Utsav Pathak vs Sebi

offer assignment for acquisition of the shares of CRISIL Ltd. This

open offer was considered as a sensitive information under the

SEBI (Prohibition of Insider Trading) Regulations, 1992 (‚PIT

Regulations‛ for short). The appellant was an employee of

Morgan Stanley and, during the relevant period, was directly

involved with the activities pertaining to the said offer.

4. CRISIL is a credit rating agency and is registered with SEBI

and its shares are listed on the Bombay Stock Exchange (BSE)

and National Stock Exchange (NSE).

5. On 3rd June, 2013 McGraw Hill Asian Holdings along with

‚persons acting in concert‛(PAC) namely, McGraw Hill Financial

Inc. S&P India LLC and Standard & Poor International LLC made

an announcement of an open offer to acquire up to 1,56,70,372

equity shares of CRISIL which amounted to 22.23% of the total

shareholding of CRISIL. The open offer was made @ Rs.1210/-

per share even though the price of the share on that date on the

stock exchange was Rs.1129.90 ps. per share. The announcement

of the public offer led to an increase in the price of the shares by

almost 20%.

-4-

6. SEBI made an investigation on the trading activities in the

scrip of CRISIL and submitted an investigation report. Based on

the said investigation report, a show-cause notice dated 9th

August, 2017 was issued which was supplanted by another show-

cause notice dated 27th April 2018 directing the appellant to

show-cause as to why penalty should not be imposed. The

charge against the appellant was that he was privy to

unpublished price sensitive information(UPSI), namely,

impending open offer and was also privy to the probable pricing

of the open offer. The show-cause notice alleged that the

appellant is the Tipper and had passed on the price sensitive

information to his sister (Tippee-1) and to the mother-in-law of

his sister (Tippee-2) and to the brother-in-law i.e., the husband of

sister (Tippee-3), and father-in-law of sister (Tippee-4). The

show-cause notice further alleged that Tippee-1 and Tippee-2

traded in the shares of CRISIL and made a profit of Rs.37,98,969/-.

The trading pattern of the Tippees indicated that they had inside

information since the Tippees only traded in the shares of CRISIL

and did not trade in any other shares. It was alleged that the

appellant was not only a ‚connected person‛ but also an

‚insider‛ under the PIT Regulations.

-5-

7. The appellant denied the allegations and pointed out that

even though Tippee-1 was his sister, he did not maintain any

close relationship and, that his sister and Tippees-1, 3 & 4 were

independent persons and were professionals in their own right to

trade in the securities market. The appellant further contended

that there is no evidence in the investigation report to suggest

that the appellant had passed on any information to the Tippees.

8. The AO after considering the material evidence on record

and after giving an opportunity of hearing to the appellant,

found that the appellant was a 'connected person' under

Regulation 2(c)(ii) of the PIT Regulations. The AO also found

that the appellant was an‛ insider'' as per Regulation 2(e) and

that the Tippees were ‛persons deemed to be connected‛ as per

Regulation 2(h)(viii) of the PIT Regulations. The AO further

came to the conclusion on the basis of circumstantial evidence

that the appellant tipped the Tippees with regard to the price

sensitive information and, therefore violated Regulation 3(ii) read

with Clause 2.0 and 2.1 of Schedule I Part B of Model Code of

Conduct for Prevention of Insider Trading for Other Entities. The

AO found that on the basis of the information supplied by the

appellant, the Tippees purchased large quantities of shares of -6-

CRISIL during unpublished price sensitive information (UPSI)

period and sold the said shares immediately after the open offer

was announced. The AO also found that the Tippees' trading

record indicates that earlier they had never traded in large

quantities. The AO after holding the appellant guilty of insider

trading, however, did not impose any penalty.

9. The appellant being aggrieved by the findings of the AO on

the charge of 'insider trading' has filed the present appeal.

10. We have heard Mr. Somasekhar Sundaresan, learned

counsel along with Ms. Shruti Rajan and Mr. Rohan Banerjee,

learned counsel for the appellant, and Mr. Gaurav Joshi, learned

Senior Counsel along with Mr. Abhiraj Arora and Mr. Vivek

Shah, learned counsel for the respondent.

11. Mr. Somasekhar Sundaresan, learned counsel for the

appellant contended that the case of the appellant was not

considered by the AO. It was urged that the statements given by

his sister and by his brother-in-law and father-in-law of his sister

were not considered. If the said statements were considered, one

would find that the Tippees were all independent professional

persons who could take their own decisions logically. Further, -7-

their statements would adequately prove that the appellant was

not having good terms with his sister and the family. The

learned counsel further submitted that the finding of the AO that

the appellant had tipped the Tippees was based on surmises and

conjectures and was not based on any foundational facts. It was

contended that it was based on no evidence. The learned counsel

submitted that merely because the appellant was closely related

to the Tippees could not lead to a finding of guilt without

considering the second part of Regulation 2(e)(i) of the PIT

Regulations which defines an 'insider'. The learned counsel

further submitted that SEBI in its investigation report

investigated one Ajay Bhalla and his firm Kotak Premier

Investment and found that they had traded far more than the

Tippees in question and made a profit of more than Rs.5 crores.

The learned counsel submitted that whereas Ajay Bhalla, etc. has

been let off, the appellant has been found guilty merely on the

ground that he had close relationship with the Tippees. The

learned counsel contended that merely having a close

relationship with the Tippees by itself would not hold him to be

guilty unless there was some further material to draw an

inference from the foundational facts. In this regard, the learned

counsel relied upon a decision of the Supreme Court in -8- Chintalapati Srinivasa Raju v. SEBI, (2018) 7 SCC 443. Reliance

was also made of a decision passed by the Whole Time Member

of SEBI in the matter of A.Vellayan & A R Murugappan dated

12.05.2016 in which the Whole Time Member held that the

finding of guilt on the basis of family relationship was not

proper. Similar view was taken in the matter of Sanjay Gala

decided by the AO on 02.12.2016. The learned counsel also

contended that the decision relied on by the AO was not

applicable and was distinguishable, especially the decision of the

Supreme court in SEBI vs. Kishore R Ajmera (2016) 6 SCC 368

which has no application to the present facts and circumstances

of the case as the said decision was based on circumstantial

evidence.

12. Mr. Gaurav Joshi, learned senior counsel for the respondent

defended the order of AO and contended that in a case of insider

trading, there is hardly any direct evidence and that from the

foundational facts one can infer on a preponderance of

probability or can infer from a circumstantial evidence as to

whether a person is guilty of insider trading. The learned

counsel contended that in the instant case the appellant was a

connected person; was an insider and was privy to the price -9-

sensitive information and, based on these foundational facts the

AO rightly came to a conclusion that the appellant had tipped the

Tippees. The learned senior counsel further contended that the

appellant had access to the price sensitive information. There

was a close relationship between the appellant and the Tippees.

Further, the appellant tried to conceal his relationship with the

Tippees before SEBI and the pattern of trading by the Tippees

leads to an irresistible inference that the appellant had passed on

the information to the Tippees and, therefore, the appellant had

violated Regulation 3(ii) of the PIT Regulations read with Clause

2.20, 2.1 Schedule I of Part B of the Model Code of Conduct and

Regulation 12(1) of the PIT Regulations. In support of his

submission, the learned senior counsel placed reliance on the

decision in USA vs. Raj Ratnam,09Cr.1184 (RJH), V.K. Kaul vs

SEBI in Appeal No.55/2012 decided on 08.10.2012, Chintalapati

Srinivasa Raju vs SEBI (2018) 7 SCC 443, Rajiv Gandhi v. SEBI in

Appeal No.50/2007 decided on 09.05.2008,SEBI vs Kishore R

Ajmera(2016) 6 SCC 368,SEBI vs Kanaiya Lal Baldevbhai Patel

(2017) 15 SCC 753and SEBI vs Rakhi Trading Pvt. Ltd. (2018) 13

SCC 753.

-10-

13. Having heard the learned counsel for the parties at length,

we find that the appellant before us has not denied the fact that

he was privy to the price sensitive information during the UPSI

period. The appellant has also not denied the fact that he was a

connected person as per Regulation 2(c)(ii) of the PIT

Regulations. The appellant has also not denied the fact that he

was an insider as defined under Regulation 2(e) of the PIT

Regulations. The appellant has also not denied the fact that he

had close relationship with the Tippees and therefore, the

Tippees were persons deemed to be connected as defined under

Regulation 2(h)(viii) of the PIT Regulations. In the light of the

aforesaid admitted position which has not been disputed, it is not

relevant for us to dwell on these aspects.

14. The crux of the assertion is, that the appellant has been

found guilty of imparting price sensitive information to the

Tippees based only on proximity of his relationship with the

Tippees. The contention is, that this by itself is not sufficient and

no adverse inference could be drawn only on the basis of

proximity of relationship between the Tipper and the Tippee. -11-

15. In order to appreciate the aforesaid submissions, it would

be appropriate to refer to Regulation 2(e)(i) of the PIT Regulations

which defines ‚insider‛ as under:-

"2(e) "insider" means any person who,

(i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company.."

16. The aforesaid regulation 2(e)(i) is in two parts. The first

part has reference to any person which is connected with the

company or is deemed to be connected with the company. In the

instant case, the fact that the appellant is a connected person has

not been denied nor can there be any doubt that the definition of

a connected person contained in regulation 2(c) would rope in the

appellant under sub-clause (i) thereof, as the appellant was

employed by the Merchant Banker, i.e., Morgan Stanley, and was

deputed to work on the open offer and including it's pricing was

thus privy to the price sensitive information, being directly

involved with the activities pertaining to the open offer. The

second part of the Regulation 2(e)(i) is also required to be

satisfied, namely, that such person must reasonably be expected

to have access to unpublished price sensitive information by

virtue of such connection in respect of securities of a company. -12-

17. According to the appellant, there is no finding of the AO

with regard to the second part of the definition of ‚insider‛ in

Regulation 2(e)(i), and thus, according to the appellant, the

inference drawn only on the strength of proximity of relationship

with the Tippees could not be made the basis of a finding of guilt

under Regulation 3.

18. The submission of the appellant in this regard is patently

erroneous. Both parts of Regulation 2(e)(i) are fully applicable

upon the appellant namely, that he is a connected person which

is admitted by the appellant and that he was in possession and

had access to the unpublished price sensitive information. In this

regard, there is ample evidence on record, namely, the statement

of the Managing Director of Morgan Stanley who stated that the

appellant was one of the employees who was working on the

open offer assignment of CRISIL and was privy to the price

sensitive information. Thus, in our view, both parts of the

definition clause of ‚insider‛ as defined under Regulation 2(e)(i)

are fully applicable upon the appellant.

19. The contention of the learned counsel for the appellant that

the inference of providing sensitive information by the appellant -13-

to the Tippees was not inferred from any foundational facts is

patently erroneous. In this regard, we may note that it is a

fundamental principle of law that proving of an allegation

levelled against a person can be derived either from direct

substantive evidence or can be inferred by a logical process of

reasoning from the totality of attending facts and circumstances

surrounding the allegations made and levelled. The Supreme

Court in SEBI vs. Kishore Ajmera( 2016) 6 SCC 368 held that in

the absence of direct evidence, the court cannot become helpless

and that the court can take notice of immediate and proximate

facts and circumstances surrounding the events and reach to a

reasonable conclusion. The Supreme Court held that the test

would always be as to what inferential process that a

reasonable/prudent man would adopt to arrive at a conclusion.

20. In this regard, the decision in Raj Ratnam's case is relevant

wherein the relevance of circumstantial evidence relating to an

insider has been culled out as under:-

"...Moreover, several other Courts of Appeals have sustained insider trading convictions based on circumstantial evidence in considering such factors as "(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the -14-

trades or the relationship between the tipper and the tippee."

United States v. Larrabee, 240 F.3d 18, 21-22 (1st Cir. 2001)..."

21. Taking a cue from the decision in Ajmera's case and Raj

Ratnam's case, we find the foundational facts as under:-

A. The appellant was a connected person and was an

insider as per the PIT Regulations and was privy to

the price sensitive information and was directly

involved with the activities pertaining to the open

offer.

B. The appellant had close relationship with the Tippees.

C. During the investigation, the appellant made attempts

to conceal his relationship with the Tippees, as well as

tried to dilute his role in the open offer process.

D. The trading pattern of the Tippees makes it

apparently clear that the Tippees had prior

information with regard to the open offer. To

elaborate, we find that the Tippee-1 i.e., the sister of

the appellant purchased 4000 shares of CRISIL on

31/5/2013 and sold it on the day when the open offer

announcement was made on 3/6/2013. Similarly,

Tippee-2 purchased 15000 shares on 14/5/2013, -15-

20/5/2013, 21/5/2013 and 24/5/2013 and sold it on

4/6/2013.

E. The Tippees only traded in the shares of CRISIL and

did not trade in any other shares.

F. Tippee 2 had borrowed large amount [Rs. 1 cr] and

sold off existing holdings etc to finance the buy orders

of CRISIL shares thereby effectively putting all her

eggs in one basket which is a highly abnormal

investment behavior.

G. Purchase of large chunks of shares and selling it

immediately after announcement of the open offer

without any plausible cause is suspicious.

H. The Tippees were also charged for insider trading and

violation of the PIT Regulations. The Tippees filed a

Settlement Application which was allowed on

payment of an amount.

22. From the aforesaid foundational facts, the circumstantial

evidence or on a preponderance of probability by a logical

process of reasoning from the totality of the attending facts and

circumstances as stated aforesaid, an irresistible inference can be

drawn that the appellant had passed on the price sensitive -16-

information regarding the open offer to the Tippees. Such

inference taken from the immediate and proximate facts and

circumstances surrounding the events is reasonable and logical

which any prudent man would arrive at such a conclusion. The

Supreme Court in Kanhaiyalal Patel (supra) held that an

inferential conclusion from proved and admitted facts would be

permissible and legally justified so long as the same is reasonable.

23. In the light of the aforesaid, the decisions cited by the

learned counsel for the appellant on the issue that a person

cannot be held guilty only on the strength of proximity of

relationship with the Tippee are distinguishable on facts and are

not applicable in the instant case. We find from the record that

there is ample evidence to draw a reasonable inference that the

appellant had passed on the price sensitive information to the

Tippees and, consequently, we are of the opinion that the order of

the AO does not suffer from an error of law.

24. The appeal fails and is dismissed with no order as to costs.

25. 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 -17-

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.

Digitally signed by TARUN

TARUN AGARWAL DN: c=IN, st=Uttar Pradesh, 2.5.4.20=a0e08b2d80e9d23c2c Sd/-

2aa3e16780d684adad6bc9e81 0de2d7b0c28efd35557c9, Justice Tarun Agarwala AGAR postalCode=211001, street=B/ A,NYAYA MARG ALLAHABAD, serialNumber=095f8b286bb0b 1cd07ff676611f4f5e7999727d4 Presiding Officer WAL 04aa38ca422f9d3529bdb8a3, o=Personal, cn=TARUN AGARWAL Date: 2020.06.12 12:14:57 +05'30' Sd/- Dr. C.K.G. Nair Member

Sd/- Justice M.T. Joshi Judicial Member

12.06.2020 dg