Sebi and some ‘inadvertent’ officers

How ‘inadvertent’ errors by some ITC executives put them under regulator’s lens

Last week, the Securities and Exchange Board of India (Sebi) disposed of a matter against Gautam Anand, a mid-level executive of ITC. A Gurgaon based vice-president at the company’s hotels division, he had breached the Model Code of Conduct under the Prevention of Insider Trading (PIT) regulations.

Anand had entered into two opposite transactions within a period of six months. He bought 493 shares of ITC in two tranches during JanuaryFebruary 2013 and sold these in March. In reply to a Sebi notice, Anand informed the regulator that the transactions were of a larger basket, which happened to include these ITC shares. And, that their purchase and sale was “inadvertent”.

He added that the company has barred him from buying and selling shares for a period of six months. ITC had also directed Anand to pay a penalty of ~2,521 to the ITC Rural Development Trust, this amount being the gain he'd made in those 493 shares.

He had also argued that as he was covered by the company’s internal code of conduct, and action had been taken against him therein, no separate action lay with Sebi. The latter's adjudicating officer held that the action taken by the company for violation of its code of conduct did not preclude Sebi from also doing so for violation of the PIT regulations. However, he did not find any need for further penalty and disposed of the matter.

Now, this is the third case under the PIT regulations involving an ITC executive in the past couple of years. In March, Sebi had dropped charges against Chandana Ghosh, head of human resources & competency development at the company. Among other things, Ghosh told Sebi she'd “inadvertently” referred to herself as a ‘manager’ in an internal communication and did not come under the term of ‘officer’. In July 2014, Sebi had slapped a penalty of ~5 lakh on Ghosh for not disclosing a transaction of sale of 10,000 ITC shares worth ~35 lakh. It had held that she was an ‘officer’, as she was capable of giving orders to her subordinates. In October 2015, the Securities Appellate Tribunal (SAT) set aside the order against Ghosh and directed Sebi to pass fresh orders.

Ghosh’s case in SAT relied on a February 2015 Sebi order in the case of a third ITC executive, A K Chowdhury. Among Ghosh’s arguments was that if Chowdhury could not be held as an officer of the company, nor could be, and Sebi could not pass opposite orders on a similar issue. Chennai-based Chowdhury had also “inadvertently” sold 5,000 ITC shares, worth ~15.5 lakh, in April 2013.

Chowdhry’s lawyers, the entity of Amarchand Mangaldas, which entered the proceedings at a later stage, were able to establish that he was not an ‘officer’ under the definition of the term and that only a director or officer of the company was bound by disclosure requirements under the PIT regulations. Chowdhury had also argued to Sebi that he'd paid a penalty of ~1.16 lakh to the ITC Rural Development Trust for his ‘inadvertent error’, inline with ITC's disciplinary action.

All these transactions pertain to a period of six months between January and July 2013. It appears some of the senior employees tried to transact in the shares after receiving these under employee stock option schemes. For a promoter-less company like ITC, the shares held by senior employees form an invisible moat against potential invaders. Steps can and should be taken to educate such critical ‘nonofficer’ holders appropriately, to avoid such “inadvertent” actions in the future.