SAT directs Sebi to pass fresh order within 6 months in Dynamatic Tech insider trading case

The investigation started in 2017 and continued till 2019 and, during this period, there was no shred of any evidence to suggest that the appellant was trying to divert the alleged notional gain." It further said the reason given by the regulator justifying its action to pass an ex-parte interim order is patently erroneous and cannot be sustained. The tribunal noted that only a show cause notice has been issued and the matter has not been adjudicated on merits, but Malhoutra has been directed to deposit the possible disgorgement amount in advance.

Setting aside Sebi's order against Dynamatic Technologies Managing Director and Chief Executive Officer Udayant Malhoutra in an insider trading case, the Securities Appellate Tribunal (SAT) has directed the markets regulator to pass a fresh order within six months. The markets regulator, through an order on June 15, 2020, had directed Malhoutra to deposit a sum of Rs 3.83 crore (including interest) in an escrow account towards notional loss allegedly avoided by him by using unpublished price sensitive information.

It had also directed that bank and demat accounts of Malhoutra will remain frozen till the time the amount is not deposited. It was alleged that he sold 51,000 shares of the company in October, 2016 having inside knowledge of the price sensitive information about the unaudited financial results of the quarter ended September 30, 2016.

By doing so, he allegedly made a notional gain or averted a notional loss. Following Sebi's order, Malhoutra approached SAT, arguing that there was no urgency to pass an ex-parte order with regard to the trade done by him more than three-and-a-half years ago, especially during the pandemic period.

It was urged that the action of the regulator in freezing his accounts during these time was wholly arbitrary. Meanehile, Sebi contended that an ex-parte interim order cum show cause notice has been issued and if the respondent files a proper reply, the matter could be decided in a short period.

It further contended that the reason for passing an ex-parte interim order was that there may be a possibility of diversion of notional gain made by Malhoutra during the pendency of the proceedings. The tribunal, in an order passed on June 27, said, "...the trades were executed in October 2016. The investigation started in 2017 and continued till 2019 and, during this period, there was no shred of any evidence to suggest that the appellant was trying to divert the alleged notional gain." It further said the reason given by the regulator justifying its action to pass an ex-parte interim order is patently erroneous and cannot be sustained.

The tribunal noted that only a show cause notice has been issued and the matter has not been adjudicated on merits, but Malhoutra has been directed to deposit the possible disgorgement amount in advance. "We are of the opinion that no amount towards disgorgement can be directed to be deposited in advance unless it is adjudicated and quantified unless there is some evidence to show and justify the action taken," it added.

Consequently, SAT quashed the impugned order and directed Malhoutra to file a reply to the show cause notice within four weeks. "The respondent (Sebi) will decide the matter finally after giving an opportunity of hearing to the appellant either through physical hearing or through video conference within six months thereafter," it added.

During the interim period, SAT directed Malhoutra to give an undertaking to Sebi within four weeks that he will not alienate 50 per cent of his total shareholding in the company..

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