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unpublished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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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