Holding

An insider under Regulation 2(e)(i) must satisfy both limbs; the appellant, not being a promoter and not reasonably expected to possess UPSI, was not an insider, and the majority judgment of the Appellate Tribunal was set aside.

Summary

The Supreme Court examined multiple appeals arising from the Satyam scandal, where the appellant, Chintalapati Srinivasa Raju, a former executive and non‑executive director of Satyam Computer Services Ltd (SCSL) and co‑brother of its chairman, was shown cause for insider trading under SEBI (Prohibition of Insider Trading) Regulations, 1992. The Court held that Regulation 2(e)(i) contains a conjunctive "and" requiring a person to be both a connected person and reasonably expected to have access to unpublished price‑sensitive information (UPSI); the appellant failed the second limb as he was not a promoter, ceased to be an executive director in 2000, retained shares without lock‑in, and sold them before UPSI arose. Consequently, the majority judgment of the Appellate Tribunal was set aside and the minority view upheld, exonerating the appellant and several family members, while affirming liability only for the appellant’s company under Regulation 2(h)(ix). The appeals were allowed and the orders of the Appellate Tribunal were quashed.

Issues considered

Whether the appellant qualified as an "insider" under Regulation 2(e)(i) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.
Whether the word "and" in Regulation 2(e)(i) requires both the connected‑person test and the reasonable‑expectation test to be satisfied.
Whether the appellant was a promoter or a connected person within the meaning of Regulation 2(c).
Whether the appellant had possession of or was reasonably expected to have UPSI at the time of his share transactions.
Whether the appellant’s company fell within the definition of a "person deemed to be a connected person" under Regulation 2(h)(ix).
Whether the disgorgement order could include gains from shares that were never sold.

Legislation cited

Companies Act, 1956s. Section 159, s. Section 246
Companies Act, 2013s. Section 92(1)(e)
Indian Evidence Act, 1872s. Section 42
SEBI (Prohibition of Insider Trading) Regulations, 1992s. Regulation 2(c), s. Regulation 2(e)(i), s. Regulation 2(h)(ix)
SEBI (Prohibition of Insider Trading) Regulations, 2015s. Regulation 2(e)(i)
Securities and Exchange Board of India Act, 1992s. 12A
Securities Contracts (Regulation) Act, 1956s. Section 21

Subjects

insider tradingunpublished price sensitive informationconnected personpromoterSatyam scandalSEBI regulationsdisgorgementshow‑cause noticeinterpretation of "and" vs "or"director liabilitycorporate fraud

Judgment

[2018] 5 S.C.R. 785 785

CHINTALAPATI SRINIVASA RAJU A
v.
SECURITIES AND EXCHANGE BOARD OF INDIA
(Civil Appeal No.16805 of 2017 Etc.)
MAY 14, 2018 B
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
SEBI (Prohibition of Insider Trading) Regulations, 1992:
Regn 2(e)(i), 2(c) – Insider trading – Satyam scam – Appellant-
co-brother of the Chairman of SCSL-Satyam Computer Services C
Limited, was executive director of SCSL from 1993 to 2000 and
non-executive director from 2000 to 2003 – Appellant holding
76,50,000 equity shares of SCSL – Letter by former Chairman of
SCSL, to the stock exchange and SEBI that financial statement of
the company had been grossly overstated – Show cause notice to
D
appellant that being a promoter and director of SCSL, he was liable
as an “insider”, having knowledge of Unpublished Price Sensitive
Information (UPSI), as a result of which he stood to gain by selling
his shares at an inflated value – Whole Time Member of SEBI and
appellate tribunal held that the appellant was a “connected person”
u/Regn 2(c) and, thus, “insider” u/Regn 2(e) – On appeal, held: E
Appellant cannot be described as a promoter since the annual
reports, which contained his signatures as a director, did not show
him as a promoter – Chairman and his brother described him as a
promoter in letters written to various stock exchanges behind his
back and duped him – He was victim of fraud perpetrated by them
F
– By 2006, all the actual promoters disposed of their shareholding
in SCSL because they were aware of the credit crunch faced by
SCSL – Appellant continued to retain substantial shareholding in
SCSL till the end of 2008 clearly points to lack of possession of
UPSI – Appellant had no professional or business relationship with
his co-brother and had no connection with any of the entities floated G
by his co-brother – Appellant ceased to be executive director in
2000 as such was not involved with fraudulent manipulation which
began only from 2001 onwards – It has not been shown how
appellant was in any manner responsible for actions taken by those
in the management of SCSL – Inference of reasonably being
H
785
786 SUPREME COURT REPORTS [2018] 5 S.C.R.

A expected to be in the knowledge of confidential information cannot
be formed – SEBI (Prohibition of Insider Trading) Regulations, 2015
– Securities and Exchange Board of India Act, 1992.
Regn 2(e)(ii), 2(h)(ix) – Unpublished Price Sensitive
Information (UPSI) – Satyam scam – Appellant Company-private
B company of the executive director/non-director of SCSL and his
wife – Each holding 50% share capital of the company – Appellant
sold only 8,00,000 shares held in SCSL – 24,00,000 shares never
sold by appellant, but for which only application money was
received and returned by 17.4.2002 – Disgorgement order included
gains made on account of the said shares – Minority judgment
C holding that 8,00,000 shares had been sold prior to the occurrence
of the UPSI and 24,00,000 shares were never sold but were merely
returned to executive director/non-director of SCSL, could not form
the basis of any disgorgement order – On appeal, held: Minority
judgment is upheld – Appellant does not have persons who are
D relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) –
Under these sub-clauses, a person is deemed to be a connected
person if such person is a relative of persons in cl (i) to (v); or is a
banker of the company; or is a relative of a connected person –
Since none of these clauses are attracted, s. 2(h)(ix) not attracted.
E Regn 2(h)(viii) – Person deemed to be connected – Satyam
scam – Father of executive director/non-executive director of the
company – Father neither a promoter nor a director of SCSL, and
sold 2,50,000 shares in 2005 and expired in 2007 – Order by the
tribunal that father was a person deemed to be connected under
Regn 2(h)(viii) since he was relative of a connected person – On
F appeal, held: Director/executive director ceased to be a connected
person in 2003 – Thus, when the father sold shares in 2005, he
could not be a deemed to be connected person since the director
himself ceased to be a connected person – Thus, order of Whole
Time Member quashed and set aside.
G Regn 2(e)(i) – Insider – Connected person – Satyam scam –
Mother of the Chairman, though relative, yet made off market
transactions way back in 2003 – Whole time member and majority
judgment of the appellate tribunal holding that mother being the
close relative, thus, must be presumed that she had access to UPSI
H – On appeal, held: CBI or the Enforcement Directorate did not
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 787
EXCHANGE BOARD OF INDIA

proceed against the mother nor was referred to by the SFIO’s report A
– She was neither promoter nor director of SCSL – Thus, the test of
the second part of clause 2(e)(i) not met with – Furthermore, had
she been in possession of UPSI, she would also have sold shares at
their peak price instead of selling them at a depressed price in 2003
– Thus, the majority judgment set aside.
B
Regn 2(e)(i) – Insider – Satyam scam – Chairman’s sons roped
in by the Whole time member and the appellate tribunal – On appeal,
held: Second limb of clause 2(e)(i) cannot be put against either of
the sons – There was no evidence of any complicity in the fraud
committed by their father – Given the fact that they were expressly
exonerated of the said fraud by the appellate tribunal, and that C
they were running independent businesses and were neither
directors nor promoters of SCSL, and that they sold their shares for
business purposes at a price much less than the peak price at which
their father sold shares of SCSL in 2006, no case made out against
them. D
Regn 2(h)(ix) – Insider – Person deemed to be connected
person – Satyam scam – Appellant-private limited company owned
shares of Satyam company which were pledged as security for
obtaining a loan amount, that was borrowed to provide funds to ten
independent companies, owned by the family of the Chairman – E
Majority judgment of the appellate tribunal held the appellant
company as deemed to be a connected person u/Regn 2(h)(ix) – On
appeal, held: Shareholding pattern of the appellant company, made
it clear that Chairman and his brother individually held more than
10% interest in the appellant company, thus, the appellant company
is deemed to be a connected person u/Regn 2(h)(ix) – Further, the F
appellant company was an ‘insider’ under the Regulations – It had
pledged and got the shares of Satyam belonging to the Chairman
and his brother and their spouses sold when in possession of UPSI
and thus, violated SEBI Act and the Regulations – Thus, the finding
of the majority judgment upheld. G
Regn 2(e)(i) and (ii) – Insider trading – Unpublished Price
Sensitive Information (UPSI) – Satyam scam – Appellant-younger
brother of the Chairman, roped in by the appellate tribunal – On
appeal, held: From s. 246 it is clear that the SFIO’s report can be
used as evidence in any other proceeding – By virtue of s. 246, it is H
788 SUPREME COURT REPORTS [2018] 5 S.C.R.

A possible to appreciate the role of the appellant in the so-called
Satyam scam – Also, the judgment of the Special Court, delivered
long after the show cause notice, proved that the appellant also
played active role in the criminal conspiracy and cheating of SCSL,
its share holders and investors – While it is true that adjudication
proceedings and criminal proceedings are separate proceedings,
B
the relevance of the Special Court’s judgment is only for the purpose
of showing that the second part of the definition of an “insider” is
made out in the appellant’s case – He was reasonably expected to
have access to UPSI in respect of the securities of SCSL – Thus,
SFIO’s report as well as the Special court judgment clearly and
C unmistakably points to the complicity of appellant, unlike that of
the other family members, in the fraud committed – Majority judgment
of the appellate tribunal upheld – Companies Act, 1956 – s. 246.
Disposing of the appeals, the Court
HELD:
D
Civil Appeal No. 16805 of 2017
1.1 Regulation 2(e)(i) of the SEBI (Prohibition of Insider
Trading) Regulations, 1992 is in two parts. The first part has
reference to any person who is connected with the company or is
E deemed to be connected with the company. There can be no doubt
that the definition of “connected person” contained in Regulation
2(c) would rope in the appellant under sub-clause (i) thereof, as
the appellant was undoubtedly a director of SCSL upto 2003.
However, the second limb of clause 2(e)(i) also has to be satisfied,
which is that such person must reasonably be expected to have
F access to unpublished price sensitive information by virtue of
such connection in respect of securities of a company. It has been
held that the word “and” should be given its ordinary meaning
and should be understood in a conjunctive sense, unless it would
lead to an absurd situation or an unintelligible result. [Para 10]
G [806-F-H; 807-A]
Maharaja Sir Pateshwari Prasad Singh v. State of U.P.
(1963) 50 ITR 731 ; M. Satyanarayana v. State of
Karnataka, (1986) 2 SCC 512 ; Union of India v. Justice
S. S. Sandhawalia [1994] 1 SCR 83 : (1994) 2 SCC
240 ; Spentex Industries Ltd. v. CCE [2015] 11 SCR
H 487 : (2016) 1 SCC 780 – referred to.
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 789
EXCHANGE BOARD OF INDIA

1.2 In the instant case, the SEBI (Prohibition of Insider A
Trading) Regulations, 2015 throw considerable light on the
definition of “insider”, as an insider is now defined to mean only
a person who is a connected person or a person who is in
possession of or having access to unpublished price sensitive
information. Obviously, post 2015, an “insider” need not satisfy
B
the second test of the 1992 Regulations and it is enough that
such person be a “connected person” as defined. The disjunctive
“or” contained in the 2015 Regulations must be contrasted with
the expression “and” contained in the 1992 Regulations.
Therefore, it is clear that the majority view of the appellate
tribunal, in giving effect to only the first part of Regulation 2(e)(i) C
of the 1992 Regulations, cannot be sustained in law. Further,
under the second part of Regulation 2(e)(i), the connected person
must be “reasonably expected” to have access to unpublished
price sensitive information. The expression “reasonably
expected” cannot be a mere ipse dixit – there must be material
D
to show that such person can reasonably be so expected to have
access to unpublished price sensitive information. [Paras 10, 11]
[807-B-E]
1.3 The minority judgment of the appellate tribunal correctly
brings out the role of the expression “and” contained in
Regulation 2(e)(i). The judgment also correctly appreciates the E
difference in language in Regulation 3 before and after it was
amended in 2002, and contrasts the expression “on the basis of”
with the expression “when in possession of”. The minority
judgment then goes on to refer and rely upon the SFIO’s report,
which found that the manipulation of financial statements was done F
by the Chairman and his cohorts, and was suppressed from the
board of directors, which would include the appellant as a member
of such board. The said judgment went on to hold that the appellant
cannot be described as a promoter inasmuch as the annual
reports, which contained his signatures as a director, did not show
him as a promoter. What was done behind his back was that the G
Chairman and his brother described him as a promoter only to
various stock exchanges in letters written to those exchanges
without the knowledge or consent of the appellant. The minority
judgment also refers to the fact that the appellant’s shares were
not subject to a lock-in period at the time of merger of SES into H
790 SUPREME COURT REPORTS [2018] 5 S.C.R.

A SCSL, which lock-in period was mandated by law for promoters.
In fact, the appellant was one of the persons duped by them and
was, therefore, a victim of the fraud perpetrated by the former
Chairman of SCSL. [Paras 12, 13] [807-F-G; 808-C-D]
1.4 It was also found that by the year 2006, all the actual
B promoters disposed of their shareholding in SCSL because they
were aware of the credit crunch faced by SCSL. The fact that the
appellant continued to retain substantial shareholding in SCSL
right till the end of 2008 clearly points to lack of possession of
UPSI. Another important point is that the last transaction of sale
of shares by the appellant on 22.12.2008, which was a substantial
C chunk of shares, was made by the appellant just like any other
shareholder of SCSL. News had got out into the market that the
merger proposal of SCSL with MI Limited and M Properties was
not going ahead. The hysteria in the share market resulted in a
steep drop in the price of shares of SCSL. The fact that the
D appellant disposed of a huge chunk of his shareholding on
22.12.2008 to avail of the price on that date completely negates
the inference that there was any information flow between the
Chairman, his brother and the appellant. It was also pointed out
that the appellant had no professional or business relationship
with his co-brother and had no connection with any of the entities
E floated by his co-brother. The fact that the appellant was not
involved with fraudulent manipulation is clear from the fact that
he ceased to be an executive director in the year 2000. Fraudulent
manipulation began only from 2001 onwards. It was also
considered significant by the minority judgment that the appellant
F was not a nominee of SCSL on the board of directors of SL
Company, but of another third party investor. [Para 14] [809-C-
G]
1.5 Non-executive directors are, therefore, persons who
are not involved in the day to day affairs of the running of the
G company and are not in charge of and not responsible for the
conduct of the business of the company. It is also important to
note that the appellant attended only six out of ten board meetings
of SCSL for the period that he was a non-executive director. The
appellant was not involved in any business development,
diversification plans and advise on new ventures of SCSL post
H 1999. It was also held by the minority judgment that the findings
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 791
EXCHANGE BOARD OF INDIA

of the Whole Time Member and the majority went clearly beyond A
the show cause notice, which, when read with Annexure 15 thereof,
makes it clear that the appellant is only sought to be roped in as
a promoter. Once it is found that he is not a promoter, then the
basis of the show cause notice goes as also the basis of the
impugned judgment. [Paras 16, 18] [811-C; 813-D-E]
B
1.6 Even though the definition of “control” in the 1997
Regulations is an inclusive one, yet the definition shows that
control must mean a right to appoint majority of directors as a
shareholder or to control management or policy decisions
exercisable by persons in any manner. The appellant was an
executive director on a fixed monthly salary, which was roughly C
in the range of Rs.1,00,000/- per month, when he stepped down
as an executive director in 2000. After stepping down, the salary
was stopped, and he was paid only for board meetings which he
attended. Nothing has been shown to indicate that, on facts, such
executive salaried director was in any manner in control of SCSL D
directly or indirectly. The absence of the word “independent” in
the annual report also does not take us very far, inasmuch as it is
admitted that he was a non-executive director from 2000 to 2003,
who only attended six board meetings and received salary
therefor. It has not been shown how the appellant was in any
manner responsible for actions taken by those in the management E
of SCSL. It is demonstrated that the minority judgment is much
more detailed and correct than the majority judgment of the
appellant tribunal. The submission that in cases like the present,
a reasonable expectation to be in the know of things can only be
based on reasonable inferences drawn from foundational facts is F
accepted. [Para 20] [816-C-G]
1.7 From the mere fact that the appellant promoted two
joint venture companies, one of which ultimately merged with
SCSL, and the fact that he was a co-brother of the Chairman,
without more, cannot be stated to be foundational facts from which G
an inference of reasonably being expected to be in the knowledge
of confidential information can be formed. The fact that the
appellant was to be continued as a director till replacement again
does not take anywhere. Two other independent non-executive
directors were appointed in his place on and from 23.1.2003. It is
H
792 SUPREME COURT REPORTS [2018] 5 S.C.R.

A clear that the appellant devoted all his energies to the businesses
he was running, on and after resigning as an executive director
of SCSL, as a result of which the salary he was being paid by
SCSL was discontinued. [Para 21] [817-C-D]
1.8 Having regard to the findings contained in the minority
B judgment and the discussion, the minority view is correct both in
law and on facts and is accepted. Therefore, the majority judgment
of the appellate tribunal is set aside. [Para 22] [817-E-F]
Pooja Ravinder Devidasani v. State of Maharashtra
(2014) 16 SCC 1 ; Godrej Industries Ltd. v. CCE
C (2008) 17 SCC 471 ; SACI Allied Products Ltd. v. CCE
[2005] 3 SCR 881 : (2005) 7 SCC 159 ; SEBI v. Kishore
R. Ajmera [2016] 1 SCR 1118 : (2016) 6 SCC 368 –
referred to.
Dovey and the Metropolitan Bank v. John Cory
D [1901] AC 477 – referred to.
Civil Appeal No. 19494 of 2017
2.1 On facts, the appellant sold 8,00,000 shares from
4.1.2001 to 14.3.2001. The occurrence of the UPSI was only from
31.3.2001 and inasmuch as these sales were made prior to this
E date, obviously, the 1992 Regulations would not get attracted.
The minority judgment of the appellate tribunal referred to this
and stated that the result would be the same as the result in
Appeal No.462 of 2015. In that case also, shares had been sold
prior to the occurrence of the UPSI and on the self-same ground,
F appeal had been allowed by the majority judgment of the appellate
tribunal with the minority concurring. The minority judgment
further went on to state that 24,00,000 shares also, which were
never sold but were merely returned to ‘CS’, could not form the
basis of any disgorgement order. The same is concurred with.
[Para 25] [818-C-E]
G
2.2 The appellant company does not have persons who are
relatives of persons mentioned in sub-clauses (vi), (vii) and (viii)
– under these sub-clauses, a person is deemed to be a connected
person if such person is a relative of persons in clauses (i) to (v);
or is a banker of the company; or is a relative of a connected
H
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 793
EXCHANGE BOARD OF INDIA

person. Since none of these clauses are attracted, it is obvious A
that Section 2(h)(ix) would also, as a matter of law, not be attracted
in the facts of this case. In this view, the majority judgment of the
appellate tribunal judgment is set aside. [Para 27] [819-A-B]
DIARY NO. 37202 of 2017
3. Appellant, father of ‘CSR’, was neither a promoter nor a B
director of SCSL and had died on 3.12.2007. He was a connected
person to ‘CSR’, being his father, but as the shares which stood
in his name were sold in August, 2005, he could not possibly be a
relative of a connected person as ‘CSR’ himself ceased to be a
connected person on and from July, 2003. The minority judgment C
of the appellate tribunal correctly appreciated the said position.
[Para 28] [819-C-D]
Civil Appeal No. 17303 of 2017
4. It was submitted that there was no evidence whatsoever
of any complicity of the mother with the fraud perpetrated by her D
son and his cohorts; and that all that has been found against his
client is that she is a close relative of the Chairman and by virtue
of this close relationship, it, therefore, must be presumed that
she had access to UPSI. Indeed, this was the basis of both the
Whole Time Member’s judgment as well as the majority judgment E
of the appellate tribunal. Given the fact that this lady was not
proceeded against by the CBI or by the Enforcement Directorate
and that the SFIO’s report does not, in any manner, refer to her,
and given the fact that she was neither promoter nor director of
SCSL, it is obvious that the test of the second part of clause
2(e)(i) is not met with. Also, had she been in possession of UPSI, F
she would also have sold shares at their peak price instead of
selling them at a depressed price in the year 2003. Thus, the
majority judgment of the Appellate Tribunal is set aside.
[Para 30] [820-C-F]
Civil Appeal No. 17313 of 2017 and 17978 of 2017 G
5. Given the fact that the second limb of clause 2(e)(i) cannot
be put against either of these appellants-sons of the Chairman,
in that there is no evidence of any complicity in the fraud
committed by their father; given the fact that they were expressly
H
794 SUPREME COURT REPORTS [2018] 5 S.C.R.

A exonerated of the said fraud by appellate tribunal; and given the
fact that they were running independent businesses and were
neither directors nor promoters of SCSL, and that they sold their
shares for business purposes at a price much less than the peak
price at which their father sold shares of SCSL in 2006, no case
has been made against them. The appellate tribunal judgment is
B
set aside in this behalf. [Para 31] [821-C-D]
Civil Appeal No. 17997 of 2017
6. It has been held that in the majority judgment of the
appellate tribunal, the amount that was borrowed by the appellant
C company was utilised to provide funds to 10 private limited
companies, which were owned by the Chairman’s family. Equally,
the shareholding pattern of the appellant company, as it stood on
and from 18.9.2006, made it clear that the Chairman and his
wife held 33.11% and 40.52% respectively, whereas the balance
was held by his brother and his wife. Obviously, therefore, as the
D Chairman and his brother individually held more than 10%
interest in the appellant company, the appellant company is
deemed to be a connected person under Regulation 2(h)(ix) of
the 1992 Regulations. The decision of the WTM of SEBI that
appellant company was an ‘insider’ under the PIT Regulations
E and that the appellant company pledged and got the shares of
Satyam belonging to Chairman and his brother and their spouses
sold when in possession of UPSI and thus SRSR violated SEBI
Act and the PIT Regulations cannot be faulted. This finding of
the majority judgment of the appellate tribunal is concurred with.
[Para 33] [821-G-H; 822-A-B, E; 823-C]
F
Civil Appeal No. 17383 of 2017
7.1 From Section 246 of the Companies Act, it is clear that
the report can be used as evidence in any other proceeding. Even
though it is correct to state that this report was delivered on
G 13.4.2009, i.e. before the show cause notice was issued on
19.6.2009, the mere fact that this was not put against the appellant
in the show cause notice cannot be any reason for this Court not
to independently view the same. The appellant has not chosen to
assail the findings contained in this report in a writ petition filed
before the High Court. Under Section 246, this Court is
H
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 795
EXCHANGE BOARD OF INDIA

empowered to look at the same as evidence of the opinion of the A
inspector concerned in relation to any matter contained in the
report. By virtue of Section 246, therefore, it is possible to
appreciate the role of the appellant in the so-called Satyam scam.
Also, the judgment of the Special Court, which was delivered
only on 9.4.2015 i.e. long after the show cause notice, proved
B
that the accused also played active role in the criminal conspiracy
and cheating of M/s. SCSL, its share holders and investors.
[Paras 38, 39] [824-D-F; 826-G; 827-G]
7.2 While it is true that adjudication proceedings and
criminal proceedings are separate proceedings, the relevance of
the Special Court’s judgment is only for the purpose of showing C
that the second part of the definition of an “insider” is made out
in the appellant’s case, for, if the appellant, along with his brothers,
was party to the fraud practiced on the public, it is obvious that
he was reasonably expected to have access to UPSI in respect of
the securities of SCSL. This appellant’s case, therefore, stands D
apart from the other family members of the Chairman in that the
SFIO’s report as well as the said judgment clearly and
unmistakably point to his complicity, unlike that of the other family
members, in the fraud committed from 2001 onwards. This being
the case, though for different reasons, the majority judgment of
the appellate tribunal is upheld. [Para 40] [828-C-E] E

Radheshyam Kejriwal v. State of W.B. [2011] 4 SCR
889 : (2011) 3 SCC 581 ; Videocon Industries Ltd. v.
State of Maharashtra [2016] 2 SCR 741: (2016) 12
SCC 315; K.G. Premshanker v. Inspector of Police
[2002] 2 Suppl. SCR 350 : (2002) 8 SCC 87 – referred F
to.
Case Law Reference
(1963) 50 ITR 731 referred to Para 10
(1986) 2 SCC 512 referred to Para 10 G
[1994] 1 SCR 83 referred to Para 10
[2015] 11 SCR 487 referred to Para 10
(2014) 16 SCC 1 referred to Para 16
(2008) 17 SCC 471 referred to Para 19 H
796 SUPREME COURT REPORTS [2018] 5 S.C.R.

A [2005] 3 SCR 881 referred to Para 19

[2016] 1 SCR 1118 referred to Para 20

[2011] 4 SCR 889 referred to Para 35

B [2016] 2 SCR 741 referred to Para 35

[2002] 2 Suppl. SCR 350 referred to Para 40

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 16805
of 2017.
C
From the Judgment and Order dated 11.08.2017 of the Securities
Appellate Tribunal at Mumbai in Appeal No. 451 of 2015

WITH
D Civil Appeal Nos. 19494, 17997, 17313, 17303, 17383, 17978 of
2017 and Civil Appeal No. 5180 of 2018.

K.V. Vishwanathan, Sidharth Luthra, C. A. Sundram, Mohan
Parasaran, V. Giri, N. K. Kaul, Mukul Rohatgi, B. Subramonium Prasad,
E Sr. Advs., Vivek Reddy, Ms. Amrita Panda, Ravichandra Hegde,
Ms. Vrinda Bhandari, Ms. Kirti Sandur, Neil Chatterjee, Debesh Panda,
Sridhar Reddy, Karan Sharma, R.L. Shankar, R. Narayana Kumar, Sanjay
Verma, Ms. Prashiela Prabhu, Ms. Mahika, Sang Rattan Negi, Gunnam
Venkateswara Rao, Ms. Rohini Musa, Abhishek Gupta, Zafar Inayat,
Ms. Aditi Dani, R.L. Shankar, B. Teja Raju, D.L. Chidananda,
F Ravichandra Hegde, K. Vivek Reddy, Ms. Kriti Sansur, Ritunjay Gupta,
Divyam Agarwal, E. R. Kumar, D. P. Mohanty, Tanuj Agarwal,
Ms. Raveena Rai, Sarthak Gaur, Ms. Pratyusha Priyadarshi, Samar
Kachwaha, Aakash Lamba, M/s. Parekh & Co., S. Udaya Kumar Sagar,
Ms. Bina Madhavan, Krishna Kumar Singh, Ms. Elizabeth Antony,
G M/s. Lawyer S. Knit & Co., Bharat Monga, Ms. Supriya Juneja, Advs.
for the Appellant.

C.U. Singh, Sr. Adv., Pratap Venugopal, Ms. Surekha Raman,
Anuj Sarma, Ms. Niharika, Ms. Kanika Kalaiyarasan, M/s. K. J. John
and Co., Advs. for the Respondent.
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 797
EXCHANGE BOARD OF INDIA

The Judgment of the Court was delivered by A
R. F. NARIMAN, J. 1. The present appeals have their genesis
in what is popularly known as the “Satyam scam”. By a letter dated
7.1.2009, one B. Ramalinga Raju, former Chairman of Satyam Computer
Services Limited (hereinafter referred to as “SCSL”) sent a letter to
various stock exchanges and the SEBI stating that the financial statements B
of SCSL had been grossly overstated and did not reflect the true and fair
view of the financial position of SCSL.
Civil Appeal No.16805 of 2017
2. In the present appeal, the appellant was roped in by the Whole
Time Member of the SEBI as well as the Appellate Tribunal as he C
happened to be an executive director of SCSL from 1993 upto 31.8.2000
and a non-executive director from 1.9.2000 to 23.1.2003. He also happens
to be the “co-brother” of B. Ramalinga Raju as the two of them have
married two sisters.
3. SCSL was originally incorporated as a private limited company D
with two shareholders, namely, B. Ramalinga Raju and D.V.
Satyanarayana Raju on 24.6.1987. These two gentlemen were the original
promoters of this company. The appellant, who was an executive director
of this company from 1993 onwards, was confined to operating a joint
venture company of SCSL, namely, Satyam Enterprise Solutions Private E
Limited (SES). The appellant stated that he was never involved in the
day to day affairs of SCSL. In the said joint venture company, 80%
shareholding was held by SCSL and the appellant held the remaining
20% shares. SES merged into SCSL pursuant to a scheme of
arrangement, approved by the Andhra Pradesh High Court in 1999, as a
result of which the appellant was issued 8,00,000 equity shares of SCSL. F
Later in the same year, SCSL declared a bonus, thereby doubling the
number of shares held by the appellant to 16,00,000 equity shares of
SCSL. On 7.8.2000, SCSL announced a stock split by which the face
value of the shares was reduced from Rs.10/- to Rs.2/- as a result of
which every shareholder got an additional five shares of Rs.2/- for each G
share of Rs.10/- held by them. Consequently, the shareholding of the
appellant increased to 76,50,000 equity shares of SCSL. The first time
that unpublished price sensitive information (hereinafter referred to as
“UPSI”) came into existence so far as SCSL is concerned is stated to
be on 31.3.2001. It is pertinent to note that as on this date, as has been
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798 SUPREME COURT REPORTS [2018] 5 S.C.R.

A stated hereinabove, the appellant was a non-executive director of the
said company. Various annual reports from 2000 till 2003 disclosed B.
Ramalinga Raju and B. Rama Raju as promoters of SCSL, but not the
appellant. The appellant sold his shares in SCSL from 22.2.2001 to
December, 2008. Ultimately, by a show cause notice dated 19.6.2009,
after referring to the said letter dated 7.1.2009 by the Chairman of SCSL,
B
it was stated that as the appellant was a promoter and director of SCSL,
he was liable as an “insider”, having knowledge of UPSI, as a result of
which he stood to gain by selling shares which he owned at an inflated
value. The appellant replied to the show cause notice, taking detailed
factual grounds as well as grounds in law, stating that he could not be
C said to be an “insider” as defined by the SEBI (Prohibition of Insider
Trading Regulations), 1992 (hereinafter referred to as the “1992
Regulations”). By an order dated 10.9.2015, the Whole Time Member
of the SEBI, after extracting relevant sections of the SEBI Act, 1992
and the relevant regulations referred to in the show cause notice, held
that given Annexure 15 to the show cause notice, the appellant being a
D
promoter was not the only ground of violation of the 1992 Regulations,
but being a director of SCSL and co-brother of B. Ramalinga Raju would
also rope the appellant in. After referring to Regulations 2(c) and 2(e) of
the 1992 Regulations, the Whole Time Member held that being a director
of SCSL, the appellant was a “connected person” under Regulation 2(c)
E and, therefore, an “insider” under Regulation 2(e). The Whole Time
Member went on to hold that the fact that the books of accounts of
SCSL were fabricated and manipulated since 2001 remains within the
knowledge and possession of “insiders” who were reasonably expected
to have access to them. When it was sought to be contended that the
Special Court, Enforcement Directorate and Serious Frauds Investigation
F
Office (SFIO) have given findings that only B. Ramalinga Raju and his
cohorts were involved in the manipulations of accounts of SCSL, and
had hidden the same from and deceived the rest of the board of directors,
the Whole Time Member stated that SEBI’s investigation is independent
and separate from that of other investigation agencies, and that since
G the appellant was part of the board of directors and declared as a promoter
in disclosures filed by SCSL with stock exchanges, and being a co-brother
of B. Ramalinga Raju, he was, therefore, closely connected with SCSL
and its Chairman and “could have in all probability known about affairs
of Satyam Computers including the claimed wrong disclosure of him
being a promoter”. It is important to note that it was held that the appellant
H
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 799
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

had no role in the fraud committed by B. Ramalinga Raju and his cohorts. A
It was then held that the appellant was barred from accessing the
securities market for a period of 7 years. Further, the appellant was to
disgorge the amount mentioned against his name, which is an amount of
Rs. 136.64 crores, for the entirety of the period till he sold his shares i.e.
upto December, 2008.
B
4. An appeal to the Appellate Tribunal was largely dismissed by
the majority judgment. The majority judgment held that it would not be
necessary to decide whether the appellant was a promoter of SCSL. It
further went on to construe Regulation 2(e) of the 1992 Regulations
stating that it would be enough that the appellant was a director until
January, 2003, which is after the date of occurrence of UPSI, which C
took place on and from 31.3.2001. Since there is no real difference
between an executive and a non-executive director, he would reasonably
be expected to know about the fraud and manipulation by the Chairman
and his cohorts, as he was closely connected to the same, being his co-
brother. The majority went on to hold that 71% of the shares were sold D
in 2003 itself, and the fact that the appellant was not mentioned in the
charge sheet filed by the CBI and was not responsible for the fraud
would make no difference. Even the SFIO’s report, which stated that
only B. Ramalinga Raju and his cohorts were responsible for the fraud,
and that they actually duped the board of directors of SCSL, would
make no difference as the appellant being an “insider” had sold shares E
of SCSL when in possession of UPSI and made profits in violation of the
1992 Regulations. It was held by the majority judgment of the Appellate
Tribunal that given Annexure 15 to the show cause notice, the appellant
being a promoter was not the only ground of violation of the 1992
Regulations, but being a director of SCSL and co-brother of Ramalinga F
Raju would also rope the appellant in. However, the appellant was given
relief to the extent that under the Explanation to Regulation 2(e) of the
1992 Regulations, the appellant could only be held liable for a period of
six months beyond his resignation as a director i.e. upto July, 2003. A
remand order, therefore, was made to assess the quantum of unlawful
gains that the appellant had made upto July, 2003. G

5. Shri K.V. Viswanathan, learned senior counsel appearing on
behalf of the present appellant, has argued that the basis of the show
cause notice is that the appellant as a promoter made illegal gains contrary
to the 1992 Regulations. Once it is demonstrated that he is not a promoter,
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800 SUPREME COURT REPORTS [2018] 5 S.C.R.

A the findings of the Whole Time Member and the majority view of the
Appellate Tribunal must be set aside as they go beyond the show cause
notice. He further argued that a fundamental error made by the Whole
Time Member as well as the majority judgment of the Appellate Tribunal
is in the construction of Regulation 2(e)(i) of the 1992 Regulations, in
that an insider is defined as a “connected person” and a person who is
B
reasonably expected to have access to unpublished price sensitive
information by virtue of such connection. The second part of the definition
after the word “and” has been ignored by both authorities and they are,
therefore, wrong in their construction of Regulation 2(e)(i) of the 1992
Regulations. Otherwise also, according to the learned senior counsel,
C even assuming that the appellant was an insider, Regulation 3(i) would,
in any case, not be attracted in the facts of the present case as the
appellant was neither in possession of nor acted on the basis of any
unpublished price sensitive information. According to the learned senior
counsel, the Whole Time Member’s order suffered from pre-
determinational bias, inasmuch as he had by an earlier order, which related
D
to B. Ramalinga Raju and his cohorts, found against the appellant without
the appellant being a party to the earlier decision and without hearing
him. Further, according to the learned senior counsel, the impugned
judgments erred in ignoring very important findings of the Special Court,
the charge sheet of the CBI and the SFIO’s report. He relied very
E heavily on the minority judgment of the Appellate Tribunal which went
into great detail on facts and ultimately exonerated his client.
6. Shri C.U. Singh, learned senior counsel appearing on behalf of
the SEBI, countered each of these allegations and took us through the
Whole Time Member’s judgment as well as the majority judgment of the
F Appellate Tribunal, and stated that they appreciated the law as well as
the facts absolutely correctly. He referred to Section 21 of the Securities
Contracts (Regulation) Act, 1956 in order to show that where securities
are listed in any recognized stock exchange, the conditions of the Listing
Agreement with that stock exchange have to be complied with. He
then took us to Clause 35 of a standard form of the Listing Agreement,
G in which it is stated that the company has to file, with the stock exchange,
the shareholding pattern on a quarterly basis in a form which contains
the promoters’ holding. “Promoter” is defined in Regulation 2(1)(h)(i)
of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (hereinafter referred to as the “1997 Regulations”),
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 801
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

which definition is incorporated in the Listing Agreement. This definition A
clearly shows that a promoter means a person who is in control of the
company, directly or indirectly, whether as shareholder, director or
otherwise. According to Shri Singh, the appellant, by virtue of being an
executive director from 1993, was, therefore, clearly a promoter within
the meaning of the aforesaid definition. He also referred to and relied
B
upon Section 159 of the Companies Act, 1956, which requires certain
particulars to be furnished by companies in their annual return. What is
conspicuous by its absence is the fact that there is no requirement to
disclose who the promoters of a company are. This has since been
changed, for in the Companies Act, 2013, Section 92(1)(e) now requires
disclosures in the annual return as to who the promoters of the company C
are. This being the case, according to the learned senior counsel, the
annual returns filed by the company did not, in law, need to disclose who
were the promoters of the company and for this reason, SCSL did not
disclose the appellant as a promoter. According to Shri Singh, this aspect
is adverted to in the majority judgment of the Appellate Tribunal, even
D
though the majority judgment, according to Shri Singh, does not ultimately
decide on the basis that the appellant is a promoter. He also relied upon
the annual reports of the company, which show the appellant as a director
on and from 2000 to 2003, but not as an independent director thereof.
He referred to the averments of the appellant himself to argue that until
a suitable replacement was found, the appellant would continue as a E
non-executive director, meaning thereby that he would continue to do
what he had done as an executive director. This being the case, the
majority judgment of the Appellant Tribunal was right in saying that insofar
as the appellant was concerned, there was no distinction between being
an executive and a non-executive director. According to the learned
F
senior counsel, when it comes to the definition of “insider”, Regulation
2(e)(i) must be contrasted with Regulation 2(e)(ii) of the 1992 Regulations,
whereas sub-clause (i) requires a connected person only to be reasonably
expected to have insider information, under sub-clause (ii), persons who
are not connected persons need to have actual knowledge of insider
information. According to the learned senior counsel, the majority G
judgment of the Appellate Tribunal was correct in considering five
important factors in ultimately holding that the appellant was an insider,
namely, (i) that he was a promoter; (ii) that he promoted two joint venture
companies which were closely linked with SCSL; (iii) that one of these
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802 SUPREME COURT REPORTS [2018] 5 S.C.R.

A companies ultimately merged with SCSL; (iv) that he would continue as
a director till he was replaced; and (v) that he was co-brother of B.
Ramalinga Raju. These factors, according to Shri Singh, were foundational
facts from which it was reasonable to draw an inference that the appellant
could be expected to have knowledge of UPSI. He relied upon certain
judgments of this Court in order to show that penalty proceedings and
B
criminal proceedings are different and independent of each other, and
that, therefore, what is held by a Special Court would not have any real
bearing on SEBI’s penalty proceeding.
7. Having heard learned counsel on both sides, it is important to
first set out the relevant statutory provisions.
C
SEBI Act, 1992
“Prohibition of manipulative and deceptive devices, insider
trading and substantial acquisition of securities or control.
12A. No person shall directly or indirectly—
D
(a) use or employ, in connection with the issue, purchase or sale
of any securities listed or proposed to be listed on a recognized
stock exchange, any manipulative or deceptive device or
contrivance in contravention of the provisions of this Act or the
rules or the regulations made thereunder;
E
(b) employ any device, scheme or artifice to defraud in connection
with issue or dealing in securities which are listed or proposed to
be listed on a recognised stock exchange;
(c) engage in any act, practice, course of business which operates
or would operate as fraud or deceit upon any person, in connection
F
with the issue, dealing in securities which are listed or proposed to
be listed on a recognised stock exchange, in contravention of the
provisions of this Act or the rules or the regulations made
thereunder;
(d) engage in insider trading;
G
(e) deal in securities while in possession of material or non-public
information or communicate such material or non-public
information to any other person, in a manner which is in
contravention of the provisions of this Act or the rules or the
regulations made thereunder;
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 803
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

(f) acquire control of any company or securities more than the A
percentage of equity share capital of a company whose securities
are listed or proposed to be listed on a recognised stock exchange
in contravention of the regulations made under this Act.
Penalty for insider trading.
15G.If any insider who,— B

(i) either on his own behalf or on behalf of any other person, deals
in securities of a body corporate listed on any stock exchange on
the basis of any unpublished price-sensitive information; or
(ii) communicates any unpublished price-sensitive information to C
any person, with or without his request for such information except
as required in the ordinary course of business or under any law;
or
(iii) counsels, or procures for any other person to deal in any
securities of any body corporate on the basis of unpublished price- D
sensitive information,
shall be liable to a penalty which shall not be less than ten lakh
rupees but which may extend to twenty-five crore rupees or three
times the amount of profits made out of insider trading, whichever
is higher.
E
Prohibition of Insider Trading Regulations, 1992
Definitions.
2. In these regulations, unless the context otherwise requires:
(c) “connected person” means any person who— F
(i) is a director, as defined in clause (13) of section 2 of the
Companies Act, 1956 (1 of 1956), of a company, or is deemed to
be a director of that company by virtue of sub-clause (10) of
section 307 of that Act or
(ii) occupies the position as an officer or an employee of the G
company or holds a position involving a professional or business
relationship between himself and the company whether temporary
or permanent and who may reasonably be expected to have an
access to unpublished price sensitive information in relation to
that company:
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804 SUPREME COURT REPORTS [2018] 5 S.C.R.

A Explanation :—For the purpose of clause (c), the words “connected
person” shall mean any person who is a connected person six
months prior to an act of insider trading;
xxx xxx xxx
(e) “insider” means any person who,
B
(i) is or was connected with the company or is deemed to have
been connected with the company and is reasonably expected to
have access to unpublished price sensitive information in respect
of securities of a company, or

C (ii) has received or has had access to such unpublished price
sensitive information;
xxx xxx xxx
(h) “person is deemed to be a connected person”, if such person—
(i) is a company under the same management or group, or any
D
subsidiary company thereof within the meaning of sub-section
(1B) of section 370, or sub-section (11) of section 372, of the
Companies Act, 1956 (1 of 1956) or sub-clause (g) of section 2 of
the Monopolies and Restrictive Trade Practices Act, 1969 (54 of
1969) as the case may be; or
E
(ii) is an intermediary as specified in section 12 of the Act,
Investment company, Trustee Company, Asset Management
Company or an employee or director thereof or an official of a
stock exchange or of clearing house or corporation;
(iii) is a merchant banker, share transfer agent, registrar to an
F issue, debenture trustee, broker, portfolio manager, Investment
Advisor, sub-broker, Investment Company or an employee thereof,
or is member of the Board of Trustees of a mutual fund or a
member of the Board of Directors of the Asset Management
Company of a mutual fund or is an employee thereof who have a
G fiduciary relationship with the company;
(iv) is a Member of the Board of Directors or an employee of a
public financial institution as defined in section 4A of the Companies
Act, 1956; or
(v) is an official or an employee of a Self-regulatory Organisation
H recognised or authorised by the Board of a regulatory body; or
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 805
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

(vi) is a relative of any of the aforementioned persons; A
(vii) is a banker of the company.
(viii) relatives of the connected person; or
(ix) is a concern, firm, trust, Hindu undivided family, company or
association of persons wherein any of the connected persons B
mentioned in sub-clause (i) of clause (c), of this regulation or any
of the persons mentioned in sub-clause (vi), (vii) or (viii) of this
clause have more than 10 per cent of the holding or interest;
(ha) “price sensitive information” means any information which
relates directly or indirectly to a company and which if published C
is likely to materially affect the price of securities of company.
Explanation.—The following shall be deemed to be price sensitive
information:-
(i) periodical financial results of the company;
D
(ii) intended declaration of dividends (both interim and final);
(iii) issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects.
(v) amalgamation, mergers or takeovers; E
(vi) disposal of the whole or substantial part of the undertaking;
(vii) and significant changes in policies, plans or operations of the
company;
xxx xxx xxx F
(i) “relative” means a person, as defined in section 6 of the
Companies Act, 1956 (1 of 1956);
Prohibition on dealing, communicating or counselling on
matters relating to insider trading. G
3. No insider shall—
(i) either on his own behalf or on behalf of any other person, deal
in securities of a company listed on any stock exchange on the
basis of any unpublished price sensitive information;
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806 SUPREME COURT REPORTS [2018] 5 S.C.R.

A Regulation 3(i) was amended with effect from 20.2.2002 as
follows:
“Prohibition on dealing, communicating or counselling on
matters relating to insider trading.
3. No insider shall— (i) either on his own behalf or on behalf of
B any other person, deal in securities of a company listed on any
stock exchange when in possession of any unpublished price
sensitive information;”
8. Similarly, the phrase “by virtue of such connection” contained
in Regulation 2(e) was also deleted by the same amendment in 2002.
C The 1992 Regulations were repealed by the SEBI (Prohibition of Insider
Trading) Regulations, 2015 (2015 Regulations). What is important to
note is the change in the definition of “insider” with effect from 2015.
Regulation 2(1)(g) of the 2015 Regulations reads as under:
“Definitions.
D
2. (1) In these regulations, unless the context otherwise requires,
the following words, expressions and derivations therefrom shall
have the meanings assigned to them as under:
(g) “insider” means any person who is: i) a connected person; or
ii) in possession of or having access to unpublished price sensitive
E
information;”
9. By Regulation 12 of the said regulations, the 1992 Regulations
were repealed with an inbuilt Section 6 of the General Clauses Act
contained in clause 2 of Regulation 12.
F 10. It is important to note that Regulation 2(e)(i) is in two parts.
The first part has reference to any person who is connected with the
company or is deemed to be connected with the company. There can
be no doubt that the definition of “connected person” contained in
Regulation 2(c) would rope in the appellant under sub-clause (i) thereof,
as the appellant was undoubtedly a director of SCSL upto 2003. However,
G the second limb of clause 2(e)(i) also has to be satisfied, which is that
such person must reasonably be expected to have access to unpublished
price sensitive information by virtue of such connection in respect of
securities of a company. It has been held in a series of judgments that
the word “and” should be given its ordinary meaning and should be
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 807
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

understood in a conjunctive sense, unless it would lead to an absurd A
situation or an unintelligible result. See Maharaja Sir Pateshwari Prasad
Singh v. State of U.P., (1963) 50 ITR 731 at paragraph 10; M.
Satyanarayana v. State of Karnataka, (1986) 2 SCC 512 at paragraph
5; Union of India v. Justice S.S. Sandhawalia, (1994) 2 SCC 240 at
paragraph 18 and Spentex Industries Ltd. v. CCE, (2016) 1 SCC
B
780 at paragraph 30. In the present case, the new 2015 Regulations
also throw considerable light on the definition of “insider”, as an insider
is now defined to mean only a person who is a connected person or a
person who is in possession of or having access to unpublished price
sensitive information. Obviously, post 2015, an “insider” need not satisfy
the second test of the 1992 Regulations and it is enough that such person C
be a “connected person” as defined. The disjunctive “or” contained in
the 2015 Regulations must be contrasted with the expression “and”
contained in the 1992 Regulations. Therefore, it is clear that the majority
view of the Appellate Tribunal, in giving effect to only the first part of
Regulation 2(e)(i) of the 1992 Regulations, cannot be sustained in law.
D
11. Further, under the second part of Regulation 2(e)(i), the
connected person must be “reasonably expected” to have access to
unpublished price sensitive information. The expression “reasonably
expected” cannot be a mere ipse dixit – there must be material to show
that such person can reasonably be so expected to have access to
unpublished price sensitive information. E

12. This brings us to the minority judgment of the Appellate Tribunal.
First and foremost, this judgment correctly brings out the role of the
expression “and” contained in Regulation 2(e)(i). The judgment also
correctly appreciates the difference in language in Regulation 3 before
and after it was amended in 2002, and contrasts the expression “on the F
basis of” with the expression “when in possession of”. The minority
judgment then goes on to refer and rely upon the SFIO’s report, which
found that the manipulation of financial statements was done by B.
Ramalinga Raju and his cohorts, and was suppressed from the board of
directors, which would include the appellant as a member of such board. G
In a significant paragraph, the minority holds:
“97. If the fabrication of the financial results (which is the UPSI
herein) was suppressed from the Board of Directors of Satyam,
it will be difficult to hold that the Appellant was even in possession
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808 SUPREME COURT REPORTS [2018] 5 S.C.R.

A of UPSI, leave alone trading on the basis of UPSI. If the Appellant
as a director had knowledge of the fabrication of the financial
statements (which is UPSI herein), he must be held to have violated
the PFUTP Regulations. However, in the Impugned Order, the
WTM drops the charge of PFUTP violation for lack of evidence.
This clearly shows that the appellant CSR was never in possession
B
of UPSI. In view of this, the finding of the WTM that the Appellant
violated PIT Regulations during this period is held to be not legally
sustainable.”
13. The said judgment went on to hold that the appellant cannot
be described as a promoter inasmuch as the annual reports, which
C contained his signatures as a director, did not show him as a promoter.
What was done behind his back was that B. Ramalinga Raju and B.
Rama Raju described him as a promoter only to various stock exchanges
in letters written to those exchanges without the knowledge or consent
of the appellant. The minority judgment also refers to the fact that the
D appellant’s shares were not subject to a lock-in period at the time of
merger of SES into SCSL, which lock-in period was mandated by law
for promoters. In fact, the appellant was one of the persons duped by B.
Ramalinga Raju and his brother B. Rama Raju and was, therefore, a
victim of the fraud perpetrated by the former Chairman of SCSL. One
very important finding of the minority judgment is as follows:
E
“114. In response CSR asserts that he had compelling reasons to
sell shares and the same was not done while in the possession of
UPSI, since he was never in possession of UPSI. Appellant asserts
that his trading pattern also demonstrates that he was not in
possession of UPSI. Specifically, CSR asserts that
F
a. he was selling shares even before the relevant period to fund
his newly created venture capital investment business (Appellant
sold 70,000 shares between 28.12.1999 to 20.06.2000, he again
sold 2,00,000 shares in 2000-2001).

G b. Unlike other Appellants, the Appellant did not sell his entire
shareholding at one go, but sold his shareholding as and when he
had a business requirement. Appellant explained that he had setup
his own venture capital investment business which purchased the
shares in unlisted companies and therefore there was no rationale
for him to purchase the shares of Satyam.
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 809
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

c. While the actual promoters sold their entire shareholding by A
2005, the Appellant continued to have his shareholding till the year
2008.
d. Appellant disposed off his entire shareholding following the
collapse of Satyam shares price after the announcement of the
merger and subsequent cancellation of the merger between Satyam B
and the Maytas entities (promoted by Mr. Ramalinga Raju and
his sons)
e. The sale proceeds went to fund the Appellant’s business
requirement over a period of time. The Appellant adduced evidence
to show the utilization of sale proceeds for genuine business C
requirements.”
14. It was also found that by the year 2006, all the actual promoters
disposed of their shareholding in SCSL because they were aware of the
credit crunch faced by SCSL. The fact that the appellant continued to
retain substantial shareholding in SCSL right till the end of 2008 clearly D
points to lack of possession of UPSI. Another important point is that the
last transaction of sale of shares by the appellant on 22.12.2008, which
was a substantial chunk of shares, was made by the appellant just like
any other shareholder of SCSL. News had got out into the market that
the merger proposal of SCSL with Maytas Infra Limited and Maytas
Properties was not going ahead. The hysteria in the share market resulted E
in a steep drop in the price of shares of SCSL. The fact that the appellant
disposed of a huge chunk of his shareholding on 22.12.2008 to avail of
the price on that date completely negates the inference that there was
any information flow between B. Ramalinga Raju, B. Rama Raju and
the appellant. It was also pointed out that the appellant had no professional F
or business relationship with his co-brother and had no connection with
any of the entities floated by his co-brother. The fact that the appellant
was not involved with fraudulent manipulation is clear from the fact that
he ceased to be an executive director in the year 2000. Fraudulent
manipulation began only from 2001 onwards. It was also considered
significant by the minority judgment that the appellant was not a nominee G
of SCSL on the board of directors of Satyam Infoway, but of another
third party investor.
15. The minority judgment then went on to notice the distinction
between an executive and a non-executive director.
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810 SUPREME COURT REPORTS [2018] 5 S.C.R.

A 16. In Pooja Ravinder Devidasani v. State of Maharashtra
(2014) 16 SCC 1 at 9, it is stated:
“17. There is no dispute that the appellant, who was wife of the
Managing Director, was appointed as a Director of the Company—
M/s Elite International (P) Ltd. on 1-7-2004 and had also executed
B a letter of guarantee on 19-1-2005. The cheques in question were
issued during April 2008 to September 2008. So far as the dishonour
of cheques is concerned, admittedly the cheques were not signed
by the appellant. There is also no dispute that the appellant was
not the Managing Director but only a non-executive Director of
the Company. Non-executive Director is no doubt a custodian of
C the governance of the company but is not involved in the day-to-
day affairs of the running of its business and only monitors the
executive activity. To fasten vicarious liability under Section 141
of the Act on a person, at the material time that person shall have
been at the helm of affairs of the company, one who actively
D looks after the day-to-day activities of the company and is
particularly responsible for the conduct of its business. Simply
because a person is a Director of a company, does not make him
liable under the NI Act. Every person connected with the
Company will not fall into the ambit of the provision. Time and
again, it has been asserted by this Court that only those persons
E who were in charge of and responsible for the conduct of the
business of the Company at the time of commission of an offence
will be liable for criminal action. A Director, who was not in charge
of and was not responsible for the conduct of the business of the
Company at the relevant time, will not be liable for an offence
F under Section 141 of the NI Act. In National Small Industries
Corpn. [National Small Industries Corpn. Ltd. v. Harmeet
Singh Paintal, (2010) 3 SCC 330 : (2010) 1 SCC (Civ) 677 :
(2010) 2 SCC (Cri) 1113] this Court observed: (SCC p. 336, paras
13-14)
G “13. Section 141 is a penal provision creating vicarious liability,
and which, as per settled law, must be strictly construed. It is
therefore, not sufficient to make a bald cursory statement in a
complaint that the Director (arrayed as an accused) is in charge
of and responsible to the company for the conduct of the
business of the company without anything more as to the
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 811
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

role of the Director. But the complaint should spell out as to A
how and in what manner Respondent 1 was in charge of or
was responsible to the accused Company for the conduct of
its business. This is in consonance with strict interpretation of
penal statutes, especially, where such statutes create vicarious
liability.
B
14. A company may have a number of Directors and to make
any or all the Directors as accused in a complaint merely on
the basis of a statement that they are in charge of and
responsible for the conduct of the business of the company
without anything more is not a sufficient or adequate fulfilment
of the requirements under Section 141.” C

Non-executive directors are, therefore, persons who are not
involved in the day to day affairs of the running of the company and are
not in charge of and not responsible for the conduct of the business of
the company.
D
17. An instructive judgment of Lord Halsbury is contained in
Dovey and the Metropolitan Bank v. John Cory [1901] AC 477.
The Lord Chancellor put it thus:
“The charge of neglect appears to rest on the assertion that Mr.
Cory, like the other directors, did not attend to any details of business E
not brought before them by the general manager or the chairman,
and the argument raises a serious question as to the responsibility
of all persons holding positions like that of directors, how far they
are called upon to distrust and be on their guard against the
possibility of fraud being committed by their subordinates of every
degree. It is obvious if there is such a duty it must render anything F
like an intelligent devolution of labour impossible. Was Mr. Cory
to turn himself into an auditor, a managing director, a chairman,
and find out whether auditors, managing directors, and chairmen
were all alike deceiving him? That the letters of the auditors were
kept from him is clear. That he was assured that provision had G
been made for bad debts, and that he believed such assurances, is
involved in the admission that he was guilty of no moral fraud; so
that it comes to this, that he ought to have discovered a network
of conspiracy and fraud by which he was surrounded, and found
out that his own brother and the managing director (who have
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812 SUPREME COURT REPORTS [2018] 5 S.C.R.

A since been made criminally responsible for frauds connected with
their respective offices) were inducing him to make representations
as to the prospects of the concern and the dividends properly
payable which have turned out to be improper and false. I cannot
think that it can be expected of a director that he should be watching
either the inferior officers of the bank or verifying the calculations
B
of the auditors himself. The business of life could not go on if
people could not trust those who are put into a position of trust for
the express purpose of attending to details of management. If Mr.
Cory was deceived by his own officers - and the theory of his
being free from moral fraud assumes under the circumstances
C that he was - there appears to me to be no case against him at all.
The provision made for bad debts, it is well said, was inadequate;
but those who assured him that it was adequate were the very
persons who were to attend to that part of the business; and so of
the rest. If the state and condition of the bank were what was
represented, then no one will say that the sum paid in dividends
D
was excessive.
(at pages 485-86)
Per Lord Davey, it was held:
“In this state of the evidence, my Lords, I ask whether the course
E of business at the board meetings, as described by the respondent,
was a reasonable course to be pursued by the respondent and
other directors, or whether the knowledge which might have been
derived from a careful and comparative examination of the weekly
states and quarterly returns from the different branches of the
F bank ought to be imputed to the respondent, or (alternatively)
whether he was guilty of such neglect of his duty as a director as
would render him liable to damages. I do not think that it is made
out that either of the two latter questions should be answered in
the affirmative. I think the respondent was bound to give his
attention to and exercise his judgment as a man of business on the
G matters which were brought before the board at the meetings
which he attended, and it is not proved that he did not do so. But
I think he was entitled to rely upon the judgment, information, and
advice of the chairman and general manager, as to whose integrity,
skill, and competence he had no reason for suspicion. I agree
H with what was said by Sir George Jessel in Hallmark’s Case, and
CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 813
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

by Chitty J. in In re Denham & Co., that directors are not bound A
to examine entries in the company’s books. It was the duty of the
general manager and (possibly) of the chairman to go carefully
through the returns from the branches, and to bring before the
board any matter requiring their consideration; but the respondent
was not, in my opinion, guilty of negligence in not examining them
B
for himself, notwithstanding that they were laid on the table of the
board for reference. The case is no doubt one of some difficulty,
but the appellant has not made out to my satisfaction that the
respondent wilfully (as that term is explained in the cases I have
referred to) misappropriated the company’s funds in payment of
dividends.” C
(at pages 492-493)
18. It is also important to note that the appellant attended only six
out of ten board meetings of SCSL for the period that he was a non-
executive director. The appellant was not involved in any business
development, diversification plans and advise on new ventures of SCSL D
post 1999. It was also held by the minority judgment that the findings of
the Whole Time Member and the majority went clearly beyond the show
cause notice, which, when read with Annexure 15 thereof, makes it
clear that the appellant is only sought to be roped in as a promoter.
Once it is found that he is not a promoter, then the basis of the show E
cause notice goes as also the basis of the impugned judgment.
19. In Godrej Industries Ltd. v. CCE, (2008) 17 SCC 471 at
471, this Court stated:
“3. The Tribunal in its impugned order has exceeded its jurisdiction
by recording a finding to the effect that Godrej Soap Ltd. (GSL) F
is a “related person” vis-à-vis Procter & Gamble Godrej Ltd.
(PGG) which is beyond the scope of the show-cause notice. We
ourselves have gone through the show-cause notice and we are
satisfied that the finding recorded by the Tribunal insofar as it
relates to a “related person” is beyond the scope of show-cause G
notice and therefore, the same cannot be sustained and is
accordingly set aside.”
To similar effect is the judgment in SACI Allied Products Ltd.
v. CCE, (2005) 7 SCC 159 at 168-169:
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814 SUPREME COURT REPORTS [2018] 5 S.C.R.

A “15. The Appellate Tribunal, by the impugned order, has upheld
the order of the respondent Collector, however, on a totally new
and different basis which was never the case of the Department
either in the show-cause notice or in the impugned order. The
Appellate Tribunal, in the impugned order, has held as under:
B “All the wholesale dealers and all the wholesale buyers in the
whole of the country would not be taken to form a single class
of buyers. M/s SACI and SCIL were related persons. M/s
SACI sold their goods in the State of U.P. through SCIL and
no direct sales were effected by SACI in the State of U.P.
Seen in the light of the Tribunal’s decision in the case of
C Goramal Hari Ram Ltd., the prices at which SCIL were
disposing of the goods of SACI in the State of U.P. had been
correctly taken as the normal price for determining the duty
liability of SACI under Section 4 of the Act.”
16. Thus according to the Appellate Tribunal, since the dealers in
D Uttar Pradesh who purchased the goods from Syndet, and
independent dealers in other parts of the country to whom the
appellants directly sold the goods are different class of buyers,
the appellants’ price to the independent dealers cannot be taken
as the basis for assessing the appellants’ sales to Syndet in Uttar
E Pradesh. This finding of the Appellate Tribunal is based on first
proviso to Section 4(1)(a) of the Act. While the show-cause notice
and the order of the Collector proceeded on the basis of the
invocation of third proviso to Section 4(1)(a) of the Act, the
Appellate Tribunal for the first time in the impugned order has
sustained the proceedings on the basis of first proviso to Section
F 4(1)(a) of the Act. It was argued that the first proviso to Section
4(1)(a) of the Act was never invoked by the Department either in
the show-cause notice or in the impugned order and it was for the
first time that the Appellate Tribunal in the impugned order has
sought to sustain the impugned order by invoking the first proviso
G to Section 4(1)(a) of the Act. It is thus seen that the Tribunal has
gone totally beyond the show-cause notice and the order of the
Collector, which is impermissible. The Appellate Tribunal cannot
sustain the case of the Revenue against the appellants on a ground
not raised by the Revenue either in the show-cause notice or in
the order.
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 815
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

17. In this context, we may usefully refer to the judgment of this A
Court in the case of Reckitt & Colman of India Ltd. v. CCE
[(1997) 10 SCC 379 : (1996) 88 ELT 641]. This Court held that it
is beyond the competence of the Tribunal to make out in favour of
the Revenue a case which the Revenue had never canvassed
and which the appellants had never been required to meet.
B
18. The impugned order of the Tribunal which had gone beyond
the show-cause notice and the order of the respondent Collector
is, therefore, liable to be set aside.”
20. However, Shri Singh argued, based on Section 21 of the the
Securities Contracts (Regulation) Act, 1956 and Clause 35 of the Listing C
Agreement, which takes us to Regulation 2(1)(h)(i) of the 1997
Regulations, to support the majority judgment of the Appellate Tribunal
by stating that as the appellant was an executive director from 1993 to
2000, he must be said to be a person who is in control as a director of the
company and hence a promoter. Regulation 2(1)(h)(i) of the 1997
Regulations states: D

“2. Definitions
(1) In these Regulations, unless the context otherwise requires-
(h) “promoter” means-
E
(i) the person or persons who are in control of the company, directly
or indirectly, whether as a shareholder, director or otherwise;”
“Control” is defined by Regulation 2(1)(c) of the 1997 Regulations
as follows:
“(c) “control” shall include the right to appoint majority of the F
directors or to control the management or policy decisions
exercisable by a person or persons acting individually or in concert,
directly or indirectly, including by virtue of their shareholding or
management rights or shareholders agreements or voting
agreements or in any other manner;
G
Explanation.
(i) Where there are two or more persons in control over the target
company, the cesser of any one of such persons from such control
shall not be deemed to be a change in control of management nor
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816 SUPREME COURT REPORTS [2018] 5 S.C.R.

A shall any change in the nature and quantum of control amongst
them constitute change in control of management:
PROVIDED that the transfer from joint control to sole control is
effected in accordance with clause (e) of sub-regulation (1) of
regulation 3.
B (ii) If consequent upon change in control of the target company in
accordance with regulation 3, the control acquired is equal to or
less than the control exercised by person(s) prior to such acquisition
of control, such control shall not be deemed to be a change in
control.”
C Even though the definition of “control” in the 1997 Regulations is
an inclusive one, yet the definition shows that control must mean a right
to appoint majority of directors as a shareholder or to control management
or policy decisions exercisable by persons in any manner. It may be
pointed out, as has been correctly argued by Shri Viswanathan in rejoinder,
D that the appellant was an executive director on a fixed monthly salary,
which was roughly in the range of Rs.1,00,000/- per month, when he
stepped down as an executive director in 2000. After stepping down, it
was pointed out to us that the salary was stopped, and he was paid only
for board meetings which he attended. Nothing has been shown to us to
indicate that, on facts, such executive salaried director was in any manner
E in control of SCSL directly or indirectly. The absence of the word
“independent” in the annual report also does not take us very far, inasmuch
as it is admitted that he was a non-executive director from 2000 to 2003,
who only attended six board meetings and received salary therefor. We
have not been shown how the appellant was in any manner responsible
F for actions taken by those in the management of SCSL. We have already
demonstrated that the minority judgment is much more detailed and
correct than the majority judgment of the Appellant Tribunal. We accept
Shri Singh’s submission that in cases like the present, a reasonable
expectation to be in the know of things can only be based on reasonable
inferences drawn from foundational facts. This Court in SEBI v.
G Kishore R. Ajmera, (2016) 6 SCC 368 at 383, stated:
“26. It is a fundamental principle of law that proof of an allegation
leveled against a person may be in the form of direct substantive
evidence or, as in many cases, such proof may have to be inferred
by a logical process of reasoning from the totality of the attending
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 817
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

facts and circumstances surrounding the allegations/charges made A
and leveled. While direct evidence is a more certain basis to come
to a conclusion, yet, in the absence thereof the Courts cannot be
helpless. It is the judicial duty to take note of the immediate and
proximate facts and circumstances surrounding the events on
which the charges/allegations are founded and to reach what would
B
appear to the Court to be a reasonable conclusion therefrom. The
test would always be that what inferential process that a
reasonable/prudent man would adopt to arrive at a conclusion.”
21. We are of the view that from the mere fact that the appellant
promoted two joint venture companies, one of which ultimately merged
with SCSL, and the fact that he was a co-brother of B. Ramalinga Raju, C
without more, cannot be stated to be foundational facts from which an
inference of reasonably being expected to be in the knowledge of
confidential information can be formed. The fact that the appellant was
to be continued as a director till replacement again does not take us
anywhere. Shri Viswanathan has shown us that two other independent D
non-executive directors were appointed in his place on and from 23.1.2003.
What is clear is that the appellant devoted all his energies to the businesses
he was running, on and after resigning as an executive director of SCSL,
as a result of which the salary he was being paid by SCSL was
discontinued.
E
22. Having regard to the findings contained in the minority judgment
and the aforestated discussion, we are clearly of the opinion that this
view is correct both in law and on facts and deserves our acceptance.
Therefore, this appeal is allowed and the majority judgment of the
Appellate Tribunal is set aside.
F
CIVIL APPEAL NO.19494 of 2017
23. The appellant in this appeal is a closely held private company
of Chintalapati Srinivasa Raju and his wife, each holding 50% of the
share capital of this company. Shri Giri, learned senior counsel appearing
on behalf of the appellant, has drawn our attention to the findings of the G
Whole Time Member and the Appellate Tribunal insofar as it pertains to
this appellant. His grievance is that after appreciating that the appellant
had sold only 8,00,000 shares held in SCSL, yet, in the operative order of
disgorgement, the learned Whole Time Member includes 24,00,000 shares
which were never sold by the appellant, but for which only application
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818 SUPREME COURT REPORTS [2018] 5 S.C.R.

A money was received and returned by 17.4.2002. Thus, the disgorgement
order includes gains made on account of 8,00,000 as well as 24,00,000
shares and, therefore, comes to the astronomical figure of
Rs. 82,49,37,875/-. He also referred to the judgment of the Appellate
Tribunal and strongly relied upon the minority judgment to state that the
result of this appeal should follow upon the result of Civil Appeal No.16805
B
of 2017.
24. Shri C.U. Singh, learned senior advocate appearing on behalf
of the SEBI, did not controvert the factual position and largely agreed
that the fate of this appeal would be the same as the result in Civil
Appeal No. 16805 of 2017.
C
25. On facts, the appellant sold 8,00,000 shares from 4.1.2001 to
14.3.2001. As has been pointed out hereinabove, the occurrence of the
UPSI was only from 31.3.2001 and inasmuch as these sales were made
prior to this date, obviously, the 1992 Regulations would not get attracted.
The minority judgment of the Appellate Tribunal referred to this and
D stated that the result would be the same as the result in Appeal No.462
of 2015, namely that of B. Jhansi Rani, who was the wife of B.
Suryanarayana Raju, brother of B. Ramalinga Raju and B. Rama Raju.
In that case also, shares had been sold prior to the occurrence of the
UPSI and on the self-same ground, B. Jhansi Rani’s appeal had been
E allowed by the majority judgment of the Appellate Tribunal with the
minority concurring. The minority judgment further went on to state
that 24,00,000 shares also, which were never sold but were merely
returned to Chintalapati Srinivasa Raju, could not form the basis of any
disgorgement order. We agree with the same.

F 26. The majority judgment then went on to rely upon Regulation
2(h)(ix). As is correctly pointed out by the minority judgment, Regulation
2(h)(ix) at the relevant time, prior to 20.2.2002, read as follows:
“Definitions.
2. In these regulations, unless the context otherwise requires:-
G
(h) “person is deemed to be a connected person”, if such person—
(ix) a concern, firm, trust, Hindu undivided family, company,
association of persons wherein the relatives of persons mentioned
in sub-clauses (vi), (vii) and (viii) has more than 10 per cent of the
holding or interest.”
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 819
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

27. Obviously, the appellant company does not have persons who A
are relatives of persons mentioned in sub-clauses (vi), (vii) and (viii) –
under these sub-clauses, a person is deemed to be a connected person if
such person is a relative of persons in clauses (i) to (v); or is a banker of
the company; or is a relative of a connected person. Since none of these
clauses are attracted, it is obvious that Section 2(h)(ix) would also, as a
B
matter of law, not be attracted in the facts of this case. In this view of
the matter, this appeal also stands allowed. Consequently, the majority
judgment of the Appellate Tribunal judgment is set aside.
DIARY NO.37202 OF 2017
28. In this civil appeal, Shri Subramonium Prasad, learned senior C
counsel appearing on behalf of the appellant, contends that the present
appellant, who is the father of Shri Chintalapati Srinivasa Raju, was
neither a promoter nor a director of SCSL and has since died on 3.12.2007.
He was a connected person to Shri Chintalapati Srinivasa Raju, being
his father, but as the shares which stood in his name were sold in August,
2005, he could not possibly be a relative of a connected person as Shri D
Chintalapati Srinivasa Raju himself ceased to be a connected person on
and from July, 2003. The minority judgment of the Appellate Tribunal
correctly appreciates this position in the following manner:
“142. The Appellant was the father of CSR. The Appellant sold
2,50,000 shares on 04.08.2005. Appellant expired on 03.12.2007. E
The Impugned Order holds the Appellant to be a person deemed
to be connected under Regulation 2(h)(viii), since he was a relative
of a connected person (CSR) (Para 37). However, as discussed
above, CSR ceased to be a connected person on 22.07.2003.
Consequently, when the Appellant sold the shares on 04.08.2005, F
he could not be “a deemed to be connected person” since CSR
himself ceased to be a connected person. On this short point alone,
the order of the WTM is liable to be quashed and set aside.”
29. This appeal has also to be allowed as even otherwise it follows
upon allowing of Civil Appeal No.16805 of 2017. G
CIVIL APPEAL NO.17303 of 2017
30. In this appeal, Shri C.A. Sundaram, learned senior counsel
appearing on behalf of the appellant, states that the present appellant is
the mother of B. Ramalinga Raju, B. Rama Raju and B. Suryanarayana
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820 SUPREME COURT REPORTS [2018] 5 S.C.R.

A Raju. She was neither a promoter nor a director of SCSL and had lost
her husband in the year 2001. She sold her shares in SCSL on 12 th and
15th December, 2003 to three group companies, in an off market sale, as
she needed money considering that she had to sustain herself as a widow.
According to Shri Sundaram, though his client would be a relative of B.
Ramalinga Raju and, therefore, a connected person, yet, it is obvious
B
that the off market transactions made way back in the year 2003 at a
price of around Rs.340/- per share did not attract the 1992 Regulations
as the price of these shares rose sharply only thereafter touching a figure
of Rs. 966.80/- in the year ending of 2006. According to the learned
senior counsel, there was no evidence whatsoever of any complicity of
C this lady with the fraud perpetrated by her son and his cohorts. He
referred to the judgment of the Whole Time Member and to the majority
judgment of the Appellate Tribunal holding that all that has been found
against his client is that she is a close relative of B. Ramalinga Raju and
by virtue of this close relationship, it, therefore, must be presumed that
she had access to UPSI. Indeed, this is the basis of both the Whole Time
D
Member’s judgment as well as the majority judgment of the Appellate
Tribunal. Given the fact that this lady was not proceeded against by the
CBI or by the Enforcement Directorate and that the SFIO’s report does
not, in any manner, refer to her, and given the fact that she was neither
promoter nor director of SCSL, it is obvious that the test of the second
E part of clause 2(e)(i) is not met in the facts of this appeal. Also, it must
be remembered that had she been in possession of UPSI, she would
also have sold shares at their peak price instead of selling them at a
depressed price in the year 2003. For all these reasons, this appeal is
also allowed, and the majority judgment of the Appellate Tribunal is set
aside.
F
CIVIL APPEAL NOs.17313 of 2017 and 17978 of 2017
31. Shri Neeraj Kishan Kaul, learned senior counsel appearing
for the appellant in Civil Appeal No.17313 of 2017, and Shri Mohan
Parasaran, learned senior counsel appearing for the appellant in Civil
G Appeal No.17978 of 2017, have drawn our attention to the fact that their
clients, being sons of B. Ramalinga Raju, were certainly relatives within
the meaning of that expression under the 1992 Regulations. However,
they were neither directors nor promoters of SCSL and were not involved
in the fraud perpetrated by their father, as has been held in their favour
by the Appellate Tribunal. Also, the CBI and the Enforcement Directorate
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 821
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

did not proceed against them and the SFIO’s report says nothing about A
their involvement. Both these brothers sold off their shares in SCSL in
August and September, 2005 at a price of roughly Rs. 518/- per share,
way below the price of Rs. 966.80/- at the end of 2006 when their father
sold off his shares. According to them, therefore, the Appellate Tribunal
was wrong in putting 2 and 2 together and making 22 only by virtue of
B
the fact that they were the sons of B. Ramalinga Raju. Also, insofar as
B. Rama Raju (Jr.) was concerned, the findings of the Appellate Tribunal
that he had given a presentation to the Board of directors of SCSL in the
meeting on 26.12.2008 in support of the proposed merger of Maytas
Properties Limited with SCSL is factually incorrect, as has been stated
by him in a subsequent application, and which is not denied by the SEBI. C
Given the fact that the second limb of clause 2(e)(i) cannot be put against
either of these appellants, in that there is no evidence of any complicity
in the fraud committed by their father; given the fact that they were
expressly exonerated of the said fraud by the Appellate Tribunal; and
given the fact that they were running independent businesses and were
D
neither directors nor promoters of SCSL, and that they sold their shares
for business purposes at a price much less than the peak price at which
their father sold shares of SCSL in 2006, no case has been made against
them. Consequently, their appeals also stand allowed and the Appellate
Tribunal judgment is set aside in this behalf.
CIVIL APPEAL NO.17997 OF 2017 E

32. Shri Mukul Rohatgi, learned senior counsel appearing on behalf
of the appellant, states that his client was a company that was incorporated
on 22.6.2006 as a private limited company. According to him, his company
owned 6,28,83,317 shares of SCSL, which were pledged as security for
obtaining a loan amount of Rs.1258.88 crores. The said amount was F
borrowed to provide funds to 10 independent companies. Inasmuch as
Rs. 1255 crores out of this sum have admittedly been repaid, partly
through sale of the pledged shares, according to the learned senior
counsel, this transaction of pledge cannot possibly drag his client into
any violation of the 1992 Regulations. G
33. Shri C.U. Singh, learned senior counsel appearing on behalf
of the SEBI, has read to us the majority judgment of the Appellate
Tribunal, in which it has been held that the amount that was borrowed
was utilised to provide funds to 10 private limited companies, which
were owned by the Raju family. Equally, the shareholding pattern of the H
822 SUPREME COURT REPORTS [2018] 5 S.C.R.

A appellant company, as it stood on and from 18.9.2006, made it clear that
B. Ramalinga Raju and his wife Nandini Raju held 33.11% and 40.52%
respectively, whereas the balance was held by his brother B. Rama
Raju and his wife B. Radha. Obviously, therefore, as B. Ramalinga
Raju and B. Rama Raju individually held more than 10% interest in the
appellant company, the appellant company is deemed to be a connected
B
person under Regulation 2(h)(ix) of the 1992 Regulations. In this context,
the Appellate Tribunal held:
“h) It is now established that Ramalinga Raju and Rama Raju
manipulated the books of Satyam during the period from 2001 to
2008. During that period Ramalinga Raju, Rama Raju and their
C wives transferred their shareholding in Satyam to SRSR and SRSR
in turn pledged those shares for obtaining loan of Rs. 1258.88
crore to the group concerns and as the loan was not repaid the
pledged shares have been sold by invoking the pledge. Thus, on
one hand Ramalinaga Raju and Rama Raju manipulated the books
D of Satyam and ensured that the market price of Satyam were
higher and on the other hand through SRSR got the Satyam shares
pledged and obtained higher loan on the basis of higher market
price of Satyam shares. In these circumstances, inference drawn
by the WTM of SEBI that SRSR was reasonably expected to
have access to the UPSI and hence an ‘insider’ under regulation
E 2(e) of the PIT Regulations cannot be faulted. Consequently, the
decision of the WTM of SEBI that SRSR indulged in pledging the
shares of Satyam belonging to Ramalinga Raju, Rama Raju and
their spouses in contravention of regulation 3 of the PIT Regulations
cannot be faulted.
F i) Apart from the above, mode and the manner in which SRSR
was incorporated, mode and the manner in which shares of Satyam
were transferred by Ramalinga Raju, Rama Raju and their wives
to SRSR and the mode and the manner in which the shares of
Satyam were pledged and the pledged amounts were utilized, leave
G no manner of doubt that SRSR was a front entity established by
Ramalinga Raju and Rama Raju for off loading their shareholding
in Satyam when the market value of Satyam shares were higher
on account of fictitious bank balances shown in the books of
Satyam. Therefore, argument that SRSR was not an ‘insider’

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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 823
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

and had not pledged the shares of Satyam when in possession of A
UPSI cannot be accepted.
xxx xxx xxx
l) In the result, decision of the WTM of SEBI that SRSR was an
‘insider’ under the PIT Regulations and that SRSR pledged and
got the shares of Satyam belonging to Ramalinga Raju, Rama B
Raju and their spouses sold when in possession of UPSI and thus
SRSR violated SEBI Act and the PIT Regulations cannot be
faulted.”
34. We agree with this finding of the majority judgment of the
learned Appellate Tribunal and, therefore, dismiss this appeal. C

CIVIL APPEAL NO.17383 of 2017
35. Shri Luthra, learned senior counsel appearing on behalf of the
appellant, brought to our notice that the said appellant was neither a
director nor a promoter of SCSL. The shares that were owned by this D
appellant in SCSL were sold by him from 5.2.2001 to 18.11.2004.
According to the learned senior counsel, his case would be like the case
of other family members of B. Ramalinga Raju, and any facts that are
beyond the show cause notice cannot be looked at. According to the
learned senior counsel, even though it is true that his client was indicted
along with B. Ramalinga Raju and his brother B. Rama Raju in the E
SFIO’s report, such report and the judgment of the Special Court,
Hyderabad cannot be looked at as they are not relied upon in the show
cause notice. Also, according to the learned senior counsel, they are not
at all relevant under Sections 40 to 44 of the Indian Evidence Act, 1872
and, therefore, cannot be looked at. According to the learned senior F
counsel, adjudication proceedings and criminal proceedings are separate
and distinct, and one cannot rely upon criminal proceedings in adjudication
proceedings. For this purpose, he cited Radheshyam Kejriwal v. State
of W.B., (2011) 3 SCC 581, which was followed in Videocon Industries
Ltd. v. State of Maharashtra, (2016) 12 SCC 315.
G
36. Shri C.U. Singh, learned senior counsel appearing on behalf
of the SEBI, drew our attention to Section 246 of the Companies Act,
1956 and stated that the SFIO’s report was a report given under the
investigatory powers conferred by Section 235 of the said Act. Section
246 of the Companies Act, 1956 makes it clear that such report may be
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824 SUPREME COURT REPORTS [2018] 5 S.C.R.

A received as evidence in other cases. Shri Singh, apart from justifying the
majority judgment of the Appellate Tribunal in the case of this appellant,
also read to us extracts from the SFIO’s report and from the judgment
of the Special Court, Hyderabad to show that the appellant was hand in
glove with B. Ramalinga Raju and his other brother, B. Rama Raju in
the fraud committed on the public from 2001 onwards. He, therefore,
B
submitted that so far as this appellant was concerned, we should uphold
the majority judgment of the Appellate Tribunal.
37. Section 246 of the Companies Act, 1956 reads as under:
“Section 246. Inspectors’ report to be evidence
C A copy of any report of any inspector or inspectors appointed
under section 235 or 237 authenticated in such manner, if any, as
may be prescribed, shall be admissible in any legal proceeding as
evidence of the opinion of the inspector or inspectors in relation to
any matter contained in the report.”
D 38. From this Section, it is clear that the report can be used as
evidence in any other proceeding. Even though it is correct to state that
this report was delivered on 13.4.2009, i.e. before the show cause notice
was issued on 19.6.2009, the mere fact that this was not put against the
appellant in the show cause notice cannot be any reason for us not to
E independently view the same. The appellant has not chosen to assail the
findings contained in this report in a writ petition filed before the High
Court. Under Section 246 of the Companies Act, 1956, this Court is
empowered to look at the same as evidence of the opinion of the inspector
concerned in relation to any matter contained in the report. By virtue of
Section 246, therefore, it is possible for us to appreciate the role of the
F appellant in the so-called Satyam scam. This report points out the
following:
“4.7.39. Shri Suryanarayana Raju is the younger brother of Shri
B. Ramalinga Raju, Chairman and elder brother of Shri B. Rama
Raju, Managing Director of SCSL. He has been adding, abetting
G and facilitating pledge, transfer, sale and management of funds
for Shri B. Ramalinga Raju and Shri B. Rama Raju. He has been
independently managing the affairs of SRSRHPL. In their
statement given on oath, Shri B. Ramalinga Raju, Shri B Rama
Raju, Smt. B. Nandini Raju and Smt. B. Radha Raju have
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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 825
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

confirmed that Shri Suryanarayana Raju has been helping them A
to fulfill various statutory formalities and meeting administrative
exigencies. Shri Ramalinga Raju considered him as a trustworthy
person to look after the statutory requirement of SRSRHPL. Shri
B. Rama Raju in his statement dated 02.04.2009 (Annexure E-
2.4), could not state reasons for appointment of Shri B.
B
Suryanarayana Raju but stated that there was no restriction to
appoint a director without holdings shares in the company. Smt.
B. Nandini Raju in her statement dated 24.03.2009 (Annexure
E-41.1), stated that Shri Suryanarayana Raju was made as director
of SRSRHPL as a family member and trust worthy person. Smt.
B. Radha Raju in her statement dated 25.03.2009 (Annexure E- C
40.1) also confirmed the same. Shri B. Suryanarayana Raju in
his statement dated 23.03.2009 (Annexure E-38.1), stated that
he was executing the instructions of Shri B. Ramalinga Raju to
pledge the shares of SCSL held by SRSRHPL for obtaining loans.
4.7.40. Shri Suryanarayana Raju was also appointed as power D
of attorney by all these persons to sell/transfer/deal/pledge etc.
their share holding in whatsoever manner he thinks fit. He arranged
funds by way of taking loans from various financial institutions/
banks in the names of various private limited companies by pledging
shares of SCSL and shares of Maytas Infra Ltd., held in the names
of promoters. E

xxx xxx xxx
4.7.42. Investigations also revealed that Shri B. Suryanarayana
Raju has signed KYC form with M/s Gandhi Securities and
Investments Ltd., member of BSE and NSE, and M/s Unifi Wealth F
Management Pvt. Ltd., member NSE for opening account on
behalf of Shri B. Rama Raju (Jr) and Shri B. Teja Raju both sons
of Shri B. Ramalinga Raju, Chairman of SCSL. Copies of the
same are placed at Annexure D-26 & D-27. Smt. B. Jhansi
Rani in her statement dated 25.03.2009 (Annexure E-39.1),
stated that she was not knowing reasons for sale of shares of G
SCSL held in her name, her husband, Shri B. Suryanarayana Raju,
makes decisions about her investments. Shri B. Suryanarayana
Raju in his statement dated 04.04.2009 (Annexure D-38.2)
admitted that he also facilitated sale of shares of SCSL held in the
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826 SUPREME COURT REPORTS [2018] 5 S.C.R.

A names of Shri B. Satyanarayana Raju, Smt. B. Appalanarsamma,
Shri B. Teja Raju, Shri B. Rama Raju (Jr.), Smt. B. Jhansi Rani,
M/s Maytas Infra Ltd.
4.7.43. From the statements of Shri B. Ramalinga Raju and Shri
B. Rama Raju, Smt. Nandini Raju, Smt. Radha Raju and other
B family members, it is clear that Shri B. Suryanarayana Raju, was
aiding, abetting and facilitating sale of shares of SCSL at
manipulated price for and on behalf of promoters and others and
thus actively connived in raising funds from the market. He followed
the instructions of Shri B. Ramalinga Raju for pledging and sale
of shares of SCSL by executing documents for the purpose of
C fund requirements of SCSL and was party to the criminal
conspiracy for doing an illegal act of cheating of unsuspecting
investors by selling shares at manipulated high price based on
falsified financial statement of SCSL.
xxx xxx xxx
D
4.7.47. Shri Suryanarayana Raju was a Power of Attorney
holder on behalf of the core-promoters and other family members
of the core-promoters for sale/pledge of their shares at manipulated
prices. The agreement here for doing any legal act was in the
form of Power of Attorney giving him all powers to deal with the
E shares in SRSRHPL, a company promoted by the core-promoters.
The act of facilitating sale and consequent pledge of shares was
an illegal act which was carried out with deceptive motive for
cheating the unsuspecting investors based on dishonest
concealment of facts. By this dishonest and willful
F misrepresentation, investors were induced to purchase the shares
of SCSL at highly manipulated prices. By this act of deception,
Shri B. Suryanarayana Raju caused damage and harm to the
investing public and hence committed the offence of cheating under
Section 417, 420 read with Section 120B of the IPC, 1860 and
make himself liable for prosecution under the above provisions of
G the Indian Penal Code, 1860.”
39. Also, the judgment of the Special Court at Hyderabad, which
was delivered only on 9.4.2015 i.e. long after the show cause notice, has
concluded as follows:

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CHINTALAPATI SRINIVASA RAJU v. SECURITIES AND 827
EXCHANGE BOARD OF INDIA [R. F. NARIMAN, J.]

“1784.The facts and circumstances shows that the accused A6 A
as Director of M/s. M/s. SRSR Advisory Limited allowed the
transfer of Rs.1425 crore from 37 companies into M/s. SCSL
without any agreement, without any Board resolution either of M/
s. SCSL or the said companies and without any agreement between
the companies and without following any corporate norms and
B
this shows that he has knowledge about the fraudulent activities
happening in M/s. SCSL and with that knowledge he aided the
accused A1 and A2 as a part of the criminal conspiracy for the
flow of funds to cover up the non-existent cash and bank balances
in M/s. SCSL and the manner in which Rs.195 crores was taken
back by the 15 companies managed by the accused A6 through C
M/s. SRSR Advisory Limited without any Board resolution further
corroborates his involvement in the conspiracy and offloading the
shares of M/s. SCSL he gained Rs.199 crore having insider
knowledge and the idea of corporatization was to raise more loans
by pledging his shares in the name of corporate entity in order to
D
shield original ownership from the market as it would have adverse
impact on the share price if the market knows that promoters are
pledging shares and the properties acquired by the companies
with the pledged amount was all at the instance of the accused
A6 as Directors of M/s. SRSR Advisory Limited and further the
offloading of shares by the accused A1, A2 and their family E
members was done through M/s. Elem Investments Private
Limited, M/s. Finciti Investments Private Limited, M/s. Higrace
Investments Private Limited and Veeyees Investments Private
Limited controlled by the accused A6 and immediately after the
statement of the accused A1 on 07-01-2009, the accused A6
F
collected about 15 crore rupees by converting the amounts into
demand drafts and got issued notices under exhibit P2964 by 37
companies which were referred in the statement of the accused
A1 on 07-01-2009 covered by exhibit P2688 and all these
circumstances proved that the accused A6 also played active role
in the criminal conspiracy and cheating of M/s. SCSL, its share G
holders and investors.”
40. Section 42 of the Indian Evidence Act, 1872 states:
“42. Relevancy and effect of judgments, orders or decrees,
other than those mentioned in section 41. –– Judgments,
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828 SUPREME COURT REPORTS [2018] 5 S.C.R.

A orders or decrees other than those mentioned in section 41 are
relevant if they relate to matters of a public nature relevant to the
enquiry; but such judgments, orders or decrees are not conclusive
proof of that which they state.”
This Court in K.G. Premshanker v. Inspector of Police, (2002)
B 8 SCC 87 at 94 stated:
“22. In the facts of the present case, Section 42 would have some
bearing and the judgment and decree passed in a civil court would
be relevant if it relates to a matter of public nature relevant to the
enquiry but such judgment and decree is not a conclusive proof of
C that which it states.”
While it is true that adjudication proceedings and criminal
proceedings are separate proceedings, the relevance of the Special
Court’s judgment is only for the purpose of showing that the second part
of the definition of an “insider” is made out in the appellant’s case, for, if
D the appellant, along with his brothers, was party to the fraud practiced
on the public, it is obvious that he was reasonably expected to have
access to UPSI in respect of the securities of SCSL. This appellant’s
case, therefore, stands apart from the other family members of B.
Ramalinga Raju, in that the SFIO’s report as well as the aforesaid
judgment clearly and unmistakably point to his complicity, unlike that of
E the other family members, in the fraud committed from 2001 onwards.
This being the case, though for different reasons, we uphold the majority
judgment of the Appellate Tribunal and dismiss this appeal.

Nidhi Jain Appeals disposed of.
F

G

H