Analysis of an Order Passed by SEBI in the Matter Relating to Insider Trading at NIIT

Technologies Limited

Thias case involves allegations of insider trading and non-compliance with regulations
against certain individuals related to the scrip ( a provisional certificate of money to a bank or
Company) of NIIT Technologies Limited, a global IT solutions organization serving clients
across multiple regions.

The shares of NIIT are listed on both the BSE and NSE, and the case primarily revolves around
a corporate announcement made by the company on March 23, 2015, regarding a dispute
between one of its subsidiaries and a client in the APAC region.

This dispute involved potential claims and counterclaims, prompting the company to provision
up to USD 10 million towards unbilled revenue during the current quarter.

Following the corporate announcement, the NSE conducted a detailed analysis of trading in
the scrip and forwarded its report to SEBI for further investigation. SEBI subsequently
investigated trading activities in the scrip of NIIT Technologies during the period from
December 22, 2014, to March 23, 2015, known as the "Investigation Period."

The investigation aimed to identify potential violations of the SEBI Act and SEBI
(Prohibition of Insider Trading) Regulations. Based on SEBI's findings, a Show Cause
Notice (SCN) was issued on July 12, 2019, to Ms. Pratibha Advani, Mr. Ashok Arora, and
Mr. Arvind Mehrotra, collectively referred to as the "Noticees."

The SCN outlined allegations of insider trading and asked the Noticees to explain why
appropriate actions should not be taken against them for violating Section 12A(d) & (e)
of the SEBI Act and regulation 3(i) of the PIT Regulations, 1992, read with regulation 12 of
the PIT Regulations, 2015.

Additionally, a Supplementary Show Cause Notice (SSCN) dated August 6, 2020, was
issued to the Noticees, asking them to respond to allegations of non-compliance with
regulation 13(4) and 13(5) of the PIT Regulations, 1992, and Clause 3.3.1 under Schedule
I-Part A of the Model Code of Conduct for prevention of insider trading for listed companies.
These violations primarily related to Noticee no. 3's failure to take pre-clearance for selling
2,000 shares of the company on November 14, 2014, and failure to disclose the details of the
transaction.

The primary focus of the investigation was to ascertain whether the Noticees engaged in
trading in the scrip while in possession of unpublished price-sensitive information (UPSI)
related to the company's dispute with a client. The Noticees' involvement and connection to
NIIT, as well as their roles and responsibilities within the company, formed the basis of SEBI's
scrutiny.

SEBI's findings also revealed that USD 10 million was raised to infuse equity into NTPL
Singapore, which is a wholly owned subsidiary of NIIT, for onward investment in NTPL
Australia, a step-down subsidiary of NIIT, to address the fund requirements arising from
changes in the scope and timelines of the TSIPL (Tenix Solutions IMES Pty. Limited)
agreement.

This involves allegations of insider trading and non-compliance with regulations against
the Noticees, primarily Noticee no. 3, and addresses potential violations of the SEBI Act and
the SEBI (Prohibition of Insider Trading) Regulations. SEBI's investigation sought to
ascertain the potential impact of the Noticees' trading activities on the market and
determine the appropriate actions to be taken in response to the findings.

Reply for Notice:

The Noticees provided detailed responses and submissions in response to the Show Cause
Notice (SCN) and Supplementary Show Cause Notice (SSCN) issued by the Securities and
Exchange Board of India (SEBI). The responses aimed to counter the allegations of insider
trading and other regulatory violations.

Noticee No. 2: Mr. Ashok Arora

Mr. Arora argued that the SCN's assertion that he was privy to unpublished price-sensitive
information (UPSI) was incorrect. He noted that his trade took place on March 10, 2015,
which was before the receipt of the Default Notice on March 13, 2015.
Mr. Arora contended that the funds remitted to NTPL, Australia, were intended for
reducing debt and paying off bank loans. He stated that there was no evidence to suggest he
had access to UPSI regarding the company's disputes.

Mr. Arora emphasized that his sale of shares was done in good faith to fulfill personal
financial obligations and was not influenced by UPSI. He claimed he did not generally trade
in the securities market.

Noticee No. 3: Mr. Arvind Mehrotra

Mr. Mehrotra provided details of his role in the company, including his involvement in
handling operational and commercial issues between NTPL, Australia, and Tenix
Solutions IMES Pty. Limited (TSIPL). He denied having access to UPSI until February 27,
2015.

Mr. Mehrotra argued that he had informed the Compliance Officer of his planned sale of
2,000 shares on November 14, 2014, through his secretary. He claimed the sale was related
to rebuilding a house and not influenced by UPSI.

Mr. Mehrotra insisted that he lacked any wrongful intent and was not seeking to gain or
avoid loss. He argued that the SCN should be dismissed without any action against him.

The responses from Noticee no. 2 and Noticee no. 3 challenged SEBI's allegations by
emphasizing their lack of access to UPSI at the time of trading and asserting that their
trades were motivated by personal reasons rather than inside information.

 The SEBI Act prohibits engaging in insider trading, and the SEBI (PIT) Regulations
forbid an insider from dealing in securities while in possession of unpublished
price-sensitive information (UPSI). Additionally, the regulations require pre-
clearance of trades above a certain threshold and proper disclosure of changes in
shareholding.

Allegations and Responses:

Noticee no. 2 was accused of trading shares on March 10, 2015, while in possession of UPSI
related to a dispute between the company's subsidiary (NTPL, Australia) and Tenix Solutions
IMES Pty Limited. He argued that his trade occurred before the receipt of the Default Notice
on March 13, 2015, suggesting he had no access to UPSI at the time.
SEBI examined company letters dated August 29, 2016, and August 21, 2018, and found
Noticee no. 3 to be an insider, as his name was listed in Annexure B of these letters. It also
noted his role in facilitating dispute resolution for the company.

Corporate Board Meetings and Approval:

The minutes of the board meeting on January 14, 2015, were assessed. SEBI found that the
approval to remit funds to NTPL, Singapore, was for projects in both Singapore and Australia.
However, the resolution did not specifically address the ongoing dispute with Tenix Solutions
IMES Pty. Limited (TSIPL).

 SEBI concluded that Noticee no. 2's attendance at the meeting did not imply direct
access to UPSI since there was no mention of the dispute or discussions with lawyers
in the minutes.

Examination of UPSI:

The definition of price-sensitive information under Regulation 2(ha) of the PIT

 The findings by SEBI indicated that Noticee no. 2 may not have been party to posess
UPSI at the time of his trade, while Noticee no. 3's conduct may have violated pre-
clearance and disclosure requirements. SEBI's analysis focused on whether the
Noticees traded in the shares of NIIT Technologies Limited while possessing UPSI.

SEBI found that Noticee no. 3 sold a total of 2,500 shares of the company on January 5 and
February 24, 2015, during the UPSI period. The evidence suggested that Noticee no. 3 was
aware of the dispute and was involved in the resolution process.

Despite Noticee no. 3's contention that his trades were not influenced by UPSI and were
motivated by personal reasons, the provided evidence did not sufficiently support this claim.
  SEBI found that Noticee no. 3 failed to disclose details of his November 14, 2014, sale
of 2,000 shares to the company and stock exchanges, violating regulation 13(4) and
13(5) of the PIT Regulations, 1992.1

SEBI's analysis of the evidence and responses from the Noticees established that Noticee no. 2
may not have been in possession of UPSI during his trades, while Noticee no. 3 traded in the
company's shares while possessing UPSI. Noticee no. 3 failed to comply with pre-clearance
and disclosure requirements, further violating regulations. SEBI's findings emphasize the
importance of adhering to regulatory requirements for market transparency and integrity.

Penalties & Violations:

The case examines potential violations of insider trading regulations, as well as failures in pre-
clearance and disclosure requirements, resulting in penalties under Sections 15A(b), 15G, and
15HB of the SEBI Act, 1992. These penalties are assessed based on the alleged misconduct of
Noticee no. 3 and the Noticee’s breach of specific sections of the SEBI Act and Prohibition of
Insider Trading (PIT) Regulations.

Penalties under Section 15A(b):

Section 15A(b) pertains to the failure to furnish required information, books, or documents
within the time specified under regulations. In this case, the allegations involve Noticee no. 3’s
non-compliance with disclosure requirements in failing to disclose the sale of 2,000 shares of
NIIT Technologies Limited on November 14, 2014, as required by regulation 13(4) and 13(5)
of the PIT Regulations. The noticee's failure to file returns or furnish required information
within the specified time led to potential penalties, subject to a minimum of one lakh rupees
per day and a maximum of one crore rupees.

1
[(4) Any person who is a director or officer of a listed company, shall disclose to the company and the
stock exchange where the securities are listed in Form D, the total number of shares or voting rights
held and change in shareholding or voting rights, if there has been a change in such holdings of such
person and his dependents (as defined by the company) from the last disclosure made under sub-
regulation (2) or under this subregulation, and the change exceeds Rs. 5 lakh in value or 25,000 shares
or 1% of total shareholding or voting rights, whichever is lower.]

(5) The disclosure mentioned in sub-regulations 54[(3), (4) and (4A)] shall be made within [two] working
days of : (a) the receipts of intimation of allotment of shares, or (b) the acquisition or sale of shares or
voting rights, as the case may be.
Penalties under Section 15G:

Section 15G addresses insider trading violations, particularly when an insider, either personally
or on behalf of someone else, deals in securities based on unpublished price-sensitive
information (UPSI). Noticee no. 3 is found to have engaged in such conduct, trading in NIIT
shares during the UPSI period. Moreover, the noticee’s actions include communicating UPSI
to others and procuring other individuals to trade in securities of the company based on
such information. The penalties for violations under this section range from a minimum of ten
lakh rupees to twenty-five crore rupees or three times the profits made from insider trading,
whichever amount is higher.

Penalties under Section 15HB:

In this case, Noticee no. 3 failed to comply with regulations such as obtaining pre-clearance
for trades (clause 3.3.1 of the Model Code of Conduct) and proper disclosure of changes in
shareholding. The resulting penalties range from a minimum of one lakh rupees to a maximum
of one crore rupees.

 SEBI’s investigation found substantial evidence supporting allegations of insider

The substantial evidence indicates that Noticee no. 3 engaged in trading based on UPSI, which
is prohibited under Section 15G of the SEBI Act. Additionally, the noticee's failure to disclose
the sale of 2,000 shares and obtain pre-clearance for trades constitutes violations of Sections
15A(b) and 15HB of the SEBI Act.
Order:

In view of the case's facts and circumstances, the presiding authority exercised the powers
conferred under various sections of the SEBI Act and relevant rules and regulations to issue
directives and impose penalties on Noticee no. 3, Mr. Arvind Mehrotra.

 The SCN dated July 12, 2019, and the SSCN dated August 6, 2020, against Noticee no.
2, Mr. Ashok Arora, are resolved without any directives due to findings in earlier
considerations.
• Noticee no. 3, Mr. Arvind Mehrotra, is prohibited from accessing the securities
market, including buying, selling, or dealing in securities directly or indirectly, for
six months from the date of the order.
• He must also disgorge the loss avoided, totaling ₹1,03,185, along with simple interest
at 9% per annum from February 24, 2015, until the date of actual payment. This amount,
with interest, must be remitted to the Investor Protection and Education Fund (IPEF)
within 45 days of the order.
• Additionally, Mr. Mehrotra must pay the penalties detailed in the order within 45 days.
This includes a penalty of ₹10,00,000 for violating Regulations 3(i) of the SEBI (PIT)
Regulations, 1992, read with regulation 12 of the SEBI (PIT) Regulations, 2015, and
Section 12A (d) & (e) of the SEBI Act, 1992.
• Another ₹1,00,000 penalty was levied for failing to comply with regulation 13(4) and
13(5) of the SEBI (PIT) Regulations, 1992, read with regulation 12 of the SEBI (PIT)
Regulations, 2015.
• A final penalty of ₹1,00,000 was imposed for violating clauses in the Model Code of
Conduct for prevention of insider trading.
• Further restrictions include prohibiting Noticee no. 3 from disposing of, alienating, or
encumbering any of his assets, movable or immovable, or any interests or investments
in such assets, until the required disgorged and penalty amounts are paid to SEBI.
• Noticee no. 3 also directed to provide a full inventory of his assets, including bank
accounts, demat accounts, and mutual fund investments, within two weeks of receiving
the order.