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A mere statement sans motive is not fraud, rules SAT

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Quashes SEBI penalty on Emami chief Agarwal, who said was he interested in acquiring Amrutanjan

In an important ruling that will provide much relief to promoters and key management personnel of listed entities, the Securities Appellate Tribunal (SAT) has ruled that statements, including those related to mergers and acquisitions made in good faith and without any element of motive, cannot be construed as fraud by the capital markets regulator.

The tribunal’s ruling came after hearing an appeal on whether a reported statement of a chairman of a company regarding his interest to acquire another company was sufficient to invoke provisions of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations. “While dealing with a serious issue of fraud, the authorities need to ascertain the motive in the absence of any connecting evidence,” the SAT stated in its order.

“In the absence of any motive or a scheme or any evidence, a reported news item alone is not sufficient to prove a serious charge like fraud. If at all the reported statement is correct, it could [be] an expansive mood of the person. Silence as a sign of wisdom cannot be stretched to a point of total silence in the world of securities market,” added the order.

In December 2017, SEBI imposed a penalty of ₹8 lakh on Emami chairman R.S. Agarwal after he reportedly told a journalist that he was interested in acquiring Amrutanjan Health Care.

Not approved

According to SEBI, the statement was not made with the approval of the board of the company. Also, it impacted the share price of Amrutanjan and hence amounted to fraud. Appearing before the tribunal, Somasekhar Sundaresan, counsel for Mr. Agarwal, highlighted the fact that the PFUTP Regulations excluded general statements made under good faith from the definition of ‘fraud’.

He added that if the SEBI stance was upheld and accepted, officials of listed entities would not be able to speak to the media about the company’s future plans as it might be looked upon as fraud by the regulator, which was clearly not the intent of the regulations as such.

Incidentally, while quashing the SEBI order, the tribunal highlighted the fact that Mr. Agarwal did not acquire any shares of Amrutanjan Health Care. Thereby, there was “no evidence to link to a motive”.

“The judgment of SAT has affirmed that unless speech by a key managerial personnel of a listed company is made dishonestly or in bad faith, it can not be assumed fraudulent,” said Sumit Agrawal, founder, RegStreet Law Advisors and a former law officer at SEBI. “SEBI’s surveillance always tries to connect price rise or price fall with statement by promoter or management related entities in the media. This judgment puts a litmus test for taking these kind of alerts for enforcement action,” he added.