Kundan Lal vs Securities And Exchange Board Of India And Others

Tarun Agarwala, Presiding Officer

The present appeal has been filed against the order dated December 24, 2020 passed by the Adjudicating Officer (“AO†for convenience) of

the Securities and Exchange Board of India (“SEBI†for convenience) imposing a penalty of Rs. 3,00,000/-(Rupees Three lakhs Only) for

violation of Regulation 9(1) and 9(3) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations, 2015â€​ for convenience).

The facts leading to the filing of the present appeal is, that the appellant was the compliance officer in Sonata Software Limited. One of the

employees of the company, namely, Mr. Mohammad Naveen Ajmal sold some shares of the company valuing more than Rs. 10,00,000/- on

September 04, 2018 without availing pre-trading approval and further did not intimate the company about the transaction within two working days as

stipulated under the PIT Regulations, 2019. The said transaction was eventually disclosed to the stock exchanges on October 24, 2018. Since there

was a delay, a show cause notice dated November 06, 2020 was issued to show cause why action should not be taken for violation of Regulation 9(1)

and 9(3) of the PIT Regulations, 2015.

The contention of the appellant before the AO was that he came to know of the aforesaid transaction only on October 22, 2018 when he was doing

the verification of the shareholding pattern for the quarter ended September 30, 2018 and found that one employee of the company had made certain

transactions. It was also contended that he made an enquiry from the employee on October 22, 2018 and directed him to submit Form C which he did

on October 23, 2018 and the necessary disclosure under Regulation 9(1) and 9(3) of the PIT Regulations was made on October 24, 2018. It was thus

contended that there was no violation.

The AO after considering the material evidence on record found the appellant to be guilty on the basis of a letter submitted by the company

indicating that the company had came to know about the transaction on September 10, 2018 from the BENPOS report which was submitted by the

Registrar and Transfer Agent (RTA). Based on this information the AO came to the conclusion that the appellant being the compliance officer was

also aware of the information about the transaction on September 10, 2018.

Having heard the learned senior counsel/ learned counsel for the parties, we are of the opinion that the approach adopted by the AO is erroneous

and cannot be sustained. In this regard, Regulation 7(2) (a) and (b) of the PIT Regulations, 2015 are extracted hereunder:-

“7(2) Continual Disclosures.

(a) Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or

disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of

transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified;

(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading

days of receipt of the disclosure or from becoming aware of such information.

Explanation. - It is clarified for the avoidance of doubts that the disclosure of the incremental transactions after any disclosure under this

sub regulation, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause (a) of sub-

regulation (2).â€​

A perusal of the aforesaid provision indicates that the company is required to notify the particulars of such trading to the stock exchange within two

trading days of receipt of the disclosure or from becoming aware of such information.

In Avenue Supermarts Limited vs. Securities and Exchange Board of India Appeal No. 298 of 2020 decided on January 17, 2022 this Tribunal

held:-

“10. Under 7(2)(a) every promoter, employee and director is required to disclose such securities acquired or disposed of within two

trading days of such transaction to the Company if the value exceeds 10 lakhs. Under Regulation 7(2)(b) every Company shall notify the

particulars of such trading to the stock exchange within two trading days of receipt of the disclosure or becoming aware of such

information. In our opinion, the burden lies upon the Company to notify the particulars of such transaction to the stock exchange within two

trading days from the receipt of the disclosure from the promoter, employee and director under Regulation 7(2)(a) or becoming aware of

such information. The words “becoming aware of such information†does not mean the information given by the promoter, employee or

director under Regulation 7(2)(a) but takes into its fold such information received from any other source. The intention of the provision is,

that the moment the Company becomes aware of such transaction it triggers the disclosure requirement under Regulation 7(2)(b) of the PIT

Regulations. Thus, it is not necessary that the information is required to be given to the Company in Form C from the promoter, employee or

director under Regulation 7(2)(a) of the PIT Regulation. In our opinion, the information can come from any other source and not necessary

in the prescribed Form C.â€​

Regulation 9(1) and 9(3) of the PIT Regulations cast an obligation upon the compliance officer to administer the code of conduct and other

requirements under these Regulations. Therefore, it became essential to the compliance officer to report the transactions within two trading days to

the stock exchange. In the instant case, the appellant categorically stated that he came to know about the transaction made by the employee on

October 22, 2018 on verification of the shareholding pattern for the quarter ended September 30, 2018 and immediately thereafter he made an enquiry

from the employee and asked him to submit Form C which the employee did on October 23, 2018 and thereafter the information was notified to the

stock exchange on October 24, 2018. This explanation has not been disputed nor disbelieved in the impugned order. The AO on the basis of the

explanation given by the Company that the Company came to know about the transaction from the BENPOS report on September 10, 2018 has been

taken it into consideration without taking into the explanation submitted by the appellant. In our view, this is not helpful as there is no finding that the

appellant became aware of the transaction made by the employee on September 10, 2018 on the basis of the BENPOS report.

In Avenue Supermarts Limited (Supra) this Tribunal also held that BENPOS report cannot be relied upon for the purpose of Regulation 7 as it is for

a different purpose under the Depositories Act. For facility, paragraph 11 is extracted hereunder:-

“11. We are of the opinion, that reliance made by the AO on Benpos report is incorrect. In the first instance, the data provided in the

Benpos report has a limited information and is for a different purpose under the Depositories Act and cannot be treated as a source for

disclosure requirement under the PIT Regulations. Further, the Benpos report does not disclose Permanent Account Number (PAN) of the

employee and only discloses the depository participant identity (DP ID) and through the DP ID it is not possible to collate or locate the

transaction made by the employee. Further, the Benpos report being too bulky, it is not possible for the Company to search for such

transactions on a weekly basis of shares which are liquid and where huge transactions are made on a daily basis. Therefore, in our

opinion, it is not practical for the Company to scan the Benpos report for the purpose of making a possible disclosure under Regulation

7(2)(b) of the PIT Regulations. Therefore, in our view, reliance on Benpos report is patently erroneous. It has been brought to our notice

that in a similar matter in the case of ITC Ltd. the AO found that the Benpos report cannot be relied upon for the purpose of making a

disclosure by the Company under Regulation 7(2)(b) of the PIT Regulations.â€​

In view of the aforesaid, we are of the opinion that the finding given by the AO that the appellant came to know about the transaction done by the

employee on the basis of the BENPOS report on September 10, 2018 is not based on cogent evidence and consequently, a benefit of doubt has to be

given to the appellant.

For the reasons stated aforesaid, the impugned order cannot be sustained and is quashed. The appeal is allowed with no order as to costs.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the Registry. In these circumstances, 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. Parties will act on production of a digitally

signed copy sent by fax and/or email.