Connected person cannot reasonably be expected to have access to Unpublished Price Sensitive Information by virtue of such connection.

[Case Brief] Chintalapati Srinivasa Raju vs Securities and Exchange Board of India

Case name Chintalapati Srinivasa Raju v. SEBI
Citation AIR 2018 SC 2411
Court Supreme Court of India 
Bench  Justice R. F. Nariman and Justice Navin Sinha
Decided on  May 14, 2018
Relevant Act/Sections Section 12 of the Securities Exchange Board of India Act, 1992 and Section 21 of the Securities Contracts Regulations Act, 1956.
Author Shubhi Maheshwari and Ayush Gupta


This case has its genesis in the “Satyam scam”. In 2009, B. Ramalinga Raju, former Chairman of Satyam Computer Services Limited (the “SCSL”) wrote ‘letter’ dated January 7, 2009 to stock exchanges and the Securities and Exchange Board of India (“SEBI”) stating that the financial statements of SCSL had been grossly overstated and did not reflect the true and fair financial position of SCSL.

SEBI, on an investigation discovered that the appellant served as an executive director of SCSL for an odd seven years from 1993 till August 31, 2000 and then subsequently as a non-executive director for the next three years till January 23, 2003 in SCSL, the infamous enterprise known for Satyam Scam, and issued a Show Cause Notice (the “SCN”) to the appellant giving reference of the said letter. The letter stated that the appellant was a promoter and director of SCSL, and thus liable as an “insider” under PIT Regulations, 1992 (“1992 PIT Regulations”).

After receiving a reply from the appellant, the Whole Time Member (“WTM”) of SEBI passed a detailed order against the appellant on following grounds –

  • Appellant is a director of SCSL and co-brother of B. Ramalinga Raju, therefore, a “connected person” within the sweep of 1992 PIT Regulations and liable as an insider under Reg. 2(e) of such regulations.
  • The fact of books of accounts being fabricated and manipulated was within the knowledge of the appellant by virtue of him being an insider during such fabrication and manipulation.
  • Appellant was part of board of directors and declared as a promoter in the disclosures filed with stock exchanges.
  • SEBI’s investigation is independent and separate from that of other investigation agencies, thus, the finding of Serious Fraud Investigation Office (“SFIO”) giving clean chit to the appellant can be disregarded as non-binding.

Appeal before Securities Appellate Tribunal (“SAT”)

An appeal to the SAT was largely dismissed by its majority judgment. The tribunal held that

  • The fact that the appellant was a director until January, 2003 (which is after the date of occurrence of Unpublished Price Sensitive Information (“UPSI”), i.e. March 31, 2001) makes him culpable under 1992 PIT Regulations.
  • There is no real difference between an executive and a non-executive director, appellant (non-executive director) would be reasonably be expected to know about the fraud and manipulation by the Chairman and his cohorts, as he was closely connected to the same, being his co-brother.
  • Even the SFIO’s report, which stated that only B. Ramalinga Raju and his cohorts were responsible for the fraud, and that they actually duped the board of directors of SCSL, would make no difference as the appellant being an “insider” had sold 71% shares of SCSL in 2003 itself when in possession of UPSI and made profits in violation of 1992 PIT Regulations.

It was held by the majority judgment of the SAT that the appellant being a promoter was not the only ground of violation of the 1992 Regulations, but being a director of SCSL and co-brother of Ramalinga Raju would also rope the appellant in. However, the appellant was given relief to the extent that under the Explanation to Regulations 2(e) of the 1992 Regulations, that the appellant could only be held liable for a period of six months beyond his resignation as a director. A remand order, therefore, was made to assess the quantum of unlawful gains that the appellant had made upto July, 2003.

Appeal to the Supreme Court

The aggrieved party (appellant) appealed against the decision of the tribunal before the Supreme Court.


  • Whether a “connected person” be reasonably be expected to have an access to UPSI by virtue of such connection simpliciter?

ARGUMENTS OF APPELLANT [Shri K.V. Viswanathan, Ld. Sr. Counsel]

  • “Connected Person” is not per se an Insider as per 1992 PIT Regulations

It was argued that a fundamental error made by the WTM as well as the majority judgment of the SAT was in the construction of Regulations 2(e)(i) of the 1992 Regulations, wherein an insider is defined as a “connected person” and a person who is reasonably expected to have access to UPSI by virtue of such connection. The second part of the definition after the word “and” has been ignored by both authorities and they are, therefore, wrong in their construction of Regulations 2(e)(i) of the 1992 Regulations.

  • Appellant was neither in possession of nor acted on the basis of any UPSI

Otherwise also, according to the learned senior counsel, even 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 the appellant was neither in possession of nor acted on the basis of any UPSI. According to the learned senior counsel, the WTM order suffered from pre-determinational bias, inasmuch as he had by an earlier order, which related to B. Ramalinga Raju and his cohorts, found against the appellant without the appellant being a party to the earlier decision and without hearing him.

  • Error in ignoring the findings of CBI and SFIO

Further, according to the learned senior counsel, the impugned judgments erred in ignoring very important findings of the Special Court, the charge sheet of the CBI and the SFIO’s report. He relied very heavily on the minority judgment of the Appellate Tribunal which went into great detail on facts and ultimately exonerated the appellant.

ARGUMENTS OF RESPONDENT [Shri C.U. Singh, Ld. Sr. Counsel]

  • The appellant was a Promoter

Given that every listed company has to mandatorily comply with the listing agreement it has entered into with the recognized stock exchange. Clause 35 of a standard form of the Listing Agreement requires every listed entity to file with the stock exchange on a quarterly basis the shareholding pattern in a prescribed form which also discloses promoters’ holding. Further, a Promoter is defined as a person who is in control of the company, directly or indirectly, whether as shareholder, director or otherwise. It was argued that the appellant, by virtue of being an executive director from 1993, was, therefore, clearly a promoter within the meaning of the aforesaid definition.

  • Annual Report describes the appellant as Director

Relying upon the annual reports of the company, which show the appellant as a director on and from 2000 to 2003, but not as an independent director thereof. Further, the averments of the appellant himself state that until a suitable replacement was found, the appellant would continue as a non-executive director, meaning thereby that he would continue to do what he had done as an executive director.

  • Contrast between Reg.2(e)(i) and (ii)

According to the learned senior counsel, when it comes to the definition of “insider”, Regulations 2(e)(i) must be contrasted with Regulations 2(e)(ii) of the 1992 Regulations, wherein sub-clause (i) requires a connected person only to be reasonably expected to have insider information, however under sub-clause (ii), persons who are not connected persons need to have actual knowledge of insider information.

The counsel argued that the SAT was correct in considering five important factors in ultimately holding that the appellant was an insider, namely,

  • that he was a promoter;
  • that he promoted two joint venture companies which were closely linked with SCSL;
  • that one of these companies ultimately merged with SCSL;
  • that he would continue as a director till he was replaced; and
  • that he was co-brother of B. Ramalinga Raju.

These factors were foundational facts from which it was reasonable to draw an inference that the appellant could be expected to have knowledge of UPSI.

  • Conditions under Reg. 2(e)(i) for designating an “Insider” are cumulative

Regulations 2(e)(i) is in two parts –

  • first part has reference to any person who is connected with the company or is deemed to be connected with the company.

There can be no doubt that the definition of “connected person” contained in Regulations 2(c) would rope in the appellant under sub-clause (i) thereof, as the appellant was undoubtedly a director of SCSL upto 2003.

  • Second part requires that such person must reasonably be expected to have access to unpublished price sensitive information by virtue of such connection in respect of securities of a company.

It has been held in a series of judgments that the word “and” should be given its ordinary meaning and should be understood in a conjunctive sense, unless it would lead to an absurd situation or an unintelligible result.

Under the new 2015 PIT Regulations, an insider is now defined to mean only a person who is a connected person or a person who is in possession of or having access to unpublished price sensitive information. Obviously, post 2015, an “insider” need not satisfy the second test of the 1992 Regulations and it is enough that such person be a “connected person” as defined. The disjunctive “or” contained in the 2015 Regulations must be contrasted with the expression “and” contained in the 1992 Regulations.


It was observed by the Apex Court that it is clear that order of the SAT, in giving effect to only the first part of Regulations 2(e)(i) of the 1992 Regulations, cannot be sustained in law.

Further, under the second part of Regulations 2(e)(i), the connected person must be “reasonably expected” to have access to unpublished price sensitive information. The expression “reasonably expected” cannot be a mere ipse dixit – there must be material to show that such person can reasonably be so expected to have access to unpublished price sensitive information. Therefore the apex court upheld the minority judgment of the SAT which correctly brought out the role of the expression “and” contained in Regulations 2(e)(i).

  • Appellant being a director can reasonably be expected to have of knowledge of things only by a priori methods on foundational facts

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 he stepped down as an executive director in 2000. After stepping down, the salary was stopped, and he was paid only for board meetings which he attended. The executive salaried director was in any manner in control of SCSL directly or indirectly. The absence of the word “independent” in the annual report also was not taken any far, inasmuch as it is admitted that he was a non-executive director from 2000 to 2003, who only attended six board meetings and received salary therefor. It was not shown how the appellant was in any manner responsible for actions taken by those in the management of SCSL. Therefore the minority judgment was held to be much more detailed and correct than the majority judgment of the SAT. Thus, it was held that a reasonable expectation to be in the know of things can only be based on reasonable inferences drawn from foundational facts.

  • ‘Appellant had promoted two joint venture companies’ – Not a foundational fact

It was observed that from the mere fact that the appellant promoted two joint venture companies, one of which ultimately merged with 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 an inference of reasonably being expected to be in the knowledge of confidential information can be formed. What is clear is that the appellant devoted all his energies to the businesses he 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 was discontinued.

  • Appellant was not in possession of UPSI

It was found that by the year 2006, all the actual promoters disposed of their shareholding in SCSL because they were aware of the credit crunch faced by SCSL. The fact that the appellant continued to retain substantial shareholding in SCSL right till the end of 2008 clearly points to lack of possession of UPSI.

  • No flow of information to the appellant

Another important point is that the last transaction of sale of shares by the appellant on 22.12.2008, which was a substantial chunk of shares, was made by the appellant just like any other shareholder of SCSL.

News had got out into the market that the merger proposal of SCSL with Maytas Infra Limited and Maytas Properties was not going ahead. The hysteria in the share market resulted in a steep drop in the price of shares of SCSL. The fact that the appellant disposed of a huge chunk of his shareholding on 22.12.2008 to avail of the price on that date completely negates the inference that there was any information flow between B. Ramalinga Raju, B. Rama Raju and the appellant. The appellant had no professional or business relationship with his co-brother and had no connection with any of the entities floated by his co-brother. The fact that the appellant was not involved with fraudulent manipulation is clear from the fact that he ceased to be an executive director in the year 2000. Fraudulent manipulation began only from 2001 onwards. It was also considered significant by the minority judgment that the appellant was not a nominee of SCSL on the board of directors of Satyam Infoway, but of another third party investor.

  • No disgorgement of money appropriated by selling shares without the knowledge of UPSI

The appellant had sold only 8,00,000 shares held in SCSL, yet, in the operative order of disgorgement, the learned WTM includes 24,00,000 shares which were never sold by the appellant, but for which only application money was received and returned by 17.4.2002. Thus, the disgorgement order includes gains made on account of 8,00,000 as well as 24,00,000 shares and, therefore, comes to the astronomical figure of Rs. 82,49,37,875/-.

On facts, the appellant sold 8,00,000 shares from 4.1.2001 to 14.3.2001 and the occurrence of the UPSI was only from 31.3.2001 and inasmuch as these sales were made prior to this date, obviously, the 1992 Regulations would not get attracted. The minority judgment also stated that 24,00,000 shares also, which were never sold but were merely returned to Chintalapati Srinivasa Raju, could not form the basis of any disgorgement order and the same was upheld by the Supreme Court.

Regulations 2(h)(ix) at the relevant time, prior to 20.2.2002, read as follows:

“Definitions. 2. In these Regulations, unless the context otherwise requires:-

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

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

Obviously, the appellant company does not have persons who are relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) – under these sub-clauses, a person is deemed to be a connected person 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 person. Since none of these clauses are attracted, it is obvious that Section 2(h)(ix) would also, as a matter of law, not be attracted in the facts of this case.

Consequently, the majority judgment of the SAT was set aside.

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