SEBI Imposes Heavey Penalty on Educomp CFOs – Sangeeta Gulati and Ashish Gupta for Insider Trading

Educomp Solutions Limited, founded in 1994, is a prominent player in the education sector.

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MUMBAI (India CSR): Capital market regulator The Securities and Exchange Board of India (SEBI) has passed an adjudication order against Sangeeta Gulati and CFO Ashish Gupta, the promoters of Educomp Solutions Limited (ESL), for indulging in insider trading in the shares of the company.

Background

SEBI initiated adjudication proceedings against Sangeeta Gulati and Ashish Gupta under Section 23H of the Securities Contracts (Regulation) Act, 1956 for alleged violation of clause 49 (V) (a) of the Listing Agreement read with regulation 103 (2) of SEBI (Listing Obligations and Disclosure Requirements) Regulations2015 (LODR Regulations)pursuant to an investigation into alleged manipulation of books of accounts of Educomp Solutions Ltd between 01.04.2008 to 31.03.2015, the investigation period, SEBI order said.

What did the promoters do?

According to the SEBI order dated May 30, 2022, Sangeeta Gulati and Ashish Gupta were in possession of unpublished price sensitive information (UPSI) relating to the financial results of ESL for the quarter ended December 2011 and March 2012. The UPSI was that ESL had incurred huge losses and its net worth had eroded significantly.

Allegations against Educomp Solutions Ltd.

A complaint dated February 10, 2015, was lodged with the Securities and Exchange Board of India (SEBI) by advocate Shri Sourabh Luthra. The complaint alleged that Educomp Solutions Ltd., a company in question, had written off trade receivables amounting to more than Rs. 900 crore. It was further alleged that these receivables were, in fact, inflated sales or capital advances provided for the purchase of fixed assets through false bills. The complaint suggested that the promoter, Shri Shantanu Prakash, had siphoned off funds through this fraudulent activity.

Show Cause Notice on 14.05.2021 was issued to Sangeeta Gulati and Ashish Gupta.

Who is Sangeeta Gulati?

Sangeeta Gulati, Chief Financial Officer has been in the employment of the Company during the period from 04-11-2000 to 25-04-2012. She joined the company on 04-11-2000 as Manager (Finance) vide Appointment Letter dated 24-10-2000 issued by Educomp Datamatics Limited (which was later changed to Educomp Solutions Limited (ESL). In order to meet the requirements of Law, the designation was changed in 2007 to Chief Finance Officer (hereinafter referred to as the “CFO”). The above fact is manifest from the Annual Accounts of the Company that she has never signed any Annual Accounts/ Report namely the Balance Sheet and/or the Profit & Loss Account of the company, whatsoever.

She was not a Director of the company namely Educomp Solutions Limited (“ESL”), so as to have comprehensive knowledge of the operations and other miscellaneous information about the company. She resigned from the Company on 06-03-2012 and had been relieved on 25-04-2012. She hand over her charge to the Director and thereafter had no contacts with the company as such.

With such background, even on being CFO, she was not deeply involved in the matters of Accounts and other incidentals and she had to act as per instructions of the CMD and the Board.

Sangeeta Gulati (PAN: AGVPG6698R) having address at G-177 Pushkar Enclave Paschim Vihar Delhi 110063

Ashish Gupta (PAN AEUPG4448J) having address at C U-6, Pitampura Delhi, 110034. He became CFO in 2011. He had resigned tendered his resignation in September 2013. He was appointed as CFO only as an interim CFO and served for a limited tenure (for April 2012 to December 2013) as a CFO, SEBI said.

The noticees traded in the shares of ESL while in possession of the UPSI and made unlawful gains by selling the shares before the disclosure of the financial results to the public. The noticees also violated the code of conduct for prevention of insider trading framed by ESL.

Overview of Educomp Solutions Limited

Educomp Solutions Limited, founded in 1994, is a prominent player in the education sector. The company operates by providing IT-enabled education packages for pre-school and K-12 schools. Its primary focus lies in offering innovative solutions to enhance the learning experience for students.

In the year 2006, Educomp successfully listed its shares on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), enabling investors to participate in the company’s growth and development.

The revenue of Educomp Solutions Limited primarily stems from three key sources: the sale, supply, and installation of educational products, as well as the rendering of educational services.

Under Insolvency Proceedings: Suspension of Directors and Management

At present, the Company is under the Insolvency Proceedings, as initiated by the Hon’ble National Company Law Tribunal (NCLT) through an order dated May 30, 2017. The Corporate Insolvency Resolution Adjudication Order was initiated in respect of Sangeeta Gulati and Ashish Gupta in the matter of Educomp Solutions Limited. This process is being carried out in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

NCLT, through its order dated September 12, 2017, appointed Mahender Khandelwal as the Resolution Professional (IRP) for the Company. Mahender Khandelwal holds IP Registration no. IBBI/IPA001/IP-P0003312016-17/10086. As per the provisions of Section 17 and 18 of the IBC, the powers of the directors and management of the Company are currently suspended.

What action did SEBI take?

SEBI found that the noticees had violated sections 12A(a), (b) and © of the SEBI Act, 1992 and regulations 3(i), 4(1) and 4(2)(a) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI also observed that the noticees had failed to cooperate with SEBI during the investigation and did not furnish the required information and documents.

SEBI, therefore, imposed a penalty on Sangeeta Gulati and Ashish Gupta. The penalty is commensurate with the gravity of the violations and the unlawful gains made by the noticees.

The order is effective from the date of its communication to the noticees. The noticees may file an appeal against this order before the Securities Appellate Tribunal within a period of forty-five days.

Edu Smart Services Private Limited (ESSPL) and Trade Receivable Acquisition

Edu Smart Services Private Limited (ESSPL) was incorporated on July 02, 2009, with its registered office located at Flat No. 13 J, Thirteen Floor, 25, Gopala Tower, Rajendra Place, New Delhi. However, it is important to note that ESSPL is currently undergoing Insolvency Proceedings, indicating its financial distress and insolvency status.

According to the annual reports of Educomp Solutions Ltd., it was observed that the company had acquired trade receivables from ESSPL, a subsidiary of Educomp. This acquisition occurred as part of the Corporate Debt Restructuring (CDR) package. In FY 2013-14, Educomp acquired trade receivables of ESSPL amounting to Rs. 1,034.92 crore. Additionally, in FY 2014-15, trade receivables of ESSPL totaling Rs. 149.86 crore were acquired by Educomp. These acquisitions were carried out as per the provisions specified in the trade receivables purchase agreement, dated March 31, 2014, between Educomp and ESSPL.

Promoters and Shareholding of ESSPL

As per the incorporation records available on the MCA (Ministry of Corporate Affairs) portal, ESSPL (Educomp Smart Schools Private Limited) was incorporated and promoted by Shri Abhinav Dhar. He was a senior employee-director of Business & Operation at Educomp, specifically handling the area related to School Learning Solutions (Smart Class). Shri Abhinav Dhar had been associated with Educomp since April 01, 2007, and resigned in the fiscal year 2014-15. He also served as a director in other subsidiaries of Educomp and other promoter-related companies at that time.

Another key individual associated with ESSPL during the investigation period was Ashok Mehta, who served as the Managing Director (MD) of ESSPL from October 01, 2009, to August 30, 2013. Ashok Mehta was also a shareholder of ESSPL during the investigation period and had previous employment with Educomp before joining ESSPL. As per the Annual Report of the fiscal year 2014-15 of Educomp, Ashok Mehta rejoined Educomp on September 01, 2013, as a senior employee designated as President – Edu Reach. He also held directorship positions in other related companies/subsidiaries at the relevant time.

Both Abhinav Dhar and Ashok Mehta were Key Managerial Personnel (KMP) of Educomp, as per the public issue Prospectus of Educomp, and reported to Shantanu Prakash, MD & CEO of Educomp. Shri Pramod Thatoi, a promoter director of ESSPL, was also a director in several subsidiaries of Educomp.

Considerations in the Instant Proceedings

In the ongoing proceedings, there are several key considerations that need to be addressed. These considerations are outlined as follows:

I. Violation of Clause 49 (v)(a) of the Listing Agreement and Regulation 103 (2) of the LODR Regulations: The first point of consideration is to determine whether the Noticees have contravened the provisions of Clause 49 (v)(a) of the Listing Agreement, along with Regulation 103 (2) of the LODR (Listing Obligations and Disclosure Requirements) Regulations.

II. Liability for Monetary Penalty under Section 23H of the SCRA: If it is established that the Noticees have indeed violated the aforementioned provisions, the next aspect to consider is whether they can be held liable for the imposition of a monetary penalty.

III. Determination of Monetary Penalty: If the Noticees are found to be liable for a monetary penalty, the third consideration involves determining the appropriate amount of the penalty. This assessment will take into account the factors stipulated in Section 23J of the SCRA, along with Rule 5 (2) of the SCRA Adjudication Rules of SEBI.