The Supreme Court yesterday absolved B Ramalinga Raju’s brother-in-law Chintalapati Srinivasa Raju (appellant) of insider trading charges..A Bench of Justices Rohinton Fali Nariman and Navin Sinha passed this judgment in an appeal against the verdict of the Appellate Tribunal..Background.The appellant was an Executive Director of Satyam Computer Services Limited (SCSL) from 1993 to 2000 and a non-executive director from 2000 to 2003..The appellant was confined to operating a joint venture company of SCSL, namely, Satyam Enterprise Solutions Private Limited (SES). The appellant stated that he was never involved in the day to day affairs of SCSL. In the said joint venture company, 80 percent shareholding was held by SCSL and the appellant held the remaining 20 percent shares. SES merged into SCSL pursuant to a scheme of arrangement, approved by the Andhra Pradesh High Court in 1999, as a result of which the appellant was issued 8,00,000 equity shares of SCSL..After various subsequent transactions, the shareholding of the appellant increased to 76,50,000 equity shares of SCSL. The appellant sold his shares in SCSL from February 22, 2001, to December 2008..After the Satyam scam came to light, a show cause notice was issued to the appellant. The said notice stated that since the appellant was a promoter and director of SCSL, he was liable as an “insider”, having knowledge of unpublished price sensitive information (UPSI), as a result of which he stood to gain by selling shares which he owned at an inflated value..The appellant replied to the show cause notice, taking detailed factual grounds as well as grounds in law, stating that he could not be said to be an “insider” as defined by the SEBI (Prohibition of Insider Trading Regulations), 1992 (1992 Regulations)..SEBI Order.By an order dated September 10, 2015, the Whole Time Member of the SEBI, after extracting relevant sections of the SEBI Act, 1992 and the relevant regulations referred to in the show cause notice, held that the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of B Ramalinga Raju would also rope the appellant in..After referring to Regulations 2(c) and 2(e) of the 1992 Regulations, the Whole Time Member held that being a director of SCSL, the appellant was a “connected person” under Regulation 2(c) and, therefore, an “insider” under Regulation 2(e). The Whole Time Member went on to hold that the fact that the books of accounts of SCSL were fabricated and manipulated since 2001 remains within the knowledge and possession of “insiders” who were reasonably expected to have access to them..When it was sought to contend that the Special Court, Enforcement Directorate and Serious Frauds Investigation Office (SFIO) have given findings that only B. Ramalinga Raju and his cohorts were involved in the manipulations of accounts of SCSL, and had hidden the same from and deceived the rest of the board of directors, the Whole Time Member stated that SEBI’s investigation is independent and separate from that of other investigation agencies. The SEBI further stated that since the appellant was part of the board of directors and declared as a promoter in disclosures filed by SCSL with stock exchanges, and being a co-brother of B. Ramalinga Raju, he was, therefore, closely connected with SCSL and its Chairman and “could have in all probability known about affairs of Satyam Computers including the claimed wrong disclosure of him being a promoter”..Importantly, it was held that the appellant had no role in the fraud committed by B. Ramalinga Raju and his cohorts. It was then held that the appellant was barred from accessing the securities market for a period of 7 years. Further, the appellant was to disgorge the amount mentioned against his name, which is an amount of Rs. 136.64 crores, for the entirety of the period, till he sold his shares i.e. up to December 2008..Appellate Tribunal.An appeal to the Appellate Tribunal was largely dismissed by the majority judgment. The majority judgment held that it would not be necessary to decide whether the appellant was a promoter of SCSL. It further went on to construe Regulation 2(e) of the 1992 Regulations stating that it would be enough that the appellant was a director until January 2003, which is after the date of occurrence of UPSI, which took place on and from 31.3.2001. Since there is no real difference between an executive and a non-executive director, he would reasonably be expected to know about the fraud and manipulation by the Chairman and his cohorts, as he was closely connected to the same, being his co-brother..However, the appellant was given relief to the extent that under the Explanation to Regulation 2(e) of the 1992 Regulations, the appellant could only be held liable for a period of six months beyond his resignation as a director i.e. upto July 2003..Supreme Court.The Court first dealt with Regulation 2(e)(i) of 1992 Regulations which deals with “insider”. The said regulation reads as follows:.(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, or (ii) has received or has had access to such unpublished price sensitive information;.The Court noted that Regulation 2(e)(i) is in two parts. The first part has reference to any person who is connected with the company or is deemed to be connected with the company. The Court held that there can be no doubt that the definition of “connected person” contained in Regulation 2(c) would rope in the appellant under sub-clause (i), as the appellant was undoubtedly a director of SCSL upto 2003..However, it held that the second limb of clause 2(e)(i) also has to be satisfied, which is 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. The court then noted that it has been held in a series of judgments that the word “and” should be given its ordinary meaning and should be understood in a conjunctive sense unless it would lead to an absurd situation or an unintelligible result..Hence, the court concluded that the view of the Appellate Tribunal, in giving effect to only the first part of Regulation 2(e)(i) of the 1992 Regulations, cannot be sustained in law..The Court then proceeded to place extensive reliance on the minority judgment of the Appellate Tribunal. Regarding the interpretation of “and” in Regulation 2(e) (i), the Court noted, that the Minority judgment correctly brings out the role of the expression “and” contained in Regulation 2(e)(i)..“The judgment also correctly appreciates the difference in language in Regulation 3 before and after it was amended in 2002 and contrasts the expression “on the basis of” with the expression “when in possession of”..Regarding the knowledge of the appellant on the doings of his brother-in-law and the possession of UPSI, the court placing reliance on Minority judgment of noted that all the actual promoters disposed of their shareholding in SCSL because they were aware of the credit crunch faced by SCSL. The fact that the appellant continued to retain a substantial shareholding in SCSL right till the end of 2008 clearly points to lack of possession of UPSI..Further, the last transaction of sale of shares by the appellant on was December 22, 2008, which was a substantial chunk of shares, was made by the appellant just like any other shareholder of SCSL. News had got out into the market that the merger proposal of SCSL with Maytas Infra Limited and Maytas Properties was not going ahead. The hysteria in the share market resulted in a steep drop in the price of shares of SCSL. The fact that the appellant disposed of a huge chunk of his shareholding on 22.12.2008 to avail of the price on that date completely negates the inference that there was any information flow between B. Ramalinga Raju, B. Rama Raju, and the appellant..“The fact that the appellant was not involved with fraudulent manipulation is clear from the fact that he ceased to be an executive director in the year 2000. Fraudulent manipulation began only from 2001 onwards. It was also considered significant by the minority judgment that the appellant was not a nominee of SCSL on the board of directors of Satyam Infoway, but of another third-party investor”, the Court noted..It, therefore, held that the mere fact that the appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed..The court further noted that after he resigned as executive director, the appellant devoted all his energies to the businesses he was running as a result of which the salary he was being paid by SCSL was discontinued..It, therefore held that the minority judgment of Appellate Tribunal is correct both in law and on facts and hence, allowed the appeal the appeal is allowed and set aside the majority judgment of the Appellate Tribunal..The Court also absolved the sons and mother of B Ramalinga Raju of similar charges against them..Read the judgment below.
The Supreme Court yesterday absolved B Ramalinga Raju’s brother-in-law Chintalapati Srinivasa Raju (appellant) of insider trading charges..A Bench of Justices Rohinton Fali Nariman and Navin Sinha passed this judgment in an appeal against the verdict of the Appellate Tribunal..Background.The appellant was an Executive Director of Satyam Computer Services Limited (SCSL) from 1993 to 2000 and a non-executive director from 2000 to 2003..The appellant was confined to operating a joint venture company of SCSL, namely, Satyam Enterprise Solutions Private Limited (SES). The appellant stated that he was never involved in the day to day affairs of SCSL. In the said joint venture company, 80 percent shareholding was held by SCSL and the appellant held the remaining 20 percent shares. SES merged into SCSL pursuant to a scheme of arrangement, approved by the Andhra Pradesh High Court in 1999, as a result of which the appellant was issued 8,00,000 equity shares of SCSL..After various subsequent transactions, the shareholding of the appellant increased to 76,50,000 equity shares of SCSL. The appellant sold his shares in SCSL from February 22, 2001, to December 2008..After the Satyam scam came to light, a show cause notice was issued to the appellant. The said notice stated that since the appellant was a promoter and director of SCSL, he was liable as an “insider”, having knowledge of unpublished price sensitive information (UPSI), as a result of which he stood to gain by selling shares which he owned at an inflated value..The appellant replied to the show cause notice, taking detailed factual grounds as well as grounds in law, stating that he could not be said to be an “insider” as defined by the SEBI (Prohibition of Insider Trading Regulations), 1992 (1992 Regulations)..SEBI Order.By an order dated September 10, 2015, the Whole Time Member of the SEBI, after extracting relevant sections of the SEBI Act, 1992 and the relevant regulations referred to in the show cause notice, held that the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of B Ramalinga Raju would also rope the appellant in..After referring to Regulations 2(c) and 2(e) of the 1992 Regulations, the Whole Time Member held that being a director of SCSL, the appellant was a “connected person” under Regulation 2(c) and, therefore, an “insider” under Regulation 2(e). The Whole Time Member went on to hold that the fact that the books of accounts of SCSL were fabricated and manipulated since 2001 remains within the knowledge and possession of “insiders” who were reasonably expected to have access to them..When it was sought to contend that the Special Court, Enforcement Directorate and Serious Frauds Investigation Office (SFIO) have given findings that only B. Ramalinga Raju and his cohorts were involved in the manipulations of accounts of SCSL, and had hidden the same from and deceived the rest of the board of directors, the Whole Time Member stated that SEBI’s investigation is independent and separate from that of other investigation agencies. The SEBI further stated that since the appellant was part of the board of directors and declared as a promoter in disclosures filed by SCSL with stock exchanges, and being a co-brother of B. Ramalinga Raju, he was, therefore, closely connected with SCSL and its Chairman and “could have in all probability known about affairs of Satyam Computers including the claimed wrong disclosure of him being a promoter”..Importantly, it was held that the appellant had no role in the fraud committed by B. Ramalinga Raju and his cohorts. It was then held that the appellant was barred from accessing the securities market for a period of 7 years. Further, the appellant was to disgorge the amount mentioned against his name, which is an amount of Rs. 136.64 crores, for the entirety of the period, till he sold his shares i.e. up to December 2008..Appellate Tribunal.An appeal to the Appellate Tribunal was largely dismissed by the majority judgment. The majority judgment held that it would not be necessary to decide whether the appellant was a promoter of SCSL. It further went on to construe Regulation 2(e) of the 1992 Regulations stating that it would be enough that the appellant was a director until January 2003, which is after the date of occurrence of UPSI, which took place on and from 31.3.2001. Since there is no real difference between an executive and a non-executive director, he would reasonably be expected to know about the fraud and manipulation by the Chairman and his cohorts, as he was closely connected to the same, being his co-brother..However, the appellant was given relief to the extent that under the Explanation to Regulation 2(e) of the 1992 Regulations, the appellant could only be held liable for a period of six months beyond his resignation as a director i.e. upto July 2003..Supreme Court.The Court first dealt with Regulation 2(e)(i) of 1992 Regulations which deals with “insider”. The said regulation reads as follows:.(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, or (ii) has received or has had access to such unpublished price sensitive information;.The Court noted that Regulation 2(e)(i) is in two parts. The first part has reference to any person who is connected with the company or is deemed to be connected with the company. The Court held that there can be no doubt that the definition of “connected person” contained in Regulation 2(c) would rope in the appellant under sub-clause (i), as the appellant was undoubtedly a director of SCSL upto 2003..However, it held that the second limb of clause 2(e)(i) also has to be satisfied, which is 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. The court then noted that it has been held in a series of judgments that the word “and” should be given its ordinary meaning and should be understood in a conjunctive sense unless it would lead to an absurd situation or an unintelligible result..Hence, the court concluded that the view of the Appellate Tribunal, in giving effect to only the first part of Regulation 2(e)(i) of the 1992 Regulations, cannot be sustained in law..The Court then proceeded to place extensive reliance on the minority judgment of the Appellate Tribunal. Regarding the interpretation of “and” in Regulation 2(e) (i), the Court noted, that the Minority judgment correctly brings out the role of the expression “and” contained in Regulation 2(e)(i)..“The judgment also correctly appreciates the difference in language in Regulation 3 before and after it was amended in 2002 and contrasts the expression “on the basis of” with the expression “when in possession of”..Regarding the knowledge of the appellant on the doings of his brother-in-law and the possession of UPSI, the court placing reliance on Minority judgment of noted that all the actual promoters disposed of their shareholding in SCSL because they were aware of the credit crunch faced by SCSL. The fact that the appellant continued to retain a substantial shareholding in SCSL right till the end of 2008 clearly points to lack of possession of UPSI..Further, the last transaction of sale of shares by the appellant on was December 22, 2008, which was a substantial chunk of shares, was made by the appellant just like any other shareholder of SCSL. News had got out into the market that the merger proposal of SCSL with Maytas Infra Limited and Maytas Properties was not going ahead. The hysteria in the share market resulted in a steep drop in the price of shares of SCSL. The fact that the appellant disposed of a huge chunk of his shareholding on 22.12.2008 to avail of the price on that date completely negates the inference that there was any information flow between B. Ramalinga Raju, B. Rama Raju, and the appellant..“The fact that the appellant was not involved with fraudulent manipulation is clear from the fact that he ceased to be an executive director in the year 2000. Fraudulent manipulation began only from 2001 onwards. It was also considered significant by the minority judgment that the appellant was not a nominee of SCSL on the board of directors of Satyam Infoway, but of another third-party investor”, the Court noted..It, therefore, held that the mere fact that the appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed..The court further noted that after he resigned as executive director, the appellant devoted all his energies to the businesses he was running as a result of which the salary he was being paid by SCSL was discontinued..It, therefore held that the minority judgment of Appellate Tribunal is correct both in law and on facts and hence, allowed the appeal the appeal is allowed and set aside the majority judgment of the Appellate Tribunal..The Court also absolved the sons and mother of B Ramalinga Raju of similar charges against them..Read the judgment below.
