SEBI conducted an investigation into the scrip of Palred Technologies Limited for the period of September 18, 2012 to November 30, 2013 regarding violation of Insider trading norms. Palred, a micro-cap runs LatestOne.com, an online mobile accessories store.

Case Introduction

Incorporated in the year 1999, the earlier name of Palred was Four Soft Limited. It is listed on NSE and BSE. SEBI has held guilty CMD Mr. Palem Srikanth Reddy, Ms. P. Soujanya Reddy, Mr. Ameen Khwaja, Ms. Noorjahan Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja, Mr. Shahid Khwaja, Ms. Kukati Parvathi, Mr. Pirani Amyn Abdul Aziz, Mr. Karna Ramanjula Reddy, Mr. Umashankar S, Ms. Raja Lakshmi Srivaiguntam, Mr. Prakash Lohia and Mr. Mohan Krishna Reddy Aryabumi of Insider Trading.

The company had run into financial difficulties from which it recovered and achieved some stability and thereafter it decided to sell its business on a slump sale basis to another entity. It is to be noted that the price of the shares of the company was low following the period of recovery. But the proposed restructuring would enable the company to raise substantial cash and value. The company decided to declare special dividend and also carry out a buyback of shares. Because of this, the shareholders received an amount far higher than the then ruling market price of the shares. Subsequently, the price of the shares also started rising substantially. It was later revealed through investigation that the CMD, CEO were part of a cartel of above 15 people termed as ‘insiders’ and were in possession of unpublished price sensitive information on the basis of which they traded in the scrip of PTL.

These persons allegedly connected with them had purchased the shares of PTL at the earlier low ruling price. While they held on to most of the shares so purchased, the fact is that they benefitted from the significant appreciation in the market price.

What is the term ‘UPSI’

“Unpublished Price sensitive information” means any information which relates to the following matters or is of concern directly or indirectly to a company and is not generally known or published by such company for general information but which if published or known is likely to materially affect the price of securities of that company in the markets.

The information regarding the public cannot also be called price sensitive since mere knowledge about the public issue without specific information cannot be considered as one which will affect the price of the scrip.

How was it happened

It was found that Mr. Palem S. Reddy had communicated the UPSI to Mr. Ameen Khwaja, Ms. Kukati Parvathy and others.
Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja were the promoter directors of Pal Premium Online Media Pvt Limited. It was discovered that Pal had provided services relating to ‘search engine’ to PTL during the period September 2011 to May 2013. Further, after the ‘slump sale of business’ by PTL to Kewill group, discussions pertaining to the merger of Palred Media and Entertainment Pvt Limited and Pal with PTL had begun on December 19, 2013, which later got approved by the Board of Directors of the Company.

In view of the same, Mr. Ameen Khwaja is also alleged to be an ‘insider’ and ‘connected person’ in terms of the Regulations 2(e) and (c) of the Regulations.

Mr. Ameen Khwaja appears to have not traded in the scrip of PTL during the period of investigation. However, his immediate family members Ms. Noorjahan A. Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja and Mr. Shahid Khwaja were found to be trading in the scrip of PTL during the UPSI period. They were not the regular trader of the scrip, but purposefully done so.

Role of Facebook in this

Sebi’s whole time member Prashant Saran said that Mr. Pirani Amyn Abdul Aziz is connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’. He was employed with Deloitte Tax Services India Pvt Limited, a group company of Deloitte Touche Tohmatsu India Pvt. Limited, which had conducted the due diligence of PTL during the slump sale.

Here, SEBI has treated Facebook as a relevant factor to determine connections between persons. In this case, SEBI observed that having “mutual friends” on Facebook will form the basis of determination of connection.

While Sebi has been examining Twitter and Facebook for quite some time for investigation purposes, this is the first time the regulator has used Facebook account as evidence for proving charges against an individual.

Mr. Pirani had opened his trading account with HDFC Securities Limited on June 25, 2013, just one day prior to his trading in the scrip of PTL. Further an analysis of his bank account details revealed that he had received a series of cash deposits, prior to each payment to his broker for transacting in the shares of Palred. He was unable to disclose any detail of the source of such cash deposits. The same raises serious suspicion on his transactions.

So, how “Insider” is interpreted in the Act

Insider means any person who is

(i) A connected person; or
(ii) in possession of or having access to unpublished price sensitive information.

The definition of insider in Regulation 2015 is also widened i.e. any one in possession of or having access to unpublished price sensitive information should be considered an ‘insider’ regardless of how one came in possession of or had access to such information as the ‘generally available information’ has already been defined. It is also to be noted that the concept of generally available information has been adopted by various Regulators in different forms.

Any information reasonably designed to provide broad as well as non-discriminatory dissemination of the information to the public at large would not be considered to be the inside information.

It can be argued that any information which is restricted to a particular region or place say for e.g. information contained or published in a regional newspaper may not be considered to be generally available as it is not available to public at large. Thus, any information which is not accessible to the public on a non-discriminatory basis would be deemed to have contain price sensitive information and any one in possession of it would be termed as an ‘insider’.

Further, the onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would therefore be on the person levelling the charge. In order to escape from the charges, the person who has traded has to demonstrate the following:-

(a) That he was not in such possession of unpublished price sensitive information or
(b) That he has not traded or
(c) He could not access or
(d) That his trading when in possession of such unpublished price sensitive information was squarely covered by the exonerating circumstances.

Extracts from SEBI’s order

“The PSI regarding the slump sale of software solutions business to Kewill group came into existence on September 18, 2012, i.e. when the non-disclosure agreement was executed between Kewill group and PTL. The non-disclosure agreement (having a confidentiality clause) was a binding contract on both the sides. Disclosure of the agreement would certainly have an impact on the deal. Therefore, the same can be considered to be an ‘unpublished price sensitive information’ (hereinafter referred to as ‘UPSI’) which had definitely originated on September 18, 2012 and the same had remained unpublished till August 10, 2013 at 13.01 hrs. in terms of the Regulation 2(ha) (vi) of the PTI Regulations. The period of such UPSI was from September 18, 2012 to August 10, 2013.”

Judgement

As per Section 19 read with Sections 11(1), 11(4)(d) and 11(B) of the SEBI Act, 1992, the watchdog SEBI has ordered impounding of the “alleged unlawful gains of a sum of Rs 2,22,14,383 (alleged gain of ₹1,65,59,129 + interest of ₹56,55,254 from the date of buy transactions to January 31, 2016), jointly and severally from the above persons.