Case: Chintalapati Srinivasa Raju and Ors Vs. Securities and Exchange Board of India

ground not raised by the Revenue either in the show-cause notice or in the order. 17. In this context, we may usefully refer to the judgment of this Court in the case of Reckitt & Colman of India Ltd. v. CCE [(1997) 10 SCC 379 : (1996) 88 ELT 641 ]. This Court held that it is beyond the competence of the Tribunal to make out in favour of the Revenue a case which the Revenue had never canvassed and which the Appellants had never been required to meet. 18. The impugned order of the Tribunal which had gone beyond the show-cause notice and the order of the Respondent Collector is, therefore, liable to be set aside. 20. However, Shri Singh argued, based on Section 21 of the Securities Contracts (Regulation) Act, 1956 and Clause 35 of the Listing Agreement, which takes us to Regulation 2(1)(h)(i) of the 1997 Regulations, to support the majority judgment of the Appellate Tribunal by stating that as the Appellant was an executive director from 1993 to 2000, he must be said to be a person who is in control as a director of the company and hence a promoter. Regulation 2(1)(h)(i) of the 1997 Regulations states: 2. Definitions (1) In these Regulations, unless the context otherwise requires- (h) "promoter" means- (i) the person or persons who are in control of the company, directly or indirectly, whether as a shareholder, director or otherwise; "Control" is defined by Regulation 2(1)(c) of the 1997 Regulations as follows: (c) "control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner; Explanation. (i) Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management: PROVIDED that the transfer from joint control to sole control is effected in accordance with Clause (e) of sub-Regulation (1) of Regulation 3. (ii) If consequent upon change in control of the target company in accordance with Regulation 3, the control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a change in control. Even though the definition of "control" in the 1997 Regulations is an inclusive one, yet the definition shows that control must mean a right to appoint majority of directors as a shareholder or to control management or policy decisions exercisable by persons in any manner. It may be pointed out, as has been correctly argued by Shri Viswanathan in rejoinder, that the Appellant was an executive director on a fixed monthly salary, which was roughly in the range of Rs. 1,00,000/- per month, when he stepped down as an executive director in 2000. After stepping down, it was pointed out to us that the salary was stopped, and he was paid only for board meetings which he attended. Nothing has been shown to us to indicate that, on facts, such executive salaried director was in any manner in control of SCSL directly or indirectly. The absence of the word "independent" in the annual report also does not take us very far, inasmuch as it is admitted that he was a non-executive director from 2000 to 2003, who only attended six board meetings and received salary therefor. We have not been shown how the Appellant was in any manner responsible for actions taken by those in the management of SCSL. We have already demonstrated that the minority judgment is much more detailed and correct than the majority judgment of the Appellant Tribunal. We accept Shri Singhs submission that in cases like the present, a reasonable expectation to be in the know of things can only be based on reasonable inferences drawn from foundational facts. This Court in SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368 at 383, stated: 26. It is a fundamental principle of law that proof of an allegation leveled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and leveled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. 21. We are of the view that from the mere fact that the Appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, without more, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed. The fact that the Appellant was to be continued as a director till replacement again does not take us anywhere. Shri Viswanathan has shown us that two other independent non-executive directors were appointed in his place on and from 23.1.2003. What is clear is that the Appellant devoted all his energies to the businesses he was running, on and after resigning as an executive director of SCSL, as a result of which the salary he was being paid by SCSL was discontinued.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In the present case, the new 2015 Regulations also throw considerable light on the definition of "insider", as an insider is now defined to mean only a person who is a connected person or a person who is in possession of or having access to unpublished price sensitive information. Obviously, post 2015, an "insider" need not satisfy the second test of the 1992 Regulations and it is enough that such person be a "connected person" as defined. The disjunctive "or" contained in the 2015 Regulations must be contrasted with the expression "and" contained in the 1992 Regulations. Therefore, it is clear that the majority view of the Appellate Tribunal, in giving effect to only the first part of Regulation 2(e)(i) of the 1992 Regulations, cannot be sustained in law11. Further, under the second part of Regulation 2(e)(i), the connected person must be "reasonably expected" to have access to unpublished price sensitive information. The expression "reasonably expected" cannot be a mere ipse dixit-there must be material to show that such person can reasonably be so expected to have access to unpublished price sensitive information12. This brings us to the minority judgment of the Appellate Tribunal. First and foremost, this judgment correctly brings out the role of the expression "and" contained in Regulation 2(e)(i). The judgment also correctly appreciates the difference in language in Regulation 3 before and after it was amended in 2002, and contrasts the expression "on the basis of" with the expression "when in possession of". The minority judgment then goes on to refer and rely upon the SFIOs report, which found that the manipulation of financial statements was done by B. Ramalinga Raju and his cohorts, and was suppressed from the board of directors, which would include the Appellant as a member of such board13. The said judgment went on to hold that the Appellant cannot be described as a promoter inasmuch as the annual reports, which contained his signatures as a director, did not show him as a promoter. What was done behind his back was that B. Ramalinga Raju and B. Rama Raju described him as a promoter only to various stock exchanges in letters written to those exchanges without the knowledge or consent of the Appellant. The minority judgment also refers to the fact that the Appellants shares were not subject to a lock-in period at the time of merger of SES into SCSL, which lock-in period was mandated by law for promoters. In fact, the Appellant was one of the persons duped by B. Ramalinga Raju and his brother B. Rama Raju and was, therefore, a victim of the fraud perpetrated by the former Chairman of SCSL. One very important finding of the minority judgment is as follows:17. There is no dispute that the Appellant, who was wife of the Managing Director, was appointed as a Director of the CompanyM/s. Elite International (P) Ltd. on 1-7-2004 and had also executed a letter of guarantee on 19-1-2005. The cheques in question were issued during April 2008 to September 2008. So far as the dishonour of cheques is concerned, admittedly the cheques were not signed by the Appellant. There is also no dispute that the Appellant was not the Managing Director but only a non-executive Director of the Company. Non-executive Director is no doubt a custodian of the governance of the company but is not involved in the day-to-day affairs of the running of its business and only monitors the executive activity. To fasten vicarious liability Under Section 141 of the Act on a person, at the material time that person shall have been at the helm of affairs of the company, one who actively looks after the day-to-day activities of the company and is particularly responsible for the conduct of its business. Simply because a person is a Director of a company, does not make him liable under the NI Act. Every person connected with the Company will not fall into the ambit of the provision. Time and again, it has been asserted by this Court that only those persons who were in charge of and responsible for the conduct of the business of the Company at the time of commission of an offence will be liable for criminal action. A Director, who was not in charge of and was not responsible for the conduct of the business of the Company at the relevant time, will not be liable for an offence Under Section 141 of the NI Act21. We are of the view that from the mere fact that the Appellant promoted two joint venture companies, one of which ultimately merged with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, without more, cannot be stated to be foundational facts from which an inference of reasonably being expected to be in the knowledge of confidential information can be formed. The fact that the Appellant was to be continued as a director till replacement again does not take us anywhere. Shri Viswanathan has shown us that two other independent non-executive directors were appointed in his place on and from 23.1.2003. What is clear is that the Appellant devoted all his energies to the businesses he was running, on and after resigning as an executive director of SCSL, as a result of which the salary he was being paid by SCSL was discontinued25. On facts, the Appellant sold 8,00,000 shares from 4.1.2001 to 14.3.2001. As has been pointed out hereinabove, the occurrence of the UPSI was only from 31.3.2001 and inasmuch as these sales were made prior to this date, obviously, the 1992 Regulations would not get attracted. The minority judgment of the Appellate Tribunal referred to this and stated that the result would be the same as the result in Appeal No. 462 of 2015, namely that of B. Jhansi Rani, who was the wife of B. Suryanarayana Raju, brother of B. Ramalinga Raju and B. Rama Raju. In that case also, shares had been sold prior to the occurrence of the UPSI and on the self-same ground, B. Jhansi Ranis appeal had been allowed by the majority judgment of the Appellate Tribunal with the minority concurring. The minority judgment further went on to state that 24,00,000 shares also, which were never sold but were merely returned to Chintalapati Srinivasa Raju, could not form the basis of any disgorgement order. We agree with the same27. Obviously, the Appellant company does not have persons who are relatives of persons mentioned in Sub-clauses (vi), (vii) and (viii)-under these sub-clauses, a person is deemed to be a connected person if such person is a relative of persons in Clauses (i) to (v); or is a banker of the company; or is a relative of a connected personHe was a connected person to Shri Chintalapati Srinivasa Raju, being his father, but as the shares which stood in his name were sold in August, 2005, he could not possibly be a relative of a connected person as Shri Chintalapati Srinivasa Raju himself ceased to be a connected person on and from July, 2003. The minority judgment of the Appellate Tribunal correctly appreciates this position in the following manner:142. The Appellant was the father of CSR. The Appellant sold 2,50,000 shares on 04.08.2005. Appellant expired on 03.12.2007. The Impugned Order holds the Appellant to be a person deemed to be connected under Regulation 2(h)(viii), since he was a relative of a connected person (CSR) (Para 37). However, as discussed above, CSR ceased to be a connected person on 22.07.2003. Consequently, when the Appellant sold the shares on 04.08.2005, he could not be "a deemed to be connected person" since CSR himself ceased to be a connected person. On this short point alone, the order of the WTM is liable to be quashed and set asideIndeed, this is the basis of both the Whole Time Members judgment as well as the majority judgment of the Appellate Tribunal. Given the fact that this lady was not proceeded against by the CBI or by the Enforcement Directorate and that the SFIOs report does not, in any manner, refer to her, and given the fact that she was neither promoter nor director of SCSL, it is obvious that the test of the second part of Clause 2(e)(i) is not met in the facts of this appeal. Also, it must be remembered that had she been in possession of UPSI, she would also have sold shares at their peak price instead of selling them at a depressed price in the year 2003However, they were neither directors nor promoters of SCSL and were not involved in the fraud perpetrated by their father, as has been held in their favour by the Appellate Tribunal. Also, the CBI and the Enforcement Directorate did not proceed against them and the SFIOs report says nothing about their involvement. Both these brothers sold off their shares in SCSL in August and September, 2005 at a price of roughly Rs. 518/- per share, way below the price of Rs. 966.80/- at the end of 2006 when their father sold off his shares. According to them, therefore, the Appellate Tribunal was wrong in putting 2 and 2 together and making 22 only by virtue of the fact that they were the sons of B. Ramalinga Raju. Also, insofar as B. Rama Raju (Jr.) was concerned, the findings of the Appellate Tribunal that he had given a presentation to the Board of directors of SCSL in the meeting on 26.12.2008 in support of the proposed merger of Maytas Properties Limited with SCSL is factually incorrect, as has been stated by him in a subsequent application, and which is not denied by the SEBI. Given the fact that the second limb of Clause 2(e)(i) cannot be put against either of these Appellants, in that there is no evidence of any complicity in the fraud committed by their father; given the fact that they were expressly exonerated of the said fraud by the Appellate Tribunal; and given the fact that they were running independent businesses and were neither directors nor promoters of SCSL, and that they sold their shares for business purposes at a price much less than the peak price at which their father sold shares of SCSL in 2006, no case has been made against themIn this context, the Appellate Tribunal held:h) It is now established that Ramalinga Raju and Rama Raju manipulated the books of Satyam during the period from 2001 to 2008. During that period Ramalinga Raju, Rama Raju and their wives transferred their shareholding in Satyam to SRSR and SRSR in turn pledged those shares for obtaining loan of Rs. 1258.88 crore to the group concerns and as the loan was not repaid the pledged shares have been sold by invoking the pledge. Thus, on one hand Ramalinaga Raju and Rama Raju manipulated the books of Satyam and ensured that the market price of Satyam were higher and on the other hand through SRSR got the Satyam shares pledged and obtained higher loan on the basis of higher market price of Satyam shares. In these circumstances, inference drawn by the WTM of SEBI that SRSR was reasonably expected to have access to the UPSI and hence an insider under Regulation 2(e) of the PIT Regulations cannot be faulted. Consequently, the decision of the WTM of SEBI that SRSR indulged in pledging the shares of Satyam belonging to Ramalinga Raju, Rama Raju and their spouses in contravention of Regulation 3 of the PIT Regulations cannot be faultedi) Apart from the above, mode and the manner in which SRSR was incorporated, mode and the manner in which shares of Satyam were transferred by Ramalinga Raju, Rama Raju and their wives to SRSR and the mode and the manner in which the shares of Satyam were pledged and the pledged amounts were utilized, leave no manner of doubt that SRSR was a front entity established by Ramalinga Raju and Rama Raju for off loading their shareholding in Satyam when the market value of Satyam shares were higher on account of fictitious bank balances shown in the books of Satyam. Therefore, argument that SRSR was not an insider and had not pledged the shares of Satyam when in possession of UPSI cannot be acceptedxxx xxx xxxl) In the result, decision of the WTM of SEBI that SRSR was an insider under the PIT Regulations and that SRSR pledged and got the shares of Satyam belonging to Ramalinga Raju, Rama Raju and their spouses sold when in possession of UPSI and thus SRSR violated SEBI Act and the PIT Regulations cannot be faulted38. From this Section, it is clear that the report can be used as evidence in any other proceeding. Even though it is correct to state that this report was delivered on 13.4.2009, i.e. before the show cause notice was issued on 19.6.2009, the mere fact that this was not put against the Appellant in the show cause notice cannot be any reason for us not to independently view the same. The Appellant has not chosen to assail the findings contained in this report in a writ petition filed before the High Court. Under Section 246 of the Companies Act, 1956, this Court is empowered to look at the same as evidence of the opinion of the inspector concerned in relation to any matter contained in the report. By virtue of Section 246, therefore, it is possible for us to appreciate the role of the Appellant in the so-called Satyam scamWhile it is true that adjudication proceedings and criminal proceedings are separate proceedings, the relevance of the Special Courts judgment is only for the purpose of showing that the second part of the definition of an "insider" is made out in the Appellants case, for, if the Appellant, along with his brothers, was party to the fraud practiced on the public, it is obvious that he was reasonably expected to have access to UPSI in respect of the securities of SCSL. This Appellants case, therefore, stands apart from the other family members of B. Ramalinga Raju, in that the SFIOs report as well as the aforesaid judgment clearly and unmistakably point to his complicity, unlike that of the other family members, in the fraud committed from 2001 onwards.