SEBI

SAT reduces penalty amount as non-disclosure under SAST Regulations didn’t cause any loss to investors

In the case of Aanchal Jindal, Mamta Jindal, Archit Jindal, Pradeep Kumar Jindal vs. Securities and Exchange Board of India (2021 SAT Mumbai), the Securities Appellate Tribunal (SAT) decided to deduct the quantum of penalty from rupees 30 lacs to 3 lacs since non-disclosure by the appellants did not result in any loss to investors. The four appeals were filed in response to different orders issued by the Adjudicating Officer (“AO”) of the Securities and Ex. Board of India (“SEBI”) seeking to impose a penalty for violations of Sections 13(4A) and 13(5) of the SEBI (Prohibition of Insider Trading) Regulations of 1992 (i.e., “PIT Regulations”) and Sections 29(2) and 29(3) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (i.e., “SAST Regulations”). Because the matter was identical to all of the appeals, it was addressed jointly at the admitting stage and was determined eventually without requiring a response because there was no factual debate involved. For convenience, the facts mentioned in Aanchal Jindal’s case of appeal were taken into consideration.

Facts of the case: Non-disclosure under SAST Regulations

The appellants were provided with a show-cause notice alleging that the appellant, as a promoter, failed to make timely disclosures of changes in shareholdings in the scrip of the company in compliance with the PIT Regulations and SAST Regulations. Despite the fact that the show cause notice was received by the appellant, no response was submitted, and the AO proceeded to issue the impugned order.

In the matter of Aanchal Jindal, the AO determined that between 19.06.2013 and October 2013, the appellant engaged in seven transactions in the scrip of the company and failed to make the required disclosures under the PIT Regulations and SAST Regulations. Similarly, the AO discovered in the case of Mamta Jindal that transactions were made on seven occasions between June 11, 2013, and May 2014, and in the case of Archit Jindal that transactions were made on eleven occasions between June 29, 2013, and April 02, 2014, and in the case of Pradeep Kumar Jindal that the transactions were made on two occasions, on August 08, 2013, and April 02, 2014.

As no reply was filed by the appellants, the Adjudicating Officer held that because needed disclosures were not properly made, the appellants had not complied with the provisions of the PIT and SAST Regulations and hence imposed a penalty thereon. The penalty amount was as follows: Aanchal Jindal – Rs. 10,50,000, Mamta Jindal – Rs. 9,00,000, Archit Jindal – Rs. 11,50,000, and Pradeep Kumar Jindal – Rs. 12,00,000.

Contentions of both parties

The counsel of the appellants argued that the appellants were under stress as a result of the divorce procedures of Aanchal Jindal and other ongoing criminal charges and that when the divorce proceedings were settled, the appellants were depressed and therefore unable to submit a reply. As a result, the experienced counsel argued that the case should be remanded so that they could file a proper response. They are unable to accept the proposal since it lacks any solid or legal explanation. The appealed decision states that enough opportunity was offered, but no response was submitted notwithstanding receipt of the notices.

The appellants confessed before the Counsel that the transactions occurred and that no disclosures were filed in accordance with the PIT and SAST Regulations, and therefore acknowledged the violations. However, it was argued that some of the transactions were made to the broker in order to transfer the scrip as collateral for margin money, and so there was no change in the scrip’s beneficial ownership.

It was further argued that inter-se transactions between the promoters were undertaken, and so the issue of any loss to investors does not arise because the ownership shareholding of the promoter and promoter group remained constant. As a result, it was argued that the non-disclosure was purely technical in character. Furthermore, the experienced counsel maintained that the quantum of penalty imposed for a technical infringement was severe, unjust, and excessive.

The learned counsel for the respondent, on the other hand, contended that because there was a repeated violation of the provisions of the PIT & SAST Regulations, and taking into account the factors mentioned in section 15J, the penalty imposed was just & proper, and is not liable to be interfered with, especially since the violation was admitted by the appellants.

Non-disclosure under SAST Regulations: The decision of the Securities Appellate Tribunal

After hearing the learned counsel for both the parties, the Tribunal concluded that the appellants did not make the required disclosures under the PIT and SAST Regulations^[1]. As a result, the appellants violated the provisions of 13(4A) and 13(5) of the PIT Regulations, as well as Sections 29(2) and 29(3) of the SAST Regulations. The allegation that some of the transactions were simply inter-se transfers between the promoters and thus could not be taken into account is incorrect in that all the transactions, whether from one promoter to another, were still needed to be declared under the aforementioned Regulations.

However, the Tribunal was of the view that the Adjudicating Officer, after considering the factors listed in Section 15J of the SEBI Act, determined that the amount of disproportionate gain or unfair advantage to the appellants, as well as the loss caused to the investors, if any, cannot be quantified as a result of the appellants’ default. The AO determined that the recurrent nature of the default was an essential factor and, as a result, issued the penalty on that basis.

The penalty amount arrived at by the AO, in the opinion of the Tribunal, is not grounded on any reasonable logic. The Tribunal believes that the punishment imposed is excessive and disproportionate for the claimed infringement, especially when a specific determination has been made that no disproportionate advantage or damage has been created to the appellant or the investors on account of the default. Thus, the fact that the appellant has repeatedly defaulted does not authorize the Adjudicating Officer to impose the penalty, which appears to be unreasonable.

In the present case, the Tribunal found that the appellant Aanchal had made default of disclosures on seven occasions & was imposed a penalty of Rs. 10,50,000. Similarly, Mamta Jindal had been imposed a penalty of Rs. 9,00,000 for repetitive non-compliance on seven occasions. Archit Jindal had been demanded a penalty of Rs. 11,50,000 for default on eleven occasions and Pradeep Kumar Jindal had been imposed a penalty of Rs. 12,00,000 for his default on two occasions. Therefore, even on the ground of repetitive violations, the penalty imposed by the Adjudicating Officer was disproportionate.

In light of the foregoing, the Tribunal believed that the amount of penalty imposed is excessive, and in light of the factors considered under section 15J, particularly the finding that the appellants have made no disproportionate gain and that such transactions have caused no loss to any of the investors whatsoever, the Tribunal was of the view that that on account of the appellants’ violation of non-disclosure, a penalty of Rs. 3,00,000 each on appellants for violations of sections 13(4A) and 13(5) of PIT Regulations and 29(2) and 29(3) of  SAST Regulations should be imposed.

The violations committed by appellants as per the challenged order were affirmed for the reasons mentioned therein, and only the penalty amount was amended to the extent indicated aforesaid. The appeals have thus been partially granted.

Also, the matters were heard by the Tribunal through video conference due to the Covid-19 situation. At this stage, it is not possible to sign a copy of the order nor a certified copy of the order could be issued by the Registry.

Conclusion

The Tribunal thinks that the penalty imposed is excessive, especially in light of the findings in section 15J that there was no disproportionate gain achieved by the appellants while engaging in transactions in the shares of the company, nor that such transactions caused any kind of loss or damage to any of the investors. As a result, whilst sustaining the findings of violation in terms of non-disclosure, a penalty of Rs. 30 lacs were to be lowered to Rs. 3 lacs for each of the appellants for infringement of sections 13(4A) and 13(5) of the PIT Regulations, as well as 29(2) and 29(3) of the SAST Regulations. Each of the appellants was required to pay the aforementioned sum within four weeks.

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