Market regulator SEBI has dropped an insider trading case against Udayant Malhoutra, CEO and MD of aerospace company Dynamatic Technologies (DTL). SEBI’s reversal of stance came after its earlier order could not stand the test in the Securities and Appellate Tribunal (SAT). SAT found SEBI’s order so erroneous that it rejected it at the admission stage itself.

Malhoutra had approached SAT against the SEBI order as it was passed without giving him any hearing. In June this year, SEBI whole time member G Mahalingam had passed an ad-interim ‘ex-parte’ order, a kind of direction given in emergency situations or rare circumstances without giving any hearing to the parties involved. In the order SEBI alleged that Malhoutra had ‘avoided losses’ to the tune of ₹3.83 crore by selling DTL shares in 2016 when in possession of unpublished price sensitive information.

SAT stance

“No order of the like nature can be passed without recording its satisfaction and cannot be based on the basis of possibility. In the instant case, we do not find any case of extreme urgency which warranted the respondent (SEBI) to pass an ‘ex-parte’ interim order only on arriving at the prima-facie case that the appellant was an insider as defined in the SEBI ACT without considering the balance of convenience or irreparable injury,” SAT said.

SAT further asserted that SEBI can pass an ex-parte interim order “but such powers can only be exercised sparingly and only in extreme urgent matters.” The SAT asked SEBI to give a hearing to Malhoutra. SAT also said that SEBI cannot direct disgorgement of money without following the due process of law or merits of the case. SEBI appealed to SC but the apex court too did not find anything wrong with the SAT order.

On reconsidering the matter and further probe, SEBI found that its own allegations against Malhoutra were ill-founded.

“SEBI’s charges were surprising, since I have been running the company since 1989 and never trade in markets. I did not want to ‘settle’ the case as some legal experts would advise you to avoid the hassle, since there was no wrongdoing on my part. Hence, I went into an appeal. SEBI has been very fair to me as the regulator took a holistic view in its final order and found no evidence of insider trading by me,” Malhoutra told BusinessLine .

On December 18, SEBI WTM Ananta Barua held that the charges under various sections (of insider trading) were “not established.” He found that Malhoutra’s sale of 51,000 shares of DTL was to comply with the covenant of a loan agreement dated June 29, 2016 entered into between DTL and a consortium of bankers led by ICICI Bank.

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