Insider trading liability upheld where purchases were made before disclosure of price sensitive partnership information.

A connected person functioning as Managing Director was held to be an insider who dealt in securities while unpublished price sensitive information about Bayer's 51% partnership in ABS remained undisclosed, because the purchases were arranged and funded before the information became public and a claimed corporate purpose did not remove the regulatory bar. The direction to deposit funds as compensation was set aside because the show-cause notice had not specifically proposed that relief, the appellant lacked a proper opportunity to meet the quantification, and no unfair advantage was shown on the facts. The separate directions for adjudication and prosecution were left undisturbed.

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Issues: (i) Whether the appellant, as an insider, dealt in securities on the basis of unpublished price sensitive information in violation of the insider trading regulations; (ii) Whether the direction to deposit Rs. 34,00,000 with investor protection funds as compensation was sustainable.

Issue (i): Whether the appellant, as an insider, dealt in securities on the basis of unpublished price sensitive information in violation of the insider trading regulations.

Analysis: The appellant was a connected person and therefore an insider by virtue of his position as Managing Director and his role in the negotiations with Bayer. The information regarding Bayer's entry as a 51% partner in ABS was not shown to have been generally known before 1 October 1996, when the stock exchanges were informed. The material placed before the Tribunal showed that the appellant arranged purchases through his brother-in-law and funded them during the period when the transaction had not yet been publicly disclosed. The Tribunal rejected the argument that a bona fide corporate purpose by itself took the case outside the regulatory prohibition, and held that the relevant information was unpublished and price sensitive when the purchases were made.

Conclusion: The appellant was found to have dealt in securities on the basis of unpublished price sensitive information and was not entitled to relief on this issue.

Issue (ii): Whether the direction to deposit Rs. 34,00,000 with investor protection funds as compensation was sustainable.

Analysis: The compensation direction was made without the show-cause notice having specifically proposed such relief, and the appellant was not given a proper opportunity to meet the quantification. The Tribunal also held that the appellant had not been shown to have gained unfair advantage warranting the impugned direction, and that the order directing deposit of the amount could not be sustained on the facts and in the circumstances of the case. The Tribunal declined to interfere with the separate directions relating to adjudication and prosecution.

Conclusion: The compensation direction was set aside, while no order was passed interfering with the directions for adjudication and prosecution.

Final Conclusion: The appeal succeeded to the extent that the monetary deposit direction was quashed, and the remaining prosecutorial and adjudicatory directions were left undisturbed.

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