The market regulator dropped the case as the Securities and Appellate Tribunal (SAT), and then the Supreme Court, found no wrongdoing
By Ajai Shukla
Business Standard, 3rd Mar 21
After having imposed a Rs 3.83 crore penalty on Udayant Malhoutra, the majority owner and chief executive of aerospace manufacturer, Dynamatic Technologies Ltd (DTL), on charges of insider trading, SEBI has dropped the case after the Securities and Appellate Tribunal (SAT), and then the Supreme Court, found no wrongdoing.
The market regulator had charged Malhoutra with trading in the company’s shares in 2016, while in possession of unpublished price sensitive information (UPSI). Malhoutra appealed to SAT, which exonerated him.
The appellate tribunal ruled that SEBI had passed ex-parte orders, normally done in situations of extreme urgency, without giving Malhoutra a hearing or the opportunity to defend himself.
The SAT ruled: “In the instant case, we do not find any case of extreme urgency which warranted the respondent (SEBI) to pass an ‘ex-parte’ interim order only on arriving at the prima-facie case that the appellant was an insider.”
When the regulator appealed against SAT’s order to the Supreme Court (SC), the apex court upheld SAT’s decision.
In its ruling, the SC stated: “The Tribunal (SAT), in our view, was correct in coming to the conclusion that since the investigation was pending since 2017 and information had been supplied on 28 November 2019, there was no urgency for passing an ex-parte interim order of the nature that was issued by (SEBI). It was, in this background, that the Tribunal, while affirming the power of SEBI to pass an ex parte interim order in appropriate cases, observed that this should be exercised “only in extreme urgent matters”.
After the SC decision, SEBI’s whole-time member, Ananta Barua, exonerated Malhoutra and held that SEBI had not been able to establish insider trading.
Barua held that Malhoutra sold 51,000 shares, not for profit but to comply with a loan agreement dated June 29, 2016 between DTL and its banks.
On that day Malhoutra owned 51.1 per cent of DTL, and the 51,000 shares he sold constituted just 0.8 per cent of his holding.
Further, Malhoutra could not have anticipated that DTL’s share price would soon fall. The broad based stock market crash that followed his share sale on October 24, 2016 was caused by the government’s announcement of demonetization on November 8, 2016, just a fortnight later.
During the period November 11-15, 2016, DTL’s share price fell by 10.29 per cent, while the broad based Sensex fell by 4.43 per cent.
Speaking to Business Standard, Malhoutra said: “After looking at the facts it was clear to the authorities that this divestment was made solely to comply with a banking covenant. Also share price movements were in line with the fall in auto-sector stocks following demonetisation. I'm very pleased with the alacrity with which SAT, the Supreme Court of India, and SEBI acted to deliver justice. It demonstrates that the system works."
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