Sudha Commercial Company Limited vs Sebi

Order Reserved On: 17.01.2017 Date of Decision : 20.01.2017

Appeal No. 384 of 2016

Sudha Commercial Company Limited Vaibhav, 5th Floor, 4, O.C. Gangoli Sarani (Lee Road), Kolkatta- 700 020 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent

Mr. Somasekhar Sundaresan, Advocate with Ms. Niyathi Kalra, Advocate i/b Negandhi Shah & Himayatullah for the Appellant.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Tomu Francis, Advocate for the Respondent.

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

Per: Justice J.P. Devadhar

1.

Appellant is aggrieved by the order passed by the Whole Time

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

India ("SEBI" for short) on September 27, 2016. By the said order

complaint filed by the appellant seeking investigation in the abnormal

trading in the scrip of Hindustan Petroleum Corporation Limited

("HPCL" for short) on July 11, 2016 and July 12, 2016, under Section

11C of the Securities and Exchange Board of India Act, 1992 ("SEBI

Act" for short) has been rejected.

2

2. Facts relevant for the present appeal are as follows:-

a) On May 27, 2016 the Board of Directors of HPCL

recommended final dividend of ` 16 per share.

b) On June 30, 2016 appellant opened long positions in

futures contracts in respect of HPCL shares in July

series of F&O segment, expiring on July 28, 2016.

c) Late in the evening on July 11, 2016 HPCL took a

decision that the "book closure" date would be from

August 01, 2016 to August 06, 2016 and accordingly

the "record date" or "ex-dividend date" would be July

28, 2016. Above decision was announced by HPCL

during market hours on July 12, 2016 at 10:42 A.M,

whereas, the said decision was uploaded on the

Bombay Stock Exchange ("BSE" for short) website

on July 12, 2016 at 9:47 A.M. and on the National

Stock Exchange ("NSE" for short) website at 10:01

A.M.

d) On July 12, 2016 the appellant requested HPCL to

postpone the record date beyond expiry of the July

F&O series since those who had bought positions in

the contract had done so factoring in the news about

the dividend without knowing that the record date

would be fixed for end of July and announced in the

midst of the month. Appellant also wrote a letter to 3

HPCL that the delay in the announcement of record

date has enabled selective leakage of the price

sensitive information relating to the record date being

made available to certain persons who took short

positions on July 12, 2016, i.e. just before the record

date was formally announced by HPCL.

e) On July 21, 2016 appellant addressed a letter to SEBI

inter alia stating that consequent upon the

announcement made on July 12, 2016 regarding the

book closure dates and the corresponding ex-dividend

date as July 28, 2016, the trading price of futures

contracts in respect of HPCL shares in the F&O

segment has seen a downward price correction and as

a consequence the appellant is incurring huge

financial losses. By the said letter appellant requested

SEBI to issue appropriate direction to HPCL and or

the relevant stock exchanges where the shares of

HPCL were listed, to forthwith revise the book

closure date and corresponding ex-dividend date

beyond August 01, 2016 in the interest of

transparency and prevention of unfair trade practices

in the securities market, more specifically in the F&O

segment of NSE.

f) As there was no response from SEBI, the appellant

filed a Writ Petition before the Calcutta High Court 4

and by an order dated July 27, 2016, Calcutta High

Court inter alia directed SEBI to examine the

representation of the appellant and after an enquiry,

give opportunity of hearing to the appellant and all

affected parties and take a decision in the matter

within a period of eight weeks from that day.

g) Subsequent to the aforesaid decision, the appellant

addressed several letters requesting SEBI to comply

with the decision of the Calcutta High Court dated

July 27, 2016. Ultimately, on September 01, 2016

personal hearing was granted to the appellant and

thereafter on September 08, 2016 the appellant filed

its written submissions in the matter before SEBI.

h) By the impugned order dated September 27, 2016 the

WTM of SEBI has disposed of the complaint by

observing that no case is made out to order

investigation under Section 11C of the SEBI Act.

i) Challenging the aforesaid decision, present appeal is

filed.

3. Mr. Sundaresan learned counsel appearing on behalf of the

appellant submitted as follows:-

a) Entire case of the appellant related to suspicious

trading and abnormal volumes witnessed prior to the 5

corporate announcement i.e. on July 11, 2016 between

3:00 to 3:30 P.M. and on July 12, 2016 between 09:15

A.M. and 10:42 A.M. i.e. just before the "record date"

was announced and thereby made generally available

to the public. Without undertaking a detailed

investigation, the WTM of SEBI is not justified in

holding that the appellant has not provided any

specific evidence supporting its claim regarding

insider trading except the spurt in volume.

b) By referring to a chart, counsel for the appellant

sought to demonstrate that there was sudden change in

the trading pattern in the futures contracts of HPCL on

July 11, 2016, where the futures contract started

trading at a discount. It is submitted that failure on

part of WTM of SEBI to consider aforesaid material

facts clearly show that the impugned order has been

passed without application of mind.

c) In the impugned order it is held that the surveillance

system of SEBI did not produce any alert and even the

stock exchanges did not provide any adverse report on

the trading pattern. It is further held that reports of

the stock exchanges do not establish any connection

between the top buyers and top sellers in the F&O

segment and HPCL its promoters and directors. 6

Without furnishing copies of those reports and other

materials the WTM of SEBI could not have arrived at

a conclusion that it was not a fit case of investigation

under Section 11C of the SEBI Act.

4. For all the aforesaid reasons, it is submitted by counsel for the

appellant that the appeal be allowed by directing SEBI to conduct an

enquiry under Section 11C of the SEBI Act in relation to the abnormal

trading in the HPCL scrip in the F&O segment on July 11, 2016 & July

12, 2016.

5. We see no merit in the above contentions.

6. It is relevant to note that after the Board of Directors of HPCL

recommended final dividend of ` 16 on May 27, 2016, there has been

abnormal movement in the scrip of HPCL. In fact, in para 34 of the

written submissions filed before SEBI the appellant admitted that

between July 01, 2016 and July 05, 2016 there were abnormal movement

in the price of HPCL securities. Thus, on the appellant's own showing,

the abnormal movement in the scrip of HPCL was not only noticed on

July 11, 2016 and July 12, 2016 but in fact such abnormal movement was

noticed even prior to July 11, 2016. Therefore, the argument of the

appellant that there was abnormal movement in the scrip of HPCL on

July 11th & 12th, 2016 due to leakage of Unpublished Price Sensitive

Information ("UPSI" for short) relating to "record date" or "ex- dividend

date" is without any merit. Consequently, findings recorded in the

impugned order that whenever corporate action of a company is 7

announced, it has an immediate effect on the market price of F&O

contracts of the concerned company and hence, there is no reason to

suspect the trades executed on July 11th & 12th, 2016, cannot be faulted.

The WTM of SEBI has also recorded in para 10 of the impugned order,

that in the present case, the dividend declared by HPCL being below 10%

of the market value of HPCL scrip, in terms of SEBI Circulars dated June

21, 2001 and November 02, 2001, the dividend declared by HPCL would

be deemed to be an ordinary dividend, for which no adjustment in the

strike price for F&O contracts was required to be made. Therefore, the

decision of the WTM of SEBI that the correction in the price of HPCL

futures during the time of announcement of dividend/corporate action in

comparison to the spot price appears to be a market trend/phenomenon,

cannot be faulted.

7. In para 11 of the impugned order the WTM of SEBI has given

three basic reasons for rejecting the complaint of the appellant. Firstly, it

is held that SEBI did not receive any alert from its integrated surveillance

system or from the stock exchanges (i.e BSE & NSE) highlighting

abnormal trading in the scrip of HPCL and its F&O contracts on July 11,

2016 and July 12, 2016. Secondly, it is held in the impugned order that

none of the stock exchanges reported any adverse findings during the

same period with regard to the HPCL securities. Thirdly, it is held in the

impugned order that BSE & NSE in their reports noted that they have

analyzed the transactions of top buyers and top sellers on July 11, 2016

and July 12, 2016 and that no pattern of insider trading has been noticed

in the said trades and no connection of theirs could be established with 8

the company, its promoters and directors. There is no reason to

disbelieve the aforesaid findings recorded in the impugned order. Once

the WTM of SEBI on the basis of the material on record arrives at a

conclusion that the top buyers and top sellers on July 11th & 12th, 2016

were not connected to HPCL its promoters and directors, then the

decision of the WTM of SEBI that no further investigation is needed

under Section 11C of SEBI Act deserves acceptance.

8. Argument of the appellant that the reports of BSE & NSE received

by SEBI ought to have been furnished to the appellant and the argument

of the appellant that SEBI ought to have investigated as to whether any

employees of HPCL had leaked the UPSI on July 11, 2016 and July 12,

2016 is also without any merit. In the absence of any specific

information provided in the complaint, SEBI could not enter into rowing

enquiry as to whether any employee of HPCL had leaked UPSI prior to

the announcement on July 12, 2016 especially when abnormal trading

was noticed even prior to July 11, 2016.

9. For all the aforesaid reasons, we see no merit in the appeal.

10. Appeal is accordingly dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 20.01.2017 Prepared & Compared By: PK