BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Date of Hearing : 13.12.2021 Date of Decision : 08.03.2022

Appeal No. 31 of 2020

Top Class Capital Markets Pvt. Ltd. 1001, Sunshine Heights, Kalina, CST Road, Santacruz (East), Mumbai - 400 098. ….. Appellant Versus

Securities & Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. … Respondent

With

Appeal No. 23 of 2021

Top Class Capital Markets Pvt. Ltd. 1001, Sunshine Heights, Kalina, CST Road, Santacruz (East), Mumbai - 400 098. ….. Appellant Versus

Securities & Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. … Respondent

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Mr. P. N. Modi, Senior Advocate with Mr. Neville Lashkari, Ms. Khushali Palrecha, Advocates i/b. Crawford Bayley for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Abhiraj Arora, Mr. Karthik Narayan, Mr. Harshavardhan Nankani, Advocates i/b. ELP for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Justice M. T. Joshi, Judicial Member Per : Justice M. T. Joshi, Judicial Member

1. Both the present appeals have arisen out of the same facts on the basis of which two separate orders were passed; one by the learned Adjudicating Officer (hereinafter referred to as 'AO') of Securities and Exchange Board of India (hereinafter referred to as 'SEBI') dated September 23, 2019 imposing a penalty of Rs. 7.5 crores on the appellant and another order of the learned Whole Time Member (hereinafter referred to as 'WTM') dated August 4, 2020 restraining any access to security market for one year and 3 years in dealing with the shares of Aurobindo Pharma Ltd. as well directing the appellant to disgorge an amount of Rs. 3.77 crore as a notional profit with interest at the rate of 12 % per annum.

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2. Against the order of the learned AO, appeal no. 31 of 2020 is preferred and against the order of the learned WTM appeal no. 23 of 2021 is filed.

3. The allegations are of insider trading in contravention of the provisions of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as 'PIT Regulations').

4. The facts in the case would show that the appellant is alleged to be a connected person with another noticee Veritaz Health Care Ltd. (hereinafter referred to as 'Veritaz'). In a nutshell, the allegations are that the appellant had received an Unpublished Price Sensitive Information (hereinafter referred to as 'UPSI') through Veritaz as regards the Aurobindo Pharma Ltd. (hereinafter referred to as 'Aurobindo Pharma') of which rest of four noticees were connected. Thus, in all six noticees were charged for contravention of the PIT Regulations. Before the learned AO, all these noticees contested the case and upon hearing them the learned AO imposed penalty in various amounts. Before the learned WTM however, except the present appellant, all other noticees made an application for the settlement of the proceedings. Their applications were

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accepted by the respondent SEBI and, therefore, the proceedings continued only as against the present appellant in which the impugned order was passed by the learned WTM.

5. We have heard Mr. P. N. Modi, the learned senior counsel with Mr. Neville Lashkari, Ms. Khushali Palrecha, the learned counsel for the appellant and Mr. Gaurav Joshi, the learned senior counsel with Mr. Abhiraj Arora, Mr. Karthik Narayan, Mr. Harshavardhan Nankani, the learned counsel for the respondent.

6. The facts, in brief, are as under :-

7. For a period between July 2008 and December 2008 Aurobindo Pharma had entered into three Licensing and Supply Agreements with Pfizer regarding various solid oral dosage products for USA, for France and for Pan Europe (including France). These agreements executed between July 22, 2008 and December 29, 2008 were disclosed by Aurobindo Pharma vide a press release on March 3, 2009. The press release declared that it was pleased to announce it's partnership with Pfizer and it was an exciting opportunity for Aurobindo Pharma which would provide for stability towards company's earnings and accelerate it's growth plans. On the very same day, the share price of the Aurobindo Pharma had touched an

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intra-day high of 13% as compared to previous day's close and ultimately closed at 7% higher than the earlier close. SEBI noted that on the same day Sensex and Nifty i.e two indices commonly used as barometers of the Indian stock exchange closed 2% down each on that day. All these facts led the respondent SEBI to conclude that three agreements as detailed earlier were price sensitive informations.

8. Respondent SEBI conducted investigation in the matter and found that during the period the information was unpublished, all the notices were connected. The original noticee no. 1, was promoter and executive chairman of Aurobindo Pharma, noticee no. 2 his wife, noticee no. 3 brother of noticee no. 1 as well as the managing director of the Aurobindo Pharma. Noticee no. 4 Trident Chemphar Ltd. - was owned by the son of notice no 1 and during the relevant period it was the promoter of Aurobindo Pharma group.

9. Noticee no. 5 Veritaz was sharing the same office and email address of Aurobindo Pharma. Further web of connections between them i.e. providing personal guarantee by the notice no. 1 to the bank loan obtained by Veritaz, production of certain brands of Aurbindo Pharma by this veritaz, fund transfer during the relevant period etc.

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were found. Noticee no. 5 Veritaz had purchased 787026 shares of Aurobindo Pharma at an average price of Rs. 173.37 when the UPSI was yet to be published.

10. So far as the present appellant is concerned, it had received a fund of Rs. 10 crores from notice no. 5 Veritaz on February 9, 2009 before the UPSI was published. This amount was utilized by it for purchase of shares of the Aurobindo Pharma on February 11 and 12, 2009. Later on, the appellant sold those shares in the month of March and June 2009. SEBI alleged that the appellant, thus, acting as a front entity of Veritaz had indulged into the insider trading. Therefore, the learned WTM as well as the learned AO passed for the violations of the PIT Regulations.

11. The learned senior counsel for the appellant submitted that the appellant in fact was earlier named as Top Class Education Facilities and Services Pvt. Ltd. In the year 2008-09, it changed it's business to trading in securities with funds borrowed from third parties. Therefore, in regular course of business, the appellant had borrowed the amount of Rs. 10 crores from Veritaz. Since the show cause notice was issued after gross delay of 8 years on September 6, 2017, the appellant did not have the agreement of loan executed between

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the appellant and Veritaz. However, the certificate of Chartered Accountant fortified by the tax deducted at source documents would show that the amount was repaid later on. The gross delay in issuing notice and conducting the proceedings has caused prejudice. Further, there is no an iota of evidence to show that the appellant had at any time received the UPSI either from Veritaz or from anybody. Simply on the basis of fund transfer from Veritaz to it and purchase of the shares of Aurobindo Pharma during the relevant period, the appellant is branded as an insider under the PIT Regulations. The appellant however at all cannot be called insider. The trading pattern of the appellant that though it has purchased the shares in the month of February 2009, the same were not sold immediately upon publication of the so called UPSI on March3, 2009, but after a period of around one month and five months (March 31, 2009 till June 10, 2009), would show that the appellant in regular course of business had purchased the shares and sold the same in the market. Alternatively, it was submitted that the disgorgement of notional profit and interest thereon as well as the penalty imposed does not take into consideration the fact of selling of the shares at lower prices than the price which was available on March 4, 2009. At any rate, according to the learned senior counsel the interest claimed by the respondent at

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Rs. 5.40 crores on the alleged disgorgement amount of Rs. 3.77 crores by the WTM is unsustainable and unjust.

12. It was further submitted that during the pendency of the appeal respondent SEBI has sold the shares from the appellant's account and recovered an amount of Rs. 1,48,20,294.88. Additionally, the appellant had also deposited an amount of Rs. 3,51,79,705/-. In the circumstances, it was submitted that in case the appeals are allowed then a relief as prayed in the amended memo of appeal may be granted.

13. On the other hand, the learned senior counsel for the respondent submitted that while the other noticees were closely connected to Aurobindo Pharma, more particularly Veritaz from whom the appellant has received funds of Rs. 10 crores from which the shares of Aurobindo Pharma were purchased was nothing but the close knit group member of Aurobindo Pharma. It shared the same office and even email of Aurobindo Pharma. The details of more connections between the two i.e personal guarantee by the notice no. 1 to the bank loan availed by Veritaz, many products of Aurobindo Pharma actually produced by Veritaz etc. are detailed in the impugned orders. Further, earlier to this transaction, the appellant neither had traded in any shares much less the shares of Aurobindo

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Pharma and suddenly purchased those shares from the funds provided by Veritaz would clearly establish high degree of preponderance of probability that Veritage has used the appellant as a front entity for purchase of the shares which were later on sold in the above manner. It was, therefore, submitted that both the appeals be dismissed.

14. Upon hearing both the sides, in our view, the appeals are liable to be dismissed for the following reasons.

15. The connection of Veritaz from whom the appellant had received an amount of Rs. 10 crore for purchase of the shares of Aurobindo Pharma with Aurobindo Pharma and its managing director, etc. is writ large on the face of record of the case. The record would show that the appellant had never traded in the shares of Aurobindo Pharma earlier. The record also show that prior to these transactions the appellant had no history of trading in the shares. The documents filed by the appellant show that after these transactions, the appellant continued in the business of trading in the various shares and had a very handsome turnover in the years to come. The appellant has not filed on record any loan agreement between it and Veritaz which was pointed by the learned WTM as

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well as the learned AO in the impugned order. The appellant contends that since 8 years has passed form the date of the transactions, the loan agreement remained untraceable and the appellant is not able to fully recollect the details of the strategy for choosing the trades in the said scrip in 2009. However, these submissions cannot be accepted for the following facts.

16. The appellant has filed on record the copies of the questionnaire sent by the respondent SEBI to the appellant Exhibit 'C' in appeal no. 23 of 2021. This document would show that the respondent SEBI had red flagged to the appellant these transactions on January 31, 2011 i.e. just within two years of the disputed purchase of the shares. In this questionnaire, SEBI vide paragraph no. (o) has specifically asked the appellant as to whether it was holding any stake or was "connected to" Veritaz and three other entities. Thus, within 2 years of the transactions, the appellant was made aware of the fact that SEBI was conducting investigation in those transactions. Therefore, the case of the appellant that since the show cause notice was issued after 8 years, it could not trace the loan agreement and any other supporting documents cannot be accepted. It is worthwhile to note that to the above specific query of the respondent SEBI that as to whether the appellant has any stake /

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related / connected or deemed to be connected to these four entities including Veritaz, the appellant replied vide Exhibit 'D' dated March 10, 2011 vide paragraph no. (o) "we wish to submit that we do not hold any stake or we are not related with the companies mentioned in your aforesaid letter …..". However, SEBI's query as to whether the appellant was connected with Veritaz is not specifically answered that it had connection in the nature of fund transfer or obtaining loan from Veritaz. In all these circumstances, the case of the appellant that the delay in issuing the show cause notice has caused prejudice in defending the case for non-tracing the loan agreement and supporting documents cannot be accepted.

17. The appellant has relied in number of cases to buttress its case of delay causing prejudice in those cases. However, since the delay has caused prejudice in those cases, the plea of the appellant therein was accepted by this Tribunal.

18. As regards the case as to whether the appellant can be termed as insider or not, it would be appropriate to refer the definition of 'insider' provided under the PIT Regulations. The same is extracted hereunder :-

12 "2(e). "insider" means any person who,

(i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of [a] company, or

(ii) has received or has had access to such unpublished price sensitive information."

19. The issue as to whether an entity had received UPSI from other noticee or connected person is essentially a question of fact. However the learned senior counsel for the appellant has relied in the cases of Chintalapati Srinivasa Raju vs. SEBI [(2018) 7 SSC 443],

Samir Arora vs. SEBI appeal no. 83 of 2004 dated September 1, 2004, Mr. Manoj Gaur vs. SEBI appeal no. 64 of 2012 dated October 3, 2012 decided by this Tribunal and Sabero Organics Gujarat Ltd. passed by SEBI, wherein the charge of receiving UPSI by the appellants therein was not accepted. Further the case of Dilip S. Pendse vs. SEBI appeal no. 80 of 2009 dated November 19, 2009, was relied to stress that higher degree of preponderance of probabilities is required to be established in such cases.

20. On the other hand, the learned senior counsel for the respondent SEBI has relied in the cases of Navin Kumar Tayal vs.

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SEBI appeal no. 8 of 2018 decided on August 2, 2021, V. K. Kaul vs. SEBI appeal no. 55 of 2012 dated October 8, 2012 and Gagan Rastogi vs. SEBI appeal no. 91 of 2015 dated July 12, 2019 decided by this Tribunal.

21. Both the learned senior counsel with their remarkable skills had distinguished the declaration made by this Tribunal in each of the above cases.

22. In our view, when a person can be called as insider and whether has traded when in possession of such UPSI is essentially a question of fact to be determined in the facts and circumstances of the each case by applying the standard of preponderance of probability albeit in higher scales.

23. It is true that the respondent has not established as to from whom the appellant had received the insider information from any of the other noticee. The facts, however, highlighted in the orders , that the appellant had begun it's career as a trader in shares with these very shares of Aurobindo Pharma, that too after obtaining a fund of Rs. 10 crores from the closely connected entity of Aurobindo Pharma and other notices, that it has no other substantial business in trading shares during the period, that no sooner the shares of Aurobindo