Polaris Arun Jain banned by SEBI for 2 years on insider trading charges

The Rajaratnam bug has hit the Indian shores. Regulator SEBI has banned Polaris CMD Arun Jain from transacting in the stock market for a period of 2 years on charges of insider trading- a case involving 15,080 shares of Polaris - relating to the failed deal Polaris pursued 12 years back with a New Jersey based IT company-Data Inc.

The ban notice from SEBI states, "SEBI conducted investigation into the dealings in the scrip of Polaris Software Lab based on media reports that the company had, after due diligence, called off the proposed acquisition of Data Inc., USA in the second week of September, 2000 but had belatedly informed the concerned stock exchanges i.e. National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE) and Madras Stock Exchange Limited (MSE) on September 30, 2000. During the investigations, it was observed that the company had deliberately withheld this price sensitive information from the public domain."

SEBI's whole time member Rajiv Kumar Agarwal while passing the order said, " Considering the facts and circumstances of this case, seriousness of violations and the above mitigating factors, I, in exercise of the powers conferred upon me under section 19 read with sections 11(1) and 11B of the Securities and Exchange Board of India Act, 1992 and regulation 11 of the SEBI (Prohibition of Insider Trading) Regulations, 1992, I, hereby restrain Mr. Arun Jain from accessing the securities market and further prohibit him from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner for a period of two years from the date of this order.".

Murky dealings?

When Polaris pursued the deal with Data Inc in 2000, it was just about Rs 150 crore company and Data Inc had a top line of $9.6 mn, Public at large came to know about the failed deal only by September end though it had fallen apart mid of September 2000. During that time commenting on why the deal was not pursued, Arun Jain said, "The deal was cancelled as the audit committee of the company found that the deal in the present form will not be of shareholders interest. So the bone of contention relates to the delay in the company in announcing the deal had fallen through and in the bargain Jain had had made unfair gains to the tune of Rs.27.26 lakh"
It may be recalled that Polaris signed an MoU on May 23, 2000 with US based Data Inc, to acquire the latter in a cash and stock deal amounting to $21 mn. After the deal fell apart, Data Inc's promoter Arun Verma filed a law suit in the State Superior Court in Bergen County, New Jersey, against Polaris and Arun Jain.

Arun Verma of Data Inc also contested that the deal fell through because of the cash transaction for the deal and its likely impact on Polaris' balance sheet. "It becomes evident that the deal was proceeding smoothly toward completion until Arun Jain was advised by his accountants of the potential negative effect the $15 million down payment might have on present and potential investors in Polaris. "Jain stated to me that the reason he was not going forward to close the deal was that the accounting for the cash down payment, on Polaris (as required by GAAP) might reflect poorly on Polaris' financial statement and possibly affect future third party investment in Polaris", stated Verma.

Arun Jain during that time dismissed Verma's allegations.
Interestingly the case was settled by Polaris with Data Inc in 2008 in which Polaris made payment of $ 600,000 to Data Inc and closed the litigation. The case was reopened in 2011 and now it had come to the ban of Arun Jain.

So clearly, now with this if the ban geos un-revoked then it will adversely impact Polaris' working capital in future and will also cast a shadow on its reputation and corporate governance practices.