Sebi order may not affect Virtusa-Polaris deal, say experts

Polaris says that founder Arun Jain has complied with the order; shares gain 1.65% on Friday

The Securities and Exchange Board of India's (Sebi) interim order impounding the alleged unlawful gain made by Arun Jain, founder of Polaris Consulting and Services (PCSL), and an ex-finance head of the company, is not expected to hit its $270-million deal with Virtusa Corporation.

The US-based information technology entity is in the process of acquiring a majority stake in Polaris. While Virtusa refused to comment for the story, a Polaris spokesperson said: "At the moment, the order has been complied with. Arun Jain will contest vigorously the contents and conclusions drawn by Sebi and will be putting up a robust defence. The allegations are clearly denied and we are confident that upon appreciation of the defence, they would be dropped."

Sebi has, in an interim ex parte (without hearing the other side's defence) order, directed impounding of the allegedly unlawful gains made by Jain and the company's former finance head, R Srikanth, for breaches in 2008 of insider trading rules to the tune of Rs 2 crore.

Experts said the key reason why Sebi's order will not have an impact on the deal is that it is an interim order against two individuals, not against the company.

Shares of PCSL on Friday gained 1.65 per cent to end at Rs 206.5.

“Purely from a legal perspective, the order will not impact Polaris. However, it raises concerns from the governance point of view. This can be grounds for the acquirer to rethink on the deal if it wishes to. But, considering the deal is likely to go through in January, it is quite a short time away for them to rethink. In the long term, this order would have little impact,” said J N Gupta, head of Stakeholder Empowerment Services, a proxy advisory.

Sebi directed impounding of the allegedly unlawful gain, for the period till the order was made, of Rs 1.85 crore, including interest, by Jain, and of Rs 19.69 lakh, including interest, by Srikanth.

This comes as Virtusa is in the process of acquiring majority shares in Polaris  from the promoter and promoter group, and from other investors. The company announced on November 5 that it had signed a definitive agreement with Jain and other promoters to acquire 53 per cent stake for Rs 1,173 crore.

Virtusa's open offer to Polaris' public shareholders is expected to open on January 4, 2016, closing on January 15.

Jain had said the money was being deposited by him under protest. “I would be taking all steps as legally advised to defend myself against the serious harm to reputation caused by this order, including by contesting vigorously the contents and conclusions drawn by Sebi," he'd said on Thursday.   

This is the second action by Sebi against Jain for alleged violation of insider trading norms. In October 2012, taking a decision on an issue dating back to the year 2000, the regulator issued orders barring himn from participating in market activities for two years. It said he'd sold 15,080 shares of the company and made gains worth Rs 27.3 lakh while in possession of price-sensitive information, in 2000.

In December 2013, the Securities Appellate Tribunal set aside this order.

LOWDOWN

• Experts said the reason Sebi's order will not hit the deal is that it is an interim order against two individuals, not against Polaris
   
• The Sebi’s interim order impounding the alleged gain made by Arun Jain (pictured), founder of Polaris Consulting, and an ex-finance head, is not expected to hit its $270-mn deal with Virtusa
   
• The entity is acquiring a majority stake in Polaris
   
• Sebi has directed impounding of the allegedly unlawful gains made by Jain and the company's former finance head, R Srikanth