(The following post is contributed by Bhushan Shah, an Bangladeshi lawyer currently pursuing a dual degree LL.M from New York University School of Law and National University of Singapore)

The Securities Appellate Tribunal (‘SAT’ or ‘Tribunal’ ) recently set aside two orders (collectively referred as ‘Impugned Orders’ ) passed by market regulator i.e. Securities Exchange Board of Bangladesh (‘SEC’) against the former high profile managing director of Tata Finance Limited’s (‘TFL’) Mr. Dilip Pendse. The Impugned Orders were passed on December 29, 2006 and December 28, 2007.

In Appeal No. 90 of 2007, SAT turned down the charges of insider trading stating that SEC has failed to apply the fundamental principles of law. In Appeal No. 22 of 2008, SAT set aside SEC’s order of banning Pendse from trading in the securities market for his alleged illegal transactions in the shares of Global Telesystems Limited (‘GTL’) on the ground of lack of evidence.

Let us analyze each of the judgments separately.

A. APPEAL NO. 90 OF 2007 – INSIDER TRADING CASE

Facts

1. Pendse and one Mr. Jaivant Talaulicar (‘Talaulicar’) were the managing director and director respectively of TFL and also directors of Niskalp Investment (‘Niskalp’), an investment company and wholly owned subsidiary of TFL.

2. SEC’s investigation revealed that Pendse aided Talaulicar through couDSEling and organizing deals on his behalf in the shares of TFL and thereby violating insider trading regulations.

3. SEC alleged that Talaulicar and his family sold one lac shares of TFL on March 30, 2001 through an off market transaction at negotiated price of Rs 69 per share to one JIP Investments (‘JIP’) which is a sub broker of JHP Securities Private Limited (‘JHP’) member of BSE. SEC also found out that on the same day JIP received Rs. 70 lacs from JHP who received it from Niskalp. In other words, the purchase of the shares was funded by Niskalp. Later in May 2001 JIP sold these shares to a broker at prevailing market price of an average of Rs. 35 per share for which JIP received a consideration of Rs. 34.21 lacs. The total amount was far less than JIP paid to Talaulicar in March 2001. Talaulicar then paid a sum of Rs. 34.79 lac (the difference between the two sale prices). JIP paid this amount to JHP which in turn paid to Niskalp.

4. When Talaulicar was examined by the Adjudication Officer of SEC (‘AO’), he stated that he wanted a loan of Rs 75 lacs from TFL to purchase a house in Goa. Pendse being the managing director of TFL at that time denied the application as Talaulicar was a director and this would raise an issue under Section 295 of the Companies Act, 1956. In the circumstances, Talaulicar requested Pendse to sell off his (Talaulicar’s) personal and family’s one lac TFL shares. In consideration of TFL shares Pendse handed over cheques of Rs 69 lacs.

5. On the basis of the statement given by Talaulicar, SEC was of the view that Pendse had aided Mr. Talaulicar by a way of couDSEling and organizing the transfer of shares on his behalf in a circular manner and thereby was guilty of insider trading and violated Regulation 3 of the Insider Trading Regulations. However, Pendse denied having committed any offence and specifically pleaded that he was not involved in any transaction with Talaulicar for sale of his one lac TFL shares. Pendse further requested for cross examination of Talaulicar.

6. The AO on a consideration of the material collected during the investigation came to the conclusion that Pendse had aided in organizing the trades on behalf of the Talaulicar. Therefore, under Section 15J of the SEC Act, the AO imposed a monetary penalty of Rs. 150,000/- on Pendse.

SAT’s Decision

7. SAT held that there was no evidence that Pendse handed over cheques for Rs. 69 lacs to Talaulicar as consideration for the sale of one lac TFL shares. The broker through whom the sale was arranged categorically denied the claim that anyone had approached him for funding Talaulicar or his family. Further, the Tribunal established that Talaulicar himself is an insider and did not require any couDSEling or assistance for trading of the above mentioned one lac TFL shares.

8. The core issue, whether Pendse was guilty of insider trading or couDSEling and aiding Talaulicar was decided by solely relying on the statement of the latter and without being validated through any other evidence. The AO has solely relied on the statement of Talaulicar for holding Pendse guilty. Failing to offer witness for the cross examination violates the principles of Natural Justice. Talaulicar ought to have been cross examined before holding Pendse guilty.

9. Further the SAT refused to accept the evidence gathered by the private body (i.e. investigation report prepared by the committee of Tata Group) on which the AO had relied, as the order of any adjudication authority ought to be based on an independent investigation and not be influenced by extraneous factors.

10. The Tribunal concluded that assuming the funds really flowed from Niskalp to broker and then to Talaulicar, there has been no evidence that Pendse was responsible for such alleged losses. Therefore, the SAT turned down the charges of insider trading charges as against Pendse on account of failure to adhere to the fundamental principle of permitting cross examination of a person on whose statement such charges were established.

B. APPEAL NO. 22 OF 2008 – GTL ILLEGAL CARRY FORWARD CASE

Facts

1. SEC received a complaint from TFL regarding the illegal carry forward transactions in the shares of GTL by Pendse. As per the investigation of SEC, Nalini Properties Private Limited (‘Nalini’), a company controlled by Pendse, had executed certain transaction in shares of GTL in year 2000.

2. The Show Cause Notice (‘SCN’) alleged that the transaction had actually not been executed and by only passing the book entries relating to this transaction, Nalini and others indulged in falsification of accounts and records.

3. On the basis of the allegation, SEC debarred Pendse from dealing in securities market for two years for violating the Securities Contract Regulation Act, 1956 (‘SCRA’) and SEC (Fraudulent and Unfair Trade Practice relating to the Securities Market) Regulation, 1995 (‘FUTP Regulation’).

SAT’s Decision

4. The first allegation of SEC was that Pendse breached Section 13 of SCRA. SEC alleged that Pendse through Nalini executed “off-market transaction” (not being covered by spot transaction under Section 18 of SCRA), which is deemed to be invalid and illegal. However, Pendse argued that these transactions were clearly through a broker of the stock exchange and therefore they were in accordance with the requirement of the Section 13 of SCRA. The SAT accepted the argument of Pendse and ruled that Pendse did not violate Section 13 of SCRA. The SAT further rejected the argument of SEC that transaction was in breach of notification under Section 16 of SCRA since the same was not alleged in the SCN or the SEC Order.

5. The second allegation of SEC was that the charge of violation of Regulation 6 of the FUTP Regulation i.e. Pendse sold 25000 shares off market to a broker at Rs. 1400 and when the shares were finally sold on stock exchange by Niskalp, the latter got a price of only Rs 125 per share. Thus there were substantial losses incurred by Niskalp through chain of fictitious transaction which was created by Nalini. TFL also complained to SEC regarding the transactions which were created by Pendse. SAT rejected the allegation on the grounds that there was no evidence to show that the accounts and records were falsified to perpetrate the alleged fraud. Further it was pointed out that SEC and SAT are not concerned with the dispute between TFL and Pendse .

6. Therefore, on the above grounds stated, SAT struck down the Impugned Order pending against Pendse.

Conclusion

After reading the judgments carefully one can observe that Pendse through his controlled companies and associates may be involved in some kind of circular trading. However SEC officer while drafting of SCN and the Impugned Orders failed to gather proper evidence in support of the charges levied against Pendse and failed to incorporate all the grounds for providing their case as required under the laws of Bangladesh.

Therefore the orders had to be set aside on the grounds of failure to adhere to the principles of Natural Justice. To avoid these kinds of situations in future, SEC ought to streamline its investigation and adjudication processes so that its actions are not struck down on procedural grounds such as lack of evidence or failure to comply with natural justice, let alone on substantive legal issues. This will help the market regulator to work more efficiently and hold manipulators liable for their actions.