Zee Insider Trading: Sebi Bars 3 Individuals from Securities Market Fines Rs. 90 Lakh

Zee Insider Trading: Sebi Bars 3 Individuals from Securities Market Fines Rs. 90 Lakh

The Securities Exchange of India (SEBI) has barred three individuals from the securities market for two years and has levied a penalty of Rs. 90 lakh on them pertaining to insider trading activities in the scrip of Zee Entertainment Enterprises Ltd. (ZEEL).

The three individuals banned by the SEBI, namely- Bijal Shah, Gopal Ritolia and Jatin Chawla, have also been ordered to pay the fine within 45 days.

ZEEL is mainly in the business of satellite television channels, space selling agent for other satellite television channels and sale of media content. The shares of ZEEL are listed on both BSE and NSE in Cash and Derivatives segment.

The case pertains to insider trading activities by certain entities in the scrip of ZEEL, while in possession of unpublished price-sensitive information (UPSI) pertaining to audited financial results of the media company for the quarter ended June 30, 2020 as well as the launch of ZEEPLEX by the company on 1 September, 2020.

The SEBI noted that the abnormality in the trading pattern was seen from the significant concentration by 14 individuals (collectively referred as Noticees) in the scrip of ZEEL in cash as well as derivative segment, prior to the announcement of unpublished price sensitive information pertaining to UPSI-1 and UPSI-2, which was squared off / sold after announcement of UPSI1 and UPSI-2. Since several positions were taken in multiple derivatives (Future and Options) by the Noticees, Delta analyses was undertaken by SEBI to analyze the directions of the positions taken by the Noticees.

The following issues were taken up by SEBI for consideration:

Whether information pertaining to UPSI-1 (quarterly financial results) can be regarded as ‘Unpublished Price Sensitive Information’ as alleged in the SCN?

The SEBI upon perusal of the Standalone Financial Results, noted that the Company had declared an impairment charge of Rs. 11,370 lakhs, towards excess of carrying value of Goodwill allocated to Online Media Business over the recoverable amount, as an Exceptional Item.

The Board opined that, financial results declared by the company, which are declared on the website of the exchanges, must be considered to examine the performance of the company and as per the said financial results, the company suffered from a loss of Rs. 14,271 lakhs (Rs. 142.71 crore) before tax even after excluding the exceptional item. Hence, the contention of the Noticees, that the company was in profit after excluding one-off item as per investor presentation, was without merit, stated SEBI.

The SEBI further highlighted that the best measure of whether an unpublished price sensitive information was positive or not can be gauged from how the market reacted to the announcement.

The Noticees had contended that that price rise was due to favourable order from the Hon’ble High Court in the matter of Yes Bank. However, the SEBI observed, “While the Hon’ble High Court’s order in Yes Bank matter may well have spurred increase in the price of the scrip post 12:58 pm, it does not take away the impact that the quarterly financial results had on the price on August 19, 2020 till then. Even if the price impact was to be seen in isolation of the order of Hon’ble High Court, the market’s reaction as well as the overall analysts’ recommendations unambiguously point to UPSI-1 being positive in nature.”

Next the SEBI dealt with the issue that whether Noticee No. 1- Bijal Shah was an ‘insider’ for UPSI-1 and UPSI-2 as per Regulation 2(1)(g) of PIT Regulations, 2015?

The SEBI noted that, Shah, who was head of the financial planning and analysis, strategy and investor relations at ZEEL during the relevant time, had access to this unpublished price-sensitive information.

However, SEBI observed that Shah was not liable for insider trading, he has played the primary role in disclosing the unpublished price-sensitive information to Ritolia and Chawla, which resulted in the violation of the provisions of insider trading rules.

Thereafter, the Board determined that whether Noticee No. 1 can be said to have communicated the information pertaining to UPSI-1 and UPSI-2 to Noticee Nos. 2- Gopal Ritolia and 3- Jatin Chawla and thereby violated Regulation 3(1) of the PIT Regulations, 2015? Whether Noticee Nos. 2 and 3 were insiders under Regulation 2(1)(g) of PIT Regulations, 2015?

The Board noted that Bijal Shah (Noticee No. 1) who had access to the UPSI, in turn had communicated the information to Ritolia and Chawla, who traded on the basis of this information and earned profits to the tune of Rs 7.52 crore and Rs 2.09 crore respectively.

The Board while considering the provision related to Connected person as defined under Regulation 2(c) of erstwhile Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations, 1992) observed, “As per the aforesaid definition, ‘connected person’ was a person holding a position in the company or having professional relationship with the company where he was reasonably expected to have an access to UPSI. This definition strictly limited the connected person criteria only to those having professional relationship with the company and no other person was covered within this definition.”

Thus, the allegations against the noticee Nos. 2 (Ritolia) and 3 (Chawla) for committing insider trading and against noticee no. 1 (Shah) for communicating the UPSI to Noticee Nos. 2 and 3 were adequately established, opined SEBI.

Further, in accordance with Regulation 4(2) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations, 2015), the burden of proving that connected persons were not in possession of unpublished price sensitive information was on the said connected persons. In the instant case, the SEBI found that Noticee Nos. 2 and 3 were not able to discharge this burden of proof.

Accordingly, the regulator restrained these individuals from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities (including units of mutual funds), directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of two years.

Further, SEBI a penalty of Rs. 30 lakh on each has been imposed on the three individuals.