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SEBI's Insider Trading Bust!

Published on Mon, Jan 16,2012 | 12:57, Updated at Mon, Jan 16 at 13:19Source : Moneycontrol.com |   Watch Video :

High profile accused, phone records and integrated surveillance to establish insider trading charges- it sounds a bit like the Raj Rajaratnam case; doesn't it? Except, it's not. Though there are hints of similarity. I’m talking about two recent SEBI orders finding a promoter, his wife and brother in one case and an independent director and his wife in another - guilty of insider trading. Payaswini Upadhyay has that story.

In March 2008, alarmed by sharp swings in the share price of Orchid Chemicals, market regulator SEBI asked the exchanges to investigate the trading activity in the scrip.

A month later, the exchange reports made no adverse observation but they reported what looked like insider trading by Bala Kaul- wife of VK Kaul, independent director on Board of Ranbaxy Laboratories. After over 3 years of investigation, SEBI in an order last week, charged VK Kaul and his wife of violating insider trading regulations.

SEBI's investigation shows that between 20th and 31st March 2008 – two Ranbaxy subsidiaries Solus & Rexcel obtained board approval for their subsidiary Solrex to purchase Orchid Chemicals shares. The plan was for Solrex to purchase Orchid shares starting 31st March, 2008 in order to make a strategic investment of of upto 200 crore rupees and less than 15%.

Four days before Solrex embarked on its shopping spree, Bala Kaul purchased 50,000 shares of Orchid chemicals and sold them two weeks later for a Rs 43 lakh profit.

SEBI alleged that V K Kaul, as a director on Ranbaxy’s board, was an insider to the subsidiaries’ decision to purchase Orchid shares. And that his wife traded on that inside information.
But Kaul argued that to make a case of insider trading, the person should be an insider of the company whose shares have been traded – in this case Orchid- a company he had no connection to.
 
V Umakanth
Assistant Professor, National University of Singapore
“In this particular case, the argument could be that the information should have come from Orchid Chemicals or a source relatable to Orchid Chemicals whereas in this case, the information came to the independent director from being a director on Ranbaxy. So, yes, this goes against conventional wisdom but there is logic in the argument that in certain cases even outsiders may get entrapped within the concept of insider trading – even if the information hasn’t come from the company, it could affect market as a whole and that’s probably why SEBI has expanded the definition of insider- both in 2002 as well as 2008 to bring in this concept of an outsider trading. So SEBI does have a case to make this argument but it really depends upon how much of weight is provided to these textual semantic questions before an Appellate forum.”
 
Daniel  Ruzumna
Partner, Patterson Belknap Webb & Tyler
“I think, in the United States, the SEC would look at Mr Kaul as an insider. The insider question has to be looked at based on fiduciary responsibility-if the individual in question has fiduciary responsibility to the corporation, to the shareholders. In this case, it appears that Mr Kaul, as an independent director, would have fiduciary responsibility.”
 
Besides denying insider status, V K Kaul also argued that he had no advance knowledge of Ranbaxy’s interest in Orchid. That the information was communicated to him only at the Ranbaxy board meeting on April 22nd much after his wife’s transactions.
 
But SEBI found otherwise. It establishes in its order that in the last week of March 2008, Solus & Rexel board members approached Ranbaxy Managing Director Malvinder Singh to fund the Orchid purchases. Ranbaxy Global finance head Omesh Sethi was also in the know, says SEBI

During that same week V K Kaul had several phone conversations with Malvinder & Sethi- just before his wife purchased Orchid shares.
 
What was discussed is not known but taking a cue from the infamous Raj Rajaratnam case, SEBI relied on those phone records to establish an information link between VK Kaul and Ranbaxy’s management.
 
Daniel  Ruzumna
Partner, Patterson Belknap Webb & Tyler
“I think in the United States, the SEC would look at much the same way as SEBI has. Circumstantial evidence is often relied upon in insider trading type cases. It has determined by the US courts and Second Circuit specifically in this context to be sufficient to for an enforcement charges and even a conviction in a criminal case. So the contact between the management and Mr Kaul would be sufficient in the United States to allow this action to go forward to the jury.”
 
V Umakanth
Assistant Professor, National University of Singapore
“There needs to be some caution while adopting US insider trading cases in the Indian context and there are two levels at which this question can be dealt with. Firstly, at the substantive level, there are differences between the US insider trading laws and Insider trading laws. US is based on a general anti-fraud provision under Rule 10b(5) of the Securities Act which gives a lot of discretion to courts to determine case whereas in India, it is a more rule-based approach where the insider trading law provides for conditions which need to be satisfied. Secondly, even in terms of evidence, Rajratnam case involved wire tap evidence. It also had testimony of witnesses but in the Indian context, in the VK Kaul case, all you have is circumstantial evidence that there were conversations that took place without actually knowing the content thereof”

RS Loona,
Managing Partner, Alliance Corporate Lawyers
Former ED, SEBI
“While it is true that in the case of an insider trading like allegation, it’s not possible to get a direct evidence and regulator may have to depend many a times of circumstantial evidence, but at the same time, the approach of the courts in India has been different. For instance, in the case of Samir Arora, the Appellate Tribunal held that a serious charge like insider trading that cannot be proved merely based on circumstantial evidence or surmises or suspicion.

According to the Tribunal in that case, there has to be a clinching evidence which should show that the person has committed the serious violation. And, in fact, similar kind of approach was adopted by SEBI itself in the matter of insider trade allegation against Reliance Industries when it sold the shares of L&T to Grasim and there again it was held that it has to be shown that the insider has passed to the tipee for the purpose of this charge.”

Clinching evidence or not SEBI imposed a 60 lakh rupee penalty on the Kauls. That was on January 4th. The very next day, SEBI came out with another insider trading order- this time against a promoter- Manoj Gaur, Executive Chairman, Jaiprakash Associates, his wife and brother.
 
Manoj Gaur, Executive Chairman, Jaiprakash Associates, to CNBC TV18 on 9th January, 2011 “We are very hurt by the order. I have no hesitation in reiterating that the learned officer has not taken cognizance of the submissions made by us. It is unfortunate that certain inferences have been drawn on presumptions.” 
 
SEBI’s investigation dates back to 2008. On October 11th that year Jaiprakash Associates made a corporate announcement to the exchanges that it’s Board will consider the quarterly results, rights issue and interim dividend in its meeting on 21st October.
 
On October 12th, the company finished preparing a consolidated trial balance, ahead of its earnings.
 
And on October 21st, its board approved the consolidated quarterly results, declared an interim dividend and approved the rights issue.
 
Interestingly, it is in that same period, on October 13th, 14th and 16th that Chairman Manoj Gaur’s wife Urvashi Gaur and brother Sameer Gaur purchased 8400 shares of the company.
 
SEBI found all 3 guilty of violating insider trading regulations. Manoj Gaur - because he was the insider, had seen the trial balances and knew of the corporate announcements. His wife and brother - because as residents of the same house they were deemed connected persons, who had traded during a closed period.
 
Daniel  Ruzumna
Partner, Patterson Belknap Webb & Tyler
“That’s a weak argument. The fact that someone may live together does not necessarily mean that they share information, particularly confidential information that the insider in this case- Mr Gaur- would know not to share.  Who is to say that the information was not just left on a table and inadvertently seen by one of these individuals or perhaps these individuals have a trading history in this particular security. So that evidence is tenable but its very weak evidence.”
 
In his defense, Manoj Gaur said that though he received the trial balance on October 12th, it served only as an initial indicator. The consolidated results were available to him only on October 17th i.e. after his wife’s and brother’s transactions.
 
Daniel  Ruzumna
Partner, Patterson Belknap Webb & Tyler
“One does not need to know the exact figures or fully synthesized information to have access to unpublished price sensitive information. If one knows the general market direction or whether the results are beating expectations – that is enough to make the information inside information that cannot be used, at least, in the US. So if materials were coming in early October, that information would likely be unpublished price sensitive information even if wasn’t fully synthesized, fully calculated and ready to go to public with the final results.”
 
RS Loona,
Managing Partner, Alliance Corporate Lawyers
Former ED, SEBI
“It is possible for them to make some guess but I don’t think they can be very sure- a company like Jaiprakash Associates- when they say they have 54 subsidiaries spread all over the country, then to assume that the Chairman would be knowing what is going to happen with certain definiteness- I think that would be expecting too much.”
 
Gaur also argued that the information he had, had ceased to be price sensitive as the company had on 11th October announced that that earnings, dividend & rights issue would be considered by the Board on Oct 21st.
 
V Umakanth
Assistant Professor, National University of Singapore
“In the past, arguments have been made that what is important in terms of price sensitivity is only the fact of these corporate actions and the exact terms of that are only secondary in nature. So if that argument were to be made, given the facts that the company had, in the past, declared similar dividends and so on, may actually lead to the conclusion that the information ceased to be unpublished price sensitive information and probably there could be no case for insider trading.”
 
Daniel  Ruzumna
Partner, Patterson Belknap Webb & Tyler
“The announcement on October 11th was not sufficient to take this out of the unpublished price sensitive information category. The information was not fully disclosed- it was disclosed that there would be a possibility of a rights issue and dividend- the Board would consider those issues but the information that whether the Board would approve the rights issue, how much the dividend would be was still confidential inside information that management had access to; the general investing public did not. So that information, at least in the US context would be unpublished price sensitive information and not for an insider to trade.”
 
Interestingly, the order does not ascertain a profit as Urvashi Gaur & Sameer Gaur continued to hold onto their shares during the investigation period. The quantity of shares is not substantial either. But then a violation cannot be excused for any amount. And so SEBI has slapped them with a Rs 30 lakh rupee penalty. The amounts may not be staggering but the message going out is clear – SEBI is watching…closely. 

In Mumbai, Payaswini Upadhyay

 
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