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The Securities and Exchange Board of India (“SEBI”) has, in its order dated June 20, 2022, in the matter of M/s. Reliance Industries Limited (Adjudication Order No. ORDER/BM/LD/2022-23/17202-04) held that a company cannot abdicate its responsibility to verify a news article that has appeared in the newspaper.

Facts

SEBI conducted an investigation in the suspected insider trading activities in the scrip of Reliance Industries Limited (“Noticee 1”). Based on the findings of the investigation, adjudication proceedings were initiated against Noticee 1, Ms. Savithri Parekh, Compliance Officer (“Noticee 2”), and Mr. K. Sethuraman, Compliance Officer (“Noticee 3”) (collectively, “Noticees”) under Section 15HB (which provides for penalty for violation of the provisions of the Act) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) for the alleged non-compliance with code of conduct for trading window closure and non-adherence to Principle no. 4 under Schedule A – Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive Information (“Principles of Fair Disclosure”).

A Show Cause Notice (“SCN”) was issued to the Noticees to show cause as to why an inquiry should not be initiated against the Noticees and why penalty, if any, should not be imposed upon Noticees under Section 15HB of the SEBI Act for the aforesaid violations alleged to have been committed by Noticees.

Issue

  • Whether the Noticees have violated the Principles of Fair Disclosure read with Regulation 30(11) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) by not disclosing or clarifying to the stock exchange the Unpublished Price Sensitive Information (“UPSI”) relating to Facebook investing in Reliance Jio (“Jio-Facebook Deal”) which got disclosed through the publication in the newspaper; and
  • Whether Noticee 2 has violated clause 4 of the minimum standards for code of conduct for listed companies to regulate, monitor and report trading by designated persons as specified in Schedule B read with Regulation 9(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) by not closing the trading window with respect to the UPSIs.

Arguments

Contentions of SEBI:

During the investigation, SEBI gathered that there was lot of news flow around Jio-Facebook Deal in the month of March and April, 2020 prior to the corporate announcement made on April 22, 2020. It was observed that the first news about the impending Jio-Facebook deal was published in the Financial Times, London (“FT”) on March 24, 2020, post market hours and, thereafter, the said news report of FT was widely circulated in Indian media on the same day and next day. The news articles, inter-alia, stated that (i) Facebook is seeking to buy a multibillion-dollar stake in Reliance Jio; (ii) Facebook was close to signing a preliminary deal for a 10% share in Jio; and (iii) a deal with Facebook was due to be announced in March end, coinciding with the end of the Indian financial year. Post publication of said news articles, the scrip price of Noticee 1 went up by almost 15% on March 25, 2020. Various other news articles/items were published/appeared in media relating to Jio-Facebook Deal prior to its corporate announcement by Noticee 1.

It was observed that with regard to the above, the Noticees did not comply with Principle no. 4 of the Principles of Fair Disclosure. The aforesaid principle deals with prompt dissemination of UPSI that gets disclosed selectively, inadvertently or otherwise to make such information generally available. Further, Noticee 2 did not comply with the code of conduct for closure of the trading window, when the UPSI was in existence. Noticee 2 did not (i) close trading window for all designated persons and their immediate relatives for the UPSI; (ii) notify the stock exchanges about the official trading window closure; and (iii) notify the period of closure of trading window to the stock exchanges after closing the trading window during which the UPSI was in existence.

Contentions of the Noticees:

The SCN alleges, firstly, that although Noticee 1 was aware of the news reports published on March 24, 2020 and March 25, 2020, yet it did not issue any clarification, as required under Regulation 30(11) of the LODR Regulations. The Noticees contended that this allegation was wholly misplaced, which is apparent from a plain reading of the said regulation.

Regulations 30(10) and (11) of the LODR Regulations state as follows:

“(10) The listed entity shall provide specific and adequate reply to all queries raised by stock exchange(s) with respect to any events or information:

Provided that the stock exchange(s) shall disseminate information and clarification as soon as reasonably practicable.

(11) The listed entity may, on its own initiative also confirm or deny any reported event or information to stock exchange(s).”

The Noticees contended that the present case is admittedly not one to which Regulation 30(10) of the LODR Regulations applies, since no query was raised by the stock exchanges. The issue that falls for consideration therefore is whether there is any obligation imposed on a listed entity under Regulation 30(11), de hors a query from a stock exchange, to confirm or deny information contained in media reports or appearing in other public fora (such as twitter or other social media platforms). According to the Noticees, plain language of Regulation 30(11) of the LODR Regulations makes it clear that the LODR Regulations impose no such obligation. The use of the phrases “may” and “on its own initiative” occurring in Regulation 30(11) of the LODR Regulations clearly brings out that what is contemplated in this provision is suo motu action by a listed entity. It is a settled principle of statutory interpretation that the word ‘may’, in a general sense, is permissive and confers discretion. Regulation 30(11) of the LODR Regulations does not impose any obligation on a listed entity, much less a positive obligation to confirm or deny any and every reported event or information.

Secondly, the Noticees contended that the charge framed by SEBI is with reference to the Principles of Fair Disclosure. In order to appreciate the substance of the obligation imposed under Principle no. 4 (“prompt dissemination of UPSI that gets disclosed selectively, inadvertently or otherwise to make such information generally available”) of the Principles of Fair Disclosure, it is necessary to read the same with Principle no. 1, which is reproduced below:

“Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally available.”

The term “prompt dissemination” occurring in Principle no. 4 takes its colour from Principle no. 1, which requires that UPSI must be disclosed no sooner than when it has become “credible and concrete information.” Any other interpretation of these provisions would result in a conflict between the substantive obligation under Principle no. 1 to disclose only such information as is “credible and concrete” and the requirement under Principle no. 4 to undertake “prompt dissemination” of UPSI.

The Noticees contended that it is a well settled maxim that a harmonious construction must always be preferred to one that would present a conflict between provisions occurring in the same body of rules/regulations. A harmonious construction of Principle no. 1 and Principle no. 4 would yield the result that only such information as is “credible and concrete” within the meaning of Principle no. 1 is required to be promptly disseminated in accordance with Principle no. 4.

The SCN takes a position that Principle no. 4 supersedes Principle no. 1. The Noticees contended that it is an elementary legal proposition that such an interpretation, which renders one provision of the regulations redundant, is unsustainable and must be avoided.

The Noticees further contended that after securing the requisite board approvals of all involved parties, the transaction documents were executed on April 21, 2020 in the United States of America and Noticee 1 intimated the stock exchanges on April 22, 2020. Until the execution of the definitive transaction documents, there was only a non-binding arrangement between the parties to explore the transaction and there was no certainty that the proposed transaction will be consummated. In regard to each investment into Jio, the disclosure was accordingly made by Noticee 1 immediately upon execution of the transaction documents by the parties thereto.

The Noticees iterated that, in addition and without prejudice to the above, the transactions were entered into during highly uncertain times of COVID-19, and the global impact of the pandemic on business sentiment particularly in March and April, 2020. There was no certainty that the deals which were under negotiation would be signed, until the signatures of the counterparty were actually received and there was every likelihood that the then prevailing global restrictions would cause the negotiations to be deferred to an uncertain future date.

Further, with respect to the alleged violations with the code of conduct for closure of the trading window, the Noticees contended that there is no SEBI regulation or standard which requires notification of trading window closure period to the stock exchanges.

Observations of the Adjudicating Officer

It was observed by the Adjudicating Officer (“AO”) that the UPSI relating to Jio-Facebook Deal had come into existence on September 1, 2019 when the initial discussion on potential transaction with Facebook started and that it became generally available upon its publication in various newspapers and media reports on March 24, 2020. From the submission made by Noticee 1 during the investigation, it was observed that Noticee 1 was aware of all the news reports published/appearing in media on March 24 and 25, 2020 relating to Jio-Facebook Deal.

The AO observed that the Noticee 1, in its submission, stated that the allegation is wholly misplaced, which is apparent from a plain reading of Regulation 30(11) of the LODR Regulations. It noted that the present case is not one to which Regulation 30(10) of the LODR Regulations applies, since no query was raised by the stock exchange(s) with respect to any events or information pertaining to the Jio-Facebook Deal during March, 2020 and particularly with respect to the media reports.

One of the circumstances contemplated in law is that if the UPSI is somehow selectively available to someone or is being made available in bits and pieces like rumours or press articles carried in newspapers, the law provides a mechanism where company can clarify on the rumour or such articles in newspapers. This forms a major part of the task that a company would need to address from rumour verification perspective. It has been argued by the Noticees that no clarification was asked from them and thus they have not provided and that there is no compulsion under the law for them to do so. However, the AO observed that a company cannot abdicate its responsibility to verify a news article that has appeared in the newspaper. One of the issues is that the company wanted to keep the information enveloped in secrecy until made public and it clearly failed in that objective. Further, when the bits of the UPSI became selectively available, the company abdicated its responsibility to verify and come clean on the unverified information that was floating around.

The other predicament the Noticees presented was that they could not have clarified the rumour on its own because the agreement was yet to be signed, approved by the Board of the company and that it was not yet final. Here, too, the AO found it hard to be convinced that the company would respond to rumours only after finality of transactions. On a mere perusal of the announcements made by companies on the stock exchanges, there are plethora of announcements where only the memorandum of understanding has been entered, or where term sheet has been signed, or other acquisition are being scouted.

While Noticee 1 had the obligation to have enveloped the UPSI, however having come to know about the selective availability of the information, the AO noted that it was incumbent upon the Noticee 1 to provide due clarification on its own. Thus, Noticee 2 and Noticee 3, on behalf of Noticee 1, should have clarified to the stock exchanges on the news item.

The Noticees have bargained about the harmonious construction of regulations and the two principles – that there should be prompt disclosure of inadvertent or otherwise available information to make it generally available (Principle no. 4); and that there should be disclosure of credible and concrete information (Principle no. 1). The principle of harmonious construction is the bedrock of legislative interpretation. The harmonious interpretation principle applies to the entire regulation and its various provisions for the ultimate purposes for which the regulation has been notified. Applying this selectively only for the principles 1 and 4 will not provide the desired result sought to be achieved by law, which in this case, the Noticees are attempting to do.

Thus, the AO noted that the Noticees have violated Principle no. 4 of Principles of Fair Disclosure. In the case of Chairman, SEBI v. Shriram Mutual Fund [[2006] 5 SCC 361] (“Shriram Mutual Fund Judgment”), the Hon’ble Court had observed: “In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulations is established and hence the intention of the parties committing such violation becomes wholly irrelevant. A breach of civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the Regulations would immediately attract the levy of penalty irrespective of the fact whether contravention made by the defaulter with guilty intention or not.” Therefore, the aforesaid violations committed by Noticees attracted monetary penalty.

Lastly, with respect to the charge of whether the compliance officer has discharged the responsibility under the PIT Regulations, the AO noted that, as per the submissions made by Noticee 2, it is evident that the code has been implemented in the manner that was intended by Noticee 1. Thus, under the company code for closure of trading window, the responsibility was cast on the relevant employees cognizant of their responsibilities.

Decision

The AO did not agree with the submissions made by the Noticees and held them liable for the violation of the provisions of Principle no. 4 of Principles of Fair Disclosure. Basis the Shriram Mutual Fund Judgment, the adjudicating officer imposed monetary penalty on the Noticees.

Further, given that the Noticee 1 had implemented the code of conduct designed by it under the PIT Regulations, the AO did not hold Noticee 2 liable for any violation of not having closed the trading window.

VA View:

Preservation of UPSI is an important duty of any company. Listed entities have the obligation to envelope UPSI. However, having come to know about the selective availability of the information, it is incumbent upon the companies to provide due clarifications on its own. The Principles of Fair Disclosure cast a fiduciary duty to make accurate and complete disclosures to all the stakeholders.

In the present case, it was observed that the Noticees did not comply with the Principles of Fair Disclosure requiring prompt dissemination of UPSI that gets disclosed selectively, inadvertently or otherwise and to make such information generally available. Keeping in view the intent of the regulations, the AO has rightly penalized the Noticees for violation of the Principles of Fair Disclosure.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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