Rajeev Vasant Sheth & Ors. vs Sebi

the appellants entered into suspected insider trading being privy

to unpublished price sensitive information ("UPSI" for short) of

declining profits of TJL and disposed of their promoter

shareholding (fully by appellants 2 and 3 and partly by appellant

1) and thereby avoided losses. Further, they have also violated

Code of Conduct applicable to „insiders‟ by not taking pre-

clearances from the concerned authority of the company for

trading in the shares of the company during the UPSI period. 5

4. We have heard Shri Somasekhar Sundaresan, learned

counsel assisted by Shri Ankit Lohia and Ms. Ryna Karani,

advocates for the appellants and Shri Rafique Dada, learned

senior counsel assisted by Shri Anubhav Ghosh and

Shri Ravishekhar Pandey, advocates for the respondent through

video conference.

5. It is the contention of the learned counsel Shri Somasekhar

Sundaresan, appearing on behalf of the appellants that the

impugned order has been passed in haste and that too without

show-causing the appellants and thereby not providing them an

opportunity of presenting the full facts. If such an opportunity

had been given, the appellants would have been able to

demonstrate that there was no UPSI in question; profits of the

company declining since 2016 was a public information;

appellants sold the shares in order to infuse funds to the

company as a final effort in reviving its falling fortunes due to

adverse market conditions; full information relating to the sale

proceeds from shares and transfer of funds to the accounts of the

company soon thereafter etc. are matters of record; in fact more

funds have been transferred to the company than the sale

proceeds and, therefore, there has been no diversion of funds in

any manner whatsoever and, therefore, the appellants were 6

trying to help the company to remain within business. It was

submitted that since the revival efforts did not succeed, later on,

the company has gone under liquidation. Therefore, the learned

counsel contended that the investigation started in April 2018

and proceeded till end of 2019 during which a number of

correspondences /replies etc. have been exchanged. Since there

was nothing to hide, all the information, including that the

appellants had made mandatory disclosures under relevant

regulations such as SEBI (Prohibition of Insider Trading)

Regulations ("PIT Regulations")/ SEBI (Substantial Acquisition

of Shares and Takeover) Regulations ("SAST Regulations"),

and even the fact that no pre-clearances had been taken as the

appellants genuinely considered no UPSI existed, were all

disclosed. Since the appellants have been cooperating fully with

SEBI there was no need for passing an ex-parte order without

enabling the appellants to get the benefit of a show cause in

order to enable them to submit detailed replies with evidence

thereon. Accordingly, an ex-parte order in the given facts and

circumstances, was absolutely unnecessary as the appellants

would have demonstrated that they sold part/full of their

promoter shareholding for infusing funds into the company and

there was genuine reasons for the actions of the appellants as

held by this Tribunal in the matter of Abhijit Rajan vs. SEBI

(Appeal No. 232 of 2016 decided on 08.11. 2019). 7

6. It was further contended by the learned counsel for the

appellants that a similar impounding direction was passed in the

matter of Dr. Udayant Malhoutra vs. SEBI (Appeal No. 145 of

2020 decided on 27.06.2020) which was quashed and set aside

by this Tribunal. Though, SEBI has challenged the said order

before the Apex Court no stay has been granted and, therefore,

as on date the ruling of this Tribunal is the law. Therefore,

given that the aforesaid orders of this Tribunal are in place it

was incumbent on SEBI not to pass an ex-parte impounding

order in the present matter.

7. The learned senior counsel Shri Dada, representing SEBI,

however, submitted that the impugned order has been passed

with adequate reasons. It is on the record that company has

gone into liquidation and the endeavor of the appellants was to

become unsecured creditors by lending funds to the company as

under liquidation promoter shareholders come last in the order

of waterfall. There is sufficient evidence to show that the

appellants‟ gained from using the advance information relating

to adverse profitability of the company and, therefore, trading

while in possession of UPSI. Moreover, the appellants have

violated code of conduct for insider since it is an admitted fact

that they did not pre-clear the trades. There is investigation by 8

multiple agencies in the matter. Therefore, given the fact that

the Company has gone under liquidation and there are only a

few shares left with appellant no. 1 it was imperative for SEBI

to secure the amount of loss averted by the appellants by trading

as insiders while in possession of UPSI. Therefore, the learned

counsel submitted that if the appellants cooperate and provide

all the relevant information a final order will be passed at the

earliest possible time and this Tribunal may not interfere with

the impugned order. In any case, it was urged that the interest of

the investors need to be protected.

8. Having heard the learned counsel for the parties at

reasonable length, we proceed to dispose of the appeal at the

stage of admission itself without calling for reply/rejoinder etc.

as this matter is squarely covered by our orders in Abhijit Rajan

(supra) and Dr. Udayant Malhoutra (supra. The relevant

paragraph in our Order of Abhijit Rajan (supra) is reproduced

below:-

"13(2) Further, even if it is assumed that the information was is a price sensitive information, still the appellant cannot be blamed of insider trading for the reasons that he did not trade "on the basis of the information". The appellant was able to show his dire need to infuse fund in the entity under the master 9

restructuring agreement to implement a CDR package as detailed supra. He was even required to sell his agricultural land and flat details of which are already given hereinabove. In these circumstances he sold the shares. In the case of Rajiv B. Gandhi on fact this Tribunal held that the appellants therein were able to rebut the presumption that they traded on the basis of UPSI as they had a necessity to sell the shares. Similar is the case of Gujarat NRE Mineral Resources Ltd. and Mrs. Chandrakala decided by this Tribunal."

In the present appeal before us, however, since all the facts are yet to be analysed by the respondent SEBI upon hearing the appellant, we do not propose to make any comment on the merit of the case at this stage.

9. The relevant paragraphs in the Order of Dr. Udayant

Malhoutra (supra) are reproduced below: -

"9. We find that the only reason directing the appellant to deposit the alleged notional gain / loss in an Escrow Account is based on the finding given in paragraph 22 of the impugned order, namely, that "it is possible that the entity may divert the notional gain" and that if an interim order is not passed it would defeat the effective implementation of the disgorgement, if any, to be passed on merits after adjudication. In our opinion, the reasoning given by the WTM justifying its action to pass an ex-parte interim order is patently erroneous and cannot be sustained. On one hand, we find that only a show cause notice has been issued and the matter has not 10

been adjudicated on merits but the appellant, on the other hand, has been directed to deposit the possible disgorgement amount in advance. We are of the opinion that no amount towards disgorgement can be directed to be deposited in advance unless it is adjudicated and quantified unless there is some evidence to show and justify the action taken. An order of the like nature can only be passed during the pendency of the proceedings and such orders cannot be passed at the time of initiation of the proceedings. Further, no order of the like nature can be passed without recording its satisfaction and cannot be based on the basis of possibility.

10. In this regard, we may refer to the provisions of Order 38 Rule 5 to 13 of the Code of Civil Procedure, 1908 which lays down the parameters for attachment before judgment. The said principles are fully applicable in the instant case. The object of attachment before judgment is to prevent any attempt on the part of the appellant to defeat the realization of the final order on disgorgement that may be passed against the appellant. But this principle applies only when it is found that the appellant is about to dispose of the property in question. Further, this principle can only be applied when there is evidence to show that the appellant has acted, or is about to act with the intent to obstruct or delay the adjudication of the proceedings that may be passed against him. We are of the opinion that there is no finding that the appellant will remove the property or will dispose of 11

all the property or that he would obstruct the proceedings or that he would delay the proceedings pursuant to the show cause notice. In the absence of any such finding, the ex-parte interim order cannot be sustained especially when the trades were of 2016 and from 2016 till the date of the impugned order there is no evidence to show that the appellant was trying to divert the alleged notional gain/loss.

11. As held in North End Foods Marketing Pvt. Ltd. (supra) there is no real urgency in the matter to pass an ex-parte interim order especially during the pandemic period. There is no doubt that SEBI has the power to pass an interim order and that in extreme urgent cases SEBI can pass an ex-parte interim order but such powers can only be exercised sparingly and only in extreme urgent matters. In the instant case, we do not find any case of extreme urgency which warranted the respondent to pass an ex-parte interim order only on arriving at the prima-facie case that the appellant was an insider as defined in the SEBI (Prohibition of Insider Trading) Regulations, 2015 ("PIT Regulations" for short) without considering the balance of convenience or irreparable injury.

12. In the light of the aforesaid, the impugned order cannot be sustained and the same is quashed at the admission stage itself without calling for a counter affidavit except the show cause notice. The appeal is allowed. The Misc. Application No. 154 of 2020 and Misc. Application No. 155 of 2020 are accordingly 12

disposed off. We further direct that the appellant to file a reply to the show cause notice within four weeks from today. The respondent will decide the matter finally after giving an opportunity of hearing to the appellant either through physical hearing or through video conference within six months thereafter. During the interim period, in order to safeguard the interests of the respondent and more particularly the interest of the investors in the securities market and also to protect the integrity of the securities market, we direct the appellant to give an undertaking to the respondent within four weeks from today that he will not alienate 50% of his total shareholdings of the company DTL held as on date, as stated by the learned counsel for the appellant. In the circumstances of the case parties shall bear their own costs."

10. Accordingly, we quash and set aside the impugned Order,

except as a Show Cause Notice (SCN), upon deposit of the

amounts as specified below. Appellants are directed to file a

reply to the SCN within four weeks from today. The respondent

will decide the matter finally after giving an opportunity of

hearing to the appellant either through physical hearing or

through video conference within six months thereafter. In the

interim, in order to safeguard the interests of the investors in the

securities market and also to protect the integrity of the

securities market, we further direct the appellants to deposit the 13

specified amounts, as given in Table 11 of the impugned Order

and as reproduced in para 1 of this Order, in an interest bearing

Escrow account with SEBI within four weeks from today. No

orders on costs.

11. The present matter was heard through video conference

due to Covid-19 pandemic. At this stage it is not possible to sign

a copy of this order nor a certified copy of this order could be

issued by the Registry. In these circumstances, this order will be

digitally signed by the Presiding Officer on behalf of the bench

and all concerned parties are directed to act on the digitally

signed copy of this order. Parties will act on production of a

digitally signed copy sent by fax and/or email.

TARUN Digitally signed by TARUN AGARWAL DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR PRADESH, postalCode=221505, st=Uttar Pradesh, 2.5.4.20=30fcf68685192bbc53e6ff1608a83fb3881de7ac2ab7954d Dr. C.K.G. Nair AGARWAL 509c85ed6e0f7c41, serialNumber=095f8b286bb0b1cd07ff676611f4f5e7999727d404a a38ca422f9d3529bdb8a3, cn=TARUN AGARWAL Date: 2020.10.01 16:53:18 +05'30' Member

Justice M. T. Joshi Judicial Member 01.10.2020 PK