SEBI Alleges Insider Trading By Divi’s Laboratories’ CFO, Seven Others

The Securities and Exchange Board of India has issued a show cause notice to L Kishore Babu, chief financial officer of Divi's Laboratories Ltd., alleging that he, along with certain other employees and individuals, was involved in insider trading activities in the company's scrip.

The market regulator has asked them to demonstrate why action should not be taken and an order for disgorgement of the gains should not be passed against them. This comes after SEBI conducted an investigation in the suspected insider trading activities by certain entities while trading in the scrip of Divi's Lab between July 7-10, 2017.

The company made an announcement on July 10, 2017, that the United States Food and Drugs Administration will be lifting import alerts on its pharma manufacturing unit in Visakhapatnam. This caused a 7% jump in the stock price and 3,200% jump in the volume of shares after the announcement, SEBI has noted in its order.

Based on the chronology of events and minutes of the board meeting, SEBI identified eight individuals—including Kishore Babu—who ‘reasonably' had access to this unpublished price sensitive information before its disclosure to the stock exchanges.

During its investigation, the market regulator also found that Divi's CFO and his son Praveen Lingamneni had not applied for a pre-clearance for their trades as required under the Prohibition of Insider Trading Regulations. It was also observed that Kishore Babu had funded the trades made by his son before the corporate announcement.

Trades based on the inside information were also made by Divi's employees including individuals who were then designated as manager and assistant general manager in the company.

Concluding its investigation, SEBI has established a prima facie case against the CFO along with his son and other individuals alleging that they have violated the insider trading regulations and disclosure norms. SEBI has alleged that the individuals made an unlawful gain of Rs 96.68 lakh.

As an ad interim measure, SEBI has asked the eight individuals to respond within 30 days and has directed banks and depositories to freeze their accounts to the extent of this amount. It has also directed these eight entities to not alienate or dispose of their assets till the completion of the proceedings.

BloombergQuint awaits a response to text messages to Kishore Babu and emailed queries to Divi's Laboratories.