SEBI holds Compliance Officer liable for selectively tracking of trading of certain designated persons - MMJC

1. Facts of Case and allegations: SEBI conducted investigation into trading pattern of Marksons Pharma Ltd (‘MPL’). During examination SEBI observed that certain employees of MPL, who were also “designated persons” of MPL, had executed contra trades in violation of Clause 10 of the Code of Conduct as per SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). The period of investigation was from May 31, 2015, to December 31, 2016  (“Investigation Period/ IP”. SEBI alleged that Mr Pereira Sebastin Ruzario (Noticee no.1) being a designated person did not obtain pre-clearances from the Mr Harshavardhan Panigrahi (‘Compliance Officer’) of MPL before trading in the scrip of MPL. SEBI further alleged that Noticee no. 1 did not disclose his trades in the scrip of MPL which have exceeded the threshold of Rs. 10 lakhs in a calendar quarter, has undertaken contra trades and not disgorged the profits earned from contra-trades executed in the scrip of MPL. SEBI also alleged that Compliance Officer of MPL failed to disclose to the exchanges transactions of Noticee No. 1, even though he was aware of Noticee no.1 crossing threshold limit of Rs 10 lakhs as many as four (04) times during the investigation period through the weekly benpos data being sent to MPL. SEBI stated that Compliance Officer is required to administer the Code of Conduct formulated by a company and hence, monitor trading by their designated persons as per Regulation 9(3) of the PIT Regulations. In view of the above, it is alleged that Compliance Officer did not make disclosures to the exchanges in respect of the transactions of Noticee No. 1, even though he was aware of the same. 

• Submission by Compliance Officer: Compliance Officer of MPL submitted that the transactions of Noticee No. 1 are ranging from 58 shares to 10,508 shares on weekly basis. It is difficult to calculate cumulative transactions across a calendar quarter to ascertain the threshold limit. It is practically not possible to maintain every week’s trading data of each and every employee across a calendar quarter to ascertain whether cumulative transaction has crossed the threshold. The weekly and quarterly RTA reports run into hundreds of pages and it is impossible to track the trading of each and every employee in the scrip of MPL (the company had 574 employees during year 2015-16 and 717 employees during year 2016-17). Compliance Officer further submitted that neither Noticee no.1 sought pre-clearance nor he dislclosed that his trading exceeded value of Rs 10 lakhs. Onus is always on the employee to seek pre-clearance and also to disclose trading in case it exceeds the threshold limit of Rs. 10 lakhs.

• Submission by SEBI: In this regard SEBI submitted that for effective monitoring of trades, it is the duty of Noticee No. 2 to obtain details of these trades and put in place a mechanism to analyze them in order to identify any deviations with the Code of Conduct. There is no exception provided in the Code of Conduct of MPL that trades of certain employees can be excluded from monitoring. SEBI further stated that Compliance Officer has also not provided any document/ record to show that the practice followed by him with respect to monitoring transactions of certain employees (viz. Directors, Promoters, KMPs) of MPL has been approved by the Board of MPL or he that he had proposed any change to the Code in order to meet these exceptions. Compliance Officer also not provided any document/ record to show that he has highlighted the constraints faced by him with respect to monitoring employee transactions to the Board of MPL. While the Code of Conduct of MPL requires every employee to make continuous disclosures of their trading in the scrip of MPL in the prescribed format, I note that this requirement does not absolve the Compliance Officer from his duty and responsibility of separately monitoring the trades of every employee. SEBI further stated that RTA is an agent of MPL and Noticee No. 2 could have directed it provide reports in the format that would have enabled him to effectively monitor the trades of all designated persons. SEBI further stated that Compliance Officer cannot take shelter under the excuse that it was the duty of Noticee No. 1 to inform him or seek pre-clearance from him for these trades. As already mentioned earlier, the responsibility of Compliance Officer to monitor the trades is independent of the reporting done by Noticee No. 1.

• What SEBI held?: SEBI found that inspite the Compliance officer had adequate access to information regarding the transactions of Noticee No. 1, he has failed to discharge his responsibilities regarding monitoring the transactions of Noticee No. 1 and not making disclosures regarding the same to stock exchanges. Accordingly SEBI held that Compliance Officer is in violation of the Code of Conduct of MPL as well as Regulation 7(2)(b) read with Regulation 9(3) of the PIT Regulations and is liable for penalty under Section 15A(b) of the SEBI Act. SEBI levied him a penalty of Rs 400,000 under Section 15A(b) of SEBI Act, 1992.

Copy of the above order can be accessed at below link: