Allowed

Rakesh Agrawal v. SEBI

SAT3 Nov 2003

Case brief

AI extract

What is this about?

Appeal against SEBI order directing Appellant to deposit Rs.34 lakhs as compensation and initiate prosecution. Tribunal held Appellant acted for corporate survival of a company facing crisis, not for personal gain, thus not violating insider trading regulations. Compensation direction quashed as ultra vires; adjudication/prosecution directions left untouched.

What did the court decide?

The direction to deposit Rs.34,00,000 with Investor Protection Funds is set aside. Matters regarding prosecution and adjudication proceedings are left untouched.

Rakesh Agrawal Vs SEBI — Securities and Capital Markets | SAT (2003)

Allowed

Rakesh Agrawal v. SEBI

SAT3 Nov 2003

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Case brief

AI extract

What is this about?

What did the court decide?

The direction to deposit Rs.34,00,000 with Investor Protection Funds is set aside. Matters regarding prosecution and adjudication proceedings are left untouched.

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managed in a professional manner and the sole motivating criterion of the promoter, the Appellant, has been the growth and reputation of the Company. The Appellant has always acted with the best interest of the Company in mind. In the post economic liberalisation, several of the end-user industries of the products manufactured by the company (ABS and SAN resins), including automobiles, consumer durables, telecommunication instruments, were planning to put up facilities in India. The Appellant was aware of the importance of technological arrangements with foreign companies so as to remain an important market player in the new economic scenario. In this regard, ABS had serious dialogues with reputed global manufacturers of ABS resin, including Japan Synthetic Rubber (“JSR”) (which was also the Company’s existing technical collaborator), Mitsubishi Rayon, Toyo Engineering, Dow Chemicals, Monsanto Chemicals, etc. since 1994. There had been several frequent reports and articles in various newspapers and magazines from late 1994, all through 1995 and most of 1996 that ABS was seriously contemplating association with a foreign company. In this context paginated index copy of the relevant press clippings filed in the Tribunal was referred to. In mid – July 1995, the Company signed a secrecy agreement with Monsanto to explore the possibility of technical/foreign collaboration, while dialogues with other foreign companies continued. In November 1995, Monsanto’s styrenic business worldwide was taken over by Bayer. As a result of this, the contractual rights and obligations under the secrecy agreement entered into by ABS with Monsanto were transferred to Bayer. Bayer approached ABS in February, 1996 as to the possibility of synergising the technical expertise of both the companies. The two companies had been in continuous discussions since on this aspect. In May 1996, the Technical Adviser to the Company and the Appellant had further discussions with Bayer. The discussion with Bayer and the Company since early May 1996 were at a preliminary stage with both companies only investigating the possibility of combining their expertise. However, ABS had kept all its options open in as much as it continued discussions with the other potential collaborators as well. In the month of July 1996, a team from Bayer visited the Company’s plant to conduct a technical evaluation together with a preliminary due diligence. In September 1996, the Appellant was requested to visit Germany by Bayer on his

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unfairness involved where one takes advantage” of “information intended to be available only for a corporate purposes and not for the personal benefit of any one”, In re Merrill Lynch, Pierce, Fenner & Smith 438 SEC 933, 936 (1968). Thus, an insider will be liable under Rule 10 b-5 for insider trading only where he fails to disclose material non-public information before trading on it and thus make “secret profit” Cady Roberts Supra 916 n.31”. The Supreme Court went on to observe “Whether disclosure is a breach of duty depends in large part of the personal benefit the insider receives as a result of the disclosure. Absent an improper purpose, there is no breach of duty to stockholders. Performance of the disclosure. SEC argues that, if insider trading liability does not exist when the information is transmitted for a proper purpose, but is used for trading, it would be a rare situation when the parties could not fabricate the same ostensibly legitimate business justification for transmitting the information. We think the SEC is unduly concerned. In determining whether the insider’s purpose in making a particular disclosure is fraudulent, the SEC and the Courts are not required to read the parties mind. Scienter in some case is relevant in determining whether the tipper has violated his Cady Roberts duty. N. 23 But to determine whether the disclosure itself “deceives, manipulates pr defrauds shareholders. The initial inquiry is whether there has been a breach of duty by an insider. This requires courts to focus on objective criteria, whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings.” In the context of the facts of that case, the Supreme Court went on to observe “ As the facts of this case clearly indicate, the tippers were motivated by the desire to expose the fraud see supra 648-649. In the absence of a breach of duty to shareholders by the insider, there was no derivative breach by Dirks. Blackman J. in his descent in footnote 11 explained requirement of scienter in insider trading cases. The Court observed “….when the disclosure to an investment banker or some other advisers, however, there is normally no breach because the insider does not have scienter; he does not intend that the insider information be used for trading purpose to the disadvantage of shareholders. Moreover, if the insider in good faith does not believe that information material or non-public, he lacks the necessary scienter, Earnst & Earnst v. Hochfelder 425 US, at 197.

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after the Appellant returned to India from Germany after having concluded an agreement with Bayer and the date of the open offer to be made by Bayer respectively. Between July -- September 1995 ABS held discussions with Monsanto Chemicals to explore the possibility of technical/financial collaborations with ABS. ABS was also holding similar discussions with JSR., Mitsubishi Rayon and Toyo Engineering. In January 1996 Bayer made a global public announcement that Bayer AG had taken over the styrenics business of Monsanto worldwide with effect from November 1995. In February 1996 Bayer approached ABS for a possible tieup. In May 1996 Bayer held discussions with ABS and sent a questionnaire seeking various details relevant to the discussions. On 28^th June, 1996 Board of ABS considered the prospects of foreign collaboration. In July, 1996 Bayer team visited ABS for technical and financial evaluation of ABS and asked for further details which were furnished by ABS. On 5^th and 6^th September 1996 Appellant visited Germany and held meetings with Bayer’s officials and concluded an “in principle” agreement whereunder interalia Bayer insisted that Bayer wanted to have a majority stake of 51% but that and the Appellant was to continue in management and in control of the merged company etc. On 8^th September 1996 Appellant returned to India from Germany. On 20^th September 1996 the Board of ABS was informed of the Appellant’s visit to Germany and the minutes recorded the salient features of the agreement that were discussed with Bayer. From the available facts nothing has happened between the 8^th and 20^th of September 1996; therefore it can safely be concluded that the “in principle” agreement was arrived at on the 5^th and 6^th of September 1996. On 29^th September, 1996 the Appellant once again visited Germany alongwith his legal advisors and the Merchant Banker and the legal advisors for Bayer in India. On 2^nd and 3^rd October, 1996 Legal consultants of both companies worked out a draft subscription agreement and shareholders agreement setting out the terms and conditions and obligations of the respective parties. These agreements were approved by the respective Board of Directors of ABS and Bayer respectively on 5^th October 1996. On 8^th October, 1996 Bayer made an open offer for purchase of 20% shares of ABS at Rs.70/- per share, which was raised to Rs.80/- per share on 26^th December 1996.

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The charge against the Appellant is that of violating the SEBI Regulations on insider trading. Though much has been said in the order about the acquisition of shares by Mr.Kedia on behalf of the Appellant, ultimately it has boiled down to the purchase of only 1,82,500 shares by Shri Kedia during the period September 9, 1996 1^st October, 1996. Both the parties have chronicled the sequence of developments preceding the acquisition of shares of ABS by Bayer. I do not consider it necessary to repeat the same and further burden this order. From the particulars furnished by the parties, it appears to me that ABS was considering to diversify its product range. For the purpose it was considering proposals from overseas companies from the beginning of 1995. It was in July 1995 ABS signed a secrecy agreement with Monsanto Chemicals to explore the possibility of technical/financial collaboration. At that time also ABS was exploring the possibilities with a Japanese company. But negotiations are negotiations. Negotiations may sometimes fail. It may some times fructify. Till the negotiations are concluded, and a decision is taken, it is not possible to conclude the ultimate result of the negotiations. But some times half way through a shrewd negotiator would be in a position to see the would be outcome of the negotiation. ABS’s negotiations/discussions with the overseas parties is in no way different. The Appellant had stated that it had in fact signed a secrecy agreement with Monsanto Chemicals in July 1995 to explore the possibility of technical/financial collaboration and ABS & Monsanto were discussing the possibility of tie up during the period July – September 1995 and in 1995 Bayer acquired the styrene business of Monsanto Chemicals worldwide. According to the Appellant, consequently the rights and obligations under the secrecy agreement between ABS and Monsanto were transferred to Bayer. I have noted that a secrecy agreement to explore the possibility of technical/financial collaboration, can not be viewed as a decision as such by Monsanto to takeover ABS. It, as the Appellant rightly stated was only for exploring the possibility. The fact that Bayer came in place of Monsanto on its takeover by Bayer does not change the nature of the undertaking. The Appellant has stated in its Appeal Memorandum that in February Bayer approached ABS to discuss the possibility of an association between ABS and Bayer. This also indicates that the matter was not crystallized then, but was in a fluid stage. From the sequence of

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developments chronicled by the Appellant in his memorandum of appeal it appears that the discussions were going on and on from February, 1996 followed by supply of various details to Bayer. It is seen from the records that even though the Board of Directors of ABS considered the prospects of foreign collaboration in their meeting held on 28.6.1996 they desired to examine the matter further. It was on 5^th –6^th September, 1996 the Appellant held discussions with Bayer in Germany regarding the possible joint venture. He returned to India on 8.9.1996. He appraised the Board of Directors of ABS of the developments with reference to his discussion with Bayer. It is also noted that on 29^th September 1996 to October, 1996 the Appellant visited Bayer’s office in Germany along with legal Counsel to “work out legal modalities”. Bayer’s legal advisers and merchant bankers were also present in the said meeting and in these meetings all modalities, valuations and offer price were finalised, subject to Board approvals. According to the Appellant on 1.10.1996 “a commercial understanding to proceed with the transaction was arrived in Germany. It was only at this stage that the transaction as well as the terms thereof acquired certainty.” It seems that the meetings of legal advisers and merchant banker of ABS and Bayer was held only to “work out legal formalities” in pursuance of the discussion the Appellant had with Bayer people in Germany on 5/6^th September, 1996. If there was no clear understanding and any decision about the nature of association of Bayer with ABS there was no question of working out legal formalities. Meeting held during September 29 to 3^rd October, 1996 was only to complete the modalities/formalities with reference to the decision arrived at in the meeting the Appellant had with Bayer people on 5/6^th September, 1996. It appears that it was in the said meeting it was decided that Bayer would require 51% holding in ABS and that “they were ready to concede the day to day management/minority protection rights and several other concessions . In this context it is noted that the Appellant returned to India on 8^th September, 1996 after the said meeting. It is noted from the Appellant’s statement recorded by SEBI on 26.5.1998 that the Appellant had furnished details wherein he had stated that he had given loans amounting to Rs.1.5 crores from his own account between 12.9.96 to 28.9.96 to Shri I. P. Kedia. He had admitted that on 18.9.96 when he lent Rs.35 lakhs to Shri Kedia he knew that Shri Kedia was purchasing shares

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residence. I enquired Mr. Kedia why he needed this money. Mr. Kedia informed that he bought some ABS Shares and therefore he needed this money as a temporary loan. I dissuaded him from entering into any purchase and sale of shares not only of ABS but of any company. After couple of days again there was a demand of money and I spoke to him then. He then explained to me that since I had purchased around 50000 shares of my relatives even at Rs.68/-, he told me that there was a possibility of getting more shares from my relatives. I was conscious at that time of my discussions with Bayer, who had very clearly in no uncertain terms indicated that any possible joint venture could not be without Bayer getting 51% equity. Since there were so many Indian companies interested and were wanting to have an agreement with Bayer for producing ABS Resins there was need of urgency of taking decision. Co. like Reliance had also initiated discussion with Bayer for a joint tie up on the same project. I therefore realized that it was critically important for me to ensure that Bayer get 51% shares which means getting as many share from the market should the discussions eventually result into joint venture with Bayer. Discussion about this matter was going to take place on the Board meeting on 20^th Sept. But Bayer would not consider any proposal unless they were guaranteed for 51% equity into the Co. I therefore told Mr.Kedia that if the shares are offered by my relatives or for that matter anybody he can procure on my behalf and I will finance the purchase. I had expressly informed him that the purchases should not be in a manner, to have any undue price rise or undue movement. I had told him to purchase the shares as long as offered in the natural course at the prevailing market price. While I was instructing Mr.Kedia I considered it to be a natural process. In my wildest imagination also I could never have thought that I was committing any crime or offense. The figure of 51% for Bayer was important for me and all the while I was thinking that should this discussion result into joint venture how to muster up this 51% of share by Bayer. The share holding pattern of 12 crores equity was that I was holding, 30% institutions were holding, around 25% my relations and friends were holding, 10% and balance was held by the public. I thought without creating any unnatural movement in the market either in price or sentiment if I could muster up some shares it would eventually help me reaching 51% target for Bayer as and when

Rakesh Agrawal v. SEBI

Case brief

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Rakesh Agrawal v. SEBI

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

What the court decided

A compact analysis

Statutes considered