2020 (1) TMI 365 - AT - SEBI

Tribunal Rulings on Insider Trading Appeals: Penalties Imposed and Reduced

The Tribunal dismissed Appeal No. 174 of 2018, partly allowed Appeal No. 175 of 2018 by reducing the penalty for Jubilant Life Sciences to Rs. 5,00,000, ... Delayed disclosure of material informations as required under Clause 36 of Listing Agreement read with Section 21 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as, 'SCRA'') and trading in the scrip of appellant - Washington Warning, China Announcement - HELD THAT:- It is to be noted that while having the negative information of slapping of the warning, the appellant sold shares of Jubilant Life Sciences on February 25, 2013. His explanation for the same is that he required funds for renovation of his house is not substantiated by any material on record. As argued before us that for penalizing a person for insider trading, SEBI has to establish that the appellant has traded 'on the basis of' the unpublished price sensitive information as provided by Section 15G of the SEBI Act as quoted above. On the other hand, the AO has relied on the provisions of Regulation 3 of the PIT Regulations as amended in 2002 which provided that only 'having possession of' unpublished price sensitive information is sufficient to attract the provisions. Prior to 2002, the Regulation 3 was on the line of the provisions of Section 15G of the SEBI Act, which provided that the insider trading in securities should be 'on the basis of' unpublished price sensitive information. It has been now established by the catena of cases that even if the penalty would be imposed only when the trading is done 'on the basis of' any unpublished price sensitive information, the person against whom the charges are levelled will have to show that the trading was not done on the basis of the information but for other reasons, since the explanation would be especially within his own knowledge. In the present case, the appellant provided the explanation which remained uncorroborated. Non-closure of the trading window during the period or non action by SEBI on this count is irrelevant. It is established that the present appellant being a Vice President of Jubilant Life Sciences had sold shares when adverse information reached him and purchased when positive news reached him when both remained to be published. AO has provided the table of price fluctuation in the scrip to show that the warning letter had adverse impact while the acceptance letter on positive impact had the positive impact on the prices. Besides this, the AO has rightly noted that this factor is irrelevant. In this view of the matter, the appellant would be guilty of insider trading. AO has imposed penalty of ₹ 10 lacs on each of the appellants Jubilant Life Sciences, Jubilant Stock Holding, Shyam Sunder Bhartia and Hari Shankar Bhartia and Amit Arora equally. The reasoning forwarded by the AO was that though the gains for the violation cannot be estimated, the violations being in the nature of detrimental to the investors, adversely impacting the equilibrium of the fair market. The appellant in Jubilant Life Sciences would be liable for penalty only on one count i.e. for non-disclosure of the China warning immediately. The penalty accordingly is reduced to ₹ 5 lacs. Issues Involved:1. Delayed disclosure of material information under Clause 36 of the Listing Agreement.2. Trading in the scrip of Jubilant Life Sciences Ltd. while in possession of Unpublished Price Sensitive Information (UPSI).3. Violation of Regulation 3 and 3A of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations).Issue-wise Detailed Analysis:1. Delayed Disclosure of Material Information:Washington Warning:The appellants argued that the Washington warning was not price-sensitive information due to the minor contribution of the concerned subsidiaries to Jubilant Life Sciences’ overall revenue. The Adjudicating Officer (AO) rejected this defense, reasoning that the decision-making process had already been established during the Canada warning, and thus, the same explanation was not valid. However, the Tribunal found that a ten-month gap between the two warnings justified the time taken for disclosure, setting aside the AO’s order regarding this issue.China Announcement:The Ministry of Commerce of China announced a provisional duty of 24.6% on a product of Jubilant Life Sciences on May 28, 2013, which was disclosed to the stock exchanges only on July 25, 2013. The appellants argued that the information was not price-sensitive and was already in the public domain. The AO concluded that the information was price-sensitive, as it would affect the company’s performance. The Tribunal upheld the AO’s reasoning, finding the appellants in violation of Clause 36 of the Listing Agreement.Canada Acceptance Letter:The US FDA classified a manufacturing facility in Canada as 'acceptable' on February 21, 2014, and the information was disclosed on February 27, 2014. The AO reasoned that the disclosure should have been immediate, given the prior experience with the warning letter. The Tribunal, however, found the AO’s reasoning unsustainable and allowed the appeal to this extent, acknowledging the inherent time lag due to hierarchical reporting and time zone differences.2. Trading in the Scrip of Jubilant Life Sciences Ltd. while in Possession of UPSI:Memorandum of Understanding (MOU) for Sale of Hospital Business:The appellants argued that the MOU was not a binding agreement but merely a proposal, and the trading window was not closed. The AO found that the MOU constituted unpublished price-sensitive information, as it was binding to some extent and the sale of the hospital was significant. The Tribunal agreed with the AO, concluding that the MOU ripened into a transfer by the time the shares were purchased, making it price-sensitive information. The appeal was dismissed.3. Violation of Regulation 3 and 3A of the PIT Regulations:Amit Arora’s Trading Activities:Amit Arora, Vice President of Jubilant Life Sciences, traded shares while in possession of UPSI. He sold shares after receiving the Canada warning and purchased shares after receiving the Canada Acceptance Letter. The AO found him guilty of insider trading, as his explanations for the trades were unsubstantiated. The Tribunal upheld the AO’s decision, noting that the trades were made while he had unpublished price-sensitive information.Penalties:The AO imposed penalties of Rs. 10,00,000 each on Jubilant Life Sciences, Jubilant Stock Holding, Shyam Sunder Bhartia, Hari Shankar Bhartia, and Amit Arora. The Tribunal reduced the penalty for Jubilant Life Sciences to Rs. 5,00,000 for the non-disclosure of the China announcement but upheld the penalties for the other violations.Conclusion:- Appeal No. 174 of 2018 was dismissed.- Appeal No. 175 of 2018 was partly allowed, reducing the penalty for Jubilant Life Sciences to Rs. 5,00,000.- Appeal No. 157 of 2018 was dismissed, upholding the penalty for Amit Arora.