Monday, May 25, 2015

SEBI’s Interim Measure in an Insider Trading Case

[The following guest post is contributed by Supreme Waskar, who is a corporate lawyer]

The securities market regulator, SEBI, has directed Mr. A. Vellayan (Chairman of Coromandel International Limited (“Coromandel”) to surrender unlawful gains along with interest for alleged passing of unpublished price sensitive information (“UPSI”) pertaining to Coramandel’s acquisition of Sabero Organic Gujarat Limited (“Sabero”) to certain persons who traded in the shares of Sabero on the basis of such UPSI.

Background

SEBI conducted a detailed investigation in the matter upon receipt of complaints alleging leak of UPSI pertaining to the acquisition to certain persons, who were acting in concert with the management of Sabero/Coromandel. On May 15, 2011, the representatives of Coromandel (including Mr. A. Vellayan) and Sabero had conducted a meeting to discuss and negotiate the acquisition. Coromandel and Sabero informed the stock exchanges about the acquisition on May 31, 2011 and June 2, 2011 respectively.  Thus, it is SEBI’s case that the UPSI came into existence on May 15, 2011, but it became public only on May 31, 2011. It is the case that certain parties traded in the shares of Sabero in the interim. Further, the share price of Sabero at BSE had increased from Rs. 58 on May 16, 2011 to Rs. 127 on June 9, 2011 after touching Rs. 130.50 on June 6, 2011. The parties share familial relationships in that Mr. A. Vellayan’s grandfather is the brother of Mr. A.R. Murugappan’s mother and Mr. V. Karuppiah is son-in-law of Mr. A.R. Murugappan.

Findings of SEBI’s investigation

- The information relating to the acquisition was a deemed 'price sensitive information' until it was published;

- Tthe trading pattern of certain individuals, Mr. Gopalkrishanan C. and V. Karuppiah (HUF), was unusual compared to their regular pattern. The timings and pattern of the trades of Mr. Gopalakrishnan. C. indicate that he had traded based on the UPSI;

- The prima facie financial links among Mr. Gopalakrishnan. C, Mr. A.R. Murugappan and Mr. A. Vellayan were traced;

- An analysis of the bank statement of Mr. A.R. Murugappan revealed certain transactions with Mr. A. Vellayan.

- Upon a query in this regard by SEBI, Mr. A.R. Murugappan, submitted that the payment to Mr. A. Vellayan was an advance for the purchase of property and as the same did not materialize, the money was returned back to him. Further, the investigation found it was only an arrangement to provide funds to Mr. Gopalakrishnan. C to trade in the scrip of Sabero;

- The trading behaviour of Mr. Gopalkrishanan C. and V. Karuppiah (HUF) in the scrip of Sabero had certain striking similarities, such as both shared personal relationship with Mr. A.R. Murugappan, both had started buying shares of Sabero from May 23, 2011 and both had not traded in the scrip of Sabero earlier;

- The funding to Mr. Gopalkrishnan C. through layered transactions by person connected with Mr. A. Vellayan, prima facie appeared that the trading by Mr. Gopalkrishnan C. and V. Karuppiah (HUF) was based on the knowledge of UPSI and the UPSI had passed on from Mr. A. Vellayan and Mr. A.R. Murugappan.

SEBI’s interim order

As an interim measure, to prevent of Mr. Gopalkrishanan C. and V. Karuppiah (HUF) from diverting the funds and to safeguard the interests of securities market, SEBI vide its interim order dated May 21, 2015, took an urgent preventive step of impounding and retaining the proceeds along with interest at 12% p.a. lying in their bank accounts. SEBI further ordered that, if the funds lying their bank accounts are insufficient to meet the unlawful gains, then the securities lying in the demat account of these persons shall be frozen to the extent of the remaining value.

Conclusion

Mr. Gopalkrishanan C. and V. Karuppiah (HUF) can make their submissions against the order by filing their replies and availing an opportunity of personal hearing before SEBI. Further SEBI’s interim order is without prejudice to take any other actions including adjudication in accordance with law and SEBI is directed to complete the investigation, within 3 months and expedite the process of issuing show cause notice, if any.

- Supreme Waskar

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