CHINTALAPATI SRINIVASA RAJU versus SECURITIES AND EXCHANGE BOARD OF INDIA on 14 May 2018

[2018] 5 S.C.R. 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 – Appellant-co-brother of the Chairman of SCSL-Satyam Computer ServicesLimited, was executive director of SCSL from 1993 to 2000 andnon-executive director from 2000 to 2003 – Appellant holding76,50,000 equity shares of SCSL – Letter by former Chairman ofSCSL, to the stock exchange and SEBI that financial statement ofthe company had been grossly overstated – Show cause notice toappellant that being a promoter and director of SCSL, he was liableas an “insider”, having knowledge of Unpublished Price SensitiveInformation (UPSI), as a result of which he stood to gain by sellinghis shares at an inflated value – Whole Time Member of SEBI andappellate 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 annualreports, which contained his signatures as a director, did not showhim as a promoter – Chairman and his brother described him as apromoter in letters written to various stock exchanges behind hisback and duped him – He was victim of fraud perpetrated by them– By 2006, all the actual promoters disposed of their shareholdingin SCSL because they were aware of the credit crunch faced bySCSL – Appellant continued to retain substantial shareholding inSCSL till the end of 2008 clearly points to lack of possession ofUPSI – Appellant had no professional or business relationship withhis co-brother and had no connection with any of the entities floatedby his co-brother – Appellant ceased to be executive director in2000 as such was not involved with fraudulent manipulation whichbegan only from 2001 onwards – It has not been shown howappellant was in any manner responsible for actions taken by thosein the management of SCSL – Inference of reasonably being

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Aexpected to be in the knowledge of confidential information cannotbe 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Regn 2(e)(ii), 2(h)(ix) – Unpublished Price SensitiveInformation (UPSI) – Satyam scam – Appellant Company-privateBcompany of the executive director/non-director of SCSL and hiswife – Each holding 50% share capital of the company – Appellantsold only 8,00,000 shares held in SCSL – 24,00,000 shares neversold by appellant, but for which only application money wasreceived and returned by 17.4.2002 – Disgorgement order includedgains made on account of the said shares – Minority judgmentCholding that 8,00,000 shares had been sold prior to the occurrenceof the UPSI and 24,00,000 shares were never sold but were merelyreturned to executive director/non-director of SCSL, could not formthe basis of any disgorgement order – On appeal, held: Minorityjudgment is upheld – Appellant does not have persons who areDrelatives of persons mentioned in sub-clauses (vi), (vii) and (viii) –Under these sub-clauses, a person is deemed to be a connectedperson if such person is a relative of persons in cl (i) to (v); or is abanker of the company; or is a relative of a connected person –Since none of these clauses are attracted, s. 2(h)(ix) not attracted.

ERegn 2(h)(viii) – Person deemed to be connected – Satyamscam – Father of executive director/non-executive director of thecompany – Father neither a promoter nor a director of SCSL, andsold 2,50,000 shares in 2005 and expired in 2007 – Order by thetribunal that father was a person deemed to be connected underRegn 2(h)(viii) since he was relative of a connected person – OnFappeal, held: Director/executive director ceased to be a connectedperson in 2003 – Thus, when the father sold shares in 2005, hecould not be a deemed to be connected person since the directorhimself ceased to be a connected person – Thus, order of WholeTime Member quashed and set aside.

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Regn 2(e)(i) – Insider – Connected person – Satyam scam –Mother of the Chairman, though relative, yet made off markettransactions way back in 2003 – Whole time member and majorityjudgment of the appellate tribunal holding that mother being theclose relative, thus, must be presumed that she had access to UPSIH– On appeal, held: CBI or the Enforcement Directorate did not proceed against the mother nor was referred to by the SFIO’s report– She was neither promoter nor director of SCSL – Thus, the test ofthe second part of clause 2(e)(i) not met with – Furthermore, hadshe been in possession of UPSI, she would also have sold shares attheir 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 ropedin by the Whole time member and the appellate tribunal – On appeal,held: Second limb of clause 2(e)(i) cannot be put against either ofthe sons – There was no evidence of any complicity in the fraudcommitted by their father – Given the fact that they were expresslyexonerated of the said fraud by the appellate tribunal, and thatthey were running independent businesses and were neitherdirectors nor promoters of SCSL, and that they sold their shares forbusiness purposes at a price much less than the peak price at whichtheir father sold shares of SCSL in 2006, no case made out againstthem.

Regn 2(h)(ix) – Insider – Person deemed to be connectedperson – Satyam scam – Appellant-private limited company ownedshares of Satyam company which were pledged as security forobtaining a loan amount, that was borrowed to provide funds to tenindependent companies, owned by the family of the Chairman –Majority judgment of the appellate tribunal held the appellantcompany as deemed to be a connected person u/Regn 2(h)(ix) – Onappeal, held: Shareholding pattern of the appellant company, madeit clear that Chairman and his brother individually held more than10% interest in the appellant company, thus, the appellant companyis deemed to be a connected person u/Regn 2(h)(ix) – Further, theappellant company was an ‘insider’ under the Regulations – It hadpledged and got the shares of Satyam belonging to the Chairmanand his brother and their spouses sold when in possession of UPSIand thus, violated SEBI Act and the Regulations – Thus, the findingof the majority judgment upheld.

Regn 2(e)(i) and (ii) – Insider trading – Unpublished PriceSensitive Information (UPSI) – Satyam scam – Appellant-youngerbrother of the Chairman, roped in by the appellate tribunal – Onappeal, held: From s. 246 it is clear that the SFIO’s report can beused as evidence in any other proceeding – By virtue of s. 246, it is A

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Apossible to appreciate the role of the appellant in the so-calledSatyam scam – Also, the judgment of the Special Court, deliveredlong after the show cause notice, proved that the appellant alsoplayed active role in the criminal conspiracy and cheating of SCSL,its share holders and investors – While it is true that adjudicationproceedings and criminal proceedings are separate proceedings,Bthe relevance of the Special Court’s judgment is only for the purposeof showing that the second part of the definition of an “insider” ismade out in the appellant’s case – He was reasonably expected tohave access to UPSI in respect of the securities of SCSL – Thus,SFIO’s report as well as the Special court judgment clearly andCunmistakably points to the complicity of appellant, unlike that ofthe other family members, in the fraud committed – Majority judgmentof the appellate tribunal upheld – Companies Act, 1956 – s. 246.

Disposing of the appeals, the Court

HELD:DCivil Appeal No. 16805 of 2017

1.1 Regulation 2(e)(i) of the SEBI (Prohibition of InsiderTrading) Regulations, 1992 is in two parts. The first part hasreference to any person who is connected with the company or isEdeemed to be connected with the company. There can be no doubtthat the definition of “connected person” contained in Regulation2(c) would rope in the appellant under sub-clause (i) thereof, asthe 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 haveFaccess to unpublished price sensitive information by virtue ofsuch connection in respect of securities of a company. It has beenheld that the word “and” should be given its ordinary meaningand should be understood in a conjunctive sense, unless it wouldlead to an absurd situation or an unintelligible result. [Para 10]G[806-F-H; 807-A]

Maharaja Sir Pateshwari Prasad Singh v. State of U.P.(1963) 50 ITR 731 ; M. Satyanarayana v. State ofKarnataka, (1986) 2 SCC 512 ; Union of India v. JusticeS. S. Sandhawalia [1994] 1 SCR 83 : (1994) 2 SCC240 ; Spentex Industries Ltd. v. CCE [2015] 11 SCRH487 : (2016) 1 SCC 780 – referred to.

1.2 In the instant case, the SEBI (Prohibition of InsiderTrading) Regulations, 2015 throw considerable light on thedefinition of “insider”, as an insider is now defined to mean onlya person who is a connected person ora person who is inpossession of or having access to unpublished price sensitiveinformation. Obviously, post 2015, an “insider” need not satisfythe second test of the 1992 Regulations and it is enough thatsuch person be a “connected person” as defined. The disjunctive“or” contained in the 2015 Regulations must be contrasted withthe expression “and” contained in the 1992 Regulations.Therefore, it is clear that the majority view of the appellatetribunal, 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 personmust be “reasonably expected” to have access to unpublishedprice sensitive information. The expression “reasonablyexpected” cannot be a mere ipse dixit – there must be materialto show that such person can reasonably be so expected to haveaccess to unpublished price sensitive information. [Paras 10, 11][807-B-E]

1.3 The minority judgment of the appellate tribunal correctlybrings out the role of the expression “and” contained inRegulation 2(e)(i). The judgment also correctly appreciates thedifference in language in Regulation 3 before and after it wasamended in 2002, and contrasts the expression “on the basis of”with the expression “when in possession of”. The minorityjudgment then goes on to refer and rely upon the SFIO’s report,which found that the manipulation of financial statements was doneby the Chairman and his cohorts, and was suppressed from theboard of directors, which would include the appellant as a memberof such board. The said judgment went on to hold that the appellantcannot be described as a promoter inasmuch as the annualreports, which contained his signatures as a director, did not showhim as a promoter. What was done behind his back was that theChairman and his brother described him as a promoter only tovarious stock exchanges in letters written to those exchangeswithout the knowledge or consent of the appellant. The minorityjudgment also refers to the fact that the appellant’s shares werenot subject to a lock-in period at the time of merger of SES into A

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ASCSL, which lock-in period was mandated by law for promoters.In fact, the appellant was one of the persons duped by them andwas, therefore, a victim of the fraud perpetrated by the formerChairman of SCSL. [Paras 12, 13] [807-F-G; 808-C-D]

1.4 It was also found that by the year 2006, all the actualBpromoters disposed of their shareholding in SCSL because theywere aware of the credit crunch faced by SCSL. The fact that theappellant continued to retain substantial shareholding in SCSLright till the end of 2008 clearly points to lack of possession ofUPSI. Another important point is that the last transaction of saleof shares by the appellant on 22.12.2008, which was a substantialCchunk of shares, was made by the appellant just like any othershareholder of SCSL. News had got out into the market that themerger proposal of SCSL with MI Limited and M Properties wasnot going ahead. The hysteria in the share market resulted in asteep drop in the price of shares of SCSL. The fact that theDappellant disposed of a huge chunk of his shareholding on22.12.2008 to avail of the price on that date completely negatesthe inference that there was any information flow between theChairman, his brother and the appellant. It was also pointed outthat the appellant had no professional or business relationshipwith his co-brother and had no connection with any of the entitiesEfloated by his co-brother. The fact that the appellant was notinvolved with fraudulent manipulation is clear from the fact thathe ceased to be an executive director in the year 2000. Fraudulentmanipulation began only from 2001 onwards. It was alsoconsidered significant by the minority judgment that the appellantFwas not a nominee of SCSL on the board of directors of SLCompany, but of another third party investor. [Para 14] [809-C-G]

1.5 Non-executive directors are, therefore, persons whoare not involved in the day to day affairs of the running of theGcompany and are not in charge of and not responsible for theconduct of the business of the company. It is also important tonote that the appellant attended only six out of ten board meetingsof SCSL for the period that he was a non-executive director. Theappellant was not involved in any business development,diversification plans and advise on new ventures of SCSL postH1999. It was also held by the minority judgment that the findings of the Whole Time Member and the majority went clearly beyondthe show cause notice, which, when read with Annexure 15 thereof,makes it clear that the appellant is only sought to be roped in asa promoter. Once it is found that he is not a promoter, then thebasis of the show cause notice goes as also the basis of theimpugned judgment. [Paras 16, 18] [811-C; 813-D-E]

1.6 Even though the definition of “control” in the 1997Regulations is an inclusive one, yet the definition shows thatcontrol must mean a right to appoint majority of directors as ashareholder or to control management or policy decisionsexercisable by persons in any manner. The appellant was anexecutive director on a fixed monthly salary, which was roughlyin the range of Rs.1,00,000/- per month, when he stepped downas an executive director in 2000. After stepping down, the salarywas stopped, and he was paid only for board meetings which heattended. Nothing has been shown to indicate that, on facts, suchexecutive salaried director was in any manner in control of SCSLdirectly or indirectly. The absence of the word “independent” inthe annual report also does not take us very far, inasmuch as it isadmitted that he was a non-executive director from 2000 to 2003,who only attended six board meetings and received salarytherefor. It has not been shown how the appellant was in anymanner responsible for actions taken by those in the managementof SCSL. It is demonstrated that the minority judgment is muchmore detailed and correct than the majority judgment of theappellant tribunal. The submission that in cases like the present,a reasonable expectation to be in the know of things can only bebased on reasonable inferences drawn from foundational facts isaccepted. [Para 20] [816-C-G]

1.7 From the mere fact that the appellant promoted twojoint venture companies, one of which ultimately merged withSCSL, and the fact that he was a co-brother of the Chairman,without more, cannot be stated to be foundational facts from whichan inference of reasonably being expected to be in the knowledgeof confidential information can be formed. The fact that theappellant was to be continued as a director till replacement againdoes not take anywhere. Two other independent non-executivedirectors were appointed in his place on and from 23.1.2003. It is ABC

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Aclear that the appellant devoted all his energies to the businesseshe was running, on and after resigning as an executive directorof SCSL, as a result of which the salary he was being paid bySCSL was discontinued. [Para 21] [817-C-D]

1.8 Having regard to the findings contained in the minorityBjudgment and the discussion, the minority view is correct both inlaw and on facts and is accepted. Therefore, the majority judgmentof 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. CCEC(2008) 17 SCC 471 ; SACI Allied Products Ltd. v. CCE[2005] 3 SCR 881 : (2005) 7 SCC 159 ; SEBI v. KishoreR. Ajmera [2016] 1 SCR 1118 : (2016) 6 SCC 368 –referred to.

Dovey and the Metropolitan Bank v. John CoryD[1901] AC 477 – referred to.

Civil Appeal No. 19494 of 2017

2.1 On facts, the appellant sold 8,00,000 shares from4.1.2001 to 14.3.2001. The occurrence of the UPSI was only from31.3.2001 and inasmuch as these sales were made prior to thisEdate, obviously, the 1992 Regulations would not get attracted.The minority judgment of the appellate tribunal referred to thisand stated that the result would be the same as the result inAppeal No.462 of 2015. In that case also, shares had been soldprior to the occurrence of the UPSI and on the self-same ground,appeal had been allowed by the majority judgment of the appellateFtribunal with the minority concurring. The minority judgmentfurther went on to state that 24,00,000 shares also, which werenever sold but were merely returned to ‘CS’, could not form thebasis of any disgorgement order. The same is concurred with.[Para 25] [818-C-E]G

2.2 The appellant company does not have persons who arerelatives of persons mentioned in sub-clauses (vi), (vii) and (viii)– under these sub-clauses, a person is deemed to be a connectedperson 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 H

person. Since none of these clauses are attracted, it is obviousthat Section 2(h)(ix) would also, as a matter of law, not be attractedin the facts of this case. In this view, the majority judgment of theappellate 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 adirector of SCSL and had died on 3.12.2007. He was a connectedperson to ‘CSR’, being his father, but as the shares which stoodin his name were sold in August, 2005, he could not possibly be arelative of a connected person as ‘CSR’ himself ceased to be aconnected person on and from July, 2003. The minority judgmentof 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 whatsoeverof any complicity of the mother with the fraud perpetrated by herson and his cohorts; and that all that has been found against hisclient is that she is a close relative of the Chairman and by virtueof this close relationship, it, therefore, must be presumed thatshe had access to UPSI. Indeed, this was the basis of both theWhole Time Member’s judgment as well as the majority judgmentof the appellate tribunal. Given the fact that this lady was notproceeded against by the CBI or by the Enforcement Directorateand that the SFIO’s report does not, in any manner, refer to her,and given the fact that she was neither promoter nor director ofSCSL, it is obvious that the test of the second part of clause2(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 ofselling them at a depressed price in the year 2003. Thus, themajority 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) cannotbe put against either of these appellants-sons of the Chairman,in that there is no evidence of any complicity in the fraudcommitted by their father; given the fact that they were expressly A

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Aexonerated of the said fraud by appellate tribunal; and given thefact that they were running independent businesses and wereneither directors nor promoters of SCSL, and that they sold theirshares for business purposes at a price much less than the peakprice at which their father sold shares of SCSL in 2006, no casehas been made against them. The appellate tribunal judgment isBset 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 theappellate tribunal, the amount that was borrowed by the appellantCcompany was utilised to provide funds to 10 private limitedcompanies, which were owned by the Chairman’s family. Equally,the shareholding pattern of the appellant company, as it stood onand from 18.9.2006, made it clear that the Chairman and hiswife held 33.11% and 40.52% respectively, whereas the balancewas held by his brother and his wife. Obviously, therefore, as theDChairman and his brother individually held more than 10%interest in the appellant company, the appellant company isdeemed to be a connected person under Regulation 2(h)(ix) ofthe 1992 Regulations. The decision of the WTM of SEBI thatappellant company was an ‘insider’ under the PIT RegulationsEand that the appellant company pledged and got the shares ofSatyam belonging to Chairman and his brother and their spousessold when in possession of UPSI and thus SRSR violated SEBIAct and the PIT Regulations cannot be faulted. This finding ofthe majority judgment of the appellate tribunal is concurred with.[Para 33] [821-G-H; 822-A-B, E; 823-C]

FCivil Appeal No. 17383 of 2017

7.1 From Section 246 of the Companies Act, it is clear thatthe report can be used as evidence in any other proceeding. Eventhough it is correct to state that this report was delivered onG13.4.2009, i.e. before the show cause notice was issued on19.6.2009, the mere fact that this was not put against the appellantin the show cause notice cannot be any reason for this Court notto independently view the same. The appellant has not chosen toassail the findings contained in this report in a writ petition filedbefore the High Court. Under Section 246, this Court isH

empowered to look at the same as evidence of the opinion of theinspector concerned in relation to any matter contained in thereport. By virtue of Section 246, therefore, it is possible toappreciate the role of the appellant in the so-called Satyam scam.Also, the judgment of the Special Court, which was deliveredonly on 9.4.2015 i.e. long after the show cause notice, provedthat the accused also played active role in the criminal conspiracyand 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 andcriminal proceedings are separate proceedings, the relevance ofthe Special Court’s judgment is only for the purpose of showingthat the second part of the definition of an “insider” is made outin the appellant’s case, for, if the appellant, along with his brothers,was party to the fraud practiced on the public, it is obvious thathe was reasonably expected to have access to UPSI in respect ofthe securities of SCSL. This appellant’s case, therefore, standsapart from the other family members of the Chairman in that theSFIO’s report as well as the said judgment clearly andunmistakably point to his complicity, unlike that of the other familymembers, in the fraud committed from 2001 onwards. This beingthe case, though for different reasons, the majority judgment ofthe appellate tribunal is upheld. [Para 40] [828-C-E]

Radheshyam Kejriwal v. State of W.B. [2011] 4 SCR889 : (2011) 3 SCC 581 ; Videocon Industries Ltd. v.State of Maharashtra [2016] 2 SCR 741: (2016) 12SCC 315; K.G. Premshanker v. Inspector of Police[2002] 2 Suppl. SCR 350 : (2002) 8 SCC 87 – referredto.

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796SUPREME COURT REPORTS[2018] 5 S.C.R.

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 16805of 2017.

From the Judgment and Order dated 11.08.2017 of the SecuritiesAppellate Tribunal at Mumbai in Appeal No. 451 of 2015

WITH

DCivil Appeal Nos. 19494, 17997, 17313, 17303, 17383, 17978 of2017 and Civil Appeal No. 5180 of 2018.

K.V. Vishwanathan, Sidharth Luthra, C. A. Sundram, MohanParasaran, V. Giri, N. K. Kaul, Mukul Rohatgi, B. Subramonium Prasad,ESr. 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, SanjayVerma, Ms. Prashiela Prabhu, Ms. Mahika, Sang Rattan Negi, GunnamVenkateswara Rao, Ms. Rohini Musa, Abhishek Gupta, Zafar Inayat,Ms. Aditi Dani, R.L. Shankar, B. Teja Raju, D.L. Chidananda,FRavichandra 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, SamarKachwaha, Aakash Lamba, M/s. Parekh & Co., S. Udaya Kumar Sagar,Ms. Bina Madhavan, Krishna Kumar Singh, Ms. Elizabeth Antony,GM/s. Lawyer S. Knit & Co., Bharat Monga, Ms. Supriya Juneja, Advs.for the Appellant.

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C.U. Singh, Sr. Adv., Pratap Venugopal, Ms. Surekha Raman,Anuj Sarma, Ms. Niharika, Ms. Kanika Kalaiyarasan, M/s. K. J. Johnand Co., Advs. for the Respondent.

The Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. The present appeals have their genesisin what is popularly known as the “Satyam scam”. By a letter dated7.1.2009, one B. Ramalinga Raju, former Chairman of Satyam ComputerServices Limited (hereinafter referred to as “SCSL”) sent a letter tovarious stock exchanges and the SEBI stating that the financial statementsof SCSL had been grossly overstated and did not reflect the true and fairview of the financial position of SCSL.

Civil Appeal No.16805 of 2017

2. In the present appeal, the appellant was roped in by the WholeTime Member of the SEBI as well as the Appellate Tribunal as hehappened to be an executive director of SCSL from 1993 upto 31.8.2000and a non-executive director from 1.9.2000 to 23.1.2003. He also happensto be the “co-brother” of B. Ramalinga Raju as the two of them havemarried two sisters.

3. SCSL was originally incorporated as a private limited companywith two shareholders, namely, B. Ramalinga Raju and D.V.Satyanarayana Raju on 24.6.1987. These two gentlemen were the originalpromoters of this company. The appellant, who was an executive directorof this company from 1993 onwards, was confined to operating a jointventure company of SCSL, namely, Satyam Enterprise Solutions PrivateLimited (SES). The appellant stated that he was never involved in theday to day affairs of SCSL. In the said joint venture company, 80%shareholding was held by SCSL and the appellant held the remaining20% shares. SES merged into SCSL pursuant to a scheme ofarrangement, approved by the Andhra Pradesh High Court in 1999, as aresult of which the appellant was issued 8,00,000 equity shares of SCSL.Later in the same year, SCSL declared a bonus, thereby doubling thenumber of shares held by the appellant to 16,00,000 equity shares ofSCSL. On 7.8.2000, SCSL announced a stock split by which the facevalue of the shares was reduced from Rs.10/- to Rs.2/- as a result ofwhich every shareholder got an additional five shares of Rs.2/- for eachshare of Rs.10/- held by them. Consequently, the shareholding of theappellant increased to 76,50,000 equity shares of SCSL. The first timethat unpublished price sensitive information (hereinafter referred to as“UPSI”) came into existence so far as SCSL is concerned is stated tobe on 31.3.2001. It is pertinent to note that as on this date, as has been A

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Astated hereinabove, the appellant was a non-executive director of thesaid company. Various annual reports from 2000 till 2003 disclosed B.Ramalinga Raju and B. Rama Raju as promoters of SCSL, but not theappellant. The appellant sold his shares in SCSL from 22.2.2001 toDecember, 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,Bit 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 ofwhich he stood to gain by selling shares which he owned at an inflatedvalue. The appellant replied to the show cause notice, taking detailedfactual grounds as well as grounds in law, stating that he could not beCsaid to be an “insider” as defined by the SEBI (Prohibition of InsiderTrading Regulations), 1992 (hereinafter referred to as the “1992Regulations”). By an order dated 10.9.2015, the Whole Time Memberof the SEBI, after extracting relevant sections of the SEBI Act, 1992and the relevant regulations referred to in the show cause notice, held that given Annexure 15 to the show cause notice, the appellant being aDpromoter was not the only ground of violation of the 1992 Regulations,but being a director of SCSL and co-brother of B. Ramalinga Raju wouldalso rope the appellant in. After referring to Regulations 2(c) and 2(e) ofthe 1992 Regulations, the Whole Time Member held that being a director

of SCSL, the appellant was a “connected person” under Regulation 2(c)Eand, therefore, an “insider” under Regulation 2(e). The Whole TimeMember went on to hold that the fact that the books of accounts ofSCSL were fabricated and manipulated since 2001 remains within theknowledge and possession of “insiders” who were reasonably expectedto have access to them. When it was sought to be contended that theSpecial Court, Enforcement Directorate and Serious Frauds InvestigationFOffice (SFIO) have given findings that only B. Ramalinga Raju and hiscohorts were involved in the manipulations of accounts of SCSL, andhad hidden the same from and deceived the rest of the board of directors,the Whole Time Member stated that SEBI’s investigation is independentand separate from that of other investigation agencies, and that sinceGthe appellant was part of the board of directors and declared as a promoterin disclosures filed by SCSL with stock exchanges, and being a co-brotherof B. Ramalinga Raju, he was, therefore, closely connected with SCSLand its Chairman and “could have in all probability known about affairsof Satyam Computers including the claimed wrong disclosure of himbeing a promoter”. It is important to note that it was held that the appellantH

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 thesecurities market for a period of 7 years. Further, the appellant was todisgorge the amount mentioned against his name, which is an amount ofRs. 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 bythe majority judgment. The majority judgment held that it would not benecessary to decide whether the appellant was a promoter of SCSL. Itfurther went on to construe Regulation 2(e) of the 1992 Regulationsstating that it would be enough that the appellant was a director untilJanuary, 2003, which is after the date of occurrence of UPSI, whichtook place on and from 31.3.2001. Since there is no real differencebetween an executive and a non-executive director, he would reasonablybe expected to know about the fraud and manipulation by the Chairmanand his cohorts, as he was closely connected to the same, being his co-brother. The majority went on to hold that 71% of the shares were soldin 2003 itself, and the fact that the appellant was not mentioned in thecharge sheet filed by the CBI and was not responsible for the fraudwould make no difference. Even the SFIO’s report, which stated thatonly B. Ramalinga Raju and his cohorts were responsible for the fraud,and that they actually duped the board of directors of SCSL, wouldmake no difference as the appellant being an “insider” had sold sharesof SCSL when in possession of UPSI and made profits in violation of the1992 Regulations. It was held by the majority judgment of the AppellateTribunal that given Annexure 15 to the show cause notice, the appellantbeing a promoter was not the only ground of violation of the 1992Regulations, but being a director of SCSL and co-brother of RamalingaRaju would also rope the appellant in. However, the appellant was givenrelief to the extent that under the Explanation to Regulation 2(e) of the1992 Regulations, the appellant could only be held liable for a period ofsix months beyond his resignation as a director i.e. upto July, 2003. Aremand order, therefore, was made to assess the quantum of unlawfulgains that the appellant had made upto July, 2003.

5. Shri K.V. Viswanathan, learned senior counsel appearing onbehalf of the present appellant, has argued that the basis of the showcause notice is that the appellant as a promoter made illegal gains contraryto the 1992 Regulations. Once it is demonstrated that he is not a promoter, A

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Athe findings of the Whole Time Member and the majority view of theAppellate Tribunal must be set aside as they go beyond the show causenotice. He further argued that a fundamental error made by the WholeTime Member as well as the majority judgment of the Appellate Tribunalis in the construction of Regulation 2(e)(i) of the 1992 Regulations, inthat an insider is defined as a “connected person” anda person who isBreasonably expected to have access to unpublished price sensitiveinformation by virtue of such connection. The second part of the definitionafter the word “and” has been ignored by both authorities and they are,therefore, wrong in their construction of Regulation 2(e)(i) of the 1992Regulations. Otherwise also, according to the learned senior counsel,Ceven 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 theappellant was neither in possession of nor acted on the basis of anyunpublished price sensitive information. According to the learned seniorcounsel, the Whole Time Member’s order suffered from pre- determinational bias, inasmuch as he had by an earlier order, which relatedDto B. Ramalinga Raju and his cohorts, found against the appellant withoutthe appellant being a party to the earlier decision and without hearinghim. Further, according to the learned senior counsel, the impugnedjudgments erred in ignoring very important findings of the Special Court,the charge sheet of the CBI and the SFIO’s report. He relied veryEheavily on the minority judgment of the Appellate Tribunal which wentinto great detail on facts and ultimately exonerated his client.

6. Shri C.U. Singh, learned senior counsel appearing on behalf ofthe SEBI, countered each of these allegations and took us through theWhole Time Member’s judgment as well as the majority judgment of the FAppellate Tribunal, and stated that they appreciated the law as well asthe facts absolutely correctly. He referred to Section 21 of the SecuritiesContracts (Regulation) Act, 1956 in order to show that where securitiesare listed in any recognized stock exchange, the conditions of the ListingAgreement with that stock exchange have to be complied with. He then took us to Clause 35 of a standard form of the Listing Agreement,Gin 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 containsthe 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”),H

which definition is incorporated in the Listing Agreement. This definitionclearly shows that a promoter means a person who is in control of thecompany, directly or indirectly, whether as shareholder, director orotherwise. According to Shri Singh, the appellant, by virtue of being anexecutive director from 1993, was, therefore, clearly a promoter withinthe meaning of the aforesaid definition. He also referred to and reliedupon Section 159 of the Companies Act, 1956, which requires certainparticulars to be furnished by companies in their annual return. What isconspicuous by its absence is the fact that there is no requirement todisclose who the promoters of a company are. This has since beenchanged, for in the Companies Act, 2013, Section 92(1)(e) now requiresdisclosures in the annual return as to who the promoters of the companyare. This being the case, according to the learned senior counsel, theannual returns filed by the company did not, in law, need to disclose whowere the promoters of the company and for this reason, SCSL did notdisclose the appellant as a promoter. According to Shri Singh, this aspectis adverted to in the majority judgment of the Appellate Tribunal, eventhough the majority judgment, according to Shri Singh, does not ultimatelydecide on the basis that the appellant is a promoter. He also relied uponthe annual reports of the company, which show the appellant as a directoron and from 2000 to 2003, but not as an independent director thereof.He referred to the averments of the appellant himself to argue that untila suitable replacement was found, the appellant would continue as anon-executive director, meaning thereby that he would continue to dowhat he had done as an executive director. This being the case, themajority judgment of the Appellant Tribunal was right in saying that insofaras the appellant was concerned, there was no distinction between beingan executive and a non-executive director. According to the learnedsenior counsel, when it comes to the definition of “insider”, Regulation2(e)(i) must be contrasted with Regulation 2(e)(ii) of the 1992 Regulations,whereas sub-clause (i) requires a connected person only to be reasonablyexpected to have insider information, under sub-clause (ii), persons whoare not connected persons need to have actual knowledge of insiderinformation. According to the learned senior counsel, the majorityjudgment of the Appellate Tribunal was correct in considering fiveimportant factors in ultimately holding that the appellant was an insider,namely, (i) that he was a promoter; (ii) that he promoted two joint venturecompanies which were closely linked with SCSL; (iii) that one of these AB

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Acompanies ultimately merged with SCSL; (iv) that he would continue asa director till he was replaced; and (v) that he was co-brother of B.Ramalinga Raju. These factors, according to Shri Singh, were foundationalfacts from which it was reasonable to draw an inference that the appellantcould be expected to have knowledge of UPSI. He relied upon certainjudgments of this Court in order to show that penalty proceedings andBcriminal proceedings are different and independent of each other, andthat, therefore, what is held by a Special Court would not have any realbearing on SEBI’s penalty proceeding.

7. Having heard learned counsel on both sides, it is important tofirst set out the relevant statutory provisions.C

SEBI Act, 1992

“Prohibition of manipulative and deceptive devices, insidertrading and substantial acquisition of securities or control.

12A. No person shall directly or indirectly—

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(a) use or employ, in connection with the issue, purchase or saleof any securities listed or proposed to be listed on a recognizedstock exchange, any manipulative or deceptive device orcontrivance in contravention of the provisions of this Act or therules or the regulations made thereunder;E(b) employ any device, scheme or artifice to defraud in connectionwith issue or dealing in securities which are listed or proposed tobe listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operatesor would operate as fraud or deceit upon any person, in connectionFwith the issue, dealing in securities which are listed or proposed tobe listed on a recognised stock exchange, in contravention of theprovisions of this Act or the rules or the regulations madethereunder; (d) engage in insider trading; G

(e) deal in securities while in possession of material or non-publicinformation or communicate such material or non-publicinformation to any other person, in a manner which is incontravention of the provisions of this Act or the rules or theregulations made thereunder; H

(f) acquire control of any company or securities more than thepercentage of equity share capital of a company whose securitiesare listed or proposed to be listed on a recognised stock exchangein contravention of the regulations made under this Act.

Penalty for insider trading.

15G.If any insider who,—

(i) either on his own behalf or on behalf of any other person, dealsin securities of a body corporate listed on any stock exchange onthe basis of any unpublished price-sensitive information; or

(ii) communicates any unpublished price-sensitive information toany person, with or without his request for such information exceptas required in the ordinary course of business or under any law;or

(iii) counsels, or procures for any other person to deal in anysecurities of any body corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakhrupees but which may extend to twenty-five crore rupees or threetimes the amount of profits made out of insider trading, whicheveris higher.

Prohibition of Insider Trading Regulations, 1992

Definitions.

2. In these regulations, unless the context otherwise requires:

(c) “connected person” means any person who—

(i) is a director, as defined in clause (13) of section 2 of theCompanies Act, 1956 (1 of 1956), of a company, or is deemed tobe a director of that company by virtue of sub-clause (10) ofsection 307 of that Act or

(ii) occupies the position as an officer or an employee of thecompany or holds a position involving a professional or businessrelationship between himself and the company whether temporaryor permanent and who may reasonably be expected to have anaccess to unpublished price sensitive information in relation tothat company:

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Explanation :—For the purpose of clause (c), the words “connectedperson” shall mean any person who is a connected person sixmonths prior to an act of insider trading; xxx xxx xxx (e) “insider” means any person who,

(i) is or was connected with the company or is deemed to havebeen connected with the company and is reasonably expected tohave access to unpublished price sensitive information in respectof securities of a company, or

(ii) has received or has had access to such unpublished pricesensitive information; xxx xxx xxx (h) “person is deemed to be a connected person”, if such person—

(i) is a company under the same management or group, or anysubsidiary company thereof within the meaning of sub-section(1B) of section 370, or sub-section (11) of section 372, of theCompanies Act, 1956 (1 of 1956) or sub-clause (g) of section 2 ofthe Monopolies and Restrictive Trade Practices Act, 1969 (54 of1969) as the case may be; or

(ii) is an intermediary as specified in section 12 of the Act,Investment company, Trustee Company, Asset ManagementCompany or an employee or director thereof or an official of astock exchange or of clearing house or corporation;

(iii) is a merchant banker, share transfer agent, registrar to anissue, debenture trustee, broker, portfolio manager, InvestmentAdvisor, sub-broker, Investment Company or an employee thereof,or is member of the Board of Trustees of a mutual fund or amember of the Board of Directors of the Asset ManagementCompany of a mutual fund or is an employee thereof who have afiduciary relationship with the company;

(iv) is a Member of the Board of Directors or an employee of apublic financial institution as defined in section 4A of the CompaniesAct, 1956; or

(v) is an official or an employee of a Self-regulatory Organisationrecognised or authorised by the Board of a regulatory body; or

(vi) is a relative of any of the aforementioned persons;

(vii) is a banker of the company.

(viii) relatives of the connected person; or

(ix) is a concern, firm, trust, Hindu undivided family, company orassociation of persons wherein any of the connected personsmentioned in sub-clause (i) of clause (c), of this regulation or anyof the persons mentioned in sub-clause (vi), (vii) or (viii) of thisclause have more than 10 per cent of the holding or interest; (ha) “price sensitive information” means any information whichrelates directly or indirectly to a company and which if publishedis likely to materially affect the price of securities of company.

Explanation.—The following shall be deemed to be price sensitiveinformation:-

(i) periodical financial results of the company;

(ii) intended declaration of dividends (both interim and final);

(iii) issue of securities or buy-back of securities;

(iv) any major expansion plans or execution of new projects.

(v) amalgamation, mergers or takeovers;

(vi) disposal of the whole or substantial part of the undertaking;

(vii) and significant changes in policies, plans or operations of thecompany; xxx xxx xxx

(i) “relative” means a person, as defined in section 6 of theCompanies Act, 1956 (1 of 1956); Prohibition on dealing, communicating or counselling onmatters relating to insider trading.

3. No insider shall—

(i) either on his own behalf or on behalf of any other person, dealin securities of a company listed on any stock exchange on thebasis of any unpublished price sensitive information; A

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[2018] 5 S.C.R.

ARegulation 3(i) was amended with effect from 20.2.2002 asfollows:

“Prohibition on dealing, communicating or counselling onmatters relating to insider trading.

3. No insider shall— (i) either on his own behalf or on behalf ofany other person, deal in securities of a company listed on anystock exchange when in possession of any unpublished pricesensitive information;”

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8. Similarly, the phrase “by virtue of such connection” containedin Regulation 2(e) was also deleted by the same amendment in 2002.CThe 1992 Regulations were repealed by the SEBI (Prohibition of InsiderTrading) Regulations, 2015 (2015 Regulations). What is important tonote is the change in the definition of “insider” with effect from 2015.Regulation 2(1)(g) of the 2015 Regulations reads as under:

“Definitions.D

2. (1) In these regulations, unless the context otherwise requires,the following words, expressions and derivations therefrom shallhave the meanings assigned to them as under:

(g) “insider” means any person who is: i) a connected person; orii) in possession of or having access to unpublished price sensitiveEinformation;”

9. By Regulation 12 of the said regulations, the 1992 Regulationswere repealed with an inbuilt Section 6 of the General Clauses Actcontained in clause 2 of Regulation 12.

F10. It is important to note that Regulation 2(e)(i) is in two parts.The first part has reference to any person who is connected with thecompany or is deemed to be connected with the company. There canbe no doubt that the definition of “connected person” contained inRegulation 2(c) would rope in the appellant under sub-clause (i) thereof,as the appellant was undoubtedly a director of SCSL upto 2003. However,Gthe second limb of clause 2(e)(i) also has to be satisfied, which is thatsuch person must reasonably be expected to have access to unpublishedprice sensitive information by virtue of such connection in respect ofsecurities of a company. It has been held in a series of judgments thatthe word “and” should be given its ordinary meaning and should be H

understood in a conjunctive sense, unless it would lead to an absurdsituation or an unintelligible result. See Maharaja Sir Pateshwari PrasadSingh v. State of U.P., (1963) 50 ITR 731 at paragraph 10; M.Satyanarayana v. State of Karnataka, (1986) 2 SCC 512 at paragraph5; Union of India v. Justice S.S. Sandhawalia, (1994) 2 SCC 240 atparagraph 18 and Spentex Industries Ltd. v. CCE, (2016) 1 SCC780 at paragraph 30. In the present case, the new 2015 Regulationsalso throw considerable light on the definition of “insider”, as an insideris now defined to mean only a person who is a connected person oraperson who is in possession of or having access to unpublished pricesensitive information. Obviously, post 2015, an “insider” need not satisfythe second test of the 1992 Regulations and it is enough that such personbe a “connected person” as defined. The disjunctive “or” contained inthe 2015 Regulations must be contrasted with the expression “and”contained in the 1992 Regulations. Therefore, it is clear that the majorityview of the Appellate Tribunal, in giving effect to only the first part ofRegulation 2(e)(i) of the 1992 Regulations, cannot be sustained in law.

11. Further, under the second part of Regulation 2(e)(i), theconnected person must be “reasonably expected” to have access tounpublished price sensitive information. The expression “reasonablyexpected” cannot be a mere ipse dixit – there must be material to showthat such person can reasonably be so expected to have access tounpublished price sensitive information.

12. This brings us to the minority judgment of the Appellate Tribunal.First and foremost, this judgment correctly brings out the role of theexpression “and” contained in Regulation 2(e)(i). The judgment alsocorrectly appreciates the difference in language in Regulation 3 beforeand after it was amended in 2002, and contrasts the expression “on thebasis of” with the expression “when in possession of”. The minorityjudgment then goes on to refer and rely upon the SFIO’s report, whichfound that the manipulation of financial statements was done by B.Ramalinga Raju and his cohorts, and was suppressed from the board ofdirectors, which would include the appellant as a member of such board.In a significant paragraph, the minority holds:

“97. If the fabrication of the financial results (which is the UPSIherein) was suppressed from the Board of Directors of Satyam,it will be difficult to hold that the Appellant was even in possession A

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Aof UPSI, leave alone trading on the basis of UPSI. If the Appellantas a director had knowledge of the fabrication of the financialstatements (which is UPSI herein), he must be held to have violatedthe PFUTP Regulations. However, in the Impugned Order, theWTM drops the charge of PFUTP violation for lack of evidence.This clearly shows that the appellant CSR was never in possessionBof UPSI. In view of this, the finding of the WTM that the Appellantviolated PIT Regulations during this period is held to be not legallysustainable.”

13. The said judgment went on to hold that the appellant cannotbe described as a promoter inasmuch as the annual reports, whichCcontained his signatures as a director, did not show him as a promoter.What was done behind his back was that B. Ramalinga Raju and B.Rama Raju described him as a promoter only to various stock exchangesin letters written to those exchanges without the knowledge or consentof the appellant. The minority judgment also refers to the fact that theDappellant’s shares were not subject to a lock-in period at the time ofmerger of SES into SCSL, which lock-in period was mandated by lawfor promoters. In fact, the appellant was one of the persons duped by B.Ramalinga Raju and his brother B. Rama Raju and was, therefore, avictim of the fraud perpetrated by the former Chairman of SCSL. Onevery important finding of the minority judgment is as follows:E“114. In response CSR asserts that he had compelling reasons tosell shares and the same was not done while in the possession ofUPSI, since he was never in possession of UPSI. Appellant assertsthat his trading pattern also demonstrates that he was not inpossession of UPSI. Specifically, CSR asserts thatFa. he was selling shares even before the relevant period to fundhis newly created venture capital investment business (Appellantsold 70,000 shares between 28.12.1999 to 20.06.2000, he againsold 2,00,000 shares in 2000-2001).

Gb. Unlike other Appellants, the Appellant did not sell his entireshareholding at one go, but sold his shareholding as and when hehad a business requirement. Appellant explained that he had setuphis own venture capital investment business which purchased theshares in unlisted companies and therefore there was no rationalefor him to purchase the shares of Satyam.H

c. While the actual promoters sold their entire shareholding by2005, the Appellant continued to have his shareholding till the year2008.

d. Appellant disposed off his entire shareholding following thecollapse of Satyam shares price after the announcement of themerger and subsequent cancellation of the merger between Satyamand the Maytas entities (promoted by Mr. Ramalinga Raju andhis sons)

e. The sale proceeds went to fund the Appellant’s businessrequirement over a period of time. The Appellant adduced evidenceto show the utilization of sale proceeds for genuine businessrequirements.”

14. It was also found that by the year 2006, all the actual promotersdisposed of their shareholding in SCSL because they were aware of thecredit crunch faced by SCSL. The fact that the appellant continued toretain substantial shareholding in SCSL right till the end of 2008 clearlypoints to lack of possession of UPSI. Another important point is that thelast transaction of sale of shares by the appellant on 22.12.2008, whichwas a substantial chunk of shares, was made by the appellant just likeany other shareholder of SCSL. News had got out into the market thatthe merger proposal of SCSL with Maytas Infra Limited and MaytasProperties was not going ahead. The hysteria in the share market resultedin a steep drop in the price of shares of SCSL. The fact that the appellantdisposed of a huge chunk of his shareholding on 22.12.2008 to avail ofthe price on that date completely negates the inference that there wasany information flow between B. Ramalinga Raju, B. Rama Raju andthe appellant. It was also pointed out that the appellant had no professionalor business relationship with his co-brother and had no connection withany of the entities floated by his co-brother. The fact that the appellantwas not involved with fraudulent manipulation is clear from the fact thathe ceased to be an executive director in the year 2000. Fraudulentmanipulation began only from 2001 onwards. It was also consideredsignificant by the minority judgment that the appellant was not a nomineeof SCSL on the board of directors of Satyam Infoway, but of anotherthird party investor.

15. The minority judgment then went on to notice the distinctionbetween an executive and a non-executive director.

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A16. In Pooja Ravinder Devidasani v. State of Maharashtra(2014) 16 SCC 1 at 9, it is stated:

“17. There is no dispute that the appellant, who was wife of theManaging Director, was appointed as a Director of the Company—M/s Elite International (P) Ltd. on 1-7-2004 and had also executeda letter of guarantee on 19-1-2005. The cheques in question wereissued during April 2008 to September 2008. So far as the dishonourof cheques is concerned, admittedly the cheques were not signedby the appellant. There is also no dispute that the appellant wasnot the Managing Director but only a non-executive Director ofthe Company. Non-executive Director is no doubt a custodian ofthe governance of the company but is not involved in the day-to-day affairs of the running of its business and only monitors theexecutive activity. To fasten vicarious liability under Section 141of the Act on a person, at the material time that person shall havebeen at the helm of affairs of the company, one who activelylooks after the day-to-day activities of the company and isparticularly responsible for the conduct of its business. Simplybecause a person is a Director of a company, does not make himliable under the NI Act. Every person connected with theCompany will not fall into the ambit of the provision. Time andagain, it has been asserted by this Court that only those personswho were in charge of and responsible for the conduct of thebusiness of the Company at the time of commission of an offencewill be liable for criminal action. A Director, who was not in chargeof and was not responsible for the conduct of the business of theCompany at the relevant time, will not be liable for an offenceunder Section 141 of the NI Act. In National Small IndustriesCorpn. [National Small Industries Corpn. Ltd. v. HarmeetSingh Paintal, (2010) 3 SCC 330 : (2010) 1 SCC (Civ) 677 :(2010) 2 SCC (Cri) 1113] this Court observed: (SCC p. 336, paras13-14)

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“13. Section 141 is a penal provision creating vicarious liability,and which, as per settled law, must be strictly construed. It istherefore, not sufficient to make a bald cursory statement in acomplaint that the Director (arrayed as an accused) is in chargeof and responsible to the company for the conduct of thebusiness of the company without anything more as to the G

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role of the Director. But the complaint should spell out as tohow and in what manner Respondent 1 was in charge of orwas responsible to the accused Company for the conduct ofits business. This is in consonance with strict interpretation ofpenal statutes, especially, where such statutes create vicariousliability.

14. A company may have a number of Directors and to makeany or all the Directors as accused in a complaint merely onthe basis of a statement that they are in charge of andresponsible for the conduct of the business of the companywithout anything more is not a sufficient or adequate fulfilmentof the requirements under Section 141.”

Non-executive directors are, therefore, persons who are notinvolved in the day to day affairs of the running of the company and arenot in charge of and not responsible for the conduct of the business ofthe company.

17. An instructive judgment of Lord Halsbury is contained inDovey and the Metropolitan Bank v. John Cory [1901] AC 477.The Lord Chancellor put it thus:

“The charge of neglect appears to rest on the assertion that Mr.Cory, like the other directors, did not attend to any details of businessnot brought before them by the general manager or the chairman,and the argument raises a serious question as to the responsibilityof all persons holding positions like that of directors, how far theyare called upon to distrust and be on their guard against thepossibility of fraud being committed by their subordinates of everydegree. It is obvious if there is such a duty it must render anythinglike an intelligent devolution of labour impossible. Was Mr. Coryto turn himself into an auditor, a managing director, a chairman,and find out whether auditors, managing directors, and chairmenwere all alike deceiving him? That the letters of the auditors werekept from him is clear. That he was assured that provision hadbeen made for bad debts, and that he believed such assurances, isinvolved in the admission that he was guilty of no moral fraud; sothat it comes to this, that he ought to have discovered a networkof conspiracy and fraud by which he was surrounded, and foundout that his own brother and the managing director (who have A

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SUPREME COURT REPORTS

Asince been made criminally responsible for frauds connected withtheir respective offices) were inducing him to make representationsas to the prospects of the concern and the dividends properlypayable which have turned out to be improper and false. I cannotthink that it can be expected of a director that he should be watchingeither the inferior officers of the bank or verifying the calculationsBof the auditors himself. The business of life could not go on ifpeople could not trust those who are put into a position of trust forthe express purpose of attending to details of management. If Mr.Cory was deceived by his own officers - and the theory of hisbeing free from moral fraud assumes under the circumstancesCthat he was - there appears to me to be no case against him at all.The provision made for bad debts, it is well said, was inadequate;but those who assured him that it was adequate were the verypersons who were to attend to that part of the business; and so ofthe rest. If the state and condition of the bank were what wasrepresented, then no one will say that the sum paid in dividendsDwas excessive.

(at pages 485-86)

Per Lord Davey, it was held:

“In this state of the evidence, my Lords, I ask whether the courseEof business at the board meetings, as described by the respondent,was a reasonable course to be pursued by the respondent andother directors, or whether the knowledge which might have beenderived from a careful and comparative examination of the weeklystates and quarterly returns from the different branches of theFbank ought to be imputed to the respondent, or (alternatively)whether he was guilty of such neglect of his duty as a director aswould render him liable to damages. I do not think that it is madeout that either of the two latter questions should be answered inthe affirmative. I think the respondent was bound to give hisattention to and exercise his judgment as a man of business on theGmatters which were brought before the board at the meetingswhich he attended, and it is not proved that he did not do so. ButI think he was entitled to rely upon the judgment, information, andadvice of the chairman and general manager, as to whose integrity,skill, and competence he had no reason for suspicion. I agreeHwith what was said by Sir George Jessel in Hallmark’s Case, and

by Chitty J. in In re Denham & Co., that directors are not boundto examine entries in the company’s books. It was the duty of thegeneral manager and (possibly) of the chairman to go carefullythrough the returns from the branches, and to bring before theboard any matter requiring their consideration; but the respondentwas not, in my opinion, guilty of negligence in not examining themfor himself, notwithstanding that they were laid on the table of theboard for reference. The case is no doubt one of some difficulty,but the appellant has not made out to my satisfaction that therespondent wilfully (as that term is explained in the cases I havereferred to) misappropriated the company’s funds in payment ofdividends.”

(at pages 492-493)

18. It is also important to note that the appellant attended only sixout of ten board meetings of SCSL for the period that he was a non-executive director. The appellant was not involved in any businessdevelopment, diversification plans and advise on new ventures of SCSLpost 1999. It was also held by the minority judgment that the findings ofthe Whole Time Member and the majority went clearly beyond the showcause notice, which, when read with Annexure 15 thereof, makes itclear 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 showcause notice goes as also the basis of the impugned judgment.

19. In Godrej Industries Ltd. v. CCE, (2008) 17 SCC 471 at471, this Court stated:

“3. The Tribunal in its impugned order has exceeded its jurisdictionby recording a finding to the effect that Godrej Soap Ltd. (GSL)is a “related person” vis-à-vis Procter & Gamble Godrej Ltd.(PGG) which is beyond the scope of the show-cause notice. Weourselves have gone through the show-cause notice and we aresatisfied that the finding recorded by the Tribunal insofar as itrelates to a “related person” is beyond the scope of show-causenotice and therefore, the same cannot be sustained and isaccordingly set aside.”

To similar effect is the judgment in SACI Allied Products Ltd.v. CCE, (2005) 7 SCC 159 at 168-169:

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“15. The Appellate Tribunal, by the impugned order, has upheldthe order of the respondent Collector, however, on a totally newand different basis which was never the case of the Departmenteither in the show-cause notice or in the impugned order. TheAppellate Tribunal, in the impugned order, has held as under:

“All the wholesale dealers and all the wholesale buyers in thewhole of the country would not be taken to form a single classof buyers. M/s SACI and SCIL were related persons. M/sSACI sold their goods in the State of U.P. through SCIL andno direct sales were effected by SACI in the State of U.P.Seen in the light of the Tribunal’s decision in the case ofGoramal Hari Ram Ltd., the prices at which SCIL weredisposing of the goods of SACI in the State of U.P. had beencorrectly taken as the normal price for determining the dutyliability of SACI under Section 4 of the Act.”

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16. Thus according to the Appellate Tribunal, since the dealers inDUttar Pradesh who purchased the goods from Syndet, andindependent dealers in other parts of the country to whom theappellants directly sold the goods are different class of buyers,the appellants’ price to the independent dealers cannot be takenas the basis for assessing the appellants’ sales to Syndet in UttarEPradesh. This finding of the Appellate Tribunal is based on firstproviso to Section 4(1)(a) of the Act. While the show-cause noticeand the order of the Collector proceeded on the basis of theinvocation of third proviso to Section 4(1)(a) of the Act, theAppellate Tribunal for the first time in the impugned order hassustained the proceedings on the basis of first proviso to SectionF4(1)(a) of the Act. It was argued that the first proviso to Section4(1)(a) of the Act was never invoked by the Department either inthe show-cause notice or in the impugned order and it was for thefirst time that the Appellate Tribunal in the impugned order hassought to sustain the impugned order by invoking the first provisoGto Section 4(1)(a) of the Act. It is thus seen that the Tribunal hasgone totally beyond the show-cause notice and the order of theCollector, which is impermissible. The Appellate Tribunal cannotsustain the case of the Revenue against the appellants on a groundnot raised by the Revenue either in the show-cause notice or inthe order.

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17. In this context, we may usefully refer to the judgment of thisCourt in the case of Reckitt & Colman of India Ltd. v. CCE[(1997) 10 SCC 379 : (1996) 88 ELT 641]. This Court held that itis beyond the competence of the Tribunal to make out in favour ofthe Revenue a case which the Revenue had never canvassedand which the appellants had never been required to meet.

18. The impugned order of the Tribunal which had gone beyondthe show-cause notice and the order of the respondent Collectoris, therefore, liable to be set aside.”

20. However, Shri Singh argued, based on Section 21 of the theSecurities Contracts (Regulation) Act, 1956 and Clause 35 of the ListingAgreement, which takes us to Regulation 2(1)(h)(i) of the 1997Regulations, to support the majority judgment of the Appellate Tribunalby stating that as the appellant was an executive director from 1993 to2000, he must be said to be a person who is in control as a director of thecompany and hence a promoter. Regulation 2(1)(h)(i) of the 1997Regulations states:

“2. Definitions

(1) In these Regulations, unless the context otherwise requires- (h) “promoter” means-

(i) the person or persons who are in control of the company, directlyor indirectly, whether as a shareholder, director or otherwise;”

“Control” is defined by Regulation 2(1)(c) of the 1997 Regulationsas follows:

“(c) “control” shall include the right to appoint majority of thedirectors or to control the management or policy decisionsexercisable by a person or persons acting individually or in concert,directly or indirectly, including by virtue of their shareholding ormanagement rights or shareholders agreements or votingagreements or in any other manner; Explanation.

(i) Where there are two or more persons in control over the targetcompany, the cesser of any one of such persons from such controlshall not be deemed to be a change in control of management nor AB

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Ashall any change in the nature and quantum of control amongstthem constitute change in control of management:

PROVIDED that the transfer from joint control to sole control iseffected in accordance with clause (e) of sub-regulation (1) ofregulation 3.

B(ii) If consequent upon change in control of the target company inaccordance with regulation 3, the control acquired is equal to orless than the control exercised by person(s) prior to such acquisitionof control, such control shall not be deemed to be a change incontrol.”

Facts

CEven though the definition of “control” in the 1997 Regulations isan inclusive one, yet the definition shows that control must mean a rightto appoint majority of directors as a shareholder or to control managementor policy decisions exercisable by persons in any manner. It may bepointed out, as has been correctly argued by Shri Viswanathan in rejoinder,Dthat 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 hestepped down as an executive director in 2000. After stepping down, itwas pointed out to us that the salary was stopped, and he was paid onlyfor board meetings which he attended. Nothing has been shown to us toindicate that, on facts, such executive salaried director was in any mannerEin control of SCSL directly or indirectly. The absence of the word“independent” in the annual report also does not take us very far, inasmuchas it is admitted that he was a non-executive director from 2000 to 2003,who only attended six board meetings and received salary therefor. Wehave not been shown how the appellant was in any manner responsibleFfor actions taken by those in the management of SCSL. We have alreadydemonstrated that the minority judgment is much more detailed andcorrect than the majority judgment of the Appellant Tribunal. We acceptShri Singh’s submission that in cases like the present, a reasonableexpectation to be in the know of things can only be based on reasonableinferences drawn from foundational facts. This Court in SEBI v.GKishore R. Ajmera, (2016) 6 SCC 368 at 383, stated:

“26. It is a fundamental principle of law that proof of an allegationleveled against a person may be in the form of direct substantiveevidence or, as in many cases, such proof may have to be inferredby a logical process of reasoning from the totality of the attending H

facts and circumstances surrounding the allegations/charges madeand leveled. While direct evidence is a more certain basis to cometo a conclusion, yet, in the absence thereof the Courts cannot behelpless. It is the judicial duty to take note of the immediate andproximate facts and circumstances surrounding the events onwhich the charges/allegations are founded and to reach what wouldappear to the Court to be a reasonable conclusion therefrom. Thetest would always be that what inferential process that areasonable/prudent man would adopt to arrive at a conclusion.”

21. We are of the view that from the mere fact that the appellantpromoted two joint venture companies, one of which ultimately mergedwith SCSL, and the fact that he was a co-brother of B. Ramalinga Raju,without more, cannot be stated to be foundational facts from which aninference of reasonably being expected to be in the knowledge ofconfidential information can be formed. The fact that the appellant wasto be continued as a director till replacement again does not take usanywhere. Shri Viswanathan has shown us that two other independentnon-executive directors were appointed in his place on and from 23.1.2003.What is clear is that the appellant devoted all his energies to the businesseshe 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 wasdiscontinued.

22. Having regard to the findings contained in the minority judgmentand the aforestated discussion, we are clearly of the opinion that thisview is correct both in law and on facts and deserves our acceptance.Therefore, this appeal is allowed and the majority judgment of theAppellate Tribunal is set aside.

CIVIL APPEAL NO.19494 of 2017

23. The appellant in this appeal is a closely held private companyof Chintalapati Srinivasa Raju and his wife, each holding 50% of theshare capital of this company. Shri Giri, learned senior counsel appearingon behalf of the appellant, has drawn our attention to the findings of theWhole Time Member and the Appellate Tribunal insofar as it pertains tothis appellant. His grievance is that after appreciating that the appellanthad sold only 8,00,000 shares held in SCSL, yet, in the operative order ofdisgorgement, the learned Whole Time Member includes 24,00,000 shareswhich were never sold by the appellant, but for which only application AB

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Amoney was received and returned by 17.4.2002. Thus, the disgorgementorder includes gains made on account of 8,00,000 as well as 24,00,000shares and, therefore, comes to the astronomical figure ofRs. 82,49,37,875/-. He also referred to the judgment of the AppellateTribunal and strongly relied upon the minority judgment to state that theresult of this appeal should follow upon the result of Civil Appeal No.16805Bof 2017.

24. Shri C.U. Singh, learned senior advocate appearing on behalfof the SEBI, did not controvert the factual position and largely agreedthat the fate of this appeal would be the same as the result in CivilAppeal No. 16805 of 2017.C

25. On facts, the appellant sold 8,00,000 shares from 4.1.2001 to14.3.2001. As has been pointed out hereinabove, the occurrence of theUPSI was only from 31.3.2001 and inasmuch as these sales were madeprior to this date, obviously, the 1992 Regulations would not get attracted.The minority judgment of the Appellate Tribunal referred to this andDstated that the result would be the same as the result in Appeal No.462of 2015, namely that of B. Jhansi Rani, who was the wife of B.Suryanarayana Raju, brother of B. Ramalinga Raju and B. Rama Raju.In that case also, shares had been sold prior to the occurrence of theUPSI and on the self-same ground, B. Jhansi Rani’s appeal had beenEallowed by the majority judgment of the Appellate Tribunal with theminority concurring. The minority judgment further went on to statethat 24,00,000 shares also, which were never sold but were merelyreturned to Chintalapati Srinivasa Raju, could not form the basis of anydisgorgement order. We agree with the same.

26. The majority judgment then went on to rely upon Regulation2(h)(ix). As is correctly pointed out by the minority judgment, Regulation2(h)(ix) at the relevant time, prior to 20.2.2002, read as follows:

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“Definitions.

2. In these regulations, unless the context otherwise requires:- G

(h) “person is deemed to be a connected person”, if such person—

(ix) a concern, firm, trust, Hindu undivided family, company,association of persons wherein the relatives of persons mentionedin sub-clauses (vi), (vii) and (viii) has more than 10 per cent of theholding or interest.”

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27. Obviously, the appellant company does not have persons whoare relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) –under these sub-clauses, a person is deemed to be a connected person ifsuch person is a relative of persons in clauses (i) to (v); or is a banker ofthe company; or is a relative of a connected person. Since none of theseclauses are attracted, it is obvious that Section 2(h)(ix) would also, as amatter of law, not be attracted in the facts of this case. In this view ofthe matter, this appeal also stands allowed. Consequently, the majorityjudgment of the Appellate Tribunal judgment is set aside.

DIARY NO.37202 OF 2017

DIARY NO.37202 OF 2017

28. In this civil appeal, Shri Subramonium Prasad, learned seniorcounsel appearing on behalf of the appellant, contends that the presentappellant, who is the father of Shri Chintalapati Srinivasa Raju, wasneither a promoter nor a director of SCSL and has since died on 3.12.2007.He was a connected person to Shri Chintalapati Srinivasa Raju, beinghis 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 ShriChintalapati Srinivasa Raju himself ceased to be a connected person onand from July, 2003. The minority judgment of the Appellate Tribunalcorrectly appreciates this position in the following manner:

“142. The Appellant was the father of CSR. The Appellant sold2,50,000 shares on 04.08.2005. Appellant expired on 03.12.2007.The Impugned Order holds the Appellant to be a person deemedto be connected under Regulation 2(h)(viii), since he was a relativeof a connected person (CSR) (Para 37). However, as discussedabove, CSR ceased to be a connected person on 22.07.2003.Consequently, when the Appellant sold the shares on 04.08.2005,he could not be “a deemed to be connected person” since CSRhimself ceased to be a connected person. On this short point alone,the order of the WTM is liable to be quashed and set aside.”

29. This appeal has also to be allowed as even otherwise it followsupon allowing of Civil Appeal No.16805 of 2017.

CIVIL APPEAL NO.17303 of 2017

30. In this appeal, Shri C.A. Sundaram, learned senior counselappearing on behalf of the appellant, states that the present appellant isthe mother of B. Ramalinga Raju, B. Rama Raju and B. Suryanarayana AB

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ARaju. She was neither a promoter nor a director of SCSL and had losther husband in the year 2001. She sold her shares in SCSL on 12[th] and15[th] December, 2003 to three group companies, in an off market sale, asshe needed money considering that she had to sustain herself as a widow.According to Shri Sundaram, though his client would be a relative of B.Ramalinga Raju and, therefore, a connected person, yet, it is obviousBthat the off market transactions made way back in the year 2003 at aprice of around Rs.340/- per share did not attract the 1992 Regulationsas the price of these shares rose sharply only thereafter touching a figureof Rs. 966.80/- in the year ending of 2006. According to the learnedsenior counsel, there was no evidence whatsoever of any complicity ofCthis lady with the fraud perpetrated by her son and his cohorts. Hereferred to the judgment of the Whole Time Member and to the majorityjudgment of the Appellate Tribunal holding that all that has been foundagainst his client is that she is a close relative of B. Ramalinga Raju andby virtue of this close relationship, it, therefore, must be presumed that she had access to UPSI. Indeed, this is the basis of both the Whole TimeDMember’s judgment as well as the majority judgment of the AppellateTribunal. Given the fact that this lady was not proceeded against by theCBI or by the Enforcement Directorate and that the SFIO’s report doesnot, in any manner, refer to her, and given the fact that she was neitherpromoter nor director of SCSL, it is obvious that the test of the secondEpart of clause 2(e)(i) is not met in the facts of this appeal. Also, it mustbe remembered that had she been in possession of UPSI, she wouldalso have sold shares at their peak price instead of selling them at adepressed price in the year 2003. For all these reasons, this appeal isalso allowed, and the majority judgment of the Appellate Tribunal is setaside.F

CIVIL APPEAL NOs.17313 of 2017 and 17978 of 2017

CIVIL APPEAL NOs.17313 of 2017 and 17978 of 2017

31. Shri Neeraj Kishan Kaul, learned senior counsel appearingfor the appellant in Civil Appeal No.17313 of 2017, and Shri MohanParasaran, learned senior counsel appearing for the appellant in CivilGAppeal No.17978 of 2017, have drawn our attention to the fact that theirclients, being sons of B. Ramalinga Raju, were certainly relatives withinthe meaning of that expression under the 1992 Regulations. However,they were neither directors nor promoters of SCSL and were not involvedin the fraud perpetrated by their father, as has been held in their favourby the Appellate Tribunal. Also, the CBI and the Enforcement DirectorateH

did not proceed against them and the SFIO’s report says nothing abouttheir involvement. Both these brothers sold off their shares in SCSL inAugust and September, 2005 at a price of roughly Rs. 518/- per share,way below the price of Rs. 966.80/- at the end of 2006 when their fathersold off his shares. According to them, therefore, the Appellate Tribunalwas wrong in putting 2 and 2 together and making 22 only by virtue ofthe fact that they were the sons of B. Ramalinga Raju. Also, insofar asB. Rama Raju (Jr.) was concerned, the findings of the Appellate Tribunalthat he had given a presentation to the Board of directors of SCSL in themeeting on 26.12.2008 in support of the proposed merger of MaytasProperties Limited with SCSL is factually incorrect, as has been statedby him in a subsequent application, and which is not denied by the SEBI.Given the fact that the second limb of clause 2(e)(i) cannot be put againsteither of these appellants, in that there is no evidence of any complicityin the fraud committed by their father; given the fact that they wereexpressly exonerated of the said fraud by the Appellate Tribunal; andgiven the fact that they were running independent businesses and wereneither directors nor promoters of SCSL, and that they sold their sharesfor business purposes at a price much less than the peak price at whichtheir father sold shares of SCSL in 2006, no case has been made againstthem. Consequently, their appeals also stand allowed and the AppellateTribunal judgment is set aside in this behalf.

CIVIL APPEAL NO.17997 OF 2017

32. Shri Mukul Rohatgi, learned senior counsel appearing on behalfof the appellant, states that his client was a company that was incorporatedon 22.6.2006 as a private limited company. According to him, his companyowned 6,28,83,317 shares of SCSL, which were pledged as security forobtaining a loan amount of Rs.1258.88 crores. The said amount wasborrowed to provide funds to 10 independent companies. Inasmuch asRs. 1255 crores out of this sum have admittedly been repaid, partlythrough sale of the pledged shares, according to the learned seniorcounsel, this transaction of pledge cannot possibly drag his client intoany violation of the 1992 Regulations.

33. Shri C.U. Singh, learned senior counsel appearing on behalfof the SEBI, has read to us the majority judgment of the AppellateTribunal, in which it has been held that the amount that was borrowedwas utilised to provide funds to 10 private limited companies, whichwere owned by the Raju family. Equally, the shareholding pattern of the AB

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Aappellant company, as it stood on and from 18.9.2006, made it clear thatB. Ramalinga Raju and his wife Nandini Raju held 33.11% and 40.52%respectively, whereas the balance was held by his brother B. RamaRaju and his wife B. Radha. Obviously, therefore, as B. RamalingaRaju and B. Rama Raju individually held more than 10% interest in theappellant company, the appellant company is deemed to be a connectedBperson under Regulation 2(h)(ix) of the 1992 Regulations. In this context,the Appellate Tribunal held:

“h) It is now established that Ramalinga Raju and Rama Rajumanipulated the books of Satyam during the period from 2001 to2008. During that period Ramalinga Raju, Rama Raju and theirwives transferred their shareholding in Satyam to SRSR and SRSRin turn pledged those shares for obtaining loan of Rs. 1258.88crore to the group concerns and as the loan was not repaid thepledged shares have been sold by invoking the pledge. Thus, onone hand Ramalinaga Raju and Rama Raju manipulated the booksof Satyam and ensured that the market price of Satyam werehigher and on the other hand through SRSR got the Satyam sharespledged and obtained higher loan on the basis of higher marketprice of Satyam shares. In these circumstances, inference drawnby the WTM of SEBI that SRSR was reasonably expected tohave access to the UPSI and hence an ‘insider’ under regulation2(e) of the PIT Regulations cannot be faulted. Consequently, thedecision of the WTM of SEBI that SRSR indulged in pledging theshares of Satyam belonging to Ramalinga Raju, Rama Raju andtheir spouses in contravention of regulation 3 of the PIT Regulationscannot be faulted.

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i) Apart from the above, mode and the manner in which SRSRwas incorporated, mode and the manner in which shares of Satyamwere transferred by Ramalinga Raju, Rama Raju and their wivesto SRSR and the mode and the manner in which the shares ofSatyam were pledged and the pledged amounts were utilized, leaveno manner of doubt that SRSR was a front entity established byRamalinga Raju and Rama Raju for off loading their shareholdingin Satyam when the market value of Satyam shares were higheron account of fictitious bank balances shown in the books ofSatyam. Therefore, argument that SRSR was not an ‘insider’

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and had not pledged the shares of Satyam when in possession ofUPSI cannot be accepted.

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l) In the result, decision of the WTM of SEBI that SRSR was an‘insider’ under the PIT Regulations and that SRSR pledged andgot the shares of Satyam belonging to Ramalinga Raju, RamaRaju and their spouses sold when in possession of UPSI and thusSRSR violated SEBI Act and the PIT Regulations cannot befaulted.”

34. We agree with this finding of the majority judgment of thelearned Appellate Tribunal and, therefore, dismiss this appeal.

CIVIL APPEAL NO.17383 of 2017

35. Shri Luthra, learned senior counsel appearing on behalf of theappellant, brought to our notice that the said appellant was neither adirector nor a promoter of SCSL. The shares that were owned by thisappellant in SCSL were sold by him from 5.2.2001 to 18.11.2004.According to the learned senior counsel, his case would be like the caseof other family members of B. Ramalinga Raju, and any facts that arebeyond the show cause notice cannot be looked at. According to thelearned senior counsel, even though it is true that his client was indictedalong with B. Ramalinga Raju and his brother B. Rama Raju in theSFIO’s report, such report and the judgment of the Special Court,Hyderabad cannot be looked at as they are not relied upon in the showcause notice. Also, according to the learned senior counsel, they are notat all relevant under Sections 40 to 44 of the Indian Evidence Act, 1872and, therefore, cannot be looked at. According to the learned seniorcounsel, adjudication proceedings and criminal proceedings are separateand distinct, and one cannot rely upon criminal proceedings in adjudicationproceedings. For this purpose, he cited Radheshyam Kejriwal v. Stateof W.B., (2011) 3 SCC 581, which was followed in Videocon IndustriesLtd. v. State of Maharashtra, (2016) 12 SCC 315.

36. Shri C.U. Singh, learned senior counsel appearing on behalfof the SEBI, drew our attention to Section 246 of the Companies Act,1956 and stated that the SFIO’s report was a report given under theinvestigatory powers conferred by Section 235 of the said Act. Section246 of the Companies Act, 1956 makes it clear that such report may be A

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Areceived as evidence in other cases. Shri Singh, apart from justifying themajority judgment of the Appellate Tribunal in the case of this appellant,also read to us extracts from the SFIO’s report and from the judgmentof the Special Court, Hyderabad to show that the appellant was hand inglove with B. Ramalinga Raju and his other brother, B. Rama Raju inthe fraud committed on the public from 2001 onwards. He, therefore,Bsubmitted that so far as this appellant was concerned, we should upholdthe majority judgment of the Appellate Tribunal.

37. Section 246 of the Companies Act, 1956 reads as under:

“Section 246. Inspectors’ report to be evidenceC

A copy of any report of any inspector or inspectors appointedunder section 235 or 237 authenticated in such manner, if any, asmay be prescribed, shall be admissible in any legal proceeding asevidence of the opinion of the inspector or inspectors in relation toany matter contained in the report.”

D38. From this Section, it is clear that the report can be used asevidence in any other proceeding. Even though it is correct to state thatthis report was delivered on 13.4.2009, i.e. before the show cause noticewas issued on 19.6.2009, the mere fact that this was not put against theappellant in the show cause notice cannot be any reason for us not toEindependently view the same. The appellant has not chosen to assail thefindings contained in this report in a writ petition filed before the HighCourt. Under Section 246 of the Companies Act, 1956, this Court isempowered to look at the same as evidence of the opinion of the inspectorconcerned in relation to any matter contained in the report. By virtue ofSection 246, therefore, it is possible for us to appreciate the role of theFappellant in the so-called Satyam scam. This report points out thefollowing:

“4.7.39.Shri Suryanarayana Raju is the younger brother of ShriB. Ramalinga Raju, Chairman and elder brother of Shri B. RamaRaju, Managing Director of SCSL. He has been adding, abettingGand facilitating pledge, transfer, sale and management of fundsfor Shri B. Ramalinga Raju and Shri B. Rama Raju. He has beenindependently managing the affairs of SRSRHPL. In theirstatement given on oath, Shri B. Ramalinga Raju, Shri B RamaRaju, Smt. B. Nandini Raju and Smt. B. Radha Raju have H

confirmed that Shri Suryanarayana Raju has been helping themto fulfill various statutory formalities and meeting administrativeexigencies. Shri Ramalinga Raju considered him as a trustworthyperson to look after the statutory requirement of SRSRHPL. ShriB. Rama Raju in his statement dated 02.04.2009 (Annexure E-2.4), could not state reasons for appointment of Shri B.Suryanarayana Raju but stated that there was no restriction toappoint a director without holdings shares in the company. Smt.B. Nandini Raju in her statement dated 24.03.2009 (AnnexureE-41.1), stated that Shri Suryanarayana Raju was made as directorof SRSRHPL as a family member and trust worthy person. Smt.B. Radha Raju in her statement dated 25.03.2009 (Annexure E-40.1) also confirmed the same. Shri B. Suryanarayana Raju inhis statement dated 23.03.2009 (Annexure E-38.1), stated thathe was executing the instructions of Shri B. Ramalinga Raju topledge the shares of SCSL held by SRSRHPL for obtaining loans.

4.7.40. Shri Suryanarayana Raju was also appointed as powerof attorney by all these persons to sell/transfer/deal/pledge etc.their share holding in whatsoever manner he thinks fit. He arrangedfunds by way of taking loans from various financial institutions/banks in the names of various private limited companies by pledgingshares of SCSL and shares of Maytas Infra Ltd., held in the namesof promoters.

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4.7.42. Investigations also revealed that Shri B. SuryanarayanaRaju has signed KYC form with M/s Gandhi Securities andInvestments Ltd., member of BSE and NSE, and M/s Unifi WealthManagement Pvt. Ltd., member NSE for opening account onbehalf of Shri B. Rama Raju (Jr) and Shri B. Teja Raju both sonsof Shri B. Ramalinga Raju, Chairman of SCSL. Copies of thesame are placed at Annexure D-26 & D-27. Smt. B. JhansiRani in her statement dated 25.03.2009 (Annexure E-39.1),stated that she was not knowing reasons for sale of shares ofSCSL held in her name, her husband, Shri B. Suryanarayana Raju,makes decisions about her investments. Shri B. SuryanarayanaRaju in his statement dated 04.04.2009 (Annexure D-38.2)admitted that he also facilitated sale of shares of SCSL held in the ABC

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names of Shri B. Satyanarayana Raju, Smt. B. Appalanarsamma,Shri B. Teja Raju, Shri B. Rama Raju (Jr.), Smt. B. Jhansi Rani,M/s Maytas Infra Ltd.

4.7.43. From the statements of Shri B. Ramalinga Raju and ShriB. Rama Raju, Smt. Nandini Raju, Smt. Radha Raju and otherfamily members, it is clear that Shri B. Suryanarayana Raju, wasaiding, abetting and facilitating sale of shares of SCSL atmanipulated price for and on behalf of promoters and others andthus actively connived in raising funds from the market. He followedthe instructions of Shri B. Ramalinga Raju for pledging and saleof shares of SCSL by executing documents for the purpose offund requirements of SCSL and was party to the criminalconspiracy for doing an illegal act of cheating of unsuspectinginvestors by selling shares at manipulated high price based onfalsified financial statement of SCSL.

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4.7.47. Shri Suryanarayana Raju was a Power of Attorneyholder on behalf of the core-promoters and other family membersof the core-promoters for sale/pledge of their shares at manipulatedprices. The agreement here for doing any legal act was in theform of Power of Attorney giving him all powers to deal with theshares in SRSRHPL, a company promoted by the core-promoters.The act of facilitating sale and consequent pledge of shares wasan illegal act which was carried out with deceptive motive forcheating the unsuspecting investors based on dishonestconcealment of facts. By this dishonest and willfulmisrepresentation, investors were induced to purchase the sharesof SCSL at highly manipulated prices. By this act of deception,Shri B. Suryanarayana Raju caused damage and harm to theinvesting public and hence committed the offence of cheating underSection 417, 420 read with Section 120B of the IPC, 1860 andmake himself liable for prosecution under the above provisions ofthe Indian Penal Code, 1860.”

39. Also, the judgment of the Special Court at Hyderabad, whichwas delivered only on 9.4.2015 i.e. long after the show cause notice, hasconcluded as follows:

“1784.The facts and circumstances shows that the accused A6Aas Director of M/s. M/s. SRSR Advisory Limited allowed thetransfer of Rs.1425 crore from 37 companies into M/s. SCSLwithout any agreement, without any Board resolution either of M/s. SCSL or the said companies and without any agreement betweenthe companies and without following any corporate norms andBthis shows that he has knowledge about the fraudulent activitieshappening in M/s. SCSL and with that knowledge he aided theaccused A1 and A2 as a part of the criminal conspiracy for theflow of funds to cover up the non-existent cash and bank balancesin M/s. SCSL and the manner in which Rs.195 crores was takenback by the 15 companies managed by the accused A6 throughCM/s. SRSR Advisory Limited without any Board resolution furthercorroborates his involvement in the conspiracy and offloading theshares of M/s. SCSL he gained Rs.199 crore having insiderknowledge and the idea of corporatization was to raise more loansby pledging his shares in the name of corporate entity in order toDshield original ownership from the market as it would have adverseimpact on the share price if the market knows that promoters arepledging shares and the properties acquired by the companieswith the pledged amount was all at the instance of the accusedA6 as Directors of M/s. SRSR Advisory Limited and further theoffloading of shares by the accused A1, A2 and their familyEmembers was done through M/s. Elem Investments PrivateLimited, M/s. Finciti Investments Private Limited, M/s. HigraceInvestments Private Limited and Veeyees Investments PrivateLimited controlled by the accused A6 and immediately after thestatement of the accused A1 on 07-01-2009, the accused A6Fcollected about 15 crore rupees by converting the amounts intodemand drafts and got issued notices under exhibit P2964 by 37companies which were referred in the statement of the accusedA1 on 07-01-2009 covered by exhibit P2688 and all thesecircumstances proved that the accused A6 also played active rolein the criminal conspiracy and cheating of M/s. SCSL, its shareGholders and investors.”

40. Section 42 of the Indian Evidence Act, 1872 states:

“42. Relevancy and effect of judgments, orders or decrees,other than those mentioned in section 41. –– Judgments, H

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orders or decrees other than those mentioned in section 41 arerelevant if they relate to matters of a public nature relevant to theenquiry; but such judgments, orders or decrees are not conclusiveproof of that which they state.”

This Court in K.G. Premshanker v. Inspector of Police, (2002)B8 SCC 87 at 94 stated:

“22. In the facts of the present case, Section 42 would have somebearing and the judgment and decree passed in a civil court wouldbe relevant if it relates to a matter of public nature relevant to theenquiry but such judgment and decree is not a conclusive proof ofCthat which it states.”

While it is true that adjudication proceedings and criminalproceedings are separate proceedings, the relevance of the SpecialCourt’s judgment is only for the purpose of showing that the second partof the definition of an “insider” is made out in the appellant’s case, for, ifDthe appellant, along with his brothers, was party to the fraud practicedon the public, it is obvious that he was reasonably expected to haveaccess to UPSI in respect of the securities of SCSL. This appellant’scase, therefore, stands apart from the other family members of B.Ramalinga Raju, in that the SFIO’s report as well as the aforesaidjudgment clearly and unmistakably point to his complicity, unlike that ofEthe other family members, in the fraud committed from 2001 onwards.This being the case, though for different reasons, we uphold the majorityjudgment of the Appellate Tribunal and dismiss this appeal.

F

Nidhi Jain

Appeals disposed of.

G

H