Crompton ex-MD dumped shares before poor results

Some 20 days before Crompton Greaves announced disastrous results for the first quarter of 2011-12, its former CEO and current non-executive vice-chairman Sudhir Trehan sold almost his entire holdings in the company for Rs 4.69 crore.

[caption id=“attachment_45859” align=“alignleft” width=“380” caption=“Since the sharp drop in profits was not anticipated by the market, the share price tanked from Rs 243, Monday’s closing price, to a low of Rs 170.55 on Tuesday. Mukesh Gupta/Reuters”]  [/caption]

There is nothing illegal in this, for Securities and Exchange Board of India (Sebi) rules forbid insider trading in the shares of a company only during the “quiet period”, which is seven days before the announcement of price-sensitive information.

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Everything would have been fine, except that Crompton Greaves shares have crashed by 27 percent to Rs 179 since results were announced on Tuesday.

Crompton Greaves reported a much lower-than-expected net profit for the June quarter. Against an expectation of a profit of Rs 210 crore, the company posted a profit of Rs 79.5 crore. It is the losses and slow growth in the overseas market that have led to the poor performance. And the profits may yet recover quickly.

But as the sharp drop in profits was not anticipated by the market, the share price tanked from Rs 243, Monday’s closing price, to a low of Rs 170.55 on Tuesday. Trehan’s exit from the stock around end-June and 1 July - duly reported to the stock markets - has thus raised eyebrows all around. Did he know?

The Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2008, defines an “insider” as any person who

(i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price-sensitive information in respect of securities of a company, or

(ii) has received or has had access to such unpublished price sensitive information"

Sudhir Trehan, currently Vice-Chairman and ex-managing director of Crompton Greaves, qualifies as an insider on both counts.

Trehan sold his entire holdings in three tranches - 55,000 shares on 29 June 2011, 1,11,809 shares on 30 June 2011 and 13,511 shares on 1 July 2011. He received Rs 46,935,590 (Rs 4.69 crore) in the process at an average price of Rs 260 per share. Though there is nothing wrong in selling the shares, especially on retirement from active management, it is the timing of the sale that has raised eyebrows.

Generally, by the end of June, the senior management of a company gets an idea of the progress made during the April-June quarter, but official numbers take some time to be rolled out. Though Trehan had quit as managing director on June 1, 2011, he remains vice-chairman of the company and might not have been involved actively in the day-to-day operations. But he could have known what was going on.

Technically, there is nothing wrong in the sale, and possibly no insider trading rules have been broken. Trading in shares of a company by its executives is not allowed only during the “quiet period.” Trehan sold his shares a good 19-21 days before the announcement of results.

Though no rules have been broken in principle, it is the spirit and timing of the sale that is being questioned.