SADHANA NABERA v.

SEBI1

FACTS

 In this case, three appeals with common questions of law and facts were combined
together. The adjudicating officer had found the appellants guilty of insider trading
and a penalty of Rs. 5 lacs was levied on each of them.
 The allegation was that the appellants dealt in the shares of Sun Infoways Ltd. (“the
company”) on the basis of unpublished price sensitive information relating to its
taking over the running business of Zap Infotech (“Zap”), a partnership firm.
 The company was proposing to take over the running business of Zap and a
memorandum of understanding (MOU) had been executed between the two.
 Mr. Dilip Nabera (“Nabera”) was the auditor of the company at the relevant time.
Adhunik Finance Pvt. Ltd. (“Adhunik”) a company registered under the Companies
Act is also alleged to have traded in the shares of the company on the basis of the
aforesaid unpublished price sensitive information.
 Mrs. Nabera was a whole time director of Adhunik and was holding 50% of its equity
capital.
 The definition of insider2 was referred by the Adjudicating officer.
 Adjudicating officer took into account the fact that Nabera had been appointed as an
auditor of the company in July 2000 and that the merger of Zap with the company had
been proposed and that Zap had been valued to the tune of Rs.359 crores as on
31.3.2000 on the basis of which the company was to issue 5588200 shares of Rs.10
each at a premium of Rs.840 per share to the promoters/partners of Zap, and came to
the conclusion that the charges levelled against the appellants stood established and
that Nabera, Mrs. Nabera and Adhunik traded in the scrip of the company on the basis
of unpublished price sensitive information which was available to Nabera at the
relevant point of time and that he was an ‘insider’ within the meaning of the
regulations.

1
Appeal No. 26 of 2007.
2
Regulation 2(e), Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992
(“the regulations”).
ISSUES

 Whether Nabera was an ‘insider?

 Whether he was in receipt of unpublished price sensitive information relating to the
merger of Zap with the company?

DECISION

 The definitions of connected person and insider under the regulations was referred
and the tribunal observed that, a director or an officer or an employee of the company
or any other person who holds position as a professional and who may reasonably be
expected to have access to any unpublished price sensitive information in relation to
that company would be a ‘connected person’ within the meaning of the regulations.
 Also, ‘insider’ is a person who is or was connected with the company and who is
reasonably expected to have access to unpublished price sensitive information in
respect of securities of a company and who has received or has had access to such
sensitive information.
 After taking into consideration the powers and duties of an auditor under the
Companies Act, 1956, the tribunal observed that in order to perform his duties, he has
a right of access at all times to the books and accounts and vouchers of the company
wherever kept and he is entitled to require from the officers of the company such
information and explanations as he may think necessary for the performance of his
duties as auditor. An auditor is not concerned with the policy of the company nor does
he sit on judgment on management decisions, policies or the commercial prudence of
transactions.3
 The Tribunal concluded that Nabera had no concern with the information pertaining
to the merger of Zap with the company nor was it a part of his duty to have access to
such information while performing his duties. Further, the tribunal held that as an
auditor Nabera had no access to the information and on that basis alone, he cannot be
said to be an ‘insider’ within the meaning of the regulations.
 Further, the tribunal concluded that Nabera and his wife traded only after the
information relating to the proposed merger was published on the BSE bulletin and it
came to the public domain and thereafter, it ceased to be unpublished price sensitive
information.

3
London & General Bank (No.2), Re, (1895) 2 Ch 673.
  With respect to Adhunik, their pattern of trading was perused and it was found that
during the relevant time period and even before and after the said period, it was
buying and selling the scrip of the company in large quantities though the purchases
were more than the sales.
 The tribunal observed that, if Adhunik through Nabera had traded on the basis of any
unpublished price sensitive information, it would have only purchased the shares of
the company and would not have sold any. However, that was not the case. Further,
Nabera was held not an ‘insider’, and thus it was held that, Adhunik did not trade on
the basis of any price sensitive information.
 Further, it was observed that merely because Adhunik had borrowed money to trade
in the scrip of the company, it cannot be concluded that such trades were executed on
the basis of any price sensitive information.
 The appeal was allowed and the impugned order was set aside.

THE NEW INSIDER TRADING REGULATIONS

SEBI (Prohibition of Insider Trading) Regulations, 2015 was passed by the Securities and
Exchange Board of India. It widens the scope of the previous regulations. It is a much needed
and a welcome change.

Following are the salient features of the 2015 regulations:

 An insider is someone who is either a connected person or is in possession/access to

unpublished price sensitive information. The definition of a connected person is
broadened. It includes people who, not only occupy a particular position in a
company, but are involved in a contractual capacity with the company and also are in
touch with the company and its officers. These people are in a position wherein they
are aware of the operations of the company. This relationship can be either temporary
or permanent. It also must reasonably allow access to unpublished price sensitive
information.
 The definition of price sensitive information has been amended to include other types
of information.
 An insider should not share unpublished price sensitive information on not only a
listed company, but a company which is about to be listed as well.
  During a due diligence, unpublished price sensitive information can be shared.
However, with strict confidentiality and non-disclosure. Also, no trading by the
parties in the securities of the company when they are in possession of unpublished
price sensitive information.

CONCLUSION

Insider trading is a practice wherein trade of a company's securities is undertaken by people

who by the virtue of their work have access to the otherwise unpublished price sensitive
information which can be vital for making investment decisions. In some cases, if the
information becomes public, it is no longer considered to be a case of insider trading. The
new insider trading regime introduces criminal liability for insider trading.
 RELIGARE SECURITIES LIMITED v. SEBI4

FACTS

 This case is an appeal by Religare Securities Limited (“appellant”), a company

registered under the provisions of the Companies Act, 1956 and registered with SEBI
as a stock broker and also as a participant with the two depositories.
 SEBI carried out inspection the records of the appellant from September 24, 2007 to
October 4, 2007 both in relation to its stock broking activities and depository
participant activities for the financial years 2005-06 to 2007-08.
 During the course of inspection, the inspecting team found a large number of
deficiencies/ irregularities committed by the appellant in the maintenance of its
records and it submitted to SEBI two separate reports, one relating to stock broking
activities and the other in relation to depository participant operations.
 The irregularities were not pointed out to the appellant at the time of inspection and
the abovementioned two reports were sent to the appellant for comments.
 Post considering the explanation of the appellant, SEBI decided to initiate
adjudication proceedings against it for violating the provisions of the Securities and
Exchange Board of India Act, 1992, the Depositories Act, 1996 and the Regulations
framed thereunder.
 The adjudicating officer concluded that the appellant had breached the procedures in
regard to the maintenance of records in two matters pertaining to its broking activities
and another seven in regard to its depository participant operations and a monetary
penalty of Rs. 3 lacs was imposed. The current case is an appeal against this order.

ISSUES

 Whether the order passed by the adjudicating officer imposing penalty on the
appellant for the violations was correct?

4
Appeal No. 23 of 2011.
DECISION

 It was observed by the tribunal that the inspecting team did not ask for any
explanation from the management of the company at the time of inspection and they
only submitted two reports pointing out the deficiencies/irregularities.
 According to the tribunal, if the inspecting team at the time of inspection had made a
query to management, then the situation would have been different.
 With regard to the issue of stamping of documents, the appellant had pointed out that
two agreements had stamp papers and were duly crossed/cancelled. The adjudicating
officer had not accepted this on grounds that the date on the agreement was missing
on the stamp paper. The tribunal held that once the name of the parties is written on
the stamp papers and the same have been crossed, it is enough to establish that the
papers have been duly cancelled for the purposes of the agreement and are not capable
of being used for any other purpose.
 On the question of failure to maintain records and details pertaining to the investors
complaint in a proper manner and thereby violating the code of conduct prescribed for
the stock brokers, the tribunal held that in the absence of a finding that the appellant
was not maintaining record in this regard in MS-Excel files as pleaded, the tribunal
cannot agree with the adjudicating officer that there was any deficiency on the part of
the appellant in maintaining records of investors’ complaints.
 The tribunal observed that all the deficiencies found by the adjudicating officer could
have been adequately responded to by the appellant if queries had been made by the
inspecting team at the time of inspection. If this procedure/practice had been
followed, there would have been no scope for an allegation that the supporting
documents were subsequently prepared.
 The purpose an inspection is not punitive and the object is to make the intermediary
comply with the procedural requirements in regard to the maintenance of records.
 A minor discrepancy/irregularity found during the course of inspection is not culpable
and the object of the inspection could be achieved by pointing out the
irregularities/deficiencies to the intermediary at the time of inspection and making it
compliant.
 The appeal was allowed and the impugned order was set aside.