The Securities and Exchange Board of India (“SEBI”) by Adjudication Order passed in the matter of Piramal Enterprises Limited (“Piramal”) dated October 3, 2016 imposed fine for noncompliance with insider trading norms.

The transaction under scrutiny was the sale of domestic healthcare business of Piramal to Abbott Laboratories Limited (“Abbott”) in May, 2010 and public announcement made with respect to the same. SEBI had conducted investigation into the alleged irregularities in the scrip of Piramal looking at possible violation of the provisions of the old insider trading norms, namely, the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“the PIT Regulations”), the Listing Agreement and the Securities Contracts (Regulation) Act, 1956.

Price Sensitive Information is defined in the PIT Regulations as below:

“price sensitive information” means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.

Explanation.—The following shall be deemed to be price sensitive information:—

(i) periodical financial results of the company;

(ii) intended declaration of dividends (both interim and final);

(iii) issue of securities or buy-back of securities;

(iv) any major expansion plans or execution of new projects;

(v) amalgamation, mergers or takeovers;

(vi) disposal of the whole or substantial part of the undertaking;

(vii) and significant changes in policies, plans or operations of the company.

In the present matter, price sensitive information was sale by Piramal of its domestic healthcare formulation business to Abbott, till such information became public.

The allegations regarding violation of several provisions of the PIT Regulations were:

I. Piramal, Mr. Ajay Piramal, Ms. Swati A Piramal, Ms. Nandini Piramal and Mr. N Santhanam had failed to handle the Unpublished Price Sensitive Information (“UPSI”) as Mr. Anand Piramal (son of Mr. Ajay Piramal) was aware about the transaction at every stage, being neither employee nor Director of Piramal.
ii. Closure of trading window was not announced by Piramal, Mr. Ajay Piramal, Ms. Swati A Piramal, Ms. Nandini Piramal and Mr. N Santhanam.
iii. Mr. Harinder Sikka, Director of Piramal traded in the scrip of Piramal during the UPSI period without obtaining pre-clearance.

Allegation was also levied regarding violation of the Listing Agreement and the Securities Contracts (Regulation) Act,1956.

In response to the allegations levied against them, it was submitted on behalf of the parties in defense that, inter alia, Mr. Anand Piramal had not traded in the scrip of Piramal and he was not involved in the decision making process at Piramal. Further that, he was part of promoter group and therefore was reasonably expected to know about the transaction. With respect to closure window, it was contended, inter alia, that it was not announced because the transaction was not final at that stage. Coming to trading by Mr. Harinder Sikka, defense taken was that he was not privy to UPSI.

With regard to issue of handling of UPSI, Adjudicating Officer, SEBI (“the AO”) very briefly discussed the diligence standards with regards handling of UPSI, noting that UPSI should be shared strictly on a need to know basis. It was observed that as Mr. Anand Piramal was neither Director nor employee of Piramal, sharing of information about the transaction with him could have been avoided. The AO held that Piramal, Mr. Ajay Piramal, Ms. Swati A Piramal, Ms. Nandini Piramal and Mr. N Santhanam failed to handle UPSI on a ‘need-to-know’ basis and therefore violated the Model Code of Conduct for Prevention of Insider Trading read with Regulation 12(3) of the PIT Regulations (Regulation 12 of the PIT Regulations deals with code of internal procedures and conduct for listed companies and other entities).

Regarding issue of closure of trading window, firstly, it is to be noted that the Model Code of Conduct for Prevention of Insider Trading for Listed Companies as contained in Part A of Schedule I of the PIT Regulations provides, inter alia:

“3.2 Trading window 3.2.1 The company shall specify a trading period, to be called “trading window”, for trading in the company’s securities. The trading window shall be closed during the time the information referred to in para 3.2.3 is unpublished.

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3.2.3 The trading window shall be, inter alia, closed at the time:—
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(f) Disposal of whole or substantially whole of the undertaking.
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3.2.3A The time for commencement of closing of trading window shall be decided by the company.”

As captured above and as noted by the AO, it was for the company to decide about the commencement of closure of trading window which had to be opened only 24 (twenty-four) hours after the information was made public. The AO further took note of the fact that because the trading window was not closed at all, Mr. Harinder Sikka who was one of the designated employees of Piramal could manage to trade in the scrip. Order of the Securities Appellate Tribunal in the matter of G Jayaraman v SEBI was cited, in which, it was observed that, “If Compliance Officer fails to close the trading window inspite of being in possession of price sensitive information, then he would be violating PIT Regulations. In such a case, whether any employee/director by taking undue advantage has traded in securities of that company or not, Compliance Officer would be liable for violating PIT Regulations.” The AO held that Piramal, Mr. Ajay Piramal, Ms. Swati A Piramal, Ms. Nandini Piramal and Mr. N Santhanam violated clauses 3.2.1 and 3.2.3(f) of Model of Conduct for Prevention of Insider Trading read with Regulation 12(3) of the PIT Regulations.

Dealing with the issue of trading by Mr. Harinder Sikka, clauses 3.3.1 and 4.2 of the Model Code of Conduct for Prevention of Insider Trading for Listed Companies as contained in Part A of Schedule I of the PIT Regulations must be referred to as below:

“3.3.1 All directors/officers/designated employees of the company and their dependents as defined by the company who intend to deal in the securities of the company (above a minimum threshold limit to be decided by the company) should pre-clear the transaction as per the pre-dealing procedure as described hereunder.

4.2 All directors/ officers/ designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i.e. sell or buy any number of shares during the next six months following the prior transaction. All directors/ officers/ designated employees shall also not take positions in derivative transactions in the shares of the company at any time.”

With regard to this issue, the AO held, “There are no allegations that he received UPSI from any insider and traded on that basis. As already observed, it is the failure of the company to close the trading window that has enabled his transactions to go through without any pre-clearance and Noticee No. 6 cannot be faulted for the impugned transactions when the trading window was not closed necessitating pre clearances of trades. In view of the above, it is not established that Noticee No. 6 violated Clauses 3.3-1 and 4.2 of Model Code of Conduct read with Regulation 12(3) of PIT Regulations.”

Violations under the Listing Agreement were not established.

Penalty totaling to INR 6,00,000/- (INR Six Lakhs only) was imposed on Piramal, Mr. Ajay Piramal, Ms. Swati A Piramal, Ms. Nandini Piramal and Mr. N Santhanam.

VA View

After this order was passed, Piramal Enterprises Limited addressed a letter to the Bombay Stock Exchange Limited and the National Stock Exchange of India Limited dated October 4, 2016 and clarified that this order was in respect of certain technical non-compliances with the Model Code of Conduct prescribed under the PIT Regulations. Further, it was stated in company’s letter that there was no finding of any insider trading done or gains made by the noticees in
this case.

The stand taken by the company seems to be correct. This order against the Piramal Enterprises Limited and other noticees is on technical violation of insider trading norms. There is no case of monetary gains made by the company and other noticees by flouting such norms. Having said that, the company ought to have scrupulously adhered to the compliance norms under the PIT Regulations.

It also remains to be seen as to what action or future course the company will take concerning this order, whether it will go for an appeal against this order or will choose to pay the fine imposed by SEBI.