# CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND EXCHANGE BOARD OF INDIA

- **Citation:** [2018] 5 S.C.R. 785
- **Court:** Supreme Court of India
- **Decided:** 2018-05-14
- **Case number:** Civil Appeal No.16805 of 2017
- **Bench:** R. F. Nariman, Navin Sinha
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/chintalapati-srinivasa-raju-v-securities-and-exchange-board-of-india-33191
- **Pages:** 44

## Headnote

SEBI (Prohibition of Insider Trading) Regulations, 1992:
Regn 2(e)(i), 2(c) - Insider trading - Satyam scam - Appellantco-brother of the Chairman of SCSL-Satyam Computer Services
Limited, was executive director of SCSL from 1993 to 2000 and
non-executive director from 2000 to 2003 - Appellant holding
76,50,000 equity shares of SCSL - Letter by former Chairman of
SCSL, to the stock exchange and SEBI that financial statement of
the company had been grossly overstated - Show cause notice to
appellant that being a promoter and director of SCSL, he was liable
as an "insider", having knowledge of Unpublished Price Sensitive
Information (UPSI), as a result of which he stood to gain by selling
his shares at an inflated value - Whole Time Member of SEBI and
appellate tribunal held that the appellant was a "connected person"
u/Regn 2(c) and, thus, "insider" u/Regn 2(e) - On appeal, held:
Appellant cannot be described as a promoter since the annual
reports, which contained his signatures as a director, did not show
him as a promoter - Chairman and his brother described him as a
promoter in letters written to various stock exchanges behind his
back and duped him - He was victim of fraud perpetrated by them
- By 2006, all the actual promoters disposed of their shareholding
in SCSL because they were aware of the credit crunch faced by
SCSL - Appellant continued to retain substantial shareholding in
SCSL till the end of 2008 clearly points to lack of possession of
UPSI - Appellant had no professional or business relationship with
his co-brother and had no connection with any of the entities floated
by his co-brother - Appellant ceased to be executive director in
2000 as such was not involved with fraudulent manipulation which
began only from 2001 onwards - It has not been shown how
appellant was in any manner responsible for actions taken by those
in the management of SCSL - Inference of reasonably being
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expected to be in the knowledge of confidential information cannot
be formed - SEBI (Prohibition of Insider Trading) Regulations, 2015
- Securities and Exchange Board of India Act, 1992.
Regn 2(e)(ii), 2(h)(ix) - Unpublished Price Sensitive
Information (UPSI) - Satyam scam - Appellant Company-private
company of the executive director/non-director of SCSL and his
wife - Each holding 50% share capital of the company - Appellant
sold only 8,00,000 shares held in SCSL - 24,00,000 shares never
sold by appellant, but for which only application money was
received and returned by 17.4.2002 - Disgorgement order included
gains made on account of the said shares - Minority judgment
holding that 8,00,000 shares had been sold prior to the occurrence
of the UPSI and 24,00,000 shares were never sold but were merely
returned to executive director/non-director of SCSL, could not form
the basis of any disgorgement order - On appeal, held: Minority
judgment is upheld - Appellant 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 cl (i) to (v); or is a
banker of the company; or is a relative of a connected person -
Since none of these clauses are attracted, s. 2(h)(ix) not attracted.
Regn 2(h)(viii) - Person deemed to be connected - Satyam
scam - Father of executive director/non-executive director of the
company - Father neither a promoter nor a director of SCSL, and
sold 2,50,000 shares in 2005 and expired in 2007 - Order by the
tribunal that father was a person deemed to be connected under
Regn 2(h)(viii) since he was relative of a connected person - On
appeal, held: Director/executive director ceased to be a connected
person in 2003 - Thus, when the father sold shares in 2005, he
could not be a deemed to be connected person since the director
himself ceased to be a connected person - Thus, order of Whole
Time Memb

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785
 CHINTALAPATI SRINIVASA RAJU
 v.
SECURITIES AND EXCHANGE BOARD OF INDIA
(Civil Appeal No.16805 of 2017 Etc.)
MAY 14, 2018
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
SEBI (Prohibition of Insider Trading) Regulations, 1992:
Regn 2(e)(i), 2(c) - Insider trading - Satyam scam - Appellantco-brother of the Chairman of SCSL-Satyam Computer Services
Limited, was executive director of SCSL from 1993 to 2000 and
non-executive director from 2000 to 2003 - Appellant holding
76,50,000 equity shares of SCSL - Letter by former Chairman of
SCSL, to the stock exchange and SEBI that financial statement of
the company had been grossly overstated - Show cause notice to
appellant that being a promoter and director of SCSL, he was liable
as an "insider", having knowledge of Unpublished Price Sensitive
Information (UPSI), as a result of which he stood to gain by selling
his shares at an inflated value - Whole Time Member of SEBI and
appellate tribunal held that the appellant was a "connected person"
u/Regn 2(c) and, thus, "insider" u/Regn 2(e) - On appeal, held:
Appellant cannot be described as a promoter since the annual
reports, which contained his signatures as a director, did not show
him as a promoter - Chairman and his brother described him as a
promoter in letters written to various stock exchanges behind his
back and duped him - He was victim of fraud perpetrated by them
- By 2006, all the actual promoters disposed of their shareholding
in SCSL because they were aware of the credit crunch faced by
SCSL - Appellant continued to retain substantial shareholding in
SCSL till the end of 2008 clearly points to lack of possession of
UPSI - Appellant had no professional or business relationship with
his co-brother and had no connection with any of the entities floated
by his co-brother - Appellant ceased to be executive director in
2000 as such was not involved with fraudulent manipulation which
began only from 2001 onwards - It has not been shown how
appellant was in any manner responsible for actions taken by those
in the management of SCSL - Inference of reasonably being
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expected to be in the knowledge of confidential information cannot
be formed - SEBI (Prohibition of Insider Trading) Regulations, 2015
- Securities and Exchange Board of India Act, 1992.
Regn 2(e)(ii), 2(h)(ix) - Unpublished Price Sensitive
Information (UPSI) - Satyam scam - Appellant Company-private
company of the executive director/non-director of SCSL and his
wife - Each holding 50% share capital of the company - Appellant
sold only 8,00,000 shares held in SCSL - 24,00,000 shares never
sold by appellant, but for which only application money was
received and returned by 17.4.2002 - Disgorgement order included
gains made on account of the said shares - Minority judgment
holding that 8,00,000 shares had been sold prior to the occurrence
of the UPSI and 24,00,000 shares were never sold but were merely
returned to executive director/non-director of SCSL, could not form
the basis of any disgorgement order - On appeal, held: Minority
judgment is upheld - Appellant 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 cl (i) to (v); or is a
banker of the company; or is a relative of a connected person -
Since none of these clauses are attracted, s. 2(h)(ix) not attracted.
Regn 2(h)(viii) - Person deemed to be connected - Satyam
scam - Father of executive director/non-executive director of the
company - Father neither a promoter nor a director of SCSL, and
sold 2,50,000 shares in 2005 and expired in 2007 - Order by the
tribunal that father was a person deemed to be connected under
Regn 2(h)(viii) since he was relative of a connected person - On
appeal, held: Director/executive director ceased to be a connected
person in 2003 - Thus, when the father sold shares in 2005, he
could not be a deemed to be connected person since the director
himself ceased to be a connected person - Thus, order of Whole
Time Member quashed and set aside.
Regn 2(e)(i) - Insider - Connected person - Satyam scam -
Mother of the Chairman, though relative, yet made off market
transactions way back in 2003 - Whole time member and majority
judgment of the appellate tribunal holding that mother being the
close relative, thus, must be presumed that she had access to UPSI
- On appeal, held: CBI or the Enforcement Directorate did not
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proceed against the mother nor was referred to by the SFIO's report
- She was neither promoter nor director of SCSL - Thus, the test of
the second part of clause 2(e)(i) not met with - Furthermore, 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 2003
- Thus, the majority judgment set aside.
Regn 2(e)(i) - Insider - Satyam scam - Chairman's sons roped
in by the Whole time member and the appellate tribunal - On appeal,
held: Second limb of clause 2(e)(i) cannot be put against either of
the sons - There was 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 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 made out against
them.
Regn 2(h)(ix) - Insider - Person deemed to be connected
person - Satyam scam - Appellant-private limited company owned
shares of Satyam company which were pledged as security for
obtaining a loan amount, that was borrowed to provide funds to ten
independent companies, owned by the family of the Chairman -
Majority judgment of the appellate tribunal held the appellant
company as deemed to be a connected person u/Regn 2(h)(ix) - On
appeal, held: Shareholding pattern of the appellant company, made
it clear that Chairman and his brother individually held more than
10% interest in the appellant company, thus, the appellant company
is deemed to be a connected person u/Regn 2(h)(ix) - Further, the
appellant company was an 'insider' under the Regulations - It had
pledged and got the shares of Satyam belonging to the Chairman
and his brother and their spouses sold when in possession of UPSI
and thus, violated SEBI Act and the Regulations - Thus, the finding
of the majority judgment upheld.
Regn 2(e)(i) and (ii) - Insider trading - Unpublished Price
Sensitive Information (UPSI) - Satyam scam - Appellant-younger
brother of the Chairman, roped in by the appellate tribunal - On
appeal, held: From s. 246 it is clear that the SFIO's report can be
used as evidence in any other proceeding - By virtue of s. 246, it is
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possible to appreciate the role of the appellant in the so-called
Satyam scam - Also, the judgment of the Special Court, delivered
long after the show cause notice, proved that the appellant also
played active role in the criminal conspiracy and cheating of SCSL,
its share holders and investors - While it is true that adjudication
proceedings and criminal proceedings are separate proceedings,
the relevance of the Special Court's judgment is only for the purpose
of showing that the second part of the definition of an "insider" is
made out in the appellant's case - He was reasonably expected to
have access to UPSI in respect of the securities of SCSL - Thus,
SFIO's report as well as the Special court judgment clearly and
unmistakably points to the complicity of appellant, unlike that of
the other family members, in the fraud committed - Majority judgment
of the appellate tribunal upheld - Companies Act, 1956 - s. 246.
Disposing of the appeals, the Court
HELD:
Civil Appeal No. 16805 of 2017
1.1 Regulation 2(e)(i) of the SEBI (Prohibition of Insider
Trading) Regulations, 1992 is in two parts. The first part has
reference to any person who is connected with the company or is
deemed to be connected with the company. There can be no doubt
that the definition of "connected person" contained in Regulation
2(c) would rope in the appellant under sub-clause (i) thereof, as
the appellant was undoubtedly a director of SCSL upto 2003.
However, the second limb of clause 2(e)(i) also has to be satisfied,
which is that such person must reasonably be expected to have
access to unpublished price sensitive information by virtue of
such connection in respect of securities of a company. It has been
held that the word "and" should be given its ordinary meaning
and should be understood in a conjunctive sense, unless it would
lead to an absurd situation or an unintelligible result. [Para 10]
[806-F-H; 807-A]
Maharaja Sir Pateshwari Prasad Singh v. State of U.P.
(1963) 50 ITR 731 ; M. Satyanarayana v. State of
Karnataka, (1986) 2 SCC 512 ; Union of India v. Justice
S. S. Sandhawalia [1994] 1 SCR 83 : (1994) 2 SCC
240 ; Spentex Industries Ltd. v. CCE [2015] 11 SCR
487 : (2016) 1 SCC 780 - referred to.
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1.2 In the instant case, the SEBI (Prohibition of Insider
Trading) Regulations, 2015 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 law. 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 information. [Paras 10, 11]
[807-B-E]
1.3 The minority judgment of the appellate tribunal 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 SFIO's report,
which found that the manipulation of financial statements was done
by the Chairman and his cohorts, and was suppressed from the
board of directors, which would include the appellant as a member
of such board. 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 the
Chairman and his brother 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 appellant's shares were
not subject to a lock-in period at the time of merger of SES into
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SCSL, which lock-in period was mandated by law for promoters.
In fact, the appellant was one of the persons duped by them and
was, therefore, a victim of the fraud perpetrated by the former
Chairman of SCSL. [Paras 12, 13] [807-F-G; 808-C-D]
1.4 It was also found that by the year 2006, all the actual
promoters disposed of their shareholding in SCSL because they
were aware of the credit crunch faced by SCSL. The fact that the
appellant continued to retain substantial shareholding in SCSL
right till the end of 2008 clearly points to lack of possession of
UPSI. Another important point is that the last transaction of sale
of shares by the appellant on 22.12.2008, which was a substantial
chunk of shares, was made by the appellant just like any other
shareholder of SCSL. News had got out into the market that the
merger proposal of SCSL with MI Limited and M Properties was
not going ahead. The hysteria in the share market resulted in a
steep drop in the price of shares of SCSL. The fact that the
appellant disposed of a huge chunk of his shareholding on
22.12.2008 to avail of the price on that date completely negates
the inference that there was any information flow between the
Chairman, his brother and the appellant. It was also pointed out
that the appellant had no professional or business relationship
with his co-brother and had no connection with any of the entities
floated by his co-brother. The fact that the appellant was not
involved with fraudulent manipulation is clear from the fact that
he ceased to be an executive director in the year 2000. Fraudulent
manipulation began only from 2001 onwards. It was also
considered significant by the minority judgment that the appellant
was not a nominee of SCSL on the board of directors of SL
Company, but of another third party investor. [Para 14] [809-CG]
1.5 Non-executive directors are, therefore, persons who
are not involved in the day to day affairs of the running of the
company and are not in charge of and not responsible for the
conduct of the business of the company. It is also important to
note that the appellant attended only six out of ten board meetings
of SCSL for the period that he was a non-executive director. The
appellant was not involved in any business development,
diversification plans and advise on new ventures of SCSL post
1999. It was also held by the minority judgment that the findings
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of the Whole Time Member and the majority went clearly beyond
the show cause notice, which, when read with Annexure 15 thereof,
makes it clear that the appellant is only sought to be roped in as
a promoter. Once it is found that he is not a promoter, then the
basis of the show cause notice goes as also the basis of the
impugned judgment. [Paras 16, 18] [811-C; 813-D-E]
1.6 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. 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, the salary
was stopped, and he was paid only for board meetings which he
attended. Nothing has been shown 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. It has not been shown how the appellant was in any
manner responsible for actions taken by those in the management
of SCSL. It is demonstrated that the minority judgment is much
more detailed and correct than the majority judgment of the
appellant tribunal. The 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 is
accepted. [Para 20] [816-C-G]
1.7 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 the Chairman,
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 anywhere. Two other independent non-executive
directors were appointed in his place on and from 23.1.2003. It is
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clear 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. [Para 21] [817-C-D]
1.8 Having regard to the findings contained in the minority
judgment and the discussion, the minority view is correct both in
law and on facts and is accepted. Therefore, the majority judgment
of the appellate tribunal is set aside. [Para 22] [817-E-F]
Pooja Ravinder Devidasani v. State of Maharashtra
(2014) 16 SCC 1 ; Godrej Industries Ltd. v. CCE
(2008) 17 SCC 471 ; SACI Allied Products Ltd. v. CCE
[2005] 3 SCR 881 : (2005) 7 SCC 159 ; SEBI v. Kishore
R. Ajmera [2016] 1 SCR 1118 : (2016) 6 SCC 368 -
referred to.
Dovey and the Metropolitan Bank v. John Cory
[1901] AC 477 - referred to.
Civil Appeal No. 19494 of 2017
2.1 On facts, the appellant sold 8,00,000 shares from
4.1.2001 to 14.3.2001. 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. In that case also, shares had been sold
prior to the occurrence of the UPSI and on the self-same ground,
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 'CS', could not form the
basis of any disgorgement order. The same is concurred with.
[Para 25] [818-C-E]
2.2 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
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person. Since none of these clauses are attracted, it is obvious
that Section 2(h)(ix) would also, as a matter of law, not be attracted
in the facts of this case. In this view, the majority judgment of the
appellate tribunal judgment is set aside. [Para 27] [819-A-B]
DIARY NO. 37202 of 2017
3. Appellant, father of 'CSR', was neither a promoter nor a
director of SCSL and had died on 3.12.2007. He was a connected
person to 'CSR', 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 'CSR' himself ceased to be a
connected person on and from July, 2003. The minority judgment
of the appellate tribunal correctly appreciated the said position.
[Para 28] [819-C-D]
Civil Appeal No. 17303 of 2017
4. It was submitted that there was no evidence whatsoever
of any complicity of the mother with the fraud perpetrated by her
son and his cohorts; and that all that has been found against his
client is that she is a close relative of the Chairman and by virtue
of this close relationship, it, therefore, must be presumed that
she had access to UPSI. Indeed, this was the basis of both the
Whole Time Member's 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 SFIO's 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 with. Also, 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 2003. Thus, the
majority judgment of the Appellate Tribunal is set aside.
[Para 30] [820-C-F]
Civil Appeal No. 17313 of 2017 and 17978 of 2017
5. Given the fact that the second limb of clause 2(e)(i) cannot
be put against either of these appellants-sons of the Chairman,
in that there is no evidence of any complicity in the fraud
committed by their father; given the fact that they were expressly
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exonerated of the said fraud by 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 them. The appellate tribunal judgment is
set aside in this behalf. [Para 31] [821-C-D]
Civil Appeal No. 17997 of 2017
6. It has been held that in the majority judgment of the
appellate tribunal, the amount that was borrowed by the appellant
company was utilised to provide funds to 10 private limited
companies, which were owned by the Chairman's family. Equally,
the shareholding pattern of the appellant company, as it stood on
and from 18.9.2006, made it clear that the Chairman and his
wife held 33.11% and 40.52% respectively, whereas the balance
was held by his brother and his wife. Obviously, therefore, as the
Chairman and his brother individually held more than 10%
interest in the appellant company, the appellant company is
deemed to be a connected person under Regulation 2(h)(ix) of
the 1992 Regulations. The decision of the WTM of SEBI that
appellant company was an 'insider' under the PIT Regulations
and that the appellant company pledged and got the shares of
Satyam belonging to Chairman and his brother and their spouses
sold when in possession of UPSI and thus SRSR violated SEBI
Act and the PIT Regulations cannot be faulted. This finding of
the majority judgment of the appellate tribunal is concurred with.
[Para 33] [821-G-H; 822-A-B, E; 823-C]
Civil Appeal No. 17383 of 2017
7.1 From Section 246 of the Companies Act, 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 this Court 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, this Court is
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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 to
appreciate the role of the appellant in the so-called Satyam scam.
Also, the judgment of the Special Court, which was delivered
only on 9.4.2015 i.e. long after the show cause notice, proved
that the accused also played active role in the criminal conspiracy
and cheating of M/s. SCSL, its share holders and investors.
[Paras 38, 39] [824-D-F; 826-G; 827-G]
7.2 While it is true that adjudication proceedings and
criminal proceedings are separate proceedings, the relevance of
the Special Court's judgment is only for the purpose of showing
that the second part of the definition of an "insider" is made out
in the appellant's 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 appellant's case, therefore, stands
apart from the other family members of the Chairman in that the
SFIO's report as well as the said judgment clearly and
unmistakably point to his complicity, unlike that of the other family
members, in the fraud committed from 2001 onwards. This being
the case, though for different reasons, the majority judgment of
the appellate tribunal is upheld. [Para 40] [828-C-E]
Radheshyam Kejriwal v. State of W.B. [2011] 4 SCR
889 : (2011) 3 SCC 581 ; Videocon Industries Ltd. v.
State of Maharashtra [2016] 2 SCR 741: (2016) 12
SCC 315; K.G. Premshanker v. Inspector of Police
[2002] 2 Suppl. SCR 350 : (2002) 8 SCC 87 - referred
to.
Case Law Reference
(1963) 50 ITR 731
 referred to
Para 10
(1986) 2 SCC 512
 referred to
Para 10
[1994] 1 SCR 83
 referred to
Para 10
[2015] 11 SCR 487
 referred to
Para 10
(2014) 16 SCC 1
 referred to
Para 16
(2008) 17 SCC 471
 referred to
Para 19
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND
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[2005] 3 SCR 881
 referred to
Para 19
[2016] 1 SCR 1118
 referred to
Para 20
[2011] 4 SCR 889
 referred to
Para 35
[2016] 2 SCR 741
 referred to
Para 35
[2002] 2 Suppl. SCR 350 referred to
Para 40
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 16805
of 2017.
From the Judgment and Order dated 11.08.2017 of the Securities
Appellate Tribunal at Mumbai in Appeal No. 451 of 2015
WITH
Civil Appeal Nos. 19494, 17997, 17313, 17303, 17383, 17978 of
2017 and Civil Appeal No. 5180 of 2018.
K.V. Vishwanathan, Sidharth Luthra, C. A. Sundram, Mohan
Parasaran, V. Giri, N. K. Kaul, Mukul Rohatgi, B. Subramonium Prasad,
Sr. Advs., Vivek Reddy, Ms. Amrita Panda, Ravichandra Hegde,
Ms. Vrinda Bhandari, Ms. Kirti Sandur, Neil Chatterjee, Debesh Panda,
Sridhar Reddy, Karan Sharma, R.L. Shankar, R. Narayana Kumar, Sanjay
Verma, Ms. Prashiela Prabhu, Ms. Mahika, Sang Rattan Negi, Gunnam
Venkateswara Rao, Ms. Rohini Musa, Abhishek Gupta, Zafar Inayat,
Ms. Aditi Dani, R.L. Shankar, B. Teja Raju, D.L. Chidananda,
Ravichandra Hegde, K. Vivek Reddy, Ms. Kriti Sansur, Ritunjay Gupta,
Divyam Agarwal, E. R. Kumar, D. P. Mohanty, Tanuj Agarwal,
Ms. Raveena Rai, Sarthak Gaur, Ms. Pratyusha Priyadarshi, Samar
Kachwaha, Aakash Lamba, M/s. Parekh & Co., S. Udaya Kumar Sagar,
Ms. Bina Madhavan, Krishna Kumar Singh, Ms. Elizabeth Antony,
M/s. Lawyer S. Knit & Co., Bharat Monga, Ms. Supriya Juneja, Advs.
for the Appellant.
C.U. Singh, Sr. Adv., Pratap Venugopal, Ms. Surekha Raman,
Anuj Sarma, Ms. Niharika, Ms. Kanika Kalaiyarasan, M/s. K. J. John
and Co., Advs. for the Respondent.
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The Judgment of the Court was delivered by
R. F. NARIMAN, J. 1. The present appeals have their genesis
in what is popularly known as the "Satyam scam". By a letter dated
7.1.2009, one B. Ramalinga Raju, former Chairman of Satyam Computer
Services Limited (hereinafter referred to as "SCSL") sent a letter to
various stock exchanges and the SEBI stating that the financial statements
of SCSL had been grossly overstated and did not reflect the true and fair
view of the financial position of SCSL.
Civil Appeal No.16805 of 2017
2. In the present appeal, the appellant was roped in by the Whole
Time Member of the SEBI as well as the Appellate Tribunal as he
happened to be an executive director of SCSL from 1993 upto 31.8.2000
and a non-executive director from 1.9.2000 to 23.1.2003. He also happens
to be the "co-brother" of B. Ramalinga Raju as the two of them have
married two sisters.
3. SCSL was originally incorporated as a private limited company
with two shareholders, namely, B. Ramalinga Raju and D.V.
Satyanarayana Raju on 24.6.1987. These two gentlemen were the original
promoters of this company. The appellant, who was an executive director
of this company from 1993 onwards, was confined to operating a joint
venture company of SCSL, namely, Satyam Enterprise Solutions Private
Limited (SES). The appellant stated that he was never involved in the
day to day affairs of SCSL. In the said joint venture company, 80%
shareholding was held by SCSL and the appellant held the remaining
20% shares. SES merged into SCSL pursuant to a scheme of
arrangement, approved by the Andhra Pradesh High Court in 1999, as a
result of which the appellant was issued 8,00,000 equity shares of SCSL.
Later in the same year, SCSL declared a bonus, thereby doubling the
number of shares held by the appellant to 16,00,000 equity shares of
SCSL. On 7.8.2000, SCSL announced a stock split by which the face
value of the shares was reduced from Rs.10/- to Rs.2/- as a result of
which every shareholder got an additional five shares of Rs.2/- for each
share of Rs.10/- held by them. Consequently, the shareholding of the
appellant increased to 76,50,000 equity shares of SCSL. The first time
that unpublished price sensitive information (hereinafter referred to as
"UPSI") came into existence so far as SCSL is concerned is stated to
be on 31.3.2001. It is pertinent to note that as on this date, as has been
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stated hereinabove, the appellant was a non-executive director of the
said company. Various annual reports from 2000 till 2003 disclosed B.
Ramalinga Raju and B. Rama Raju as promoters of SCSL, but not the
appellant. The appellant sold his shares in SCSL from 22.2.2001 to
December, 2008. Ultimately, by a show cause notice dated 19.6.2009,
after referring to the said letter dated 7.1.2009 by the Chairman of SCSL,
it was stated that as the appellant was a promoter and director of SCSL,
he was liable as an "insider", having knowledge of UPSI, as a result of
which he stood to gain by selling shares which he owned at an inflated
value. The appellant replied to the show cause notice, taking detailed
factual grounds as well as grounds in law, stating that he could not be
said to be an "insider" as defined by the SEBI (Prohibition of Insider
Trading Regulations), 1992 (hereinafter referred to as the "1992
Regulations"). By an order dated 10.9.2015, the Whole Time Member
of the SEBI, after extracting relevant sections of the SEBI Act, 1992
and the relevant regulations referred to in the show cause notice, held
that given Annexure 15 to the show cause notice, the appellant being a
promoter was not the only ground of violation of the 1992 Regulations,
but being a director of SCSL and co-brother of B. Ramalinga Raju would
also rope the appellant in. After referring to Regulations 2(c) and 2(e) of
the 1992 Regulations, the Whole Time Member held that being a director
of SCSL, the appellant was a "connected person" under Regulation 2(c)
and, therefore, an "insider" under Regulation 2(e). The Whole Time
Member went on to hold that the fact that the books of accounts of
SCSL were fabricated and manipulated since 2001 remains within the
knowledge and possession of "insiders" who were reasonably expected
to have access to them. When it was sought to be contended that the
Special Court, Enforcement Directorate and Serious Frauds Investigation
Office (SFIO) have given findings that only B. Ramalinga Raju and his
cohorts were involved in the manipulations of accounts of SCSL, and
had hidden the same from and deceived the rest of the board of directors,
the Whole Time Member stated that SEBI's investigation is independent
and separate from that of other investigation agencies, and that since
the appellant was part of the board of directors and declared as a promoter
in disclosures filed by SCSL with stock exchanges, and being a co-brother
of B. Ramalinga Raju, he was, therefore, closely connected with SCSL
and its Chairman and "could have in all probability known about affairs
of Satyam Computers including the claimed wrong disclosure of him
being a promoter". It is important to note that it was held that the appellant
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had no role in the fraud committed by B. Ramalinga Raju and his cohorts.
It was then held that the appellant was barred from accessing the
securities market for a period of 7 years. Further, the appellant was to
disgorge the amount mentioned against his name, which is an amount of
Rs. 136.64 crores, for the entirety of the period till he sold his shares i.e.
upto December, 2008.
4. An appeal to the Appellate Tribunal was largely dismissed by
the majority judgment. The majority judgment held that it would not be
necessary to decide whether the appellant was a promoter of SCSL. It
further went on to construe Regulation 2(e) of the 1992 Regulations
stating that it would be enough that the appellant was a director until
January, 2003, which is after the date of occurrence of UPSI, which
took place on and from 31.3.2001. Since there is no real difference
between an executive and a non-executive director, he would reasonably
be expected to know about the fraud and manipulation by the Chairman
and his cohorts, as he was closely connected to the same, being his cobrother. The majority went on to hold that 71% of the shares were sold
in 2003 itself, and the fact that the appellant was not mentioned in the
charge sheet filed by the CBI and was not responsible for the fraud
would make no difference. Even the SFIO's report, which stated that
only B. Ramalinga Raju and his cohorts were responsible for the fraud,
and that they actually duped the board of directors of SCSL, would
make no difference as the appellant being an "insider" had sold shares
of SCSL when in possession of UPSI and made profits in violation of the
1992 Regulations. It was held by the majority judgment of the Appellate
Tribunal that given Annexure 15 to the show cause notice, the appellant
being a promoter was not the only ground of violation of the 1992
Regulations, but being a director of SCSL and co-brother of Ramalinga
Raju would also rope the appellant in. However, the appellant was given
relief to the extent that under the Explanation to Regulation 2(e) of the
1992 Regulations, the appellant could only be held liable for a period of
six months beyond his resignation as a director i.e. upto July, 2003. A
remand order, therefore, was made to assess the quantum of unlawful
gains that the appellant had made upto July, 2003.
5. Shri K.V. Viswanathan, learned senior counsel appearing on
behalf of the present appellant, has argued that the basis of the show
cause notice is that the appellant as a promoter made illegal gains contrary
to the 1992 Regulations. Once it is demonstrated that he is not a promoter,
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the findings of the Whole Time Member and the majority view of the
Appellate Tribunal must be set aside as they go beyond the show cause
notice. He further argued that a fundamental error made by the Whole
Time Member as well as the majority judgment of the Appellate Tribunal
is in the construction of Regulation 2(e)(i) of the 1992 Regulations, in
that an insider is defined as a "connected person" and a person who is
reasonably expected to have access to unpublished price sensitive
information by virtue of such connection. The second part of the definition
after the word "and" has been ignored by both authorities and they are,
therefore, wrong in their construction of Regulation 2(e)(i) of the 1992
Regulations. Otherwise also, according to the learned senior counsel,
even assuming that the appellant was an insider, Regulation 3(i) would,
in any case, not be attracted in the facts of the present case as the
appellant was neither in possession of nor acted on the basis of any
unpublished price sensitive information. According to the learned senior
counsel, the Whole Time Member's order suffered from predeterminational bias, inasmuch as he had by an earlier order, which related
to B. Ramalinga Raju and his cohorts, found against the appellant without
the appellant being a party to the earlier decision and without hearing
him. Further, according to the learned senior counsel, the impugned
judgments erred in ignoring very important findings of the Special Court,
the charge sheet of the CBI and the SFIO's report. He relied very
heavily on the minority judgment of the Appellate Tribunal which went
into great detail on facts and ultimately exonerated his client.
6. Shri C.U. Singh, learned senior counsel appearing on behalf of
the SEBI, countered each of these allegations and took us through the
Whole Time Member's judgment as well as the majority judgment of the
Appellate Tribunal, and stated that they appreciated the law as well as
the facts absolutely correctly. He referred to Section 21 of the Securities
Contracts (Regulation) Act, 1956 in order to show that where securities
are listed in any recognized stock exchange, the conditions of the Listing
Agreement with that stock exchange have to be complied with. He
then took us to Clause 35 of a standard form of the Listing Agreement,
in which it is stated that the company has to file, with the stock exchange,
the shareholding pattern on a quarterly basis in a form which contains
the promoters' holding. "Promoter" is defined in Regulation 2(1)(h)(i)
of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (hereinafter referred to as the "1997 Regulations"),
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which definition is incorporated in the Listing Agreement. This definition
clearly shows that a promoter means a person who is in control of the
company, directly or indirectly, whether as shareholder, director or
otherwise. According to Shri Singh, the appellant, by virtue of being an
executive director from 1993, was, therefore, clearly a promoter within
the meaning of the aforesaid definition. He also referred to and relied
upon Section 159 of the Companies Act, 1956, which requires certain
particulars to be furnished by companies in their annual return. What is
conspicuous by its absence is the fact that there is no requirement to
disclose who the promoters of a company are. This has since been
changed, for in the Companies Act, 2013, Section 92(1)(e) now requires
disclosures in the annual return as to who the promoters of the company
are. This being the case, according to the learned senior counsel, the
annual returns filed by the company did not, in law, need to disclose who
were the promoters of the company and for this reason, SCSL did not
disclose the appellant as a promoter. According to Shri Singh, this aspect
is adverted to in the majority judgment of the Appellate Tribunal, even
though the majority judgment, according to Shri Singh, does not ultimately
decide on the basis that the appellant is a promoter. He also relied upon
the annual reports of the company, which show the appellant as a director
on and from 2000 to 2003, but not as an independent director thereof.
He referred to the averments of the appellant himself to argue that until
a suitable replacement was found, the appellant would continue as a
non-executive director, meaning thereby that he would continue to do
what he had done as an executive director. This being the case, the
majority judgment of the Appellant Tribunal was right in saying that insofar
as the appellant was concerned, there was no distinction between being
an executive and a non-executive director.