The Adjudicating Officer, SEBI, passed an order dated May 22, 2017 in respect of Mr. Sumanth K. Reddy Mettu (Noticee), a promoter of Aurobindo Pharma Ltd. (APL), dismissing the show cause notice issued against the Noticee for having traded in securities in violation of the provisions of the erstwhile insider trading regulations.
The Noticee had traded in derivatives of APL on May 30, 2013, just before the announcement of the quarterly financial results of APL for the quarter ended March 31, 2013, and during the period when the notional trading window was closed for promoters as per APL’s code of conduct under the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“PIT Regulations”). Financial results of a Company are considered to be unpublished price sensitive information (UPSI) under the PIT Regulations. The Noticee who was one of the promoters of APL, is also a “connected person” or an “insider” for the purpose of the PIT Regulations. Connected persons or insiders are prohibited from transacting in the shares of a company during the closure of the notional trading window. Trading or dealing in shares during the closure of the trading window is a violation of Regulation 12 read with the model code of conduct provided in the PIT Regulations and it also results in a violation of Regulation 3(i) of the PIT Regulations, which prohibits an insider from dealing in securities while in possession of UPSI.
However, in this matter, the AO noted that APL had already taken action against the Noticee for violation of Regulation 12 read with the model code of conduct and had directed the Noticee to pay Rs. 5,00,000 into the account of Prime Minister’s National Relief Fund for the irregularity, which the Noticee had paid, and had cautioned him to comply with its code of conduct and to avoid future violations. This was in line with Regulation 12 of the PIT Regulations which obligated listed companies to frame an internal code of conduct and to adopt appropriate mechanisms and procedures to enforce the code. While that does not preclude SEBI from initiating proceedings for such violation, SEBI retains the power to examine whether the action taken by the company is commensurate with the violation committed, and in this case the AO compared the gains made by the Noticee with the action taken by APL and held that no further penalty was required to be imposed by SEBI. It is submitted that the AO has rightly dismissed the show cause notice against the Noticee as there was no requirement for the AO to impose additional penalties on the Noticee when APL had already taken action against him.