Chapter 3

Selected Indian Case Studies on Insider Trading

3.1 Introduction
From the preceding chapter we have came to know the types of and
motivations behind insider trading. Insiders play a crucial role in the securities
market. Big market players in the stock market may destabilise securities market
through their insider activities. Insiders or their relatives or connected persons of
the company are using unpublished price sensitive information for their own
benefits. Ultimately, common investors may be hurt and foreign institutional
investors may deter from the securities market. It could be possible to understand
the intensity and gravity of this situation through the analysis of insider trading
cases in India.
The objective of this chapter is to understand the intensity of the problems
of insider trading as well as to review the effectiveness of the Indian insider
trading regulations through the analysis of different court cases on insider trading
in India. This chapter is divided into three sections. Role of Securities and
Exchange Board of India (SEBI) in the context of insider trading cases in India is
discussed in section 3.2. Some selected cases are studied in Section 3.3. Section-
3.4 concludes the chapter.

3.2 Role of SEBI in the context of insider trading cases in India

Since 1991 Indian securities markets have been considered as one of the
leading emerging markets in the world. At the same time it witnessed irregularities
and violation of rules and regulations of securities market of India which may
broadly fall under: (a) price manipulation1; (b) creation of artificial market; (c)
insider trading; (d) public issue related irregularities; (e) irregularities in the event

54
of Mergers and Acquisitions and (f) other misconducts. SEBI Act, 1992 has given
power to the SEBI to investigate different types of cases against violators of such
rules and regulations. Once such case came out to the public or any allegations are
made by the public against market manipulators or insiders then SEBI takes
initiative to investigate those cases. Exhibit- 3.1 shows total number of cases
taken up for investigation and completed by SEBI since its inception in the
yearl992 to Financial Year 2007-08P*.

Exhibit 3.1: No. of cases taken up and completed by SEBI for

investigation from 1992-93 to 2007-08P*
Year Cases taken up Cumulative Cases Cumulative of
for of Cases for Completed Cases Completed
Investigation investigation
1992-93 2 2 2 2
1993-94 3 5 3 5
1994-95 2 7 2 7
1995-96 60 67 18 25
1996-97 122 199 55 80
1997-98 53 252 46 126
1998-99 55 307 60 186
1999-00 56 363 57 243
2000-01 68 431 46 289
2001-02 111 542 29 318
2002-03 125 667 106 424
2003-04 121 788 152 576
2004-05 130 918 179 755
2005-06 165 1083 81 836
2006-07 120 1203 102 938

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2007-08P 25 1228 169 1107

Total 1228 1107

Source: Compiled from SEBI Annual Reports and SEBI Hand Book of Statistics (1992-2008)

*P- Indicates provisional

Data of Exhibit 3.1 has been projected in a comprehensive bar-chart, as

shown below.

Cases taken up and completed by SEBI from 1992-93 to

2007-08P

Year

□ Cases taken up m Cases completed

After formation of SEBI in 1992, it has undertaken 1228 cases for

investigation till 2007-08P out of which 1107 cases have been completed so far.

The rate of progress for completion of the cases is 78%. During 2006-07, 120 new

cases were taken up for investigation by the SEBI as against 165 and 130 cases in

the previous years. Out of the total cases taken up 83% pertained to market
manipulations and price rigging as against 84.6% of those cases in the previous
year2. Other cases pertain to issue related manipulation, insider trading, takeovers

and miscellaneous cases.

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 Insider trading cases in securities market has been investigated by the
SEBI. Insider trading cases taken up and completed by SEBI during the period
from 1996-97 to 2007-08P is shown in Exhibit 3.2.

Exhibit 3.2: Insider trading cases taken up and completed by SEBI

Year Insider Trading Insider Trading % of Completion
Cases taken up Cases Completed against taken up
1996-97 4 -

1997-98 5 -

1998-99 4 -

1999-00 3 5 166.67
2000-01 6 4 66.67
2001-02 16 6 37.50
2002-03 13 14 107.69
2003-04 14 9 64.28
2004-05 7 10 142.85
2005-06 6 8 133.33
2006-07 18 10 55.56
2007-08P 7 28 400.00
Total 103 94 91.26

Source: Compiled from SEBI Annual Reports and SEBI Hand Book of Statistics (1992-2008)
P- Indicates provisional

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Data exhibited in Exhibit 3.2 are shown in a comparative bar diagram as
follows.

Insider trading cases taken up and completed by

SEBI
co
o
Cases taken up and completed
>
ui
rv
om
o
ocn
oi

1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007-
97 98 99 00 01 02 03 04 05 06 07 08P
Year

□ Cases taken up h Cases completed

Comparative analysis of Exhibit 3.1 and Exhibit 3.2 reveal that (i)number
of cases on insider trading are almost 10% of the total number of cases taken up;
(ii) it has completed 94 cases out of 103 cases taken up since its inception (iii)
since 1996-97 to 1998-99 SEBI has taken 13 cases but could not completed a
single case. Whereas in the year 1999-2000 the rate of completion of cases are
more than number of cases taken up in that year. It is important to note that in that
years SEBI has completed some of its pending cases. It is also revealed that over
the years success rate of completion of those cases increases at an extremely fast
pace. For example during four financial years from 2003-04 to 2006-07, SEBI’s
success rate is approximately 82%.

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 Most of the alleged insider trading cases where SEBI took drastic action
has met with a tragic end. The Securities Appellate Tribunal (SAT), where
appeals against SEBI orders were placed, has nullified SEBI’s arguments due to
the lack of concrete evidence or due to misinterpretation and wrong-application of
the provisions by SEBI regulations.

3.3 Analysis of some selected insider trading cases

In our study we have selected some important insider trading cases in India.
These cases include (a) TISCO Case (1992), (b) DSQ Holdings Ltd. vs. SEBI
(1994), (c) Reliance Industries vs. SEBI (2001), (d) Dilip Pendse vs. SEBI (2001),
(e) Rakesh Agrawal vs. SEBI (2001), (f) Samir Arora vs. SEBI (2004), and (g)
Satyam Computer Services Ltd. (2009).

3.3.1 TISCO Case (1992)3

The profit before tax of Tata Iron and Steel Company (TISCO) for the first
half of financial year 1992-93 felt steeply to Rs. 50.22 crore in comparison to
profit of Rs.278.16 crore for the financial year 1991-92 and Rs.238.13 crore for
the financial year 1990-91. Before the announcement of the half yearly financial
results there was intense activity in the activity of volume of TISCO shares traded
between October 22, 1992 and October 29, 1992. Exhibit 3.3 shows the trading
volume of TISCO shares.

Exhibit 3.3: Trading volume of TISCO shares

Date No of shares traded
22.10.1992 3.26 lacs shares
25.10.1992 3.781acs shares
26.10.1992 5.59 lacs shares

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 29.10.1992 9.991acs shares
31.10.1992 Ban on short sales

The price of the share registered a sharp fall of 36.6 % from Rs.335 on
October 27, 1992 to Rs.245 on November 6, 1992. It may, however be noted that
SENSEX4 registered a decline of 8.3% during the same period from 2986.7 points
on October 27, 1992 to 2756 points on November 6, 1992. The sharp fall in prices
of TISCO shares and active trading indicated that insiders who had knowledge of
poor results of the company had manipulated the market to make large short sales.
Bombay Stock Exchange (BSE) authorities initiated investigation. Small investors
were hit badly. BSE authorities claimed that it would not be possible for the
exchange to initiate action even if it was proved that insider trading took place in
the absence of any law against it. Due to the absence of insider trading regulations
in India it was not possible to investigate the case. It may be noted that SEBI
insider trading regulations were issued on November 19, 1992.

3.3.2 DSQ Holdings Ltd. vs. SEBI (1994)5

DSQ Biotech Ltd. (DSQB) (earlier Usta Te Biotech Ltd.) was originally
promoted by M/s. KND Engineering and Technologies Ltd., jointly with Tamil
Nadu Industrial Development Corporation. DSQ Holdings Ltd. (DSQH) is a same
promoter group company of DSQB. The charge against DSQH was that it
indulged insider trading in the shares of DSQB which was promoter Group
Company of DSQH.
The Board of Directors of DSQB in their meeting held on 30 July, 1994
considered rights issue and the same was also communicated to the stock
exchange as per the listing agreement. The purpose of sending information to the
stock exchange was to properly disseminate the information among the public.
The ratio of rights issue was one share for every two shares held. The rights issue

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of DSQB was made for 44, 16,000 equity shares of Rs.10 each for cash at a
premium of Rs.35 per share. The said rights issue of DSQB opened for
subscription on 3rd July, 1995 and closed on 2nd August, 1995.
The erstwhile management of DSQB entered into an agreement in April,
1994 with DSQH Ltd. promoted by Shri Dinesh Dalmia (DD) group. Through the
agreement, the DSQ Holdings Ltd. (DSQH) purchased 44, 98,995 shares of DSQB
at the rate of Rs. 15.94 per share from the erstwhile promoters. Thereafter DSQ
group made an offer as per clauses 40A and 40B of the Listing Agreement to
acquire a further 17,66,400 shares (20% of the paid up capital of the company)
during the last quarter of 1994. The scrip of DSQB prior to takeover of the
company by the DSQ group in April, 1994 was not actively traded on the
exchanges with the price hovering in the region between Rs.12 and Rs.18 during
most part of 1993 and also during the first half of 1994. The scrip witnessed
considerable movement both in terms of price and volume immediately after the
DSQ group took over the company.
DSQH which was connected with DSQB had purchased shares on the basis
of the unpublished price- sensitive information relating to rights issue of DSQB. It
had acquired shares because it was evident from the minutes of DSQB’s board
meeting held on 30 July 1994 and it had passed resolution to make a right issue
which was also communicated to the stock exchange as per listing agreement. The
information of the rights issue of DSQB became public only on 30 September
1994. The transaction has taken place during the period from 1 August 1994 to 30
Septemberl994.
A detailed investigation was carried out by SEBI for two periods i.e. June
1994 to December 1994 and June 1995 to March 1996. It has found that there was
a steep jump in the shares of DSQB both in terms of price and volume with effect
from June, 1994. The scrip increased from Rs.20 to around Rs.91-92. Immediately
after the closure of the rights issue (August 2, 1995), the scrip of DSQB once
again witnessed movements both in terms of price and volume and this movement

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sustained till the first quarter of 1996. The price of scrip also rose from Rs.44.44 to
around Rs.122. Since April, 1996, the scrip of DSQB was not being traded
actively. During the whole calendar year 1997 only 14 trades in the scrip took
place for 1600 shares. During the year 1998, the price of scrip of DSQB also
touched a new low of Rs.8.
From the investigation by the SEBI it was also found that DSQB failed to
submit the actual proof of dispatch of the AGM notices and only submitted a copy
of Form 23 filed with Registrar of Companies (ROC), Chennai. Regulation
2(k)(iii) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 considers
the information regarding issue of shares by way of public, rights, bonus etc. as
unpublished price sensitive information. In this case the DSQH was clearly in an
advantageous position and was much ahead of other investors with the
unpublished price sensitive information relating to the rights issue. Further the
Managing Director of DSQB, Shri K. Gopalkrishnan was also a Director on the
Board of the appellant at the time of Rights Issue. SEBI found that DSQH have
indulged in insider trading in shares of a promoter company DSQB on the basis of
unpublished price sensitive information relating to the issue of rights shares of
company. So, on the ground of violation of Regulation 3(1), SEBI debarred the
company from dealing in securities market for a period of five years.
Both DSQH and DSQB have a common parentage and both the companies
were promoted by the same person i.e. Shri Dinesh Dalmia. DSQH was a
‘connected person’ under regulation 2(c) of the SEBI Insider trading regulations.

3.3.3 Reliance Industries Ltd. (RIL) vs. SEBI (2001)6

The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is
India's largest private sector enterprise, with businesses in the energy and materials
value chain. Group's annual revenues are in excess of US$ 27 billion. The parent

62
company, Reliance Industries Limited is a Fortune Global 500 company and is the
largest private sector company in India.
On 5th Nov 2001, Reliance Industries Ltd (RIL)’s stake in Larsen & Toubro
Ltd (L&T) was 5.32%. RIL had two nominees on the Board of L&T viz. Mr.
Mukesh Ambani & Mr. Anil Ambani. RIL started purchasing shares of L&T and
as a result of which its stake reached upto 10.98% on 12th November, 2001. This
entire block of 2.5 crore shares was sold by RIL to Grasim Industries Ltd (GIL) on
and around 16lh November 2001. This deal was ratified by the Boards of RIL as
well as GIL. Under this transaction the shares were sold Rs. 306.60 per share as
against the ruling market price of Rs. 208.50. For this reason RIL was required to
withdraw its two nominees from the Board of L&T and was prohibited from
dealing in L&T shares for a period of five years. Necessary disclosures were
made to the Stock Exchanges as well as to L&T (the target company). The
chronology of purchase/events is shown in Exhibit 3.4:

Exhibit 3.4: Chronology of purchase/events of RIL7

Date Chronology of Purchase/event
1-10-2001 Holding of RIL Group in Larsen & Toubro (L&T) was 4.38%
31-10- Holding of RIL Group in L&T was 4.80%
2001
5-11-2001 RIL and its sister concerns purchased 12,89,000 shares of L&T
raised its holding to 5.32%
6-11-2001 (a) As per the statement JM Morgan Stanley (JMMS) approached
Grasim India Ltd. (GIL) to acquire stake of RIL in L&T
(b) RIL Group purchased 2,15,45,687 L&T shares raising its
holding to 6.02%
7-11-2001 (a) Grasim constituted an internal task team to evaluate the
proposal received from JMMS

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 (b) RIL purchased 4,86,174 L&T shares that raised its holding to
6.21%
8-11-2001 RIL purchased 37,40,518 L&T shares which raised its holding to
7.69%
9-11-2001 RIL purchased 51,73,173 L&T shares and raised its holding to
9.53%
12-11- (a) RJDL purchased 15,00,206 L&T shares that raised its holding to
2001 10.14%
(b) Arrangements for major parts of the funds were made on 12-
11-2001. A short term loan for Rs.150 crore was sanctioned by
HDFC Bank on 12-11-2001. An amount of Rs.250 crores were
raised through five negotiable commercial papers. Stamp duty of
Rs.12.5 lacs i.e. Rs.2.5 lacs on each negotiable commercial paper
was paid on 12-11-2001 to the General Stamp office. Rs.200 crore
was raised from Bank of America, Nariman Point Branch; offer
letter in this regard for the loan was issued by the Bank of America
on 12-11-2001. An amount of Rs.600 crore was raised by Grasim
on 12-11-2001.
13-11- RIL consolidated its group holdings in L&T on 13-11-2001, which
2001 were held in the name of RIL, Reliance Industrial Investments and
Holdings Limited (RIIHL), Reliance Capital Ltd. (RCL) and
Shreenath Enterprises.
16-11- (a) Shri Nimesh Kampani of JMMS approached RJDL to sell of
2001 L&T shares for a maximum price of Rs.315.
(b) RIL responded on the same day by selling 2.5 crore shares of
L&T at around 50% premium.
(c) Deal between RIL and GIL was finalised in the evening subject
to approval of the respective boards.

64
 (d) GIL issued notice for urgent Board meeting to be held on 18-
11-2001
18-11- (a) RIL Board Committee approves the deal
2001 (b) Grasim Board approved the deal
(c) Stock exchanges were informed about the deal by Grasim
(d) Covenant - Share sale/purchase agreement entered into by RIL
and GIL, with Anil Ambani and Mukesh Ambani were agreeing
not to deal in the shares of L&T for a minimum period of 5 years.
20/21-11- Payment to RIL made by GIL for the deal. The total amount is
2001 Rs.766.5 crore for 2.5 crore shares.
22-11- (a) Shri Mukesh Ambani & Anil Ambani resigned from L&T
2001 Borad.
23-11- Shri Kumarmangalam Birla and Ms. Rajshree Birla were
2001 appointed as directors of L&T.

From the above chronology it has been found that RIL purchased 2.5 crore
shares of L&T with a very short span of time between 5-11-200land 12-11-2001
in the secondary market at prices ranging between Rs.167 to Rs.209 per share. RIL
sold shares to GIL- a Birla group company at a price of Rs. 306.60 per share
involving a total consideration of Rs.766.50 crore. A complaint was made to
SEBI by the Investors Grievances Forum (IGF) to the effect that RIL had indulged
in insider trading by increasing its holding to 10.05% prior to their deal with GIL
and then made a huge profit by selling its entire stake Rs. 306.60 per share as
against the prevailing market price of Rs. 208.50. The thrust of the complaint was
that RIL was aware of the intended purchase by GIL and therefore acted on the
basis of this price sensitive information which was not available to the
shareholders of the L&T who sold their shares to RIL in the secondary market at a
huge premium.

65
 A three bench member of SEBI had held that while the accused acted on
the price sensitive information the same was available to RIL not by virtue of
being insiders in L&T - the company whose shares were bought and sold -but as
directors of RIL. Nominees of RIL appealed to the Securities Appellate Tribunal
(SAT). Then the SAT raised basic questions which were (i) was the information
about the impending deal of REL with GEL price- sensitive and (ii) did REL acted
on the basis of this information for unjust enrichment and to the detriment of the
general investors?
The SAT held that RIL could not be held responsible for the offence of
insider trading on account of the following reasons:
(i) The information of the impending deal was not supposed to emanate
from L&T and in fact did not emanate from L&T. The reason why RIL nominees
on the Board of L&T were aware of the impending deal was not because of their
directorship but due to their position as potential sellers as managing directors of
REL. The Ambani brothers were only two in numbers as compared to the total
number of seventeen members and
(ii) In order to punish the offence of insider trading, price- sensitive
information must come from an insider by virtue of his being an insider. L&T was
not even aware of this deal and in fact was not supposed to know the same. Thus,
it was held that the information about the impending deal could not be treated to
be falling within the ambit of the insider trading regulations.

3.3.4 Dilip Pendse vs. SEBI (2001)8

Nishkalpa was a wholly owned subsidiary of TATA Finance Ltd. (TFL)
which was a listed company. Dilip Pendse was the Managing Director of TFL. On
March 31, 2001, Nishkalpa had incurred a huge loss of Rs. 79.37 crore and this
was bound to effect the profits of TFL. This was basically the unpublished price
sensitive information of which Pendse was aware of. This information was
disclosed to the public only on April 30, 2001. Thus any transaction by an insider

66
between the periods March 31, 2001 to April 30, 2001 was bound to fall within the
scope of insider trading. Dilip Pendse passed this information to his wife who sold
2, 90,000 shares of TEL held in her own name as well as in the name of
companies controlled by herself and her father-in-law. This information was
disclosed to the public a month later.
SEBI made an investigation against Dilip Pendse. After completing
investigation, SEBI concluded that Pendse used unpublished price sensitive
information and he avoided loss. He was found guilty and punished. Penalty of Rs.
5,00,000 was imposed on each of Dilip Pendse, his wife and Nalini Properties
Limited. This was perhaps the simplest case of insider trading which was
successfully handled by SEBI and faced no difficulties in punishing the offenders.

3.3.5 Rakesh Agrawal vs. SEBI (2001)’

Rakesh Agrawal was the Managing Director of ABS Industries Ltd.
Vadodara, a company incorporated under the Companies Act, 1956 (name
subsequently changed to Bayer ABS Ltd.) for more than 25 years. The company
was listed with BSE, NSE, Ahmedabad and Vadodara stock exchanges. The main
business of ABS was production of ABS resins (Acrylonitrile Butadiene Styrene)
and SAN (Styrene Acrylonitrile resins). In July 1995 ABS signed a secret
agreement with ‘Monsanto” to explore the possibility of technical/financial
collaboration while dialogues with other foreign companies continued. At that
time also ABS was exploring the possibilities with a Japanese company. In
November 1995, Monsanto’s worldwide styrenic business was taken over by
Bayer. As a result of this, the contractual rights and obligations under the secret
agreement entered into by ABS with Monsanto were transferred to Bayer. Till the
negotiations are concluded and a decision was finally taken it was not possible to
conclude the ultimate result of the negotiations.
In February 1996, Bayer approached ABS to discuss the possibility of an
association between ABS and Bayer with synergising the technical expertise of

67
both the companies. Since 1996, both the companies had been in continuous
dialogue on this aspect. In May 1996, the Technical Adviser of ABS and Rakesh
Agrawal had further discussion with Bayer. The discussion with Bayer and the
ABS since early May 1996 was at a preliminary stage while both companies were
only investigating the possibility of combining their expertise. However, ABS had
kept all its options open in as much as it continued discussions with the other
potential collaborators as well. In the month of July 1996 a team from Bayer
visited the ABS’s plant to conduct a technical evaluation together with a
preliminary due diligence. In September, 1996 Rakesh Agrawal was requested to
visit Germany by Bayer on his way back from the USA, where he had gone with
his family for a personal visit. The first meeting of legal advisers and merchant
banker of ABS and Bayer was held only to work out legal formalities in Germany
on September 5-6, 1996. Rakesh Agrawal returned to India on 8th September,
1996. During these discussions, Bayer indicated that as per the worldwide policy
of Bayer, any joint venture with Bayer would require that Bayer would control
51% in the joint venture company. Bayer had a majority stake in any company to
which it licensed its technology. In fact it is well known that Bayer has never
licensed any technology in the world where they do not have a majority stake.
Subsequently, the proposal of Bayer was discussed by the directors of ABS
at its meeting held on September 20 1996. The ABS and Bayer had merely
discussed the viability of a possible joint venture but not the details thereof.
Rakesh Agrawal appraised the Board accordingly. At that stage there was no
agreement or understanding between the parties and there was no certainty that the
parties would in fact agree to go ahead with the joint venture. Accordingly the
Board authorised Rakesh Agrawal to undertake further discussions in the matter.
There was no concrete proposal whatsoever before the Board on which it could
take a decision, at that stage. The resolutions passed by the Extraordinary General
Meeting were subject to the approval by the financial institutions. On 29th
September 1996, Rakesh Agrawal visited Germany again, with a view to obtain a

68
definite commitment from Bayer to initiate the said joint venture/merger and to
agree on the terms and conditions on the basis of which the parties would do so.
The experts were involved for the first time at this stage to fix up the methodology
and modality of investment. Bayer had invited their merchant bankers and legal
advisers to be present at the said discussions in Germany. At the said meeting,
several suggestions were made regarding the modalities of the transaction,
including making a preferential allotment to Bayer and also a public offer by
Bayer to the other shareholders of ABS to purchase their shares under the
provisions of the SEBI (Substantial Acquisition and Takeovers) Regulations,
1994. An understanding to proceed with the said joint venture/merger was arrived
at in Germany only on October 1, 1996 for the first time. As soon as an
understanding of the transaction was reached, the BSE, NSE and Vadodara Stock
Exchange were informed of the Board Meeting that was going to be conveyed to
discuss the issue of raising further capital through preferential offer, if any. On 3rd
October, 1996 the decision was only to complete the formalities with reference to
the decision arrived at the meeting. Rakesh Agrawal was present at the meeting
with Bayer officials. It was decided that Bayer would acquire 51% holding in ABS
and that they were ready to concede the day to day protection rights and several
other concessions. Bayer took controlling stake in ABS by acquiring 55,80,000
shares in the allotment made on a preferential basis by ABS at the rate of Rs.70
and 20 percent shares from the existing shareholders at the rate of Rs.80 per share
in a public offer.
When the industry was facing problems, Rakesh Agrawal was trying
seriously to get a joint venture partner to strengthen the company. Since Bayer’s
entry was subject to the condition that it would associate with ABS only if it could
hold 51% share in the capital of ABS that 51% procurement in share capital was
required to be organised. Rakesh Agrawal did not want to bring down his holdings
below 26%. The importance of the magical figure of 26% was that a person
holding 26% of capital had the power to veto down certain major decisions of the

69
company by overriding the special resolution proposed for such purpose. Agrawal
had informed this price sensitive information to his brother-in-law Mr. I.P. Kedia
and instructed him to purchase shares of the company from the market. He had
given loans amounting to Rs.1.5 crore from his own account between 12 -29
September 1996 to Mr. Kedia. He purchased 1,82,500 shares preceding Bayer’s
acquisition of ABS. This was to meet the eventuality of the open offer failing. In
such a case Kedia would sell the shares to Bayer to ensure that Bayer is able to
acquire 51% stake. Agrawal even funded some of the purchases of such shares by
Mr. I. P. Kedia.
Allegations were made that purchases were being made prior to the
announcement of Bayer acquiring controlling shares in ABS. On receiving
complaints SEBI initiated investigation and concluded that the purchase of shares
was doubtlessly made on the basis of unpublished price- sensitive information
available to Agrawal by virtue of his position as managing director and also as the
negotiator with Bayer. Agrawal violated SEBI insider trading regulations and
found guilty. SEBI directed him to deposit a sum of Rs. 34 lacs with the Investor
Protection Funds of National Stock Exchange (NSE) & Bombay Stock Exchange
(BSE) to compensate any investor who is aggrieved by the said act of insider
trading. Subsequently, the SEBI also directed to initiate prosecution under section
24 and adjudication proceedings under section 15-1 read with section 15G of the
SEBI (Prohibition of Insider Trading) Regulations, 1992.
However, on basis of appeal of Rakesh Agrawal, SAT overruled SEBFs
charge on the following grounds:
(i) There was no distinct advantage to the insider by this act. The intention
/motive of the insider are required to be taken into account. It is true that
this regulation does not specifically bring in ‘mens rea’J0 or guilty intention
as ingredient, but that does not mean that the motive can be ignored.
(ii) What is sought to be prohibited is gaining an unfair advantage by the
insider over the public investors at large. If an insider has dealt in

70
 securities without any intention of gaining any unfair advantage then the
charge of insider trading would not be sustainable. In the instant case the
object was not to gain any unfair advantage.
The Supreme Court of India has in the case of Indo China Steam
Navigation Co. vs. Jasjit Singh held that certain statutes impose absolute
prohibition irrespective of guilty intention and have to be interpreted accordingly.
It has found from the show-cause notice that SEBI had not asked Rakesh
Agrawal to show-cause as to why he should not be directed to compensate the
shareholders whose shares were purchased in the relevant period. Even the
compensation amount was calculated arbitrarily by the SEBI. No aggrieved party
has come forward at a later period of time seeking compensation for loss incurred
by the in selling at a higher price than the offer price.

3.3.6 Samir Arora vs. SEBI (2004)11

Alliance Capital Mutual Fund (ACMF) is a mutual fund registered with the
SEBI. This fund is sponsored by Alliance Capital Management Corporation of
Delaware, USA, where parent company is Alliance Capital Management LP
(ACM), U.S.A. Alliance Capital Asset Management (India) Ltd. (ACAML) is the
asset management company of ACMF. ACAML is the subsidiary of Alliance
Capital (Mauritius) P. Ltd. (ACMPL) whose parent company is also ACM. It
seems that towards the second half of 2002, ACM decided to sell its India
business. Samir C. Arora who was then working as head, Asian Emerging Markets
with Alliance, Singapore - an affiliate of ACM - was managing equity funds of
several affiliates of ACM group companies including ACMF. He was also
in-charge of ACM investments in India through the Foreign Institutional
Investments (FII) route. On April 10, 2003 ACML and ACM managed 14.66 lacs
shares of Digital Global Soft (DGL) constituting 4.45 percent of the paid up equity
capital of DGL.

71
 The merger of DGL and Hewlett Packard (HP) at the global level had been
in the offing for quite some time since October, 2002. The due diligence process
was on and the negotiations seem to have reached a critical stage around May/June
2003. On May 2, 2003, DGL appointed M/s Bansi S Mehta12 &Company (BMC)
to recommend a merger ratio for the proposed de-merger of HP ISO Division of
Hewlett Packard (HP) and its merger with DGL. BSM finalised the valuation ratio
for the de-merger on May 7, 2003 and this ratio was discussed in the Board
meeting of DGL on May 12, 2003. The Board however, did not announce the
merger and decided to seek fairness opinion from third party. The ratio was finally
announced by DGL after another Board meeting on June 6-7, 2003. The merger
ratio was perceived to be adverse to the stock market and the price of DGL scrip
felt from Rs.500.50 to Rs.371 on June 9, 2003 because of the announcement of the
merger ratio.
The charge that was brought against Samir Arora is that he had inside
information that the Board meeting of DGL on May 12, 2003 would announce the
merger ratio which was supposed to create an adverse impact on the value of the
scrip. On the basis of this inside information he sold the entire holdings between
May 8, and May13, 2003 which is shown in Exhibit- 3.5. Reasons recorded by
him contemporaneously on files for liquidating the entire holdings on different
dates. These noting are reproduced below13:

Exhibit 3.5: Shares of DGL sold by Samir Arora between May 8-13,2003
Date No. of Shares Minutes recorded by Samir Arora
May 8, 2003 ACMF 1,19,000 Price has rallied nicely- taking profits
ACM 2,18,400
May 9, 2003 ACMF 3,34,562 Event risk in digital too high- getting
ACM 2,50,000 nervous- reducing exposure
May 12, 2003 ACMF 3,34,562 Event risk from tomorrow’s

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 ACM 2,50,000 announcements/results is too high. Bipolar
situation but we do not like to take such risks
post very high volatility in technology stocks
around results/corporate issues.
May 13,2003 ACM 2,11,478 No reasons were available from the
impugned order.

As a result price moved from Rs.537.55 on 2nd May, 2003 to Rs.579.25 on

7th May, 2003. Consequentially made a favourable statement regarding business
prospect of DGL consequent to the proposed merger with HP-ISO on April 30,
2003 and published the same on May 5, 2003 in the Business Standard. Then he
sold all his holdings of the funds of ACMF and ACM managed by him averting a
loss of Rs.23 crore over the next four days.
SEBI alleged that the price of DGL scrip moved up from Rs.575.5 to
Rs.597.25 by making a promising statement that the scrip would be promising
which appeared in the Business Standard on May 5, 2003. SEBI observed that
there was no other reason for Samir Arora to dispose off all of his holdings when
he had made a statement that the scrip was promising. SEBI also based its charge
on the statement made by Managing Director of DGL that he had known Samir
Arora for the past 5-6 years. SEBI concluded that Samir Arora had indulged in
insider trading by liquidating the holdings of DGL on the basis of prior knowledge
of the valuation ratio which was unpublished as well as price sensitive.
The Securities Appellate Tribunal (SAT) overruled SEBI’s charge. The
price- sensitive information which Samir Arora had alleged to have access did not
turn out to be correct because the merger was not announced on May 12, 2003.
Information which finally turned out to be false or least uncertain cannot even be
labelled as information. The sale of securities prior to the board meeting therefore,
can only be considered to be based on his analysis and assessment of the
information available in the public domain. Besides there was an attempt by SEBI

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to show as to how the valuation ratio worked out by a renowned Chartered
Accountant ( Bansi S Mehta) which was given to Samir Arora in a sealed cover
with instructions to open the same only at the Board meeting on 12 May, 2003. It
was also found that Samir Arora had also disposed off holdings in many other
reputed types of scrip like Infosys, Satyam, MTNL and Century Textiles.
Liquidation of entire stock in DGL cannot be construed as insider trading. No
independent proof was available to establish this charge.

3.3.7 Satyam Computer Services Ltd. Case (2009)

Satyam scam is the largest corporate fraud so far in the Indian stock market.
B.Ramlinga Raju, the promoter siphoned off around Rs.7000 crore from his
company. He confessed this fraud by sending an e-mail to the SEBI chairman on
7th January, 2009. Raju in his letter claimed that neither he nor the Managing
Director (Rama Raju, Brother of Ramalinga Raju) took even one rupee/dollar from
the company and had not benefited in financial terms on account of the inflated
results. He also stated that neither he nor his managing director (including their
spouses) sold any share in the last eight years except for a small proportion
declared and sold for philanthropic purposes. In another statement he claimed that
in the last two years net amount of rupees amounting to Rs. 1230 crores was
arranged to Satyam (not reflected in the books) to keep the operations going by
resorting to pledging all the promoters shares and raising from known sources by
giving all kinds of assurances.
Since 2001 the promoter’s stake has come down from 25% to less than
3.45% in January 200914. He took loans from time to time against pledging shares
and willing to forgo them if he could not repay in time or if the margins calls were
triggered. During the last eight years he realised Rs. 2530.87crores (March 2001-
January 2009) by transferring or selling of shares of the company. Exhibit 3.6 is

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shown insider trading made by the promoters especially the chairman of the
company.

Exhibit 3.6: Insider Trading of Promoters Shares15

Period Promoter Quarterly Average Realisation(Rs. in

shares (Crore) Traded price (Rs.) Crore)
March 01 14.40 174 -

June 01 14.40 109 -

September 01 14.33 78 5.44

December 01 14.09 94 22.06
March 02 14.01 138 11.89
June 02 13.85 121 18.88
September 02 13.60 112 28.27
December 02 13.13 124 57.81
March 03 13.05 114 9.36
June 03 12.84 84 17.46
September 03 12.10 109 80.07
December 03 11.56 159 86.50
March 04 10.97 160 93.94
June 04 10.63 156 52.86
September 04 10.31 172 55.84
December 04 10.02 199 57.95
March 05 10.01 198 2.24
June 05 9.74 221 59.04
September 05 9.30 262 115.84
December 05 9.10 316 63.04
March 06 9.10 385 0.69

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 June 06 5.99 370 1148.11
September 06 5.99 382 0.52
December 06 5.98 441 2.57
Mar 07 5.87 471 55.23
June 07 5.87 467 0.00
Sep 07 5.87 459 0.24
December 07 5.86 446 2.51
March 08 5.86 409 1.55
June 08 5.80 475 26.96
September 08 5.80 386 0.00
January 09 3.45 130 454.0
Total 312.88 — 2530.87

From exhibit 3.6, it has found that the promoters of the company sold
312.88 crore shares during the period from March 2001 to January 2009 and
realised Rs.2530.87 crore. Even the top executives of the company including the
interim CEO of Satyam Mr. Ram Mayanpati sold 60 lakh shares in 2008. He sold
9.5 lakh shares when Satyam scrip was around Rs. 300-500 per share. DSP Merrill
Lynch (DSPML) was appointed by Satyam to review the acquisition deal with
Maytas Infra and Maytas Properties Ltd. Both these companies were controlled by
Raju and his son. After examining the books of accounts of Satyam, DSPML had
sent a letter to Satyam stating the material accounting irregularities had been found
in their books of accounts. Thereafter DSPML had terminated their assignments
on 6th January 2009. DSP ML also sent the letter to the SEBI on the following
date.
This scam really hurts the stock market sentiment. Investors have found
themselves in great distress due to share prices felt down drastically. Foreign
Institutional Investors (Fils) are also in a dilemma to invest in Indian stock market.

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A series of actions have been taken by the different investigators to overcome the
situation. Different issues have been raised by the professionals, lawyers,
politicians, academicians, investors and others. Some persons have explained
Satyam episode as financial number game. Others have analysed this issue as
auditors’ negligence16. Questions raised from corporate governance as well as the
role of independent directors perspectives. Issue of insider trading is also equally
relevant regarding the activities of insiders of the company.

3.4 Conclusions
Seven case studies on insider trading in India depict interesting
observations. In several situations insider trading India takes place through broker
management nexus. Managements employ the services of brokers who are quite
close to them to buy and sell shares since the brokers gain knowledge of the likely
trend in scrip price they buy and sell on their own account. Many of the big
brokers are also privy to major happenings in companies. Journalists, government
officials and company executives deal on the basis of insider information. The
financial institutions and banks also trade on insider information. They regularly
buy and sell shares and possess inside information about the company in which
they have invested either in equity or as term loans. The mutual funds floated by
them can always get a feedback on the departments about major happenings of the
company. Finally, there are brokers who search out the advanced tax paid by
companies to get an idea of the trend in earning of the company.
Since its inception in 1992, SEBI has undertaken huge responsibilities to
develop securities market as well as to protect interest of investors. Before
enactment of the SEBI insider trading regulations, no securities regulatory
authority was taken specific measures for regulating and controlling insider
trading. SEBI (Insider Trading) Regulations, 1992 became the first comprehensive
regulations adopted in Indian securities market to combat insider trading. Insiders

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may purchase or sale securities in their own name or tipping inside information to
his relatives, friends or other parties who are connected to him in the context of
purchase or sale. It has been found that regulators’ choice in favour of non-
controversial decisions were the main reasons for not being successful in insider
trading cases. Loosely drafted regulations, technical incompetencies on the part of
the investigation squad were some of the main reasons of not wining the cases of
insider trading. Findings are common almost in all cases within India. In India for
disposal of some of the insider trading cases SEBI has taken more than five years.
Provisions for imposing penalty are also meagre in terms of other developed
markets.
SEBI's periodical announcements and press releases including disclosure of
interest by persons holding 10 per cent or more of company shares, employees of
MFs, etc. are satisfactory. Although it has not been able to check rampant
malpractices, even at the top-most level of company promoters, brokers and
institutional investors. It has to put in more efforts for this.

Notes and References

1 Price manipulation means the act of artificially inflating or deflating the price of
a security

2 SEBI Annual Report, 2006-07, p-104

3
Machiraju, H.R., (2009) “The Working of Stock Exchanges in India”, New Age
International (P) Ltd., pp-164-165

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4 SENSEX is Sensitivity Index. It is constructed by the Bombay Stock Exchange
of 30 top listed companies’ shares.

5 SEBI and Corporate Laws, May23-29, 2005 pp-156-164

6 SEBI and Corporate Laws, April 4- April 10, 2005, pp-96-164

7 SEBI and Corporate Laws, April 4- April 10, 2005 pp-155-156

8 Vyas Amit K. (2006), “Insider Trading : Review of Some Important Cases”,

Chartered Secretary, ICSI, August 2006, pp-1133-1138

9 SEBI and Corporate Laws, January 19-25, 2004, pp-351-420

10 Mens rea- There is a presumption that in any statutory crime the common law,
mental element, mens rea, is an essential ingredient. A crime may or may not
contain an express definition of the necessary state of mind. A statute may require
a specific intention, malice, knowledge, willfulness or recklessness. On the other
hand it may be silent as to any requirement of mens rea and in such a case in order
to determine whether or not mens rea is an essential element of the offence, it is
necessary to look at the objects and terms of the statute.

11 63 CLA 38 (SAT)

12 Bansi S Mehta is a Chartered Accountant also was the former President of the
Institute of Chartered Accountants of India

13 SEBI & Corporate Laws, April 4-April10,2005, p-171

14 After adjusting for splitting of shares

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15 Keshabdev V & Mahalingam Kripa (2009) “Truth be Damned”, Outlook Profit,
January 23, 2009, pp-38-42, Others - Business World, January 26, 2009, Dalai
Street, February 1, 2009, Frontline, February 13, 2009, India Today, January 26,
2009

16 Price Waterhouse Coopers (PwC) has been found negligent in discharging their
coveted role and duties. Two members of the audit team have been arrested and a
show-cause notices issued by the Institute if Chartered Accountants of India
(ICAI) to the Auditors, viz., M/s Price Waterhouse Coopers, Bangalore, M/s
Price Waterhouse Coopers, Kolkata, and M/s Price Waterhouse Coopers, New
Delhi. Show-cause notices were issued to Vadlamani Srinivas, ex-CFO to V.S.
Prabhakara Gupta, ex-Sr. Vice President (Internal Audit) of Satyam.

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