India: SEBI Disposes Off Insider Trading Charges Against Reliance Petroinvestments Ltd.

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India: SEBI Disposes Off Insider Trading Charges Against Reliance Petroinvestments Ltd.

An insider is one who because of his status has access to price sensitive information which is not in public domain. James Surowiecki quoted, “If companies tell us more, Insider Trading will be worth less”. Quite precisely, as per Regulation 2 (ha) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) Unpublished Price Sensitive Information (“UPSI”) is not generally known to the public. But if known, may likely affect the price of the securities in the capital market.

The issue occurred in February 2007 when alerts were generated at the share market regarding dealing in shares of Indian Petrochemical Corporation Limited (“IPCL”) wherein it was observed that some entities purchased large quantities of IPCL shares before it announced its intention to declare interim dividend and considered to amalgamate with Reliance Industries Limited (“RIL”). In March 2016, SEBI by disposing off the charges of Insider Trading against Reliance Petroinvestments Ltd. (“RPIL”) added further lucidity to the understanding of who an insider may be.

Major Findings

• RPIL was not an insider as there was no evidence to establish the access of UPSI.
• RPIL is not a person “deemed to be connected”.
• RIL did not exercise any voting power in RPIL directly.

Factual Matrix:

• RPIL, which also held 46% stake in IPCL, took a commercial decision authorizing its Directors to invest INR 30 crores in the equity of IPCL. Further it made additional investments of upto INR 100 Crore in the equity of IPCL.
• On March 2, 2007, IPCL made an announcement to the stock exchanges for declaration of Interim Dividend. It is pertinent to note that the order to purchase 98,280 shares of IPCL were placed before an announcement for declaration of Interim Dividend was made.
• On March 4, 2007, the proposal for merger of RIL and IPCL was discussed and on the next day the steps for initiating the proposed merger were taken.
• On March 10, 2007, a joint meeting of the boards of RIL and IPCL took place where a joint report was submitted setting out the recommended swap ratio was deliberated on. Subsequently, the Boards of RIL and IPCL approved the merger at their respective Board Meetings.
• In view thereof, SEBI ordered an investigation in June, 2007 regarding buying, dealing or selling in shares of IPCL in order to determine if any provisions of the SEBI Act or Rules and Regulations thereunder were violated.

RPIL’s Plea

• RPIL submitted that the acquisition of shares in IPCL was a part of creeping acquisition of IPCL which was already underway. For better understanding of the subject matter, creeping acquisition is when any person holds 15% or more but less than 55% of shares or voting rights of a target company (IPCL in the present case), such person can acquire additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 after making a public announcement to acquire at least additional 20% shares of target company from the shareholders.

• RPIL further added that their investment of INR 30 Crore was a commercial decision as they had made a decision to commence creeping acquisition of IPCL shares. As the investment limit agreed to, was almost exhausted in June, 2006. Thereafter, the share prices of IPCL had started to increase and eventually touched INR 325 per share, as a result of which shares were not purchased further.
• Moreover, RPIL stated that the relevant trade did not take place abruptly, the shares in question were purchased on the basis of share price of IPCL and in line with the commercial decision of RPIL.
• RPIL pleaded that the past trading pattern of RPIL in the shares of IPCL should have been taken into consideration by the SEBI to ascertain whether the relevant trades were conducted on the basis of UPSI, as there was no proof incumbent upon it in order to sustain a charge of insider trading.

SEBI’s Observation

• The two announcements made by IPCL were not Price Sensitive Information

According to the investigation report (“IR”), RPIL had made two announcements:

– The order to purchase 98,280 shares of IPCL.

– An announcement to the stock exchanges for declaration of Interim Dividend.

The share price of IPCL more or less moved in sync with the movement in Sensex. Wherein, the scrips witnessed a substantial price rise subsequent to the announcement of amalgamation of IPCL with RIL.

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  RPIL is not an insider as defined in Regulation 2(e) of PIT Regulations

Regulation 2(e) of PIT Regulations stipulate that an insider is one who is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to UPSI in respect of securities of a company, or has had access to such UPSI.

 

• RPIL is not a person ‘deemed to be connected’ within the meaning of Regulation 2(h) of the PIT Regulations

The Adjudicating Officer noted that it is imperative to establish that the same individual or body corporate holds more than a third of the voting rights with respect to both the Companies being examined for the purposes of this clause.

 

It was found that RIL did not exercise any voting power in RPIL directly, as is evident from the shareholding pattern of RPIL during the financial year 2006-07 and RIL as a single entity did not directly hold the requisite one-third shares in RPIL, as the shareholding of RPIL was cross-held by a number of subsidiaries. Moreover, one-third of the voting right in RPIL were exercised by Reliance Ventures Ltd. and not by RIL.

On the basis of the foregoing findings, the Adjudicating Officer disposed of the Adjudication Proceedings initiated against RPIL.

Key Takeaway

Trading by an insider in the shares of a Company is not in itself violation of law. In fact, trading by the Insiders (directors, employees, officers etc.) is a positive sign which should be encouraged by the Companies as it aligns its interest with those of the insiders. The law on the other hand prohibits trading by an insider in breach of fiduciary and duty of care and confidence towards the stock of a Company on the basis of non-public information to the exclusion of others. Therefore, in our view SEBI action of disposing of the insider trading charges against RPIL holds good. The reason being, PIT Regulations were put in place as a fresh tryout for those having perpetual control over UPSI. As suggested in the
Sodhi Committee Report, it placed paramount thrust upon review of empirical evidence and feedback after the concept of trading plan was introduced. In view thereof, the present case at hand goes on to affirm the judicial intent of the PIT Regulation in spirit.

 

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Mandatory Blackout in Industries, If Effluent Treatment Plants ‘Non-Functional’

The Paryavaran Suraksha Samiti (PSS) approached the Apex Court with a writ petition in the nature of
mandamus (command) in 2012, seeking action from the Union Government as well as States and Union Territories towards prevention of pollution by ensuring that no industry that requires a “consent to operate” from a Pollution Control Board, would be permitted to function, unless it had a functional effluent treatment plant, capable of meeting the prescribed norms for removing the pollutants from the effluent, before it is discharged. .

On 22nd February, 2017 Supreme Court passed its judgement in this regard laying down a mandate for industries to have ‘functional’ primary effluent treatment plant, within three months from the date of passing of judgement. Further the Court also directed the State Governments and the concerned Union territories to set up ‘common effluent treatment plants’ mandatorily within a period of three years.

Moreover, to ensure the implementation of these orders, the concerned State Governments/ Union Territories were directed to make provision for setting up an “online, real time, continuous monitoring system” to display emission levels on the portal of the concerned State Pollution Control Board.

The key highlights of the judgment are as below-

‘Primary’ Effluent Treatment Plant

• The Supreme Court, based on the affidavits provided by the Pollution Control Boards noted that all running industrial units, which require “consent to operate” from the concerned Pollution Control Board, have a functional primary effluent treatment plant, in place without which the “no objection certificate” and “consent to operate” are not issued. The Supreme Court noted that the question before the Court was whether the effluent treatment plants remained in force after the issue of the “no objection certificate” and “consent to operate”. The Supreme Court directed the concerned State’s Pollution Control Board to issue notice to all industries through a common advertisement, to make their primary effluent treatment plant fully operational within 3 months duration, to obtain a ‘consent to operate’ from the concerned Pollution Control Board.
• After the expiry of the said notice period, the concerned State Pollution Control Board(s) are required to carry out inspections in the industries to verify the establishment of ‘functional’ treatment plant.
• After the inspection, if it is found that any industry is not able to comply with the orders, such industry shall be restrained from any further industrial activity.
• For the implementation of the restraining orders, the Supreme Court guided the State Pollution Control Boards to co-ordinate with the concerned electrical supply and distribution agency/company, and further disconnecting the electricity supply to the defaulting industry.

It is pertinent to note that the State Pollution Control Board has power to issue directions vide Section 31A of the Air (Prevention and Control of Pollution) Act, 1981which provides that-

“Notwithstanding anything contained in any other law, subject to the provisions of this Act, and to any directions that the Central Government may give in this behalf, a Board may, in the exercise of its powers and performance of its functions under this Act, issue any directions in writing to any person, officer or authority, and such person, officer or authority shall be bound to comply with such directions.

Explanation.-For the avoidance of doubts, it is hereby declared that tile power to issue directions under this section, includes the power to direct-
(a) The closure, prohibition or regulation of any industry, operation or
(b)The stoppage or regulation of supply of electricity, water or any other service”

Same power has also been bestowed upon State Pollution Control Board under section 33A of the Water (Prevention and Control of Pollution) Act, 1974 to extend powers to Board under the said Act.

Accordingly, the State Pollution Control Board has been endowed with wide discretionary powers and authority to ensure compliance of the laws relating to prevention and control of pollution. The Supreme Court has reiterated that State Boards shall make use of these powers to make sure that all industrial units have effluent treatment plant in proper functioning state.

• The defaulting industry will be then required to make fresh application for obtaining permission to operate from the Pollution Control Board, only after making the primary effluent treatment plant ‘operational’.

This direction is to ensure that all industries have a ‘functional’ effluent treatment plant rather than a treatment plant just for the show to obtain permission from the concerned Pollution Control Board. Industries now need to have mandatory fully-functional effluent treatment plant before they seek any permission to operate.

Common Effluent Treatment Plant

• The Supreme Court directed the State Governments including the Union Territories to set up ‘Common effluent treatment plants’ within a period of three years from the date of judgment.
• During the course of hearing, the running of operational ‘common effluent treatment plants’ was also raised as matter of serious concern as some of the common effluent treatment plants were dis-functional, because of lack of finances.
• The Supreme Court observed that local authorities cannot shy away from their responsibilities vested upon them by the Constitution of India, contending lack of financial resources and hence norms should be evolved and finalized on or before 31st March, 2017, for the purpose of generating finances to install and run all ‘common effluent treatment plants’. The Court noted that Article 243X and Article 243Y provides power to municipalities to levy taxes for any concerned cause and hence provide a remedy towards financial constraints. Hence, the Municipalities and other local authorities cannot shy away from the obligation contending financial constraints.

 

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The Doctrine of Auto Block

This Doctrine was first introduced by the Supreme Court of India, in the case of
Sabu Mathew George v. Union of India and Ors., directing Google India, Microsoft Corporation (I) Pvt. Ltd. and Yahoo India (hereinafter referred to as the “three Companies”) to constitute an “In-House Expert Body” to detect violation on their respective platforms of the provisions of The Pre-conception and Pre-natal Diagnostic Techniques (Prohibition of Sex Selection) Act, 1994 (hereinafter referred to as the “said Act”). A “proposed list of words” has been developed which include inter alia ‘gender selection’, ‘prenatal sex selection’, ‘baby gender selection’, ‘Prenatal diagnostic’, etc. in respect of which when a search command is given, there will be “auto block” with a warning and nothing would be reflected on the screen in regards to the list of words.

Brief Facts of the case

Since 2001, the Hon’ble Supreme Court has expressed its concern with regard to reduction of sex ratio in this country with the Court noting that when there was a decrease in the sex ratio, it was a signal of disaster to mankind. This writ petition was filed by a doctor in the field of Public Health and Nutrition in the year 2008, expressing his concern about the modus operandi adopted by the respondents to act in detriment to the fundamental conception of balancing of sex ratio by entertaining advertisements, either directly or indirectly or as alleged, in engaging themselves in violation of Section 22 of the said Act. It is pertinent to note that the Supreme Court vide its order dated January 28, 2015 had previously directed, the three Companies to not advertise or sponsor any advertisement which would violate Section 22 of the said Act.

Questionnaire Prepared by the Central Government

The Central Government had held a meeting with the three Companies where they were asked to respond to certain questions. The questions are as follows:

• Whether the three Companies felt obligated to comply with the provisions of the said Act, especially Section 22?
• Whether the three Companies were ready to publish a “Warning Message” on top of search result, as and when any user in India submits any “key word searches” in search engines, which relates to pre conception and pre-natal determination of sex or sex selection?
• Whether the three Companies were ready to block “auto-complete” failure for “key word” searches which relates to pre-conception and/or pre-natal determination of sex or sex selection?
• Whether the words/phrases relating to pre-conception and pre-natal determination of sex or sex selection to be provided and regularly updated by the Government for the ‘key word search’ or shall it be the onus of the three Companies providing search engine facilities?
• Whether it was feasible for the Respondents to place this Hon’ble Court order dated 28.01.2015 on their respective Home Page(s), instead of placing them on Terms of Service (TOS) pages?
• What was the suggested timeline to incorporate “Warning Message”, blocking of the “auto-complete” feature for key word search & related terms etc. relating to pre-conception and pre-natal determination of sex or sex selection?
• Any other information as Respondents would like to share.

Contentions by the Three Companies (Google India Private Limited, Yahoo India Microsoft Corporation (I) Pvt. Ltd.)

The three Companies in their response to the above questions had submitted the following responses:

• The three Companies indicated their willingness to comply with the provisions of Section 22 of the said Act.
• The three Companies indicated their willingness to publish the Warning Message/ a public service announcement.

• The three Companies produced a “proposed list of words” like ‘gender selection’, ‘prenatal sex selection’, ‘baby gender selection’, ‘Prenatal diagnostic’ etc., in respect of which when commands are given, there will be “auto block” with a warning and nothing would be reflected in the internet.
• The three Companies contended that apart from the words mentioned in the list, if anyone, taking recourse to any kind of ingenuity, feed certain words and something that is prohibited under the Act comes into existence, the “Doctrine of Auto Block” shall be immediately applied and it shall not be shown. Further, this can only be done when it was brought to the notice of the three Companies.
• The Respondent No. 3 (Google India Ltd.) asserted that if any activity is illegal/ prohibited under the provision of the Indian Penal Code, it does not mean that everyone in the world is disentitled from having any information about the subject and blocking access to the same would be in violation of Article 19(1)(a) of the Constitution of India including the right to know, the right to receive and right to access the information or content.

Decision of the Court

The Hon’ble Supreme Court of India directed the Union of India that:

• It shall constitute a Nodal Agency. (In Compliance with the direction of the Court the Nodal Agency has been set up. Any person can file a Complaint for violation of Section 22 of the said Act on pcpndtcomplaints@nihfw.org).
• It shall give an advertisement in television, newspapers and radio by stating that Nodal Agency has been created by order of the Court and anyone who comes across anything that has the nature of an advertisement or any impact in identifying a boy or a girl in any method, manner or mode by any search engine shall be brought to the notice of the Nodal Agency (In Compliance for advertising in television, newspaper and radio appropriate steps are being undertaken).
• The Nodal Agency shall immediately intimate the search engine when any such information is brought to the notice of the Nodal Agency.
• The search engines are obliged to delete such information within thirty-six hours and intimate the Nodal Agency.
• The Nodal Agency shall put the ultimate action taken by the search engine on its website.

Further the “In-House Expert Body” that is to be constituted by the three Companies, if not already constituted, shall on its own understanding delete anything that violates the letter and spirit of language of Section 22 of the said Act as they are under obligation to see that the “doctrine of auto block” is applied within a reasonable period of time. In case there is any doubt, they can enter into a communication with the Nodal Agency appointed by the Union of India and, thereafter, they will be guided by the suggestion of the Nodal Agency of the Union of India.

The present matter has been listed for further hearing on April 11, 2017.

Observation

It is pertinent to note that The Delhi High Court in the case of Kent RO Systems Ltd. & Anr. v. Mr. Amit Kotak & Ors. , has categorically stated that the “Doctrine of Auto Block” is only limited to the said Act. The relevant text from the judgement reads as follow-

“Post Script: Before this order has been corrected and released, Supreme Court has vide Order dated 16th February, 2017 in WP(Civil) No.341/2008 titled Sabu Mathew George Vs. Union of India referred to the principle/doctrine of “auto block” and constitution by Google India, Microsoft Corporation (I) Pvt. Ltd. and Yahoo India of an “In House Expert Body” to detect violation on their respective platforms of the provisions of The Pre-conception and Pre-natal Diagnostic Techniques (Prohibition of Sex Selection) Act, 1994 (PNDT Act), as the counsel for the plaintiffs herein has been contending, in the context of enforcement of the PNDT Act, 1994. However that was under Section 22 of PNDT Act and not under the IT Act or Rules.”

 

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Simplification of Provident Fund Claims Process

The retirement fund body EPFO (Employment Provident Fund Organisation) is taking several steps for speedy settlement of claims, as stated by Shri Bandaru Dattatreya, the Minister of State (IC) for Labour and Employment. These steps were published by Press Information Bureau, under Ministry of Labour and Employment on March 20, 2017. As per his statement there were a total of 17.14 crore Employees’ Provident Fund (EPF) accounts as on March 31, 2016 and 12.21 lakhs accounts were pending for updation. The closing balance in interest account of the EPFO was INR 45,135.25 Crore as on March 31, 2016. These steps which promote e-governance and seek to expedite the process of settlement of claims are as follows:

1. Composite Claim Form (Aadhar) and Composite Claim Form (Non-Aadhar):

EPFO issued order dated February 20, 2017 stating subscribers can now withdraw their money from the Provident Fund (PF) account using only one common composite form, and are not required to file other relevant documents. This order is a welcome move to make services available to stakeholders of EPFO in an efficient and transparent manner.

Prior to this order, EPFO had introduced Universal Account Number (UAN) where new forms i.e., Form No.s 19 (UAN), 10C (UAN) & 31 (UAN) were introduced by the order of Central Provident Fund Commissioner dated December 1, 2015 for all employees whose Aadhar number and bank account details had been linked with UAN. This order has now been replaced by the new order which has introduced Composite Claim Form (Aadhar) and Composite Claim Form (Non-Aadhar) to replace Form Nos. 19, 10C and 31.

Subscribers, who have linked Aadhar and bank account details, to their UAN can submit Composite Claim Form (Aadhar) to their respective jurisdictional EPFO office without attestation of the employers. Subscribers, who are yet to link Aadhar and Bank details with their UAN can submit Composite Claim Form (Non-Aadhar) to their respective jurisdictional EPFO office without attestation of the employers.

Moreover, the Composite Claim Form (Aadhar) and Composite Claim Form (Non-Aadhar) can be self-certified in place of various certificates previously prescribed to be submitted, due to which the following requirements have been done away with:

1. The “New Declaration Form” required for housing loan/purchase of site/house/flat and “Utilization certificate” have been done away with.
2. No document will be required for grant of advances in case of closure of factories, for marriage advance and for availing post-matriculation education of children.
3. For advance in abnormal condition, member may self-certify that his property has been damaged.
4. Submission of Composite Claim Form (Aadhar) and (Composite Claim form (Non-Aadhar) duly signed by the subscriber shall be construed as ‘self-certification’ for the mentioned partial withdrawals, for which no document would be required to be submitted to the EPFO offices.
5. Settlement of claims

EPFO has mandated to settle claims within 20 days. However, a notification streamlining the process for speedy disposal of claims is awaited.

1. Online Transfer Claim Portal (OTCP)

EPFO has introduced OTCP to facilitate seamless transfer of claims.

1. Internet Banking (INB)

EPFO has introduced online payment facility for employers for payment of dues. This facility improves efficiency and payment and also ensures online access is available at all times and at all places while using existing internet bank account to make payments online.

1. National Electronic Fund Transfer (NEFT)

NEFT has been set in motion to make payments.

Observations:

The strategies declared by the honourable Minister will help resolve a large number of claims submitted by members which are lying pending with the employers. These steps will allow speedy processing of claims with the introduction of all time available online payments modes. Time consuming processes of filing various documents have been discarded, thus simplifying and accelerating the process of providing services to EPFO subscribers.

EPFO takes various steps for speedy settlement of claims,
published by Press Information Bureau, under Ministry of Labour
and Employment on March 20, 2017 available at http://pib.nic.in/newsite/erelease.aspx?relid=0

 

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Vikrant Rana speaks at the Workshop on Intellectual Property Rights (IPRs) for the cement sector at NCCBM

Vikrant Rana, Managing Partner of S.S. Rana & Co., recently spoke at the ‘Workshop on Patents and Intellectual Property Rights (IPRs) for the Cement Sector’, at the National Council for Cement and Building Materials (hereinafter referred to as the ‘NCCBM’), Ballabgarh.

The technical workshop was organized with the aim of apprising NCCBM’s technical staff of the nuances and applicability of patents and IPRs in the cement sector. The said workshop was organized in collaboration with the Patent Facilitating Centre (PFC) of the Technology Information, Forecasting and Assessment Council (TIFAC), Department of Science and Technology, Government of India.
Mr. Rana spoke on the topic titled, “Industrial Designs and Trademark Protection in India’.

The talk began with a short introduction on the Importance of Intellectual Property as a tool to enhancing one’s business, after which it moved on to briefly explaining the concepts of Designs and Trademarks for the convenience of the audience. Thereafter, the session was concluded with Mr. Rana describing the role Intellectual Property can play in improving the overall efficiency of the Cement Industry with special reference being drawn from innovative equipment & brick designs filed by different entities in India.