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The Inside Man

Published on Sat, Jun 20,2015 | 09:24, Updated at Mon, Jun 22 at 17:53Source : CNBC-TV18 |   Watch Video :

He’s the most high profile fish SEBI has netted so far. The securities regulator has charged Murugappa group Executive Chairman, A Vellayan with insider trading. While Mr. Vellayan has not traded himself, he stands accused of passing on unpublished price sensitive information of the acquisition of Sabero Organics by Muruguppa group company-Coromandel International. In an interim order, SEBI has linked Mr. Vellayan to suspicious trades in Sabero’s stock. Aayush Ailawadi details SEBI’s case…

The story dates back to May 2011. At the time Muruguppa group owned company Coromandel International was about to acquire Sabero Organics. As group chairman, A Vellayan was privy to unpublished price sensitive information about the imminent acquisition. SEBI in its investigation has traced financial links between Vellayan, his uncle Murugappan; Gopalakrishnan and Karuppiah– the 2 individuals who traded in Sabero’s shares before the acquisition.

On the 23rd & 24th of May, in the year 2011, Mr. Gopalakrishnan purchased 3,19,500 shares of Sabero for nearly 2.7 crore rupees. This was the only trade he had made in 2 years and the trade value was several times his indicated income.

Another individual, Mr. Karrupiah bought and sold 40,750 Sabero shares before the acquisition announcement and though he traded in other shares as well during that period, the Sabero trade amounted to 64% of his transactions.

SEBI found Gopalakrishnan & Karuppiah’s trades unusual and on further investigation found that both were connected to a Mr Murrugappan. Karrupiah is his son-in-law and Gopalakrishnan was funded by Murugappan. On May 28, 2011, Murugappan prematurely redeemed a fixed deposit of 1 crore rupees and transferred the money to his son, Subramaniam who in turn passed it on to Gopalakrishnan. All the transactions took place on the very same day! After the trades, Gopalakrishnan returned the money to Murugappan’s son.

Simone Reis, Co-head, M&A & PE, Nishith Desai Associates

“Sure, if you look at the order, SEBI has done a good job in tracing the money trail between Murguppan, Subramaniam and Gopalakrisnan. That trail has been established and one could allege that given the trading history and given the money trail between these 3 persons it smells sort of fishy!”

The suspicious trades led SEBI to believe that Gopalakrishnan & Karrupiah traded on the basis of unpublished price sensitive information (UPSI). But, how did they find out about the acquisition? To answer that question, SEBI made a connection to Murugappa Group chairman A Vellayan.

It found that Vellayan is Murugappan’s nephew and hence, the regulator alleged a connection with Karrupiah and Gopalakrishnan as well. SEBI’s order also mentions that certain transactions between Muruggapan and Vellayan, namely a 1 crore rupee advance payment to Vellayan for a property transaction that did not materialize, and hence Vellayan returned the 1 crore to Murugappan. But, when this transaction took place is not disclosed. Based on these connections SEBI alleged that Vellayan communicated the unpublished price sensitive information regarding Sabero’s acquisition to Murugappan and others, prompting them to trade the stock. Hence, it has charged all 4 with insider trading and passed an order impounding the unlawful gains.

Since the case dates back to 2011 – the 1992 insider trading regulations apply. Under these regulations, to prove insider trading, SEBI has to prove they were all insiders. One criterion is to prove they had inside information…

Sanjay Asher, Partner, Crawford Bayley & Co.

“Fine, Mr. Velayyan is the Chairman of the Coromandel Group! There was a meeting on 15, May 2011, wherein he attended the meeting, appointed legal advisors, other intermediaries and the due diligence process did commence from that particular day. But, it is just a presumption that Mr. Vellayan because of the ‘distant relationship’ with Mr. Muruguppan has passed on that information to him that there is an impending acquisition of Sabero Organics and therefore the UPSI has been communicated by Vellayan to Muruguppan. Except that there is nothing else.”

…Or, SEBI must show that those who traded were “connected” to an insider. The definition of a connected person includes company officials and their relatives.

Simone Reis, Co-head, M&A & PE, Nishith Desai Associates

“Now, whether under the old regulations or the new regulations, ‘relative’ is something that has been defined. Under the old regulations, it referred back to section 6 of the Companies Act and the schedule that was attached thereto. And even if you look at the list of relatives under the 1956 Companies Act, this lineage would not fall within the list under the Act! Now, even under the new regulations, the definition has become narrower and definitely such a lineage would not fall within the definition of relative or immediate relative under the new regs. So the only link that the SEBI has tried to draw between these two persons seems to be unfounded. It doesn’t lead to the conclusion that there was a deemed connected person incidence here.”

At the heart of this case are suspicious trades in Sabero’s stock, days before the acquisition was announced. But, SEBI’S order does not detail any proof the regulator may have that Vellayan communicated information to the others. Nor does it suggest how Vellayan gained from the trades. The order refers to a monetary transaction between Vellayan and Murugappan but its timing is not disclosed.

Sanjay Asher, Partner, Crawford Bayley & Co.

“As far as Mr. Gopalakrishnan is concerned or Murugupan is concerned or HUF is concerned, fine there is some money trail which is there but that doesn’t mean that Vellayan is responsible for all of that and why are you booking him for that?! Vellayan has nothing to do with the money which was given to Muruguppan for the purpose of acquiring the shares, whether it was given by Subramaniam breaking the FD…”

Simone Reis, Co-head, M&A & PE, Nishith Desai Associates

“I think it’s very important for regulators to know who they are pinpointing to and- we’re not saying that the ‘smell test’ has not been breached, it does smell fishy! But, the question here is who is sort of liable and you can’t just make a scapegoat out of anyone. So, I think SEBI is right to investigate such a matter or look at such a transaction when there has been money flow and there is no real basis as to why such a securities transaction was conducted. Having said that, it needs to be really careful how it alleges how the information was passed. If you see there is no profit motive or alleged profit being made by Mr. Vellayan so that has a very dire consequence!”

This is an interim order and SEBI has given the parties 21 days to respond. It has also directed that the investigation be expedited and preferably completed within 3 months. But the interim order has prompted A Vellayan to step down as group chairman and clouded one of south India’s best known business groups.

In Mumbai, Aayush Ailawadi

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