' IMRAN INAYAT BUTT, DIRECTOR (SMD).---This order shall dispose of the proceedings initiated through Show-Cause Notice bearing No, 1(6) PIL/MSW/SMD/2011/03 dated March 24, 2011 ("SCN") under section 15E of the Securities and Exchange Ordinance, 1969 ("the Ordinance") issued by the Securities and Exchange Commission of Pakistan ("the Commission") to Mr. Ghulam Muhammad ("the Respondent").
2. At the outset, it is imperative to give an account of the facts relating to the case. The respondent is the Chief Executive Officer ("CEO") and Director of Excel Insurance Company Limited ("EICL"), which is a public unlisted company. The respondent' also holds 2,901,856 shares of EICL representing 11.60% of its shareholding. In addition to this, the wife of respondent, MRs, Shagufta Ghulam, is also a Director of EICL and holds 11,987,188 of its shares or 47.94% shareholding.
3. ' On December 14, 2010, a meeting of Board of Directors ("BoD") of EICL was held which was also attended by the respondent. The BoD discussed the prospects of investment in the shares of PICIC Insurance Limited ("PIL"), which is a listed company on the Karachi Stock Exchange ("KSE") having paid-up capital of Rs, 350 million. It was resolved in the said BoD meeting that EICL will make investment in the shares of PIL by purchasing 6,490,000 of its shares with a maximum allowed investment of Rs, 70 million.
4. It was also resolved in the aforementioned BoD meeting that the purchase of PIL shares may be made through a number of ways including stock market purchase or through negotiations. It was also resolved that an approval of shareholders will be taken in a general meeting which was to be held on January 10, 2011. The respondent, being the CEO of EICL, was also authorized by the BoD to take appropriate action in this respect.
5. On perusal of Karachi Automated Trading System data of KSE, it was observed that the respondent started purchasing the shares of PIL in his personal account on January 5, 2011, through BMA Capital Management Limited, Member KSE ("the Brokerage Company"), which was prior to the general meeting of shareholders of EICL to take approval for purchase of PIL shares by EICL. The respondent conducted transactions in the off-market from January 5, 2011 to January 12, 2011 to purchase 3,936,551 shares of PIL at an average price of Rs, 9.00 per share. The respondent further made purchases in the shares of PIL in the ready market where he purchased 2,552,922 shares of PIL at an average price of Rs, 10.07 from January 6, 2011 to January 12, 2011. The respondent's aggregate purchase in the shares of PIL totaled 6,489,473 shares at an average price of Rs,9.42 per share.
6. Subsequent to the purchase of PIL shares by the respondent in his personal account, he sold a total of 6,368,972 shares of PIL to EICL on January 13, 2011 and January 17, 2011 at an average price of Rs, 10.66 per share by way of cross transactions in the off-market through the Brokerage Company.
The sale of PIL shares to EICL earned the respondent a total profit of Rs, 7,897,525 in his personal account.
7. The following table lays down the price/volume history in the scrip of PIL over the period of three calendar years from 2008 to 2010 and beginning weeks of 2011.
Year Volume (in shares) High Price (Rs,) Low Price (Rs,) 3,254,000 43.50 11.99 5,033,185 103.99 3.31 Jan. 1, 2011 Jan. 17, 20114,867,429 8.09 1.75 2,921,644 10.59 7.84
8. Based on the significance of the transactions executed by the respondent and EICL as compared to normal trading pattern of PIL, the Commission sought information from the Brokerage Company, including account opening forms, trading details and financial ledgers for both the respondent and EICL. The analysis of the information and documents received from the Brokerage Company transpired that the respondent had the sole authority to operate the brokerage account of EICL at the Brokerage Company.
9. The purchase of shares of PIL by the respondent and subsequent sale to EICL at a substantial profit, which was after the decision of BoD of EICL to purchase shares of PIL, prima facie, established a violation of section 15A of the Ordinance. Consequently, SCN was issued to the respondent to explain as to why action may not be taken against him under section 15E of the Ordinance. The respondent was required to appear in person or through an authorized representative before the undersigned at the Commission's Head Office on April 7, 2011 for a hearing. However, Mr. Ijaz Ahmed ("Legal Counsel") vide letter dated April 2, 2011 requested for additional time in order to respond to SCN on behalf of the respondent. In view of the same, extension in time was granted to respond to SCN by April 18, 2011 and consequently, the date of hearing was re-scheduled to April 21, 2011.
10. The respondent submitted the written reply to SCN dated April 16, 2011 through the Legal Counsel, the key points of which are summarized as follows.
(a) The shares of EICL are 99.97% held by the respondent and his family, which shows that the respondent has no incentive or reason to cause any loss to EICL.
(b) The respondent and his wife are directors of EICL and the respondent initiated purchase of shares in his own account to be ultimately transferred to EICL, which was in knowledge of other directors of EICL.
(c) The respondent is ready and willing to refund the amount of Rs,7,897,525 to EICL or reverse the sale of shares transaction and refund the entire price of purchase to EICL.
(d) The information relating to investment decision by EICL is not a non-public price sensitive information that related to PIL in any manner.
11. On the hearing date, the Legal Counsel assisted by Mr. Habib Ahmed appeared before me, whereby the Legal Counsel made the following submissions on behalf of the respondent.
(a) The EICL is 99.97% owned by the respondent and his family and thus no effort had been made by the respondent to make gain at the cost/loss of EICL.
(b) For section 15A of the Ordinance to hold, the inside information, the insider and the security should relate directly to the issuer in question.
(c) The respondent is not directly related to PIL, therefore he cannot be termed as an 'insider' under section 15C of the Ordinance.
(d) The information regarding decision to purchase shares of PIL by EICL was not inside information under section 15B of the Ordinance, since EICL is an independent entity and the information was not relating directly to PIL.
(e) The information did not fill in the criteria prescribed under section 15B(1)(a) of the Ordinance relating to impact on the price of the security upon public dissemination of inside information, because the information relating to investment decision to purchase shares of PIL by EICL was never going to be made public.
(f) Unless there is an intention or motive (concept of Scienter) to commit breach of law, no penal provision can follow, even if it is negligence.
(g) The respondent is willing to refund the amount of gain made to EICL or to transfer the shares back to EICL, but without admitting the offence.
(h) Chapter III A of the Ordinance has not been validly legislated, because the same was legislated with the Finance Bill.
12. I have examined the facts and documents on record, in addition to written and verbal submissions made on behalf of the respondent. Accordingly, it is necessary to address the aforementioned arguments raised by Legal Counsel in terms of the following key questions for an equitable decision in the matter:--
(i) Was the information regarding investment decision of EICL in PIL was inside information under section 15B(1)(a) of the Ordinance and did it relate to PIL?
(ii) Was the respondent an insider as defined under section 15C(1) of the. Ordinance?
(iii) Was there an absence of an intention to cause offence under section 15 of the Ordinance?
' The issues enumerated above are addressed in detail and analyzed seriatim as follows:
13. Was the Wormation regarding investment decision of EICL in PIL was inside Wormation under section 15B(1)(a) of the Ordinance and did it relate to PIL?
13.1 To determine this question it is imperative to replicate section 15B(1)(a) of the Ordinance: 15B. Inside information.---(1) The expression "inside information" means, -
(a) information which has not been made public relating, directlu or indirectlu, to listed securities or one or more issuers and which, if it were made public, would be likely to have an effect on the prices of those listed securities or on the price of related securities; 13.2 By a plain reading of the above subsection, the argument of the Legal Counsel that 'inside information' must relate directly to the issuer, is rebutted. The wording of the subsection is un- ambiguous in explaining what constitutes of 'inside information. In even simpler words, inside information for the purposes of the instant matter, is information that relates to listed security (Share of PIL in this case) that was not in public knowledge and if it were to be made public it would affect the price of the said listed security.
13.3 Accordingly, it is already established that the decision of the BoD to purchase shares of PIL was not in public domain, yet the respondent traded in the shares whilst being privy to the said information. It is also an admitted fact that the respondent earned a profit from the transactions that have been mentioned in paragraph 6 of this Order. In order to adjudge whether the information would have affected the price of the share traded by the respondent, an example of a similar type of instance can be viewed to attain clarity in the matter.
13.4 Accordingly, it is observed that the share price of PIL opened at Rs, 10.17 on March 8, 2011 and increased by 18% to Rs, 12.00 in three trading sessions consecutively till March 10, 2011. This was owed to the announcement made by the respondent on the stock exchanges on March 8, 2011 showing intention in purchasing 40% shares of PIL, This clearly evidences that information that related to purchase of PIL shares, once was disseminated in the public domain had an impact/effect on the price of the said share. Therefore, the natural conclusion drawn from this consequence is that the information relating to purchase of PIL shares at first instance when the BoD decided in its meeting on December 14, 2010 to purchase shares of PIL was beyond doubt 'inside information' in terms of section 15B(1)(a) of the Ordinance.
13.5 In view of the above, the argument of the Legal Counsel that there is a pre-requisite for such non-public information to be made public for it to classify as inside information, is not tenable. The wording of subsection (a) above clearly shows that the aspect of the information being in public domain is a deeming characteristic of the subsection and that there is as such no compulsory 'disclosure' requirement. This is why the statue clearly states with regard to inside information 'if it were made public....' meaning that there is no requirement of that information to be made public but if such information that relates to inter alia, listed security would affect the price of such security, it would fall within the ambit of section 15B(1)(a) of the Ordinance.
14. Was the respondent an insider as defined under section 15C1) of the. Ordinance?
14.1 In order to determine this key question, it is important to replicate clause (g) of subsection (1) of section 15C of the Ordinance that defines an 'insider':
(g) any person obtaining inside information as part of his employment or when discharging his usual duties in an official capacity, or in any other way relating to work performed under contract of employment or otherwise; 14.2 Since the respondent is the CEO and Director of EICL, by virtue of his position he was present in the BoD meeting dated December 14, 2010, wherein the decision to purchase shares of PIL by EICL was made. This clearly shows that the respondent learned the inside information relating to investment in PIL by EICL as a part of his employment and in his official capacity, hence establishing him as an insider person in terms of the above-mentioned clause. Accordingly, the argument of the Legal Counsel that the respondent is not directly related to PIL, therefore he cannot be termed as an 'insider' under section 15C of the Ordinance has been considered but is not in consonance with the unambiguous wording of clause (g) above read with the facts stated above.
15. Was there an absence of an intention to cause offence under section 15 of the Ordinance?
15.1 The Legal Counsel tluring his argument emphasized on the concept termed as 'Scienter' and kindly provided a copy of an extract from a dictionary containing the term. For propriety the term and its meaning is replicated as under:-- Scienter (Latin "Knowingly") I. A degree of knowledge that makes a person legally responsible for the consequences of his or her act or omission; the fact of an act's having been done knowingly, esp as a ground for civil damages or criminal punishment. See knowledge; Mens rea.
2. A mental state consisting in an intent to deceive, manipulate, or defraud In this sense, the term is used most often in the context of securities fraud.
15.2 It is the observation of this forum that since 'knowledge', 'intention or as argued Scienter is a state of mind it is difficult to adjudicate the matter this specific point alone. It is the act itself, the result and the circumstances surrounding the act which point towards the intention of a person committing an offence in this case, 'Insider Trading'. If for argument's sake the contention of the Legal Counsel is accepted that the act of trading by the respondent lacked 'knowledge' or 'state of mind', it would mean that the respondent is not capable or competent to understand the effect of trading that are in contravention of the regulatory framework. However, the facts and figures relating to the transaction portray a completely different picture as the respondent purchased the shares at a lower price and sold to EICL at a higher rate and earned a profit from the transaction.
This clearly reflects that there was an intention to earn profit and since this transaction was based in inside information, it falls within the ambit of Insider Trading.
15.3 This forum also considers it important to decide- on the first argument of the Legal Counsel that EICL is 99.97% owned by the respondent and his family and thus no effort had been made by the respondent to make gain at the cost/loss of EICL. It is a matter of fact that EICL is a public limited company and not a private concern of the respondent irrespective of his percentage of shareholding in the said company. It is a Well settled principle that a company has a separate legal personality to that of its membeRs, A mere claim that the respondent by virtue of his shareholding could not have made a gain at the loss of the company cannot be accepted in view of the established fact that the respondent has made a substantial gain from the transaction of buy and sale of PIL shares to the detriment of EICL. Therefore, the argument of the Legal Counsel is not tenable.
16. The last argument of the Legal Counsel was that amendments to Chapter III-A of the Ordinance have not been properly legislated as it was introduced in the Ordinance through Finance Act of 2008. The Legal Counsel asserted that this is contra to Article 73 of the Constitution of Islamic Republic of Pakistan. It is observed that this is not the proper forum to debate or decide upon such a matter which challenges the authority of the legislature as amendments in Chapter III-A of the Ordinance have been made through an Act of Parliament.
17. In view of the foregoing, it is established that the respondent purchased 6,489,473 shares of PIL at an average price of Rs, 9.42 per share from January 5, 2011 to January 12, 2011 on the basis of 'inside information regarding EICL's decision to make investment in PIL. Later on, the respondents old a total of Rs, 6,368,972 shares to EICL on January 13, 2011 and January 17, 2011 at an average price of Rs, 10.66. This conduct resulted in a per share profit of Rs,1.24 to the respondent or a total illicit gain of Rs,7,897,525.
18. In light of the above, it is established that the respondent indulged in Insider Trading by purchasing shares of PIL on the basis of inside information relating to investment in PIL by EICL and subsequently selling the shares of PIL to EICL at a substantial profit. Therefore, on the basis of facts and evidences as mentioned above, however, taking a lenient view in the light of the agreement shown by the respondent to repay the total amount of profit earned by him to EICL; in exercise of the powers under section 15E of the Ordinance, I hereby direct the respondent the following:
(a) Pay a fine of Rs, 800,000 (Rupees Eight Hundred Thousand Only) for contravention of subsection
(1) of section 15A of the Ordinance: and
(b) Pay a sum of Rs, 7,897,525 (Rupees Seven Million, Eight Hundred Ninety-Seven Thousand, Five Hundred and Twenty Five Only) to EICL under section 15E(2)(a)(ii) of the Ordinance.
19. The matter is disposed of in the above manner and the respondent is directed to deposit the fine as mentioned in paragraph 18 (a) above in the account of the Commission being maintained in the designated branches of MCB Bank Limited not later than thirty (30) days from the date of this Order and furnish the copy of the deposit challan to the undersigned. Moreover, the respondent is directed to deposit the sum of money to EICL as mentioned in paragraph 18(b) above and furnish the copy of the deposit receipt to the undersigned.
20. This Order is issued without prejudice to any other action that the Commission may initiate against the respondent in accordance with law on matters subsequently investigated or otherwise brought to the knowledge of the Commission.