ORDER This order shall dispose of the proceedings initiated through Show Cause Notice dated March 12, 2010 ("SCN") issued by the Securities and Exchange Commission of Pakistan ("the Commission') under Section 15A of the Securities and Exchange Ordinance, 1969 ("Ordinance") to Mr. Irfan Aslam ("the Respondent").
The brief facts of the case are that Shahzad Textile Mills Limited ('STML") and Shaheen Cotton Mills Limited ("SCML") are public limited companies listed on the Karachi Stock Exchange (Guarantee)
Limited ("KSE"), During the period from July 30, 2009 to August 24, 2009 ("Period under Review"), SCML sold its entire holding of 2,608,200 shares (19.25% of paid-up capital) of STIVIL at an average price of Rs. 1.48 per share, On perusal of the trading data of the KSE for the Period under Review, it was noted that out of the total sale of 2,608,200 shares of STML by SCML, 2,548,200 shares were purchased by the Respondent, He purchased 2,148,200 shares of STML from SCML through the Karachi Automated Trading System ("K AM") of KSE from July 30, 2009 to August 21, 2009 and a further 400,000 shares of STML through an off-market cross transaction on August 24, 2009, Both the Respondent and SCML conducted the transactions through the same terminal ID of Arif Habib Limited ("the Brokerage Company"), Member ICSE, Furthermore, it was also noted that after the completion of the said transactions with SCML, the Respondent continued to place purchase orders for STML on KATS from August 24, 2009 to September 18, 2009 to a cumulative 447,450 shares, whereas he was able to purchase only 6,325 shares from the market, The Respondent was a beneficial owner of SCML holding a total of 35.39% shares of the same as of September 2009. He also held 15.66% shareholding of STML prior to the above said purchase of 2,548,200 shares from SCML. The Respondent currently holds 34.51% shares of STMT.., He is also brother of Mr. Imran Aslam, who is Chief Executive Officer ("CEO") of STML and director at SCML, and sort of Mr. Pervez Aslarn, who is CEO of SCML and a director at STML 6, Subsequent to the purchase of STML shares by the Respondent and his placement of purchase orders after the purchase from SCML, the share price of STML soared sharply from Rs. 1.56 per share to Rs. 6.00 per share from September 18, 2009 to October 07, 2009, STML sent a letter to KSE on September 24, 2009 to announce the meeting of Board of Directors to be held on October 05, 2009 at 3:30 p.m. In order to consider the annual financial results of STML for the financial year ended June 30, 2009 ("FY2009"). The same letter was received by KSE on September 25, 2009 and was announced by ICSE at 1:13 p.m. The share price on September 24, 2009 opened at Rs. 2,56 per share-
7. STML announced its results on KSE for FY2009 on October 06, 2009 at 9:34 a.m., in which it reported an earning per share ("EPS") of Rs. 2.49, out of which, Rs, 1.28 pertained to the iast quarter of the financial year. The EPS was significantly improved compared to the preceding quarter and exceeded that of the total earnings of the previous nine months of FY2009, Furthermore, the financial performance improved materially from the previous financial years where loss per share ("LPS") was reported, as termed below: Table-1 Year 2007 2008 2009 EPS / (LPS) Rs. (1.95) (0.05) 2A9 In the same meeting of Board of Directors of gm', dated October 05, 2009, the issue of merger between STML and SCML., was also discussed. As a result of the said merger, SCML is supposed to be merged into STML, with STML remaining as the surviving entity and is supposed to benefit from synergies in administrative and other operating costs and optimal economic resource mobilization as mentioned in the merger petition of SCML and STML filed in the Lahore High Court.
It should be noted that the scrip of ST-NIL has a thin trading history on KSE. When seen in this context, the transactions between the Respondent and SCML during the Period under Review were found materially significant. These transactions on KATS constituted 91.12% of the total market turnover in STML scrip in the calendar year 2009. The historical annual volumes and relevant high and low prices for STML are given in the table below; SEC P Table-2 Year Total Volume (Shares) High Price (Rs.) Low Price (Rs.) 2006 142,500 20.50 11.50 2007 115,000 13.00 3.50 2008 1,000 8.50 6.00 2009 2,357,513 6.00 1.01 Based on the significance of the transact-ions executed between the Respondent and SCML as compared to normal trading pattern in the scrip of STML, and its subsequent announcement of a positive financial result for FY2009, the Commission sought information from the Brokerage Company, including account opening forms along with all its enclosures, the trading details, the financial ledgers, and receipt and payment details for both the Respondent and SCML.
On the analysis of the information and documents obtained from the Brokerage Company, it transpired that Mr. Imran Aslam had the sole authority to operate the brokerage account of SCML at the Brokerage Company, by way of a Board of Directors' resolution. Moreover, it was also noted that a total payment of Rs. 4,810,000 was made by the Respondent to the Brokerage Company mainly for the purchase of STML shares through the bank account, maintained jointly by the Respondent and Mr. Irnran Aslam at MCB Bank Limited, Fortress Stadium Branch, Lahore.
The execution of unusual transactions in the scrip of STML between the Respondent and SCML followed by positive financial results announced by STML, in addition to strong family linkages found between the Respondent and Mr. Imran Aslam, prima facie, appeared to be a violation of Section 15A of the Ordinance. Consequently, the SCN dated March 12, 2010 was served on the Respondent to show cause 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 Islamabad Office on April 02, 2010 for a personal hearing. However, due to non-reply of the Respondent to SCN within the stipulated time period of fifteen (15) days, the heating was re-scheduled to be held on April 06, 2010, which was further changed to April 09, 2010 at the request of the Respondent.
13. The Respondent submitted the written reply to SC N which was received on March 31, 2010. The following contentions were raised in the same written reply: It was denied that the transactions between the Respondent and SCML in the shares of SIMI, were in any way coordinated or carried out in a pre-arranged manner. It was stated that the KATS system of KSE is an automatic order matching system without volition of either the buyer or the seller. It was further argued that buying and selling carried out by SCML and the Respondent was not in a pre-arranged manner.
It was submitted that the financial results of STML for FY2009 were already a matter of public knowledge before their announcement on October 06, 2009 because STML had presented significant improvement in its financial performance in the half-yearly results for the period ended December 3L 2008 which was announced in February 2009 when the STML reported profit after tax of Rs. 16;19 million or EPS of Rs. 119, Therefore, the results for the FY2009 were not entirely new or previously unavailable information, but simply a confirmation of STML's positive growth.
It was contended that the financial results of STML announced on October 06, 2009 did not result in increase in vice of STML shares. It was asserted that the STML share price did not respond to the positive financial performance shown in the half-yearly results for December 31, 2008. It was further stated that the price increase of STML shares does not coincide with the result announcement made on October 06, 2009. It was mentioned that the STML share price started increasing from September 18, 2009 whereas the results were announced on October 06, 2009. Therefore, it was contended that there was noticeable increase in share price of other textile sector companies as well from September 2009. It was argued that, therefore, the price increase in STML share was on account of positive circumstances prevailing in the spinning sector of textile industry during the last quarter of year 2009 and first quarter of year 2010, It was argued that the Respondent had no knowledge of the information regarding the financial results of STML prior to the transactions with SCML. It was contended that SECP the SCI does not contain any proof that information regarding financial results was in the knowledge of the Respondent prior to or during the period of the transactions (i.e. July 30th 2009 to 24th August 2009), It was also stated that the SCI did not prove that Mr. Imran Aslam disclosed any inside information to the Respondent as alleged, It was asserted that SCI gave no account to any correspondence or other proof of communication between Mr. Imran Aslam and the Respondent where the former had passed on the information regarding financial results of STK.. To the latter. It was further stated that the Respondent's decision to purchase the SIMI, shares from SCML was made solely on the basis of positive half yearly financial results of STML that were made public in February 2009.
It was submitted that the account with MCB Bank Ltd, Fortress Stadium Branch was operated exclusively by the Respondent. Though, Mr, Imran Aslam had been given the authority to operate the said account as a contingency measure to provide for unforeseen events and emergencies, however, he did not make deposit to the said account nor did he monitor payments being made from the said account. It was mentioned that Mr. Imran Aslam was in no way privy of the trading of the Respondent in the scrip of STML. g It was argued that neither the Respondent nor Mr. Imran Aslam has made any gain or avoided any loss; therefore, no judgment can be made against them under Section 15E of the Ordinance.
14. On the first hearing held on April 09, 2010, Mr. Salman Akram Raja ("Legal Counsel") along with Mr. Rashid Sadiq ("Consultant") and Mr. Humayun 13alcht, Chief Financial Officer ("CFO") of STML appeared before me and made the following submissions:
(a) The Legal Counsel informed that the transactions conducted by the Respondent and SCML were essentially coordinated based on the fact that SCML was in need of cash to start a unit which was non-operational for several months. Therefore, the directors of SECP SCML decided to dispose of the holding in STML in a Board meeting held on July 04, 2009 and the Respondent showed interest in acquiring the same from SCML upon knowing about the potential sale of STML shares.
The Legal Counsel, asserted that Mr. IMran Aslarn had no specific knowledge of the financial results of STIVIL at the time of the transactions, though he had a general idea about the improvement in the results based on industry circumstances. The Legal Counsel further mentioned that the yam prices had improved considerably in September, 2009 leading the advance in the spinning sector of textile industry and supported his arguments with the share price data provided for certain companies with the Respondent's written reply of March 31, 2010. He argued that the phenomenon of yarn price surge led the advance in the price of STML share, and not the information regarding financial results of STML. He added that there was no correlation found between increase in STILL price movement and financial results announced on October 06, 2009.
The Legal Counsel mentioned that if these transactions had riot taken place, the shares of STML held by SCML would have been cancelled in a proposed merger of STML and SCML and would have rendered no value to SCML in that case.
15, Subsequent to the first hearing on April 09, 2010, the Consultant of the Respondent requested, vide letter dated April 19, 2010, for a further opportunity of personal hearing on behalf of the Respondent to make further legal and factual submissions, In response to the request, a second hearing was conducted on April 22, 2010 at the Head Office of the Commission in Islamabad.
16. In the second hearing, which was attended by the Consultant of the Respondent and the CFO of STML, the following verbal submissions were made on behalf of the Respondent
(a) The Consultant sought clarification on the subject of the SC N as it was issued under Section 15A of the Ordinance. He argued that the SCI didn't identify which specific violation under any specific sub-sections of Section 15A (2) of the Ordinance was made by the Respondent.
SECP The Consultant mentioned that since the SCN alleges the Respondent to transact based on the information received from Mr. Imran Aslam, Section 15A (2) (b) of the Ordinance would be invoked, which requires that (1) any other person should transact a deal, (2) based on some inside information, (3) passed to him by an insider and, (4) he uses the information to transact the deal.
He stated that Section 15A (2) (b) of the Ordinance requires the afore-mentioned four conditions to be met, in order for offence to be determined.
The Consultant argued that the Respondent is not any other person since he is an insider holding more than 10% shareholding of SC/vIL and STML, therefore he cannot be treated as any other person as referred to in Section 15A (2) (b) of the Ordinance.
The Consultant reiterated the assertions made in the first hearing by the Legal Counsel regarding public availability of information regarding financial position of STML and upturn in the spinning industry. He supported his arguments by presenting textile industry research reports and news excerpts on the issue.
The Consultant argued that no proof of communication or correspondence was provided in SCN to establish that the information relating to financial results of STML was passed by Mr. Imran Aslam to the Respondent. Also, he argued that the SCN has not provided the proof that the earnings of STML for FY2009 were available to Mr_ Irnran Aslam at the time of the transactions.
The Consultant asserted that the transactions were not conducted by the Respondent using any inside information. He stated that the information regarding financial results was irrelevant, and shares would still have been purchased by the Respondent even if STML had declared a loss. He further stated that the transactions in STML shares were between informed insiders and is not prohibited under Section 15A (2) (d) of the Ordinance. He mentioned that both the parties to the transactions had equality of information and, therefore, these were legitimate transactions, (g) The Consultant asserted that 97% of the shares of SCML and STML are held by the family itself and therefore, the transactions didn't damage the interests of anyone out of the minority shareholders as stated in the SCN. The Consultant further stated that the transactions were conducted out of good faith and for the purpose of long-term holding by the Respondent and there was no intention of earning any illicit profit by selling the shares of STML or to damage or hurt the interest of any investor.
Subsequent to the second hearing, the Consultant of the Respondent submitted a reply dated April 2S, 2010 containing written form of arguments, which were made in the second hearing. The same were thoroughly reviewed and assessed in relation to the earlier submissions and assertions made on behalf of the Respondent during the course of the complete proceedings as covered above.
Based on the above arguments in both written and verbal form, it is noted that the representatives of the Respondent have admitted a number of points, which were raised in the SCN. The Legal Counsel in the first hearing, admitted that the transactions in the shares of STML were conducted between the Respondent and SCML through a coordinated and pre- arranged manner and therefore, Mr. Imran Aslam was privy to the transactions, It was also admitted that Mr. Imran Aslam was operating the brokerage account of SCML singly at the brokerage Company as authorized by the Board of Directors of SCML. Moreover, it was not denied that the bank account held at MCB Bank Limited, Fortress Stadium Branch, Lahore was jointly owned by Mr. Imran Aslam and the Respondent. Further, in the written as well as verbal submissions, it was also admitted that the Respondent is brother of Mr. Imran Aslant, CEO of STML.
It is also pertinent to mention that the arguments presented in the written reply received on March 31, 2010 and submissions made in subsequent hearings by the representatives of the Respondent have clear contradictions. In the above-referenced written response of the Respondent, it was dearly mentioned that these transactions in shares of STML between the Respondent and SCML were normal and in no way could be synchronized. Similarly, it was categorically denied that Mr. Imran Aslam was privy of trading between the Respondent and SCML, Moreover, in the same written reply, it was submitted that the decision to purchase the shares of STML by the Respondent from SCML was made based on the positive financial position of STML. However, contrary to the above written submissions, the representatives of the Respondent at both hearings made contradictory statements namely, the Legal Counsel himself, in the first hearing, accepted that the trading between the Respondent and Safi, was coordinated as the Respondent had knowledge of the prior sale of shares by SCML. Furthermore, the Legal Counsel admitted that since the transactions were coordinated, Mr. Imran Aslam was fully aware of the transactions as these were executed. In addition to same, the Consultant of the Respondent, in the second hearing as well as the second reply dated April 28, 2010, stated that information regarding financial performance was irrelevant in the purchase of STML shares by the Respondent, whereas in the written reply of March 31, 2010 as mentioned above, it was admitted that the purchase decision was made based on positive financial position of MAL.
20. 1 have thoroughly analyzed and examined the facts, evidences and documents on record, in addition to the written replies to SCN from the Respondent and further assertions made by the representatives of the Respondent on both the hearings. Consequently, it is necessary to address the following issues raised during the complete course of the proceedings, in order to determine the offence detailed in the KN.
Was the Ma's financial result for FY2009 inside information?
Was the improvement in the textile industry, the basis of price increase in STML shares during the period from September 18, 2009 to October 07, 2009?
Was Mr. Inman Aslant aware of information regarding financial performance of STML for FY2009 during the transactions between the Respondent and SCML?
Was the information regarding financial results of STML disclosed by Mr. Imran Aslam to the Respondent?
Was the Respondent, an insider person at the time of transactions and was he required to know the information regarding financial results of FY2 009 prior to its public disclosure?
Can the transactions between the Respondent and SCML, be termed as insider trading under Section 15A of the Ordinance?
The issues listed above are addressed in detail and analyzed seriatim:
21. Was ST L's financial result for FY2009, the inside information?
21.1 In order to comprehend this issue, it is important to look what constitutes inside information under Section 15B (1) of the Ordinance, mentioned hereunder: "Information which has 110i been made public relating, directly or indirectly. 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." It is clear from the above sub- section of Section 15B of the Ordinance that the inside information should be material non-public, price-sensitive information which directly or indirectly relates to the listed company. In the above context, material price-sensitive information may inter alia include the following: Information regarding financial performance and results of a listed company Dividend payout and other corporate announcements Information relating to a joint-venture, merger or acquisition Any material contract entered into or lost, or purchase or sale of significant assets.
21.2 It is clear that the information regarding the financial results of FY2009 directly related to STMT., and was essentially not known to public before the announcement of the said financial results on October 06, 2009. Furthermore, the thorough review of financial results of FY2009 depicts that these results of STML could not be predicted/forecasted on the basis of historical operational performance as argued by the representatives of the Respondent because, in the last quarter of the FY2009, an increase in the profit after tax of STML was registered mainly due to one time gains and cost savings which were not seen in the previous nine months of FY2009. Moreover, the operational performance in the last quarter of FY2009 for STML was dismal and gross profit margin declined to the lowest level from the previous quarters of the same financial year. Therefore, based on the financial results of STML for nine months ended March 31, 2009, the results for the last quarter of FY2009 could not be predicted due to the reasons mentioned above.
21.3 The following table highlights the quarterly performance of STML ire FY2009: Table-3 Quarter Ended September 30, 2008 December 31, 2008 March 31, 2009 June 30, 2009 Gross Profit - Rs. 30,016,000 40,112,000 21,585,000 12,851,485 Gross Profit Margin 7.41% 12.64% 6.75% 3.60% Profit/ (Loss) After Tax - Rs. (1,163,000) 16,195,000 1,441,000 17,282,204 Profit After Tax Margin -0.28% 5.10% 0.45% 4.84% I EIS/ LPS) - Rs. (0.09) I 1.19 0.11 1.28 As evident from data in Table-3, gross profit margin of STML was fluctuating abruptly throughout the FY2009. Therefore, it is clear from the above analysis that the financial results for FY2009, before their announcement on October 06, 2009, could not be forecasted on the basis of operational performance of STML in the previous quarters of FY2009.
22. Was the improvement in the textile industry, the basis of price increase in STML shares during the period from September 18, 2009 to October 07, 2009?
22.1 Before assessing the basis of increase in STML share price, it is necessary to understand the price movement in shares of STML. As already mentioned, the share price of STML increased from September 18, 2009 to October 07, 2009. The price of STML shares started increasing immediately after the Respondent stopped placing purchase orders, Le, on September 18, 2009 and increased again on September 24, 2009 being the first trading day after Eid Holidays. STML dispatched a letter to KSE on September 24, 2009 to announce the Board of Directors meeting in order to consider annual financial results of STML for FY20CI9 to be held on October 05, 2009 at 3:30 PM. The Board meeting notification was announced by KSE on September 25, 2009 at 1:13 p.m. The following table shows the price movement in the shares of STML in detail: Table-4 Opening Price Rs.
1.56 Closing Price Rs, 2.56 Day Date 18, 2009 _ Sep 21, 2009 Sep 22, 2009 . SeE23, 2009 Se 24, 2009 Sep 25, 2009 Sep 28, 2009 Sep 29, 2009 Sep 30, 2009 Oct 01, 2009 H. Oct 02, 2009 12. Oct 05, 2009 3.75 3,01 3.60 3.56 3.56 3.55 I -x,00 12,812 4.50 4,50 430 +0.94 690 3.50 5.50 3.50 -1.00 43 330 MB =1 3,75 3.75 2.51 +0.25 1,001 3.01 3.01 3+01 -0.74 1 3.60 4.01 2,02 +039 8,734 450 4.60 3.51 +0.90 1,041 5.50 550 550 +1,00 7,500 6.00 6.50 6.00 +0,50 6,627 256 3.56 Oct 06, 2009 Oct 07, 2009 4.50 550 High Low Price Price Rs. Rs.) 2.56 Price Change (Rs.) +1.00 256 EID HOLIDAYS Volume (Shares) 23,188 4.50 22.2 Moving towards the issue of the basis of STML:s price increase, it requires the analysis of the complete textile sector in addition to specific performance of spinning sector during the period in question, because the representatives of the Respondent have repeatedly argued that the increase in share price of STML was because of the general increase in the shares of textile spinning sector. In addition to the above analysis, general increase in the stock market as benchrnarked with KSE 100 shares index ("KSE-100"), in the same period is also assessed to determine the overall market performance (KSE-100 Index is a key indicator of the stock market activity and movement over the KSE). The following table presents the analysis to assess the performance of KSE-100 Index, Textile Composite Sector, Textile Weaving Sector, Textile Spinning Sector and STML for the months of August 2009 to October 2009 along with the performance specifically in period under question i.e. September 18, 2009 to October 07, 2009: Table-5 August 2009 September 2009 12.37% 6.61% KSE-100 3.51% 4.40% Textile n site 14.70% 23.82% Textile inin 13.80% 9.72% Textile Weavin -6.00% 165.96% STML October 2009 1.61% 1.85% 2.61% 0.66% 7.20% September 18, 2009 to October 07, 2009 4.24% 2.97% 3,65% 15.17% 284.61% 22,3 The information in Table-5 above ascertains that the price of STMT.., shares had no correlation with any of the benchmark listed there in wider market or in the textile sector specifically, Since, the price increase in STML shares had been preceded by historic trading activity, being created by the Respondent and SCIvIL and subsequent orders placed by the Respondent in the scrip of STML; therefore, the increase in the price of STML shares may not be attributed to the performance of textile industry over KSE.
22.4 In the written replies as well as during the course of both hearings, the representatives of the Respondent strongly argued that the financial results of STML were already anticipated by the market and had no effect on the price of scrip on their announcement. In this regard, I would like to highlight a fact which clearly rebuts the aforesaid argument of the Respondent. More recently, STML's financial results for nine months ended March 31, no were announced on KSE on April 28, 2010 which were seen generally positive. The improved results announcement caused the price of STIvIL share to move up from Rs. 4.99 to Rs. 8.17 (increase of 63%) in just 4 trading days from April 29, 2010 to May 04, 2010 with trading volume making up over 80% of the total volume in the scrip of STML in the calendar year 2010 so far, making it reach its highest price in more than a year. This fact shows that the financial results of a company do have effect on the share price of the company.
23, Was Mr. Inman Adam aware of information regarding financial performance of STML for TY2009 during the transactions between the Respondent and SCML?
231 The financial year for STML ended on June 30, 2009, whereas the transactions between the Respondent and SCML started after one month, on July 30, 2009. Since Mr. Imran Aslam was CEO of STfyIL, being the highest level officer in the company, it remains his responsibility at all times to manage and have a clear view on the operational and financial position and performance of STML to discharge his professional responsibilities effectively under the usual course of business.
However, it would have been adverse for STML, if Mr. Imran Aslam was ignorant of the affairs of STILL including the financial and operational performance. Therefore, under normal circumstances, Mr. Imran Aslam, as CEO of STML must have knowledge regarding the financial performance including any SECP unexpected change in the financial position of STML, on frequent basis. To further emphasize the knowledge of Mr. Imran Aslam regarding financial performance of STML, it is clear that preparation of financial statements is the responsibility of the management and auditors are only required to form an opinion on the true and fair presentation of those financial statements, therefore, it is evident that Mr. Imran Aslam CEO of STML had prior knowledge of the financial affairs of STML.
24. Was the information regarding financial results of STAR disclosed by Mr. Imran Aslam to the Respondent?
24.1 In order to determine that whether the information was disclosed by Mr. Inuan Aslam to the Respondent, it would be useful to establish the strong family linkage of the Respondent with top management of SCML and STML along with his shareholding in the said companies as of September 2009.
Table-6 Relationship with Res 6ondent Position in STML Position in SCIVIL Respondent - 34.51% Shareholder* 35.39% Shareholder Mr. Pervez Aslam Father Director, 4.77% Shareholder CEO, 9.69% Shareholder Mr. Imran Aslam L Brother CEO, 5.45% Shareholder Director, 4A2% Shareholder *Respondent herd 15.66% shares of STML prior to purchasing 18.80% shareholding from SOIL and fiirther 6,325 shares of SIMI_ from the market.
24.2 From the facts of the case mentioned above, it stands established that Mr. Imran Aslam being the CEO of STML was an insider person and hence, through his dominant position in STIVIL, he had information regarding financial performance of STML. It is also established that the trading in the shares of STML by the Respondent and SCML in the Period under Review was substantially different from the trading history of the scrip and it constituted 91;12% of the total volume in the scrip of STML in the calendar 2009. Moreover, the close relationship of the Respondent with Mr. Imran Minn, being his real brother and the pre-arranged and synchronized manner of the transactions in the shares of STML also indicates that the information was disclosed to the Respondent by Mr. Imran Aslant, Moreover, Mr. Imran Aslarn was selling the shares of STML from SCML account to the Respondent as he was authorized by SCML, and the funds for the purchase of STML shares by the Respondent were arranged from the bank account at MCB Bank Limited, which was jointly held by the Respondent and Mr. Imran Aslarn, Since the Respondent had not traded so extensively in the shares of STML before the transactions with SCML, it clearly shows that the Respondent was purchasing the STML shares in a pre-arranged manner only on account or in furtherance of some specific information regarding STML that was not in the public domain, which was the information regarding positive financial results for FY2009.
24.3 Since, the Respondent was not an officer of SCML and STML; neither was on the Board of Directors of the said companies, therefore, as a simple shareholder the Respondent would not have had access to confidential information regarding the financial performance of the either STML or SCML directly. Furthermore, as already admitted by the Legal Counsel of the Respondent, during the course of first hearing that the transactions conducted between the Respondent and SCML were coordinated as the Respondent consistently placed purchase orders to buy STML shares prior to the sale order by SCML, with difference of a few seconds. This clearly indicates that the Respondent had inside information prior to the transactions based on which he placed orders to purchase STML shares from SCML. The table below highlights the trading pattern of the Respondent and SCML in the transactions in STMT.. Shares: Table-7 Number of Trading Dam 16 Total Shares sold by SCML 2,608 200 Shares PU rchased by Respondent from SCML 2,548,200 Total Transactions of SCML on RATS_ Matched Transactions between SCML and Respondent on KArTS60 No of times Orders Placed First by Respondent on RATS 60 SF CP 24.4 To determine the timing of orders placement on KAI'S in shares of STML, the following table highlights a sample of ten transactions to indicate the fact that purchase orders of the Respondent were consistently placed before the sale orders of SCML with a very short interval: Table's July 31, 2009 3*yL,2009 July 31, 20CI9 Aug 04, 2009 Res ondent Res dent ResElndent Respondent Respondent Respondent Respondent Aug 04, 2009 Respondent Au n 04,2009 Respondent Aug04, 2009 Respondent SCML SCML SCML 14:54:02 15,000 SCML 16:23:26 25,000 SCML 16:24:59 25,000 SCML 16:25:23 25,000 SCML 1155:59 L 25,000 SCML 12:57:09 25,000 12:57:45 25,000 12:59:40 15,000 Buyer Buy Order Time 14:52:17 14:53:06 14:53:48 16:23;14 16:24:50 16:25:15 12:53:48 12:57:01 12:57:38 12:59:32 Seller Sale Order Time SCML 14:52:41 Order Size Shares 23,000 SCML 14:53:21 55,000 Terminal ID MEM05003 MEM05003 1 MEM05003 MEM05003 MEM05003 MEM05003 MEM05003 MEM05003 MEM05003 MEM05003 Date Jul 30, 2009 2009 July 30, 2009 24.5 Since the Respondent was already holding the shares of STML prior to the purchase from SCML, his decision to increase the holding, just prior to financial results announcement of STML indicates that he was in possession of the inside information regarding STML. It is also worth mentioning that there was no significant information regarding STML prevailing in the market during the time, those transactions between the Respondent and SCML took place. Additionally, there was no significant trading by any other outside person in STML shares during the time of the said transactions as it is a thinly traded scrip in the market. Moreover, the Respondent's intent to place purchase orders for STML shares to a total of 447,450 shares in the period from August 24, 2009 to September 18, 2009 after the completion of the transactions with KNIT., but before the announcement of the financial results of STML further establishes that he had a strong stimulu based on the prior information of financial performance of STML provided to him by Mr. Imran Aslant, to buy more shares of STML even after completing the purchase of 2,548,200 shares from 5CML.
25. Was the Respondent an insider person at the time of transactions and was he required to know the information regarding financial results of FY2009 prior to its public disclosure?
25,1 The issue highlighted requires assessing whether the Respondent was indeed an insider at the time of the purchase of shares from SCML. Section 15C (1) (e) of the Ordinance as reproduced below states an insider to be: Any natural person holding, directly or indirectly, ten per cent or more shares of an issuer." 25,2 On account of the above-mentioned sub-section of Section 15C of the Ordinance, the Respondent was an insider of STML as he held 15.66% of the shareholding prior to further purchase of shares, It should, however, be noted that Section 15C of the Ordinance is a deeming clause. It is pointed out that all insiders enlisted m section 15 C of the Ordinance do not necessarily possess inside information at all times nor do they have the right or need to have all the information. Inside information being confidential in nature is confined to the knowledge of those who are required by law to have that knowledge. Inside information as long as it is confidential is required to be divulged on "need to know basis'''. The insiders will come across the information when they need to know it, i.e. When the law requires that they be told for certain approval. The person in possession of this confidential information must take proper care and caution so that this confidentiality is neither compromised nor breached. It would be right to suggest that person in possession of inside information holds that information as a trust As in the instant case the Mr. Imran Aslam in his capacity as the CEO of STML was in a position to have access to and knowledge about the positive financial results of SD& but the Respondent in his capacity as a shareholder was not required under the law to posses the information at that relevant time. The trading pattern of STML shares during the Period under Review provides ample evidence that this trading was being conducted on inside information. As discussed above this inside information in the facts and circumstances of the case was the positive financial results of STIR. For FY2009. Therefore, the issue of the Respondent's requirement to possess inside information as a shareholder needs to be looked thoroughly along with the argument made by the Consultant of the Respondent that under Section 15A (2) (b) of the Ordinance, any other person needs to transact a deal based on inside information provided by an insider for any offence to be established.
25.3 As already stated above, the Respondent was not any officer in STML and SCML, but was a shareholder of the company owning a substantial holding of both the companies. It does not, however, establish that he needed to obtain or hold any kind of information regarding the financial results of STML prior to their public disclosure or dissemination in order to discharge his professional responsibilities or in the normal course of business. Despite the fact that the Respondent is deemed to be an insider due to holding of more than 10% shares of STML, but his status as a shareholder does not mean that he was required under the law to possess information regarding the financial performance of STML prior to its public announcement. Under normal circumstances shareholders are not required to possess information regarding the financial results of the company prior to their public dissemination. It is reiterated that the Respondent was not an officer of either STML or SCML, nor was he on the Board of Directors of either companies at the time of the transactions and to this date. In this view of the matter it stands established that the Respondent as a shareholder of STML was not required to possess the information regarding the financial position of the company before its public announcement in accordance with the law.
However, the facts clearly establish that Respondent gained the inside information from his brother i.e. Mr. Imran Aslam who is the CEO of STML.
26. Can the transactions between the Respondent and SCML, be termed as insider trading under Section 15A of the Ordinance?
263 Section 15A (2) of the Ordinance identifies insider trading, as among the following: an insider person transacting any deal, directly or indirectly, using inside inftmation involving listed securities to which the inside in pertains, or using others to transact such deals; any other person to whom inside information has been passed or disclosed by an insider person transacting any deal, directly or indirectly, using inside infornuition involving listed securities to which the inside information pertains, or using others to transact such deals; transactions by any person as specified in clauses (a) and (b), or any other person who knows, or ought to have known under normal and reasonable circumstances, that the in possessed and used for transacting any deal is inside information;
(d) an insider person suggesting or recommending to another person to engage in dealing in any listed securities to which the inside information possessed by the insider person pertains, without the inside information being disclosed to the person who has dealt in such securities:" SECP (c) It is evident that the Respondent bought the shares of STML from SCML (whose account was being operated by Mr. Imran Asian* The Respondent had been provided the information regarding financial results of STML by Mr. Imran Aslam (CEO, gimp. The Respondent continued placing purchase orders for the shares of STMT. After completing the transactions with SCML clearly indicating his knowledge of inside information which caused him to purchase even more shares from ready market. However the Respondent as a simple shareholder was not required to possess that information for any reason. Another appealing fact to be considered is that all the transactions were conducted at share prices which might be among the lowest in the complete trading history of STML. Moreover, the intent of the Respondent concentrating mainly in purchase of shares of STML out of the whole textile industry gives clear indication that he had a special and specific impetus to buy only STML shares, whereas the whole industry might be prospering as argued by the representatives of the Respondent abundantly. Therefore, the offence is clearly established under Section 15A (2) (b) of the Ordinance.
27. The Consultant of the Respondent raised an additional argument in the reply dated April 28, 2010 that the SCN had taken contradictory stance regarding position of the Respondent wherein the Consultant argued that at first, the Respondent was said to receive STML's financial information from Mr. Imran Aslam and later in paragraph 12 of the SCN, it was mentioned that he was in possession of financial information regarding STML. To determine the fact of the position, it is necessary to consider the said paragraph of SCN which states: dd ..., being one of the sponsors and closely related with the management of STML, you were in possession of positive financial information regarding STML...
It is clear from the paragraph 12 of SCN as reproduced above that the stance taken for the Respondent was not in any way contradictory, because he possessed the information regarding financial results of STML based on the fact that he was closely related with the management of STML and material information regarding financial results of STML were passed to him by his brother, Mr.. Lmran Aslam. It should also be noted that the complete substance of the SCN should be read and assessed as a whole and not in isolation to any statement made therein. The complete substance of the SCN clearly shows that there is no contradiction therein in respect of the allegations against the Respondent.
28. With reference to the issue of merger between STML and SCML, it is dear and also admitted by the Legal Counsel of the Respondent in the first hearing that if shares of STML had not been sold by SCML, they would have been cancelled in a merger between SCML and STML, and which could have an impact on the shareholding structure of STIvIL. There is no doubt that the Respondent, by purchasing the STML shares from SCML on the basis of the inside information regarding financial results of STML, benefited from the improved financial fundamentals of STML shown in the last quarter of FY 200.9 and other financial results announced by STML in financial year 2010, as a shareholder. Further, after the completion of the merger between SCML and STML, STML would become a larger entity having more resources, which would also be of advantage to the Respondent through his major shareholding in the combined entity emerging after the merger.
29. In order to address the argument of Consultant of the Respondent regarding shareholding structure of SCIVIL, the pattern of shareholding needs to be looked at, which was reported by SCML in its FY2009 financial statements. The shareholding pattern depicted that directors and their immediate families, the associated undertakings, and major shareholders including the Respondent collectively owned over 65% of the shareholding of the company and remaining shareholding amounting to 30.20% was categorized under the heading of General Public and another 3.98% shareholding was categorized as Modaraba and Mutual Funds. Therefore, it may not be the case, as argued by the Consultant of the Respondent that 97% shares of SCML are held by the sponsors.
30. In view of the foregoing, it is established that the Respondent purchased 2,548,200 shares of SIMI, from SCML at a significantly low price of Rs. 1+47 per share on the basis of inside information regarding financial results of 571%/11, whereas, the share price of STML subsequently increased to Rs. 6.00 per share after the announcement of FY2009 financial results. It is further stated that the volume-weighted average price of STILL share has remained at Rs. 6.13 per share from the announcement of the FY2009 financial results, i.e. October 06, 2009 to July 22, 2010 with a total volume in the scrip of 196,580 shares. Taking consideration of this aspect, it is clear that the Respondent caused loss to SCML as a result of purchasing the shares of STILL, at a materially low price prior to the announcement of financial results of STML. Had the shares of STML not been sold by SCML, these shares would have been valued at Rs. 15,289,200 based on the share price of Rs.
6.00, being the highest price reached shortly after the FY2009 financial results announcement, However., the same shares of STML were bought by the Respondent for Rs. 3,748,060. Consequently the total loss caused by the Respondent to the SCML amounted to Rs. 11,541,140.
31. In light of the above, in exercise of the powers under Section 15E of the Ordinance, I hereby direct the Respondent to: pay a penalty of Rs. 1,000,000/- (Rupees One Million Only), for contravening the provisions of sub- section (1) of Section 15A of the Ordinance; and pay a sum of R.S. 11,541,140/- (Rupees Eleven Million, Five Hundred Forty-One Thousand, One Hundred and Forty Only) to SCML as compensation of the loss caused by purchasing the shares of STML, under Section 15E (2) (a) (ii) of the Ordinance.
32+ The matter is disposed of in the above manner and the Respondent is directed to deposit the fine as mentioned in paragraph 31 (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 SCML as mentioned in paragraph 31 (b) above and furnish the copy of the deposit receipt to the undersigned.
Page 23 of 23 SECURITIES & EXCHANGE COMMISSION OF PAKISTAN (Securities Market Division) SEC P
33. 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. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.