 "The logo of the Securities and Exchange Board of India (SEBI), India's market regulator, is seen on the facade of its head office building in Mumbai")
A Securities and Exchange Board of India (Sebi) whole-time member has issued an order directing the market regulator to re-investigate the matter of alleged insider trading in the scrip of Sabero Organic Gujarat, disposing of an earlier interim order and showcause notice against Murugappa Group executive chairman A Vellayan and others.
The order comes in a matter in which Sebi has alleged that Vellayan, who was privy to the unpublished price sensitive information (UPSI) about a potential acquisition of the shares of Sabero by Coromandel International, passed on the information to his distant relative Murugappan who in turn passed the information to C Gopalakrishnan and V Karuppaiah, helping them to buy shares at the pre-acquisition rate and sell at a higher rate post the acquisition.
Sebi whole-time member S Raman observed that there were in all nineteen suspected entities (including Gopalakrishnan and Karuppiah-HUF), who traded in the shares of Sabero during the investigation period and these entities too had never traded in the scrip of Sabero during a period of six months prior to this period.
These entities have also made gains ranging between Rs 0.06 crore to Rs 2.98 crore by trading in the shares of Sabero during the investigation period. It also observed that on further examination of the investigation report, including Vellayan, there were in all sixty-nine persons/entities comprising of the management of Coromandel and Sabero, besides the employees and professionals of the two companies, who were privy to the UPSI.
While the showcause notice alleges Vellayan's relationship with Murugappan as the key evidence to indicate the flow of information from Vellayan to Murugappan and in turn to Karuppiah and Gopalakrishnan, it is, however, observed that the investigation has not adduced any supporting evidence to arrive at the conclusion that UPSI was passed by Vellayan to Murugappan and by Murugappan to Gopalakrishnan and Karuppiah-HUF who traded in the shares. Apart from inferences (even if entirely logical), it is equally important that there should at least be some collateral material on record to support the assertion or conclusion, he said.
"In my view, proceeding merely on the basis of available but inadequate evidence on record, without support of any collateral material to arrive at a reasonably conclusive finding that it was indeed only Vellayan who had passed the UPSI to Murugappan, who thereafter passed on the same to Gopalakrishnan and Karuppiah, may not be just and reasonable. It is also important to arrive at a conclusion regarding the many others who had made money in circumstances exactly identical to Gopalakrishnan and Karuppiah-HUF," said Raman.
"I am therefore of the considered view that unless the investigation dwells deeper and brings out the truth with respect to all entities, many of the perpetrators of insider trading in this case may remain undetected forever," he added.
In a statement issued today, Murugappa Group said that its executive chairman A Vellayan has been vindicated, "with the Sebi finding that it never had a fair and reasonable basis to conclude that he was the source of information for alleged insider trading in shares of Sabero Organics Gujarat".
The Sebi order added that it is in the interests of investors that all the perpetrators of insider trading in this case are brought to book and sternly dealt with. As more material facts need to be unearthed to arrive at a clear finding in the matter, I am of the view that this is the fit case of re-investigation and SEBI should employ all the investigative powers entrusted to it to unearth the entire truth and to find out the role of each of the suspected entities vis-a-vis the persons/entities privy to the UPSI including the Noticees, he said.
"SEBI shall endeavour to complete the investigation within six months from the date of this order and thereafter, to conclude the matter expeditiously," said the order.
The allegation was that Gopalakrishnan and Karuppiah were found having made gains to the tune of Rs 1.30 crore and Rs 15.93 lakh, respectively, by buying shares of Sabero during the pre-announcement period (May 15, 2011 to May 30, 2011) of the 42.22% acquisition of Sabero shares by Muruappa Group firm Coromandel International, and selling them in the post-announcement period (May 31, 2011 to June 15, 2011). The investigation report alleged that since the information was passed from Murugappan to these persons and Murugappan has connection or relationship with Vellayan, Vellayan is the one who passed UPSI. Coromandel informed the stock exchanges about the acquisition on May 31, 2011.
An interim order was passed by Sebi on May 21, 2015, directing "... to impound the unlawful gains of Rs 1,92,07,206/- (alleged gain of Rs 1,30,38,795 along with interest of Rs 61,68,411/-) made by Gopalakrishnan C and Rs 23,43,219/-(alleged gain of Rs 15,93,325/-along with interest of Rs 7,49,894/-) made by V Karuppiah (HUF) lying in the bank accounts of Gopalakrishnan C, V Karuppiah (HUF), AR Murugappan and A Vellayan with immediate effect", according to the order. The bank accounts of these persons were also freezed, which was released later.
Vellayan, in response to the allegation, argued that the material on record does not establish that he was the source of any communication of UPSI to any of the parties who are mentioned in the SCN as having traded in Sabero shares. There were many persons in the know of UPSI about the Sabero transaction and no investigation has been done on other potential source of leakage of news.
"Until the passing of the ex-parte order, I was the chairman of the Murugappa corporate board, which oversees the Murugappa Group, a conglomerate with a business turnover of over Rs 27,000 crore and profits of almost Rs 1,800 crore. My personal net worth is estimated at Rs 400 crore, a fact that is normally not relevant to me but which I am being forced to mention in view of the insinuation that I had communicated UPSI which led to alleged insider trading involving gains of a couple of crores for the individuals who traded and with no gain having been made by me," submitted Vellayan.
While the notice was issued on the premise that the UPSI relating to the potential acquisition of Sabero by Coromandel was known only to Coromandel, the fundamental premise is erroneous, since there were others who were privy to the same UPSI — including Sabero, its promoters and various advisors to Coromandel and Sabero. There were at least thirty persons who were privy to the very same UPSI, he argued.
In May, last year, he had stepped down as chairman of Murugappa Group after the market regulator charged him and three others with insider-trading, but returned to the position on the request of the Group board and legal advise.
