Unpublished price sensitive information on L1 status upheld as insider trading, while other penalties were set aside.

Information that a company was the lowest bidder and that its bids were under consideration was unpublished price sensitive information because it had not been announced by the company or its agent and was likely to materially affect share price; trading on that basis amounted to insider trading, so the insider-trading penalty was maintained. A penalty for allegedly giving misleading information about relationships with connected entities was not sustainable because the regulator's query was not clear enough to require disclosure of professional or working relationships, so that penalty was set aside. Non-disclosure of pledged shares could not be fastened on persons who were neither promoters nor part of the promoter group, so the takeover-regulation penalty was quashed. The quantum of penalty and joint and several liability were upheld only for the insider-trading violation.

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Issues: (i) whether the information that the company was the lowest bidder and its bids were under consideration constituted unpublished price sensitive information for the purposes of insider trading; (ii) whether the appellants were liable for penalty for giving misleading information regarding their relationship with connected entities; (iii) whether penalty could be sustained for non-disclosure of pledged shares under the takeover regulations; and (iv) whether the quantum of penalty and joint and several liability were justified.

Issue (i): whether the information that the company was the lowest bidder and its bids were under consideration constituted unpublished price sensitive information for the purposes of insider trading

Analysis: Price sensitive information is information relating directly or indirectly to a company which, if published, is likely to materially affect the price of its securities. Information concerning execution of new projects falls within the inclusive definition. Information is unpublished when it has not been published by the company or its agents and is not specific in nature. The fact that bids were opened by a third party did not make the information public. The company had not announced the contract award when the shares were purchased, and the appellant had specific knowledge that the company was L1 and had been called for negotiation. In these circumstances, the information was not only unpublished but was also price sensitive.

Conclusion: Yes. The L1 status and related bid approval process amounted to unpublished price sensitive information, and trading on that basis constituted insider trading.

Issue (ii): whether the appellants were liable for penalty for giving misleading information regarding their relationship with connected entities

Analysis: The information sought by the regulator was the relationship of the appellant with the other entities, whether they were relatives or otherwise. The reply was furnished by reference to the definition of relatives under the Companies Act. The request was not framed with clarity so as to require disclosure of professional or working relationships. In the absence of a clear and specific query, the response could not be treated as misleading.

Conclusion: No. The penalty for submitting misleading information was not sustainable.

Issue (iii): whether penalty could be sustained for non-disclosure of pledged shares under the takeover regulations

Analysis: The obligation under the takeover regulations to disclose pledged shares is placed on a promoter or a person forming part of the promoter group. Appellants who were not promoters and did not form part of the promoter group could not be fastened with that obligation merely because they acted at the instance of a promoter or because the funding and ultimate benefit were traced to promoter entities. The regulatory requirement did not permit a deemed promoter concept for this purpose.

Conclusion: No. The penalty for violation of the pledged-share disclosure requirement was liable to be quashed.

Issue (iv): whether the quantum of penalty and joint and several liability were justified

Analysis: The maximum penalty under the relevant provisions could extend to three times the profit made from the prohibited conduct. The profit established on the record justified the amount imposed. Since all appellants were found to be connected persons and insiders participating in the common transaction, joint and several liability for the penalty was not erroneous.

Conclusion: Yes, in relation to the insider-trading penalty. The quantum and joint and several liability were upheld.

Final Conclusion: The appeal succeeded only in part. The insider-trading penalty was maintained, while the penalties for misleading information and for non-disclosure under the takeover regulations were set aside.

Ratio Decidendi: Information regarding a company's L1 status and pending bid approval can be unpublished price sensitive information if it has not been published by the company or its agent and is likely to materially affect the price of the securities.

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