by virtue of him being a ‘connected person’, he is also an ‘insider’ within the meaning of Regulation 2(e) of the PIT Regulations.

(d) During the investigation period, Mr. Arun Jain and Mr. R. Srikanth had traded in the shares of Polaris during the UPSI period (i.e. pertaining to the declaration of quarterly financial results and commencement of real estate activities) while in possession of the PSI. The details of their trading in the scrip of Polaris are as under:

Purchases made by Mr. Arun Jain in the scrip of Polaris Exchange Date No. of Avg. Date of pre- Avg. cost of shares purchase clearance purchase price ( ₹) approval ( ₹) BSE 2-July-08 35948 66.73 July 02, 2008 23,98,810 NSE 2-July-08 155000 67.35 July 02, 2008 1,04,39,250 NSE 3-July-08 209000 65.75 July 02, 2008 1,37,41,750 NSE 4-July-08 175000 68.54 July 02, 2008 1,19,94,500 NSE 7-July-08 200000 74.83 July 02, 2008 1,49,66,000 7,74,948 5,35,40,310

Purchases made by Mr. R. Srikanth in the scrip of Polaris Exchange Date Buy Avg. Purchase Date of pre- Avg. cost of Qty Price ( ₹) clearance purchase ( ₹) approval NSE 7-July-08 75548 74.09 July 05, 2008 55,97,351 NSE 8-July-08 22300 73.96 July 05, 2008 16,49,308 BSE 7-July-08 30452 73.87 July 05, 2008 22,49,489 BSE 8-July-08 6700 73.70 July 05, 2008 4,93,790 Total 1,35,000 99,89,938 (e) From the above, it was observed that during the period (i.e. from June 09, 2008 to July 17, 2008, 14:51 hrs) when the PSI remained unpublished: - Mr. Arun Jain bought 7,74,948 shares, - Mr. R. Srikanth bought 1,35,000 shares.

(f) The investigation has found that the purchases by Mr. Arun Jain were made through the market transactions, prior to the Board Meeting of Polaris held on July 17, 2008.He had not sold his shares in the scrip of Polaris subsequently. An analysis of the demat account statement held in the name of Mr. Arun Jain from April 2008 to August 2008, has prima facie revealed that he had not traded in any other scrip other than Polaris. Mr. Arun Jain had taken the approval from Mr. R. Srikanth, CFO of Polaris to purchase the shares of the Company, as aforesaid (as per the Company’s trading and pre-clearance policy).

(g) Further, it was also noted that Mr. R. Srikanth had joined Polaris on June 06, 2006 as an Executive Vice President and CFO and had reported directly to Mr. Arun Jain, the CMD of Polaris. He was also the ‘head of the finance wing’ of Polaris and primarily responsible for the preparation of the financial statements of Polaris. As discussed earlier, he by virtue of his position in Polaris, was in possession of the UPSI at the time he made the purchases in the scrip of Polaris on July 07, 2008 and July 08, 2008. The purchases of Mr. R. Srikanth had taken place during the period from July 02, 2008 to July 08, 2008. The investigations found that during the period of investigation Mr. R. Srikanth did not have the requisite finances/ capital to procure such quantities of shares of Polaris. For arranging the same, he obtained Margin Funding arrangement from Kotak Mahindra Investments Limited immediately prior to his transactions in the scrip of Polaris, by which he funded his purchase of 1,35,000 shares of Polaris on July 07, 2008 and July 08, 2008. Further, the investigations also revealed that Mr. R. Srikanth had not made the required disclosures of the discussed purchases to the Company as required under the Regulation 13(4) and 13(5) of the PIT Regulations.

(h) The trading activity by Mr. Arun Jain and Mr. R. Srikanth was observed on five days i.e. on July 02, 2008, July 03, 2008, July 04, 2008, July 07, 2008 and July 08, 2008 respectively. As discussed earlier, these persons had allegedly traded in the scrip of Polaris while in possession of the UPSI, allegedly in violation of Section 12A(d) and (e) of the SEBI Act and Regulation 3 and 4 of the PIT Regulations and have allegedly committed the offence of ‘insider trading’ in terms of the Regulation 4 of the PIT

Regulations. Further, the investigations also revealed that Mr. R. Srikanth had failed to make the required disclosures of the discussed purchases to the Company under Regulation 13(4) and 13(5) of the PIT Regulations.

(i) Taking into account the number of shares purchased by the Noticees, the cost of acquisition of such shares and the closing price of the scrip at Rs.81.75 on July 18, 2008, Shri Arun Jain and Shri R. Srikanth were alleged to have made a notional profit of Rs.98,11,689/- and Rs.10,46,312/- respectively, which when taken together with interest @ 8% per annum, calculated from July 18, 2008 (i.e. the day after the Board meeting declaring the quarterly financial results) to November 24, 2015 (i.e. the date of interim order) came to Rs.1,84,68,558/- and Rs.19,69,471/- respectively.

3. In view of the above, SEBI, vide the Interim Order, ordered to impound the alleged unlawful gains of Rs.1,84,68,558 allegedly made by Shri Arun Jain and Rs.19,69,471/- made by Shri R. Srikanth. The Noticees were also directed inter alia not to dispose of or alienate any of their assets / properties / securities, till such time the abovementioned amounts were credited to an escrow account, created specifically for the purpose in a nationalized bank.

4. The Interim Order was served on the Noticees. The Noticees have responded to SEBI and made submissions. An opportunity of personal hearing was also granted to the Noticees on September 14, 2017.

5. The submissions made by Shri Arun Jain vide his letter dated September 12, 2017, September 14, 2017, October 10, 2017 and during the course of the personal hearing are as follows:

(a) He had founded Polaris in the year 1993 with an initial investment of Rs.10,000/- which today is a globally respected institution. He has personally received many rewards and recognition in this regard. He is a member of various Government councils. He has also founded a trust which has awarded 36,000 scholarships to students. (b) He strongly objects to the proposed impounding directed by the interim order. It has been more than 8 years since the commencement of investigation and he has provided his responses to each query raised by SEBI without any delay. The interim order has led to immense loss of reputation to him.

(c) In any case, he has not even sold the shares that were purchased by him until his exit in March 2016, Even the alleged gains are a notional amount without any illegal benefit or gain actually been made by him. There is no rational or legal basis for imposing interest @12% on alleged gains. (d) In any case, a show cause notice dated March 15, 2017 has been issued by an adjudicating officer and the issues relevant to the present proceedings can be adjudicated by the adjudicating officer. There is no reason for the present proceedings to continue. (e) The interim order does not contain any allegation or circumstance to indicate that the purchases were effected by him whilst in possession of UPSI. (f) He had decided to effect the purchases on July 02, 2008 when there was no UPSI in relation to the Draft Financial Result, whereas the interim order contends that the UPSI in relation to the Draft Financial Results ‘definitely originated’ on July 07, 2008 i.e. 5 days after his decision to effect the purchases. (g) The internal auditors of Polaris were provided with material in relation to the Draft Financial Results on July 07, 2008. The internal auditors had no tole to play in the finalization of the Draft Financial Results.

Shri Arun Jain was not privy to the material shared with the internal auditors of Polaris. There is no material or evidence to indicate otherwise. (h) The external auditors who were participants in finalization of the Draft Financial Results were provided with the same only on July 09, 2008. Shri Jain was not privy to such sharing of details. In any case, this was two days after the last of his purchases. (i) It has been stated consistently that as a practice, he was not made privy to the draft financial statements at the preparation stage. As a matter of practice, he was provided the draft financial statements only a day or two prior to the Board meeting for his general instructions. There is nothing to indicate that there was any deviation from this practice in the present situation. (j) He was provided a presentation in relation to the Draft Financial Results only on July 17, 2008 by an email from R. Srikanth. The trading window of Polaris was thereafter shut on July 11, 2008. The period of UPSI in relation to the Draft Financial Results is July 11, 2008 to July 17, 2008 and not July 07, 2008 to July 11, 2008 as incorrectly cited in the interim order.

(k) There is no evidence to indicate that the Draft Financial Results were available with him prior to July 17, 2008. (l) The interim order does not even allege, let alone demonstrate, as to i)when he received the UPSI relating to the Draft Financial Results; ii) how such UPSI was allegedly passed onto him. (m) The allegation that he was in possession of UPSI relating to the Draft Financial Results is based solely on a wrong reading of his own statement. He had stated clearly that there was no such thing as sequential reporting of results which means that there is nothing like the draft results first being put up to him and then being provided to the auditors. This statement has been incorrectly read to mean that the accounts were first put to him and thereafter provided to the auditors. (n) There are several places in his statement where he has stated the fact that the Draft Financial Results were not reviewed by him at the time when he effected the trading. (o) He has stated on oath that he was never provided with the Draft Financial Results prior to the same being provided to the auditors, which has been ignored in the interim order.

There is no evidence to suggest that he was provided the Draft Financial Results. It cannot thus be alleged that he had any UPSI with him at the time of purchases. (p) The allegation with regard to the proposed foray into the real estate business by Polaris is also incorrect. There was nothing in the email to conclude that there was any specific UPSI in relation to the proposed foray into the real estate business. The email merely sets out that there are plans to effect the demerger process for this purpose. Such demerger was never effected. (q) The finalization of the proposal was not in the hands of any one individual but was deputed to the committee that was responsible for the planning, execution and conclusion of the project in this regard. The committee did not conclude on the plan in this regard and had merely made its recommendations to Polaris’ Board which did not take any decision until well after he had effected the purchases. (r) The contention about 87% increase in profits after tax of the company, as referred to in the interim order, is misplaced. The record of Polaris demonstrates that there was a gradual increase in profitability and revenue of Polaris since the preceding four quarters.

This information was in the public domain on account of periodic disclosures by Polaris. The results during the quarter ended June 30, 2008 were therefore in line with such general increase. The information about the general increase in profitability was indeed in the public domain and therefore could not be the basis of any insider trading, (s) Polaris had already declared on April 23, 2008 that Polaris’ Board proposed to capitalize on its real estate. Therefore, the information about Polaris’ exploring the market for its real estate was already in the public domain. (t) The proposal regarding capitalizing the real estate of Polaris did not fructify in the form that was set out in the email. While the proposal in the email was about effecting a demerger for real estate business, the Board of Polaris on July 17, 2008 decided to amend the MoA for including the power to conduct real estate business. Thus, he was not in possession of UPSI by receiving the email. (u) He had effected purchases on account of having excess funds which could be deployed into investment. He thus, decided to increase his stake in Polaris.

(v) Even assuming that UPSI regarding the Draft Quarterly Results had originated on July 07, 2008, there was no violation on his part, as he had sought pre-clearance of his purchases on July 02, 2008 which indicated that at the time of his decision to purchase, there was no UPSI. (w) The interim order does not specify the exact date on which the UPSI is alleged to have come into his possession. The interim order alleges without any basis or evidence that the UPSI about draft financial results were in his possession on July 02, 2008 or at least a few days before July 07, 2008. (x) Polaris vide letter dated September 07, 2010 had stated in no uncertain terms that he was not involved in the preparation of the financial statements, which also corroborates his statements about absence of his role. (y) The Draft Financial Results were sent to the external auditors of Polaris only on July 09, 2008 and not on July 07, 2008, as alleged in the Interim Order. This is clear from Polaris’ letter dated November 03, 2010 to SEBI. (z) The details sent to the internal auditors cannot be regarded as being in furtherance of finalization of Draft Financial Results, as they do not participate in finalization of the financial results.

This is confirmed by Shri Jain’s statements as well as those of Shri R. Srikanth. (aa) There was no compilation of the Draft Financial Results until at least July 09, 2008 when the same were sent to the external auditors for their approval. The Draft Financial Results not being ready before July 09, 2008 means that there was no Draft Financial Results that he could have possessed until then or at the time of purchases between July 02, 2008 and July 07, 2008. He received the Draft Financial Results only on July 17, 2008. (bb) In 2008, Polaris was organized around 7 business solution centers (BCSs). Polaris’ clientele at the relevant time mainly constituted banks and international institutions. The nature of complex global business required substantial work for determining exact revenue for the quarter across various dimensions of the business. This exercise, when performed across 7 BCSs, multiple horizontal practices and 10 geographies, brings in significant complexity in finalizing the correct revenue and profit and loss numbers for Polaris globally, due to which there was no daily report at the relevant time that could present a complete picture of the business on an ongoing / real time basis.

This demonstrates that there was no financial data available with Shri Jain at the time when he effected the purchases. (cc) The judgment of the Hon’ble SAT in the case of Samir Arora v. SEBI (Decided on October 15, 2004) is relevant for deciding this case. (dd) On April 21, 2008 an email was addressed by one S. Prasanna from Spark Capital Advisors to Srikanth containing a power-point presentation titled ‘De-merger concept note.ppt’. There was no concrete decision in relation to the de-merger process with the presentation by Spark. The same was only a proposal which had to be approved by Polaris’ Board and the shareholders for any concrete decision on the way forward. (ee) It is apparent from the press release dated April 23, 2008 by Polaris that despite the presentation by Spark, Polaris’ Board did not take any decision in relation to the proposed de-merger process presented by spark. The press release merely stated that there was a proposal to maximize value from real estate investments and did not state that the same was to be effected pursuant to the proposed de-merger process presented by Spark.

(ff) A Committee was constituted by Polaris’ Board to give recommendations to it for Polaris’ Board to decide on the manner in which real estate assets of Polaris could be monetized. On the same date, i.e. April 23, 2008, a press conference was held wherein representatives of various institutions interacted with the management of Polaris and there was extensive discussion. (gg) Srikanth addressed the email to Spark on June 09, 2008 marking him in copy. This email was in the context of Spark seeking a mandate from Polaris to take forward the proposal suggested by them i.e. to effect de-merger of Polaris. There was no concrete proposal on the way forward as Srikanth sought Spark’s view on the manner in which the proposal could be taken forward. (hh) The Committee or Srikanth or indeed he could not have issued a mandate to Spark without formalizing the proposed way forward. The email from Srikanth cannot mean that there was any decision in relation to the proposal suggested by Spark for the de-merger. (ii) He got an email from Srikanth on July 10, 2008 informing about the meeting of the Committee on the issue of monetizing the real estate business.

Srikanth informed him in generic terms, about the fact that the Committee met on July 09, 2008 (two days after his last purchase) without indicating the outcome of such a meeting. (jj) Polaris’ Board met on July 17, 2008 and recorded in the minutes of the meeting that the Committee had discussed the possibility of carrying on the real estate business as an independent business activity within Polaris by amending its objects clause. The Committee did not however decide on the issue at that meeting but merely directed that a legal opinion be procured. It was pursuant to such legal opinion that the Board approved the alteration of the objects clause of Polaris subject to shareholders’ approval. (kk) The announcement about monetizing the real estate business was already in the public domain. There was extensive discussion on this count in media. (ll) He did not sell any of the shares purchased by him until his exit in March 2016.

6. Shri R. Srikanth, vide his submissions dated January 06, 2016; September 14, 2017 and October 12, 2017 and during his personal hearing has submitted inter alia the following: (a) The interim order is prima facie illegal and against the established law. (b) There was a gap of more than 1300 days between his last response to SEBI and the interim order. Thus, there was no urgency to pass the interim order. (c) SEBI has erroneously concluded that the decision of the board that was communicated to the stock exchanges on 17/07/2008 was in the nature of UPSI. The UPSI was in fact the decision of the Board in its meeting on April 23, 2008 to utilize the real estate investments of the company for maximizing the shareholder value. The same was already disseminated to public by and under the press release of April 23, 2008 and also the Investor Conference. The only aspect that came out on July 17, 2008 was the methodology in which the company would monetize its real estate investment and thereby enhance shareholder value. (d) He had a net worth of Rs.8.8 Crores and thus adequate financial resources and wealth of his own to make the purchase of shares.

(e) The computation of notional profit is grossly incorrect. In fact he has incurred loss in the transactions. (f) As regards quarterly results, market normally reacts to news disseminated by a company. The trend of the results of the company was not something that the market was not kept informed of. This is apparent from the statement made by him in the press release dated July 17, 2008. (g) For any financials to be complete to know the true picture of any financial statement, it is essential that all the entries are made and the trial balance is generated. Polaris has intimated that the closure happens on 6th, only for the purpose of contribution and does not take into account the other necessary entries that are required for completion of the financial statements. Even in respect of the quarter ended June 2008, the completed accounts were given to the auditors for audit only on July 09, 2008, which has been confirmed by the company vide letter dated November 03, 2010. (h) The statement of Shri Arun Jain, as referred to in the interim order, has been completely misread to come to the conclusion that the CFO and the COO put up the aggregated results to Shri Jain before they were approved by the auditors, when it actually means the opposite.

It meant that the audit process is concurrent, as it starts even before the end of the quarter and is concurrent with the period when it starts in the last week before end of the quarter. (i) As per the letter dated November 03, 2010 of the Company to SEBI, the company has stated that the accounts were given to the statutory auditors on July 09, 2008 for the purpose of audit. (j) The results of June 2008 quarter were ready only around 9th July 2008 and not 7th July 2008 as incorrectly specified in the investigation report. (k) There was no UPSI on a date on which Shri Srikanth decided to invest or when the permission to invest in the shares were taken or when the trades were actually executed.

7. I have gone through the charges against the Noticees mentioned in the interim order. I have also perused and considered the Noticees’ submissions and other material available on record.

8. I note that the Noticees have been charged with having traded in the scrip of the company while having UPSI pertaining to two specific areas - (i) Declaration of quarterly results of the company for quarter ended June 30, 2008; and (ii) the commencement of real estate business activity by the company.

9. As regards the UPSI pertaining to draft quarterly results for quarter dated June 30, 2008, I note that it is crucial to decide whether the Noticees were in possession of any UPSI during their trades in the scrip during July 02 2008 to July 08, 2008.

10. I note that the investigation has relied upon the statement dated June 07, 2012 of Shri Arun Jain to construe that the draft quarterly results were put up first to him on July 07, 2008, before putting up the same to the auditors. Shri Jain in his submissions has vehemently denied the said interpretation of his statement and has contended that the investigation has misconstrued it to derive a totally different meaning than what was intended. The said statement (at Answer no. 24 of his statement) is quoted below:

“The results are aggregated by the CFO and COO. There is no such thing as sequential reporting of results – draft results put to me and then approved by the auditors. The auditors typically start in the last week of the quarter and hence the results which are brought to me are not specifically provided to me by the finance department but are also looked into by the auditors because of the concurrent audit that takes place.”

11. I note that Shri Jain in his submissions has specifically pointed out his statements at Answer nos. 16 and 23 in order to show that he used to receive the draft quarterly results only few days before the Board meeting, and that SEBI has totally misinterpreted his abovementioned statement to mean exactly the opposite. I note that Shri Jain in his Answer no. 23 has stated the following:

“The COO and the CFO bring the results on my table. I do not recall the exact date, but the draft results subject to auditor discussions is brought to me generally 2-3 days before the Board meeting.”

12. The above statement indicates that Shri Jain used to receive the draft results only 2-3 days before the Board Meeting. I note that Shri Jain in his Answer no. 16 has given similar statement about receiving the draft results 2-3 days prior to the Board meeting. I note that the Board meeting of the company where the quarterly financial results of the company were discussed and approved, had happened on July 17, 2008, which is much later than July 07, 2008 (the last date on which Shri Arun Jain had traded).

13. As regards Shri R. Srikanth, the investigation has charged him with having UPSI entirely on the ground that he reported directly to Shri Arun Jain and was also the head of the finance wing of Polaris and primarily responsible for the preparation of the financial statements of Polaris. Thus, by virtue of his position in Polaris, he is alleged to have been in possession of UPSI while trading in the scrip on July 07-08, 2008. The investigation has also alleged that Shri Srikanth did not have the requisite financial capital to procure such quantities of shares of Polaris. The Investigation has not produced any evidence of Shri Srikanth having obtained UPSI as alleged in the interim order, except assuming that he had so by virtue of his position. In my opinion, for proving serious charges like insider training, mere assumptions would not suffice. The charges should be backed with some minimum credible evidence, beyond assumptions, against the alleged offenders. I find that investigation has failed to bring out the same.

14. Apart from the above, I further note that Shri Arun Jain had obtained pre-clearances for his trades on July 02, 2008 itself and Shri R. Srikanth had similarly obtained pre-clearances for his trades on July 05, 2008 itself. The same indicates that the Noticees had decided to execute their purchase transactions much before July 07, 2008 (the date on which UPSI is alleged to have come into possession of the Noticees, as per the investigation).

15. I find that except relying on one statement of Shri Jain, whose interpretation by SEBI has been challenged by the Noticee, and the position of Shri Srikanth as CFO in the company, the investigation has failed to provide any evidence or material to prove that both the Noticees indeed had access to the unaudited financial results while they had traded during July 02, 2008 to July 08, 2008.

16. As regards the UPSI pertaining to commencement of real estate business activity by the company, I note that Shri Arun Jain has contended that the same was merely a proposal and nothing concrete had been decided about the same by the company, which could amount to being UPSI. In this regard, he has stated the chain of events as mentioned under his submissions above. I note that the investigation has rested its entire case on an email from Shri R. Srikanth on June 09, 2008 to the Merchant Banker, Spark Capital Advisors, with a copy marked to Shri Arun Jain mentioning specifically about the demerger process on the ‘real estate business’ activity and the need to expedite the decision on the demerger. As per the investigation, the same shows that there was a move on part of the company to take forward the demerger process. However, in this regard, I note the following:

(a) The company had disclosed in a press release and Investor Conference on April 23, 2008 its decision to constitute a Committee to make a study on the real estate investments made by the company so as to maximise shareholders returns. The same indicates that the company’s intentions about foraying into real estate business had already come into public domain. (b) The email dated July 09, 2008 referred to by the investigation itself refers to the need to expedite the decision on the demerger. This shows that there was no concrete decision which had been arrived at, as on the date of the email. I further note that the said email was sent after the last date on which the Noticees had traded. (c) The Board of the company in its meeting on July 17, 2008 approved the alteration of the objects clause of Polaris, instead of approving the demerger proposal, as referred to in the email dated July 09, 2008. The same indicates that the concept of demerger was only a proposal, which was ultimately rejected by the company, rather than being a concrete decision taken by the company. As the said proposal was already in the public domain, it cannot be said to be amounting to UPSI.

17. Apart from the above, I note that clause 3.2.1 of the Model Code of Conduct for Prevention of Insider Trading for Listed Companies, as prescribed under Regulation 12(1) of the PIT Regulations, provides that the trading window shall be closed during the time the information referred to in para 3.2.3 (i.e. declaration of financial results, declaration of dividends etc.) is unpublished. Further, clause 3.2.3A provides that the time for commencement of closing of trading window shall be decided by the company. I further note that in the instant case, the company had closed the trading window only on July 11, 2008 for the purpose of Board meeting held on July 17, 2008 where financial results for quarter ended June 2008 were discussed and approved and the decision to foray into real estate business activity was taken, subject to amendment of objects clause in the MoA of the company. From these circumstances, it cannot be said that the UPSI was in existence prior to the closure of the trading window on July 11, 2008.

18. In view of the above observations and findings, I am of the considered opinion that the investigation has failed to substantiate its charges that the Noticees had traded in the scrip of the company while being in possession of UPSI, as alleged in the interim order. In the event of charges of insider trading against the Noticees not being established, the question of any illegal notional gain or impounding thereof does not arise.

DIRECTIONS 19. In view of the foregoing, I, in exercise of the powers conferred upon me under Sections 11, 11(4) and 11B of the SEBI Act, 1992, hereby revoke the directions issued against the Noticees in the interim order dated November 24, 2015. The instant proceedings against the Noticees shall, accordingly, stand disposed of.

20. The Noticees shall be at liberty to withdraw the respective amounts deposited by them, along with accrued interest, if any, from the escrow account opened pursuant to the directions passed in the interim order.

21. This order shall come into force with immediate effect.

Date: March 23, 2018 G. MAHALINGAM Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA