Sebi Bans 14 Entities In Lux Industries Insider Trading Case

In Re Udit Todi & 13 Others (Securities and Exchange Board of India) 

Capital markets regulator Sebi on Monday barred 14 entities for indulging in insider trading and ordered impounding ill-gotten gains of Rs 2.94 crore in the matter of Lux Industries Ltd.

FULL TEXT OF THE ORDER OF SECURITIES AND EXCHANGE BOARD OF INDIA

WTM/SM/ISD/56/2021-22

BEFORE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: S. K. MOHANTY, WHOLE TIME MEMBER

INTERIM EX PARTE ORDER

Under Sections 11(1), 11(4), 11B (1) of the Securities and Exchange Board of India Act, 1992 read with Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015

In respect of:

In the matter of insider trading in the scrip of Lux Industries Limited

(The above-mentioned entities are individually referred to by their corresponding names/numbers and collectively referred to as “Entities”)

BACKGROUND

1) Securities and Exchange Board of India (hereinafter referred to as “SEBI”) received system generated suspected insider trading alerts in the scrip of Lux Industries Limited (hereinafter referred to as “Lux/Company”) during the month of May, 2021, when the Company had made its corporate announcement regarding audited financial results for the Quarter and Financial year ending March 31, 2021.

2) Based on the aforesaid alerts, SEBI initiated a preliminary examination into trading in the scrip of Lux to ascertain as to whether certain persons/ entities traded in the said scrip while they were in possession of/on the basis of an Unpublished Price Sensitive Information (hereinafter referred to as “UPSI”) which could be termed as possible contravention of the provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act, 1992”) read with the SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereinafter referred to as “PIT Regulations, 2015”).

3) It is noted that Lux is a company having its registered office address at 39, Kali Krishna Tagore street, Kolkata, West Bengal and its issued securities are listed on the BSE Limited (hereinafter referred to as “BSE”) and the National Stock Exchange of India Limited (hereinafter referred to as “NSE”). The Company is engaged in the business of manufacturing and exporting innerwear and offers bloomers, slacks, slips, trunks, and winter wears for men, women, and kids and its products have markets worldwide.

BRIEF FINDINGS OF SEBI’S PRELIMINARY EXAMINATION

4) The preliminary examination of information so far collected by SEBI’s surveillance team reveals prima facie, the following facts:

a) The Company made a corporate announcement regarding audited financial results for the Quarter and Financial year ended March 31, 2021 on May 25, 2021 at 17:29:57 (i.e. after market hrs.). It is observed from the announcement that:

“Net Profit for the March-2021 quarter increased to ₹92.28 crores as compared to profit of ₹75.89 crores of December-2020 quarter. Percentage increase of 21.60% observed for quarter-on-quarter basis. Further, percentage increase of 51.25% observed in the net profit when compared year-on-year basis i.e FY 2020-21 compared to FY 2019-20.

b) The information pertaining to audited financial results for the Quarter and Financial year ending March 31, 2021 (hereinafter referred as “Financial Results”) satisfies the criteria to be termed as an UPSI in terms of regulation 2(1) (n) of the PIT Regulations, 2015.

c) As per information furnished by the Company, the drafting of the Financials Results started on April 20, 2021, which means, the period of UPSI commenced from April 20, 2021 and ended on May 25, 2021 i.e., the day when the said information was announced to public at large, thereby making the period (i.e. April 20, 2021 to May 25, 2021) to be considered as the UPSI period.

d) Udit Todi (hereinafter referred to as “Udit/Entity no. 1”) is an Additional Executive Non – Independent Director of the Company w.e.f from May 25, 2021. Prior to that, the Entity no. 1 was President of Strategy in the Company. Also, the Entity no. 1 is a son of Pradip Kumar Todi, the Managing Director of the Company and named as part of the list of ‘Designated Persons’ [i.e., list of persons having access to the UPSI in terms of SEBI(PIT) Regulations, 2015] as on April 30, 2021 and is continuing to be part of the said list for the Company as on January 2022. From the above, it is prima facie observed that the Entity no. 1 is a ‘connected person’ in terms of regulation 2(1)(d) of the PIT Regulations 2015 and consequently an ‘Insider’ as per regulation 2(1)(g) of the said Regulations.

e) On the basis of the family relationships including blood relationships, Call Data Records (hereinafter referred to as “CDRs”), Facebook and LinkedIn profile and Know Your Clients (hereinafter referred to as “KYC”) details, it is prima facie observed that the Entity no. 1 is connected to Mrs. Avani Todi (hereinafter referred to as “Avani/Entity no. 2”), Sanjeev Bubna (hereinafter referred to as “Sanjeev/Entity no. 3”), Akshay Kapoor (hereinafter referred to as “Akshay/Entity no. 5”) and Mohd Mujtaba Ali Khan (hereinafter referred to as “Mujtaba/Entity no. 8”).

f) Further, based on the post of directorship including common directorship and significant shareholding (direct and indirect), it is prima facie observed that the Entity no. 3 is connected to Indi Stock Private Limited (hereinafter referred to as “ISPL/Entity no. 4”) and the Entity no. 5 is connected to Dinero Finance & Investments Pvt Ltd. (hereinafter referred to as “Dinero/Entity no. 7”) and Shubham Somani (hereinafter referred to as “Shubham/Entity no. 9”).

g) Moreover, as per KYC details, it is noticed that the Entity no. 5 has family relationships with Arun Kapoor (hereinafter referred to as “Arun/Entity no. 6”) and the Entity no. 9 has family relationships with Anju Somani (hereinafter referred to as “Anju/Entity no. 10”), Sunder Somani (hereinafter referred to as “Sunder/Entity no. 12”) and Suyash Somani (hereinafter referred to as “Suyash/Entity no. 13”). Further, on the basis of directorship, shareholdings and current/past employment, it is also noticed that the Entity no. 9 is connected to SS Corporate Securities Limited (hereinafter referred to as “SSCSL/Entity no 11”) and Evermore Stock Brokers Limited (hereinafter referred to as “Evermore/Entity no. 14”).

h) It is noticed that there were phone calls and transfer of funds amongst the Entities during the relevant period. Further, it is also noticed that out of the above named connected entities, some entities enjoying connection/ relationships based on blood relationships, directorship, shareholdings, phone calls, fund transfers, etc. have traded in the scrip of Lux, when most of these connected Entities had either no earlier trading history or had a very negligible amount of trading history in the scrip of the Company before the afore-mentioned event happened i.e. disclosure of the Financial Results. The phone calls and transfer of funds connecting the Entities are dealt with in detail, in the later part of this order.

i) Trading during UPSI period: It is noticed that during the UPSI period the Entity no. 3 (Sanjeev Bubna), Entity no. 6 (Arun Kapoor) and Entity no. 9 (Subham Somani) have dealt in the scrip of Lux by executing/placing orders in the trading accounts of the Entity no. 4 (Indi Stock Private Limited), Entity no. 7 (Dinero Finance) and Entity no. 11 (SS Corporate Securities Limited), respectively during the UPSI period. Similarly, the Entity no. 9 (Shubham Somani) has dealt in the scrip of Lux by executing/placing orders in the trading account of his mother, Anju Somani i.e., the Entity no. 10. The examination reveals that the Entity no. 5 (Akshay Kapoor), Entity no. 12 (Sunder Somani) and Entity no. 13 (Suyash Somani) have executed trades in their respective individual trading accounts. Thus, the initial examination of information reveals that trades in the scrip of the Lux in the accounts of the aforesaid Entities have been executed during the UPSI period, prima facie on the basis of or while these entities were in possession of the aforesaid UPSI about the Company.

j) It is observed from the trading pattern of the aforesaid Entities that they have bought shares of the Company prior to the public announcement of the USPI and have sold those shares subsequent to the public announcement of the said UPSI and in the process, these Entities have prima facie made unlawful profits.

k) In view of the aforesaid findings from the examination of material collected including the information gathered about the connection of Entity no. 1 with certain other persons and looking at the manner in which the above cited Entities have traded in the scrip of Lux during the UPSI period, it is prima facie observed that Entity no. 1, being undoubtedly an insider and in possession of the UPSI about the Company, has communicated the UPSI to the Entity nos. 3 and 8 and the Entity no. 8 has in turn, communicated the said UPSI to the Entity no. 5. As noted above, the Entity no. 2 is connected to the Entity no. 1 being his wife and thus falls under the category of immediate relative. Further, it is also noticed that after the Entity no. 3 has received the UPSI from the Entity no. 1(son-in-law of the Entity no. 3) and Entity no. 2 (daughter of the Entity no. 3), trades were executed in the shares of Lux in the account of the Entity no. 4 (Indi Stock Private Limited) which is practically a family controlled company of the Entity no. 3 for which the Entity no. 3 has placed the orders. Similarly, the Entity no. 6 (Arun Kapoor) subsequent to receipt of UPSI from his son i.e., the Entity no. 5 (Akshay Kapoor), has dealt in the shares of Lux wherein he executed/placed orders in the trading account of the Entity no. 7 i.e. Dinero Finance and Investments Private Limited, a family controlled company where the Entity no. 6 and his wife are the only two directors and directly or indirectly, the Entity no. 6 holds 89.63% shareholding in it. In a similar fashion, on acquiring UPSI from Entity no. 5 (Akshay Kapoor), the Entity no. 9 (Shubham Somani) has dealt in the shares of Lux where he placed orders in the trading account of his mother i.e., the Entity no. 10 (Anju Somani). It is also noticed that a transfer of fund took place between the Entity nos. 5 and 10 and the Entity no. 5 has utilised the money received by him from Entity no. 10 for trading in the scrip of Lux as he is noticed to have transferred the said fund to his broker’s account upon receipt of the same from the Entity no. 10. Also, the Entity no. 9 i.e. Shubham Somani (director and major shareholder of the Entity no. 11), after receiving the UPSI from the Entity no. 5, has placed orders in the trading account of the Entity no. 11 (SS Corporate Securities Ltd.).

l) The examination has further revealed that the Entity no. 9 has communicated the said UPSI to the Entity no. 12 (Sunder Somani, uncle of the Entity no. 9) who in turn apparently communicated it to his son i.e., the Entity no. 13 (Suyash Somani). Subsequently, it is also seen that trades were executed from the accounts of the Entity nos. 5, 12 and 13 which prima facie seem to be based on and influenced by the possession of UPSI. Similarly, the Entity no. 14 i.e., Evermore Stock Brokers Pvt Ltd. (where the Entity no. 9 is a shareholder, a past director and also its current director for business development) has executed trades in the scrip of Lux which prima facie seems to be based on and influenced by the possession of UPSI, communicated by the Entity no. 9. A holistic appreciation of evidences in the particular facts and circumstances of the matter is observed to be sufficiently indicating that the aforesaid acts of the Entities have prima facie resulted into violation of the provisions of the SEBI Act, 1992 and the PIT Regulations, 2015.

CONSIDERATION AND PRIMA FACIE FINDINGS

5) As noted earlier, the aforesaid examination into the trading in the scrip of Lux has revealed that the information pertaining to the Financial Results was a UPSI of the Company in terms of regulation 2(1)(n) of the PIT Regulations, 2015. In this respect, it will be relevant to visit the definition of “unpublished price sensitive information” as prescribed under regulation 2(1)(n) of the PIT Regulations, 2015. The text of the said regulation is reproduced below:

Regulation 2(1)(n) of PIT Regulations, 2015:

“unpublished price sensitive information” means any information relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: –

i. financial results;

ii. …

…

NOTE: It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information.

6) From the aforesaid definition it can be noted that, a ‘UPSI’ means any information which relates directly or indirectly to a company and which is not generally available and which, upon becoming generally available, is likely to materially affect the price of securities of a company. It is observed that the following ingredients appear to be required to qualify an information as an UPSI:

a) The information must be directly or indirectly related to a company or its securities;

b) The information must not be generally available;

c) The information upon becoming generally available, is likely to materially affect the price of the securities.

7) I note that in terms of regulations 2(1)(n)(i) of the PIT Regulations, 2015, financial results of a company are one of the of matters which is included in the definition of UPSI. Therefore, the information regarding audited financial results for the Quarter and Financial year ending March 31, 2021 of the Company pertaining directly to Lux would fall in the category of UPSI under regulation 2(1)(n) of the PIT Regulations, 2015. With regard to the criteria that the information should not be “generally available”, it is pertinent to look at the definition of “generally available information” which has been laid out under regulation 2 (1)(e) of the PIT Regulations, 2015. For the purpose of convenience, the same is reproduced below:

“generally available information” means information that is accessible to the public on a non­discriminatory basis;

NOTE: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what unpublished price sensitive information is. Information published on the website of a stock exchange, would ordinarily be considered generally available.

8) The aforesaid definition essentially means that the generally available information should be equally accessible to the public on a non-selective, non- discriminatory basis and in a transparent manner. To put it differently, for an information to be held as generally available, the information must be uniformly and universally disseminated. One of the mechanism for a listed company to ensure that the information is universally available, is to publish it on the website of a stock exchange on which the said company is listed. In the instant matter, the detailed public announcement about the financial results of Lux was made by the Company on May 25, 2021 at 17:29:57 (i.e. after market hours), pursuant to the board meeting which was held on May 25, 2021 to consider and approve the said audited financial results for the Quarter and Financial year ending March 31, 2021. The aforesaid information pertaining to the financial results having been published on the website of the stock exchanges was uniformly and universally accessible to the public on a non-discriminatory basis only after the Company made the afore-stated public announcement i.e. on May 25, 2021 at 17:29:57 i.e. after market hours. Therefore, from the records, it appears that the above information was not generally available until May 25, 2021, 17:29:57 hours, when it was disseminated for the first time for the consumption of public at large on a non-discriminatory basis.

9) Regarding the criteria which entails that the subject information is likely to materially affect the price of the securities, it is pertinent to note that the information relating to Financial Results of a company are those types of price sensitive matters which are likely to materially affect the price of securities of a company upon becoming generally available. It is for this reason that extensive regulations around disclosures of Financial Results by listed companies have been provided under various regulations of SEBI. In fact, in this case, I note that pursuant to the corporate announcement of Financial Results on May 25, 2021 at 17:29:57, the price of the shares of the Company started rising from May 26, 2021. The price-volume movement in the scrip of Lux from May 25, 2021 to May 28, 2021 on the BSE and the NSE is tabulated below:

Table 1