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Ashok Dal & Oil Mills & Others v/s Securities and Exchange Board of India SEBI Bhavan

    Appeal Nos. 254 to 258 of 2022

    Decided On, 13 June 2022

    At, SEBI Securities amp Exchange Board of India Securities Appellate Tribunal

    By, THE HONOURABLE MR. JUSTICE TARUN AGARWALA
    By, PRESIDING OFFICER & THE HONOURABLE MS. MEERA SWARUP
    By, TECHNICAL MEMBER

    For the Appellants: Kritika A. Nahate, Advocate i/b Juris Matrix Partners LLP. For the Respondent: Suraj Chaudhary, Manish Chhangani, Ravishekhar Pandey, Samreen Fatima, Advocates i/b The Law Point.



Judgment Text

Tarun Agarwala, Presiding Officer

1. Even though separate orders have been passed by the Adjudicating Officer (hereinafter referred to as ‘AO’) of Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), the scrip involved is the same and the issue is also the same, consequently, all the appeals are being decided together. For facility, the facts enumerated in Appeal No. 254 of 2022 of Ashok Dal and Oil Mills vs. SEBI are being taken into consideration.

2. The show cause notice alleges that the appellant Ashok Dal and Oil Mills (hereinafter referred to as ‘ADOM’) is a promoter group entity of the company Sanwaria Consumer Ltd. and is a designated person. It was alleged that ADOM through one of its partners Gulab Chand Agrawal had traded in the scrip of the company during the investigation period. Each of the transactions undertaken was more than Rs. 10 lac in value which was above the threshold limit prescribed by the company for seeking pre-clearance by designated person and, consequently, it was observed that ADOM being a designated person under the provisions of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (hereinafter referred to as ‘PIT Regulations’) was required to take pre-clearance from the company before carrying out the aforesaid transactions which was not taken and, therefore, the noticee was required to show cause as to why an enquiry should not be held and penalty should not be imposed under Section 15HB of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) for violation of Clause 6 of the Code of Conduct read with Regulation 9(1) of the PIT Regulations.

3. The appellant admitted the execution of the transactions but justified his stand contending that no pre-clearance was required to be taken, on the ground that shares received or bought were the shares that belong to ADOM and consequently, there was only a correction and not a sell / buy transaction and consequently did not require any pre-clearance.

4. The AO after considering the material evidence on record did not agree with the submissions of the appellants and held that trading / trade as defined under Regulation 2(1)(l) of the PIT Regulations includes buying, selling and dealing in any securities and consequently even trades done from partnership company to a partner of the company is still a trade which requires pre-clearance if it crosses the threshold limit. The AO found that Clause 6 of the Code of Conduct read with Regulation 9(1) of the PIT Regulations was violated and consequently, imposed a penalty of Rs. 5 lacs under Section 15HB of the SEBI Act. Similar is the case of the appellants in other appeals.

5. We have heard Ms. Kritika A. Nahate, the learned counsel for the appellants and Mr. Suraj Chaudhary, the learned counsel with Mr. Manish Chhangani, Mr. Ravishekhar Pandey, Ms. Samreen Fatima, the learned counsel for the respondent.

6. Before proceeding, it would be appropriate to refer to the Regulation 9(1) and Schedule B of the PIT Regulations which are extracted hereunder :-

“9(1). The board of directors of every listed company and [the board of directors or head(s) of the organization of every intermediary shall ensure that the chief executive officer or managing director] shall formulate a code of conduct [with their approval] to regulate, monitory and report trading by its [designated persons and immediate relatives of designated persons] towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B [(in case of a listed company) and Schedule C (in case of a intermediary)] to these regulations, without diluting the provisions of these regulations in any manner.

[Explanation. - For the avoidance of doubt it is clarified that intermediaries, which are listed, would be required to formulate a code of conduct to regulate, monitor and report trading by their designated persons, by adopting the minimum standards set out in Schedule B with respect to trading in their own securities and in Schedule C with respect to trading in other securities.

Note : It is intended that every company whose securities are listed on stock exchanges and every [intermediary] registered with SEBI is mandatorily required to formulate a code of conduct governing trading by [designated persons and their immediate relatives]. The standards set out in the [schedules] are required to be addressed by such code of conduct.”

SCHEDULE B

Minimum Standards for Code of Conduct [for listed Companies] to Regulate, Monitor and Report Trading by [Designated Persons]

“1. ……………..

2. ……………..

3. ………………

4. ………………

5. ………………

6. When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate.”

7. Regulation 9(1) of the PIT Regulations prescribes that the board of directors of a listed company is required to frame a code of conduct in order to maintain minimum standards which are set out in the code of conduct of Schedule B of the PIT Regulations. Clause 6 of the Schedule B provides that such designated person is required to obtain a pre-clearance from the Compliance Officer if the value of the proposed trades crosses the threshold prescribed by the board of directors. In the instant case, the threshold limit with respect to the value of the proposed trades for seeking pre-clearance before trading was Rs. 10 lacs. In the instance case, admittedly, the transactions executed by the appellants were in excess of the prescribed threshold.

8. The contention of the appellants is, that they were not required to obtain pre-clearance before executing the transactions as the shares bought and sold by them, in fact, had belonged to them and, therefore, the transactions were in the nature of correction of name as opposed to buy or sell transactions, since the shares were being returned to the original owner, no pre-clearance was required. It was urged that the shares belong to the partnership firm and since the shares could not be held in the name of partnership firm, they were held and clubbed together with the holdings of the partners which resulted in the transactions crossing the threshold limit. It was contended that the transactions did not amount to buy or sell transactions but was in the nature of correction in the name of the scrip in favour of the partners of the firm. The contention raised cannot be accepted. Even though it is trade executed from a partnership firm in favour of the partners, nonetheless, it is a trade as per Regulation 2(1)(l) of the PIT Regulations which reads as under :-

“2(1)(l). “trading” means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities, and “trade” shall be construed accordingly;

NOTE : Under the parliamentary mandate, since the Section 12A(e) and Section 15G of the Act employs the term ‘dealing in securities’, it is intended to widely define the term “trading” to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pleading etc. when in possession of unpublished price sensitive information.”

9. The aforesaid definition makes it clear that trading means and includes buy, sell or deal in any securities. Whether the trade was made in the name of self or is made in the name of partners of the firm it is a trade and the moment the trade is executed on the stock exchange platform, pre-clearance is required to be obtained under the PIT Regulations if it crosses the threshold limit prescribed by the company. In this regard, we are satisfied with the reasoning adopted by the AO while considering the various decisions of this Tribunal.

10. Consequently, we are of the opinion that since the value of the trades exceeded the threshold limit prescribed by the company, the appellants were required to take pre-clearance from the compliance officer which admittedly they had not taken. Thus, the appellants have violated Regulation 9(1) of the PIT Regulations read with Clause 6 of Schedule B.

11. We find that the AO has reported that there is no material on record to quantify the amount of disproportionate gain or unfair advantage ensued to the appellants by not obtaining pre-clearance for the transactions executed by them. The AO further held that it is not possible to assess the consequent loss caused to the investors as a result of not taken pre-clearance. The AO found it necessary to impose a monetary penalty so that it acts as a deterrent to the appellants in future and consequently, imposed a penalty of Rs. 5 lacs each on the appellants.

12. In our opinion, the violation committed by the appellants is technical as they have transferred the shares of the company in the name of the partners for which no loss was caused to the investors. Considering the aforesaid, that it was only a technical violation, we are of the opinion that in the given facts and circumstances, the imposition of penalty under Section 15HB of the SEBI Act appears to be excessive and on the higher side.

13. Section 15HB of the SEBI Act provides as under :-


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“15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.” 14. The penalty ranges from Rs. 1 lacs to Rs. 1 crore. Considering the technical violation, we are of the opinion that in the given circumstances, a minimum penalty of Rs. 1 lac should be imposed. 15. In view of the aforesaid, while affirming the violations committed by the appellants, we reduce the penalty from Rs. 5 lacs to Rs. 1 lac each to be paid by the appellants within four weeks from today. The appeals are partly allowed with no order as to costs. 16. This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.
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