Tammalli Shivakumar vs Securities and Exchange Board of India

G. Chandraiah, J.—Heard Senior Counsel Sri K. Rama Krishna Reddi and Sri Vedula Venkataramana for the writ petitioners, Sri B. Adinarayana Rao for 4th respondent -Sun Pharmaceutical Industries Ltd., Sri D. Prakash Reddy for 5th respondent - Ranbaxy Laboratories Ltd., Sri T.K. Seshadri for 6th respondent - Daichii Sankyo Company Ltd., and the learned Standing counsel Sri Y. Suryanarayana for 1st respondent - the Securities and Exchange Board of India (for short ''the Board''). No representation for respondents 2, 3 and 7. The case of the writ petitioners, as per the affidavit filed in support of the writ petition is that the respondents 4 and 5 are pharmaceutical companies of repute and they made announcement on 6.4.2012 to the public at large with regard to amalgamation of 5th respondent-company in 4th respondent. After the said announcement, the petitioners stated to have purchased some shares of the 5th respondent-company. The case of the writ petitioners is that announcement of acquisition of respondent No. 5 by respondent No. 4 prior to 6.4.2014, constitutes confidential and unpublished price sensitive information, and Regulation 3 A of Securities and Exchange Board of India (Prohibition of) Insider Trading Regulations, 1992 (for short ''Regulations''), which are enacted by virtue of the power conferred under Section 30 of Securities and Exchange Board of India Act, 1992, (for short ''the Act'') prohibits a company from dealing in the securities of other company and associates of other company while in possession of any unpublished price sensitive information. The further case of the writ petitioners is that the 7th respondent-firm, which is the subsidiary of the 4th respondent-company, and which is actively involved in the merger negotiations and which allegedly is in possession of price sensitive information, has acquired the shares of the 5th respondent just before the notice of amalgamation was made public on 6.4.2014 and this acquisition of shares by 7th respondent, has benefited the people who were in possession of unpublished price sensitive information to a tune of about Rs. 284.15 crores, since about 3.74 crore shares were transaction between 2nd April 2014 to 4th April, 2014, just three days prior to the date of announcement. This benefit to the persons with prior knowledge of unpublished price sensitive information, was at the expense of retail investors. This dealing of securities by 4th respondent-company, through the 7th respondent, in purchase of shares of 5th respondent, which is sought to be amalgamated in the 4th respondent-company, amounts to violation of Regulation 3A and it is the duty of the Board under Section 11(1) of the Act to protect the interests of investors in securities. Therefore, the case of the writ petitioners is that the respondents 4 and 7 have committed offence of insider trading by trading in the shares of the respondent No. 5 on the basis of the unpublished price sensitive information. The further case of the writ petitioners is that the Board mandates the respondents 2 and 3 stock exchanges under listing agreement, to give "in principle clearance" for the amalgamation and they are obligated to ensure that the deal was arrived at fairly and does not in any way adversely affect the interest of public shareholders of respondents 4 and 5. As the respondents 4 and 7 have violated Regulation 3A, they are not entitled for clearance from respondents 2 and 3 stock exchanges. Alleging these irregularities, the petitioners stated to have made representations to respondents 1 to 3 and as there was inaction on their part in inquiring into the matter, filed the present writ petition seeking direction to the 1st respondent-Board to investigate into the insider trading in the shares of respondent No. 5 by respondent Nos. 4 and 7 just prior to the date of announcement with regard to amalgamation dated 6.4.2014 under Section 11(1) of Act and to direct the respondents 2 and 3 not to give ''in principle approval'' for amalgamation.

Along with the writ petition, the petitioners filed WPMP No. 16656 of 2014 in W.P. No. 13309 of 2014 to grant status quo with respect to any application filed before the respondents 2 and 3 - Stock Exchanges, seeking clearance for any scheme of amalgamation/merger/arrangements between respondents 4 and 5 during the pendency of the writ petition.

This court on 25.4.2014 while ordering notice before admission, granted the order of status quo as prayed for in WPMP No. 16656/2014 in W.P. No. 13309 of 2014.

Aggrieved by the interim order of this court dated 25.4.2014, the 4th respondent - Sun Pharmaceutical Industries Limited, carried the matter in Special Leave to Appeal (Civil) No. 13714/2014 and the Apex Court by order dated 21.5.2014 passed the following order:

"It is argued by Dr. Singhvi that there is a Scheme of Amalgamation between Sun Pharmaceutical Industries Limited and Ranbaxy Laboratories Limited who are the petitioners in these petitions. It is further pointed out that the petitioners under Sections 391 and 392 of the Companies Act, 1956 are to be filed seeking approval of the Scheme in the High Courts of Gujarat and Punjab and Haryana. However, before filing those petitions, certain other formalities are required which are listed in page ''C of the list of dates in SLP(C) No. 13714 of 2014 and those steps have been taken/are being taken in the matters.

At this stage, respondents 1 & 2 have filed writ petition in the High Court of Andhra Pradesh alleging insider trading. It is further pointed out that the High Court has granted ex parte ad interim status quo orders.

The contention of the learned counsel for the petitioners is that it is nothing but a forum shopping and gross misuse and abuse of the process of law on the part of the said writ petitioners. The High Court of Andhra Pradesh does not even have territorial jurisdiction to entertain the writ petition. It is further argued that the impugned order is non-speaking. Mr. Giri, leaned Senior Counsel for respondents 1 & 2 has contested the aforesaid claims of the petitioners.

Since it is only an ad interim order passed by the High Court and the petitioners have also filed applications for vacation of the stay orders as well, it would be more appropriate for the petitioners to first have their application decided by the High Court of Andhra Pradesh. Having regard to the urgency of the matter involved, we request the High Court to take up the applications and decide the same within two days. Learned counsel for all the parties agreed for the aforesaid course of action and they understand to appear in the High Court tomorrow, i.e., May 22, 2014.

List the matter on Thursday, 29th May, 2014."

In the light of the above order of the Hon''ble Apex Court, on 22.5.2014 the learned counsel for both the parties sought to take up the matter by way of lunch motion and accordingly the matter was taken up for hearing on 23.5.2014 and posted to 24.5.2014 for orders.

Respondents 4 to 6 filed counters in vacate petitions in W.V.M.P. Nos. 1264, 1265 and 1266, of 2014 in WPMP No. 16656 of 2014 in W.P. No. 13309 of 2014.

The learned Senior Counsel Sri K. Rama Krishna Reddi appearing for the writ petitions reiterating the averments made in the writ affidavit, which are noted above at paragraph No. 2, contended that the respondents 4 and 7 committed insider trading, which is prohibited under Regulation 3 A of Regulations. Relying on the judgment of the Apex Court in Manoj Manu and Another Vs. Union of India (UOI) and Others, he contended that Board, which is a market regulator, has to deal sternly with companies and their directors indulging in manipulative and deceptive devices, insider trading etc., or else they will be failing in their duty to promote orderly and healthy growth of the securities market. He submitted that the 1st respondent-Board, which is obligated under Section 11 of the Act, to protect the interests of the investors in securities and to promote the development and regulate the securities market, failed to initiate necessary proceedings for conducting investigation in spite of the representation of the petitioners dated 15.4.2014 and press reports dated 9.4.2014 and 10.4.2014, therefore there is inaction on the part of the 1st respondent and sought a direction to investigate into the allegations and take appropriate action in accordance with law.

The learned Senior Counsel Sri Vedula Venkataramana also reiterated the averments made in the writ affidavit and further contended that Section 12A of the Act prohibits manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. In the present case, the 7th respondent, which is a subsidiary of the 4th respondent, purchased the shares of the 5th respondent, which is scheduled for amalgamation with 4th respondent and this is in violation of Sections 11 and 12A of the Act and also contrary to Regulation 3A. He contended that the respondents 2 and 3, which are stock exchanges, are required to give ''in principle clearance'' and in view of the allegations, they may be directed not to process the application for clearance. He contended that any person can bring to the notice of the authorities with regard to the illegalities and in the present case, the petitioners being the shareholders, who have purchased the shares at higher price in view of the insider trading, have locus standi to file the writ petition and as the cause of action has arisen within the territorial jurisdiction of the High Court of A.P., present writ petition is filed. With these averments, the writ petition was sought to be allowed.

Sri D. Prakash Reddy, learned Senior Counsel appearing for the 5th respondent-company submitted that the procedure that is contemplated for investigating into the alleged offence of insider trading and the procedure contemplated for amalgamation, are completely different. There is no comparison with the two situations and the said situations will be dealt with under two different enactments viz,, the alleged offence of insider trading will be dealt with under the provisions of the 1992 Act and the Regulations made thereunder by the Board and whereas the issue of amalgamation of two companies i.e., respondents 4 and 5, will be considered by the Company Court, under the provisions of Sections 391 to 394 of the Companies Act, 1956. He submitted that under both the enactments procedure is prescribed and the writ petitioners without availing the alternative remedies, filed the writ petition. He contended that the writ petitioners have stated to have purchased shares after the date of announcement of amalgamation and the respondent No. 7 firm has also purchased the shares and therefore, the status of the writ petitioners is on par with respondent No. 7 and therefore, the writ petition is filed with mala fide intention and hence the writ petition is liable to be dismissed.

Sri B. Adinarayana Rao, learned Senior Counsel appearing for the 4th respondent while pointing out the various provisions of the 1992 Act and the Regulations and the Companies Act, 1956, and while reiterating the counter averments specifically contended that the allegations made against the respondents 4 and 7 with regard to insider trading are pure questions of fact, which are required to be inquired by the Board under the provisions of the Act and the Regulations made thereunder. The alleged offence of insider trading and the amalgamation are two different areas, which are independent and have to be dealt with under two different enactments by different forums and on the alleged offence of insider trading, amalgamation cannot be stalled. With these averments he sought to dismiss the writ petition.

The learned Counsel appearing for the 6th respondent Sri D.K. Seshadri, in continuation of the arguments advanced by the learned counsel appearing for respondents 4 and 5, submitted that the issue of amalgamation is an elaborate procedure and the writ petitioners will have an opportunity, if they so chooses, at different stages to file objections and the appeals and the issue of amalgamation has nothing to do with the issue of inquiring into the alleged offence of insider trading and further the interim order passed in the present writ petition would come in the way of respective High Courts, where the petitions for amalgamation are/or going to be filed. Therefore, he sought to vacate the interim order.

The learned Standing Counsel appearing for the 1st respondent-Board submitted that the Board has already initiated proceedings to investigate into the alleged insider trading, which is prohibited under Regulation 3A and the same would be completed in accordance with law.

The tenor of the counter affidavits and submissions of the learned Senior Counsel appearing for the contesting respondents is noted once again. The contesting respondents have denied the allegations made by the writ petitioners with regard to insider trading by the 7th respondent-firm in the shares of the 5th respondent-company and the learned Senior Counsel appearing on their behalf contended that these are disputed questions of fact and the same cannot be gone into under the writ jurisdiction. It is stated that the Regulations provides procedure for investing into the allegations of insider trading. Further, the scheme of amalgamation is to be considered by the respective High Courts under Sections 391 to 394 of the Companies Act, 1956. The writ petitioners without availing the alternative remedies, filed the present writ petition and hence the same is not maintainable. However, the case of the petitioners is that they made representation dated 15.4.2014 to the Board. It is stated that the 2nd and 3rd respondents-Stock Exchange Boards, have already sought for certain documents from the contesting respondents and they were accordingly submitted and they are under consideration. The petitioners without pursuing the same, approached this court by way of writ petition and the same cannot be countenanced. It is further stated that the insider trading has nothing to do with the scheme of amalgamation, since for the allegations of insider trading, procedure is contemplated under the Regulations and for amalgamation, the procedure prescribed under Sections 391 to 394 of the Companies Act, 2013 has to be followed and hence the petitioners are trying to mislead this court, which cannot be permitted and further there is no connection between the averments made in the writ affidavit, which are relating to the allegations of insider trading and not against amalgamation and in the interim prayer the petitioners are seeking to stall the process of considering the applications for giving clearance by stock exchange boards. Under Clause 24(f) of the Listing Agreement, before filing petitions under Sections 391, 394 and 101 of the Companies Act, 1956, any listed company has to file a draft scheme of proposed amalgamation with the stock exchange and in turn the stock exchanges concerned after seeking clarification from the Board, will forward either ''objections'' or ''no objections'' to the Board and this procedure which is introduced in the circular No. CIR/CFD/DIL/5/2013 dated 4.2.2013 also provides for redressal of complaints. The petitioners can avail the remedy under Clause 24(/) of Listing Agreement and without availing the said remedy by filing objections, filed the present writ petition and the same cannot be entertained even on this ground. It is further contended that even assuming for the sake of argument that the allegations of insider trading are found to be correct by the Board, the persons responsible for insider trading, will be liable and not the 5th respondent-company and on this ground, the amalgamation cannot be stalled. Further, the interim order passed by this court would come in the way of the respective High Courts, where the registered head offices of respondents 4 and 5 companies are located, in considering the company petitions filed for amalgamation under Sections 391 to 394 of the Companies Act, 1956. It is contended that the registered offices of contesting respondents are not located within the jurisdiction of the High Court of A.R and the petitioners have not made out clear case for filing the writ petition in the High Court of A.R and on the aspect of jurisdiction also, the writ petition is not maintainable. With these averments, the interim order of status quo was sought to be vacated.

In view of the above rival contentions, the issue that falls for my consideration, is whether in the facts arid circumstances, the interim order needs to be continued till the disposal of the writ petition?

The main allegation of the writ petitioners is that the even before the date of announcement of amalgamation of 5th respondent company into the 4th respondent, the 7th respondent, which is the entity of 4th respondent, which is in possession of unpublished price sensitive information, traded with the shares of the 5th respondent just prior to the date of announcement of amalgamation and this caused wrongly gain to the 7th respondent, as they purchased the shares at the lesser price and the petitioners, who have purchased the shares after the date of announcement of amalgamation, had to purchase the share at higher price and trading based on unpublished price sensitive information, which is alleged to be in the knowledge of 7th respondent, amounts to violation of the provisions of Act and the Regulations made thereunder.

It may be necessary to refer to relevant provisions of 1992 Act, Regulations and also the Companies Act, 1956 which deal with the aspect of insider trading and amalgamation.

Section 2(a) of the Act defines the ''Board'' which is Securities and Exchange Board of India, established under Section 3; Section 3 deals with Establishment and incorporation of Board, Section 11 deals with the powers and functions of the Board, Section 12 prohibits manipulation and deceptive devices, insider trading and substantial acquisition of securities or control, Sections 15A to 15JB deals with penalties and adjudication and Sections 15K to 15Z deal with establishment, jurisdiction, authority and procedure of Appellate Tribunal and Section 20 deals with bar of jurisdiction of civil court to entertain any matter over which the Board has jurisdiction and Section 30 empowers the Board to make Regulations. In exercise of the power under Section 30, the Board made the 1993 Regulations.

Regulation 3A prohibits any company from dealing in the securities of another company or associate of that other company while in possession of any unpublished sensitive information. Regulations 4A to 11A deals with investigation by the Board.

Sections 391 and 392 of the Companies Act, 1956 deal with the filing of petitions before the High Courts for seeking approval of the scheme of amalgamation.

In the present case, as noted above, the allegations of the petitioners are with regard to insider trading. Regulation 3A states that no company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information. Regulation 4A empowers the Board to enquiry into the violations and provisions of the regulations. The procedure for investigation is contemplated from Regulations 6 to 11 A. Powers and functions of the Board and the Penalties are provided under the provisions of the Act. Therefore, from these provisions it is clear that the Act and the Regulations, provide for forum, procedure and penalty for investigating into the offences prohibited under the Act. In other words, under the above provisions, it is the Board, which is the competent authority to investigation into the alleged offence. While dealing with the duties of the Board, which is Securities and Exchange Board of India, the Apex Court, held as under:

"42. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading etc., or else they will be failing in their duty to promote orderly and healthy growth of the securities market. Economic offence, people of this country should know, in a serious crime which, if not properly dealt with, as it should be, will affect not only the country''s economic growth, but also slow the inflow of foreign investment by genuine investors and also cast a slur on India''s securities market. Message should go that our country will not tolerate "market abuse" and that we are governed by "rule of law". Fraud, deceit, artificiality, SEBI should ensure, have no place in the securities market of this country and "market security" is our motto. People with power and money and in management of the companies, unfortunately often command more respect in our society than the subscribers and investors in their companies. Companies are thriving with investors'' contributions but they are a divided lot. SEBI has, therefore, a duty to protect investors, individual and collective, against opportunistic behaviour of Directors and insiders of the listed companies so as to safeguard market''s integrity."

Coming to the facts of the case, the allegations of the petitioners have been vehemently denied by the contesting respondents, and these disputed questions of fact cannot be gone into by this court under the writ jurisdiction. As noted in the preceding paragraph, the Act and the Regulations, provide for complete procedure for investigating the allegations of insider trading. Further the contesting respondents also referred to procedure contemplated under Clause 24(f) of the Listing Agreement, which the listed company has to follow before seeking approval for scheme of amalgamation, during which also the petitioners can file objections. The Act and the Regulations provide for forum for investigating into the alleged offence of insider trading. Therefore, in my considered view, the petitioners are not justified in approaching this court without availing the alternative and efficacious remedy.

Further, under Sections 391 to 394 of the Companies Act, 1956, provide the procedure for amalgamation whereunder, the respective High Courts, where the registered head offices of the two companies are located, have to consider the amalgamation of companies and in the process, they are required to consider all the issues. In my considered view, as contended by the learned counsel appearing for the 6th respondent, the present interim order may come in the process of considering the amalgamation proceedings.

Whether the alleged offence of insider trading will affect the amalgamation proceedings and whether they are independent issues effecting persons responsible vis-�-vis companies under amalgamation and the relevant issues are requires to be considered during the process of considering the proceedings for amalgamation.

The contesting respondents submitted that the respondents 2 and 3 stock-exchanges have sought for information and these respondents have accordingly submitted the same and they are in the process of due consideration. And as per the submissions of the learned counsel for the petitioners, the petitioners have already made representations to the Board and as per the submissions of the Standing Counsel for the 1st respondent-Board, it has initiated investigation, which will follow due procedure contemplated under the Regulations.

Therefore, as the writ petitioners have alternative remedy under the provisions of the Act and the Regulations made thereunder and in according with the said provisions, the Board has already initiated proceedings and seized of the matter and having regard to the above facts and the circumstances, I am of the considered view, that it is not desirable to continue the interim order and the issue framed is answered in the negative. Accordingly the interim order 25.4.2014 in WPMP No. 16656/2014 in W.P. No. 13309/2014 is vacated and the vacate petitions are allowed.

Today, after the pronouncement of the above, order, the learned Senior Counsel for the writ petitioners Sri K. Rama Krishna Reddi submitted that as the Board has already initiated investigation, the purpose of filing writ petition is served and no further orders need be passed and sought to dispose of the writ petition accordingly by fixing a time frame for the Board to complete the investigation.

The learned Standing Counsel for the Board submitted that the procedure is contemplated under the Regulations for conducting the investigation and hence no time limit can be fixed.

As per the submissions of the learned Standing Counsel for the Board, as the Board has commenced the investigation, it will follow the procedure contemplated under the Regulations and complete the same in accordance with law. The writ petition is accordingly disposed of. No costs. Miscellaneous petitions, pending in any, stands closed.