Securities and Exchange Board of India (SEBI) had received a complaint against Axis Bank Limited (Noticee) stating that the Noticee had traded in the shares of KSK Energy Venture Ltd. and Bombay Rayons Fashion Ltd. at the time when it was acting as a Merchant Banker for the open offer of KEVL and BRFL under SEBI (SAST) Regulations, 1997 (SAST Regulations).

Brief details of the facts of the each offer are as follows:

 Open offer made to the shareholders of KEVL

The Noticee acquired 6,05,412 shares of the KEVL during the period starting from August 20, 2010 to April 04, 2011 and acquired 7,65,260 during the period from April 25, 2011 to May 10, 2011 on BSE.

Further, it acquired 19,99,959 shares of the KEVL during the period starting from January 20, 2011 to April 13, 2011 and acquired 10,17,740 during the period from April 25, 2011 to May 10, 2011 on NSE

Open offer made to the shareholders of BRFL,

During the period starting from November 29, 2010 to February 11, 2011, Noticee acquired 6,48,600 shares and sold 13,100 shares of the BRFL on BSE and acquired 12,69,400 shares and sold 2,54,900 shares on NSE.

Contentions:

• The Noticee has a blemish-less track record for over 18 years since its inception as UTI Bank Ltd. and it has a long standing history of servicing over 170000 investors as shareholders without any adverse regulatory history. As MB, the Noticee is fully aware of its role under the various Regulations of SEBI.
• In the case of the said companies, the only material relied upon by SEBI to specify the dates of initiation of negotiation and conclusion of MoU was the Noticee's letter dated September 28, 2011 which was in response to the information sought by SEBI about the dates of interaction with the clients.
• Relying on the fact that the Noticee was the Lead Manager to the IPOs of KEVL and BRFL in 2005 and 2008 and "it is possible" that it would have "prior knowledge" of the upcoming open offers by these two companies is clearly and completely in the realm of conjectures and premises.
• No dealings have been taken place in the shares of both KEVL and BRFL after its appointment as MB.
• The equity trading function of the Noticee is distinct and separate from its investment banking function and there are clear Chinese Walls between the two divisions and in any event information flow, access and usage of information across the organization is strictly on a need-to- know basis.
• There is not a whisper of an allegation in the SCN about the employees of the merchant banking division having communicated any unpublished price sensitive information to the independent equities trading function.
• There was no breakdown in the system of the Noticee and the Noticee is squarely covered by each of the defences available in Regulation 3B of the PIT Regulations.
• The negotiation which had taken place between the Target Companies and the Noticee was with regard to fees payable to the MB to the offer and the terms of engagement of the MB for handling the mandate. There is nothing sacrosanct about the negotiation period.

Issues:
Whether the noticee has violated the provisions of Regulation 3(i), 3A, 4 and Clauses 3 (3.1) and 4.0 (4.1 & 4.2) of Model Code of Conduct provided in Schedule I (Part B) read with Regulation 12 (1) of SEBI (PIT) Regulations, 1992, Regulation 24(5A) of SEBI (SAST) Regulations, 1997 and Regulation 26 and Clauses 11, 12 and 18 of Model Code of Conduct provided in Schedule III read with regulation 13 of SEBI (Merchant Bankers) Regulations, 1992

Ao observations:

Charge of Insider Trading

In respect of shares of BRFL, AO Observed that Noticee had altogether purchased 6,48,600 shares and sold 13,100 shares during the period starting from November 29, 2010 to February 11, 2011 on BSE. On NSE, the Noticee had altogether purchased 12,69,400 shares and sold 2,54,900 shares during the period starting from November 29, 2010 to February 11, 2011. However, the first meeting of the Noticee with Acquirer-B was held on February 21, 2011 and the Noticee had not traded in the shares of BRFL either during the period of negotiation or after taking up the assignment. Therefore, it does not appear that the Noticee has traded in the shares of BRFL while in possession of unpublished price sensitive information (UPSI).

In respect of shares of KEVL, AO observed that Noticee has acquired the shares of KEVL during the belowmentioned period:

• From August 20, 2010 to April 04, 2011,
• April 25, 2011 to May 10, 2011
• January 20, 2011 to April 13, 2011

The Merchant Banking Division/Investment Banking Division of the Noticee commenced its discussions/meetings with Acquirer-K from April 18, 2011 onwards which resulted in the Noticee being appointed as MB for open offer of KEVL shares. However, the final MoU was signed on May 16, 2011 and the Noticee has not traded in the shares of KEVL after May 16, 2011.

Further as contented by Noticee that the said trading had been done by the Debt Capital Market and Equity Trading Division (Trading Division) of the Noticee in the proprietary account of the Noticee since August 2010 and it continued trading till May 10, 2011. The Noticee has further contended that the trading division and the merchant banking division of the Noticee have been physically segregated and the officials of the merchant banking division have no role to play in the proprietary trades of the Noticee. There were no signs of any breakdown in its system and hence it is squarely covered by each of the defences available in Regulation 3B.

Furthermore, the AO observed that the Noticee had traded in the shares of KEVL when its merchant banking division was holding meetings with Acquirer-K regarding the terms of open offer. It is also clear that the Noticee has not traded in shares of the said companies after formally signing of the MoU. Further, as per material available on record, the Noticee has traded in shares of KEVL since August 2010 which was well before the time when negotiation regarding the proposed open offer was initiated.

Therefore after considering the material available on record AO is of the view that the Noticee can be given the benefit of doubt as regards the allegation of violation of the provisions of Insider Trading Regulations.

Regulation 24 (5A) of the SEBI (SAST) Regulations, 2011

AO observed that the Noticee did not deal in BRFL shares after February 11, 2011 and in KEVL shares after May 10, 2011. Further there is no material to show that the Noticee had traded during the 15 days period from the date of closure of the offer and hence, there is no violation of Regulation 24 (5A) of the SEBI (SAST) Regulations, 2011.

Allegation in respect of charge of Code of conduct provided in Schedule III read with Regulation 13 of the MB Regulations

AO does not find any conclusive evidence to show the failure in the system put in place by the Noticee and therefore a benefit of doubt has been given to the Noticee in respect of violations of the MB Regulations as mentioned in the SCN.