2022 (9) TMI 1072 - SC - SEBI

Court rules on insider trading in shareholder agreements

SECURITIES AND EXCHANGE BOARD OF INDIA Versus ABHIJIT RAJAN

The court held that the information on the termination of two shareholders agreements was price-sensitive. However, the respondent's sale of shares, ... Offence under SEBI ACT - Insider trading - violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 - HELD THAT:- The contention of the appellant that SEBI took note of the situation in which the respondent was placed and the dire need that he had to sell the shares and that therefore SEBI confined the final order only to disgorgement, is neither here nor there. This argument is actually an argument of convenience. It so happened in this case that according to SEBI the closing price of the stock on 03.09.2013 showed favourable position for the respondent and SEBI was able to calculate as though the respondent made a profit. But if a company is likely to gain strength by making a significant change in its policy, the price of its securities is likely to shoot up. Despite such a natural phenomena, if a person sells his stocks without waiting for the market trend to show up, it can only be taken as a sale, devoid of any desire to make unlawful gains, even if it cannot be termed as a distress sale. In SEBI vs. Kishore R. Ajmera [2016 (2) TMI 723 - SUPREME COURT] this Court was concerned with the question as to what is the degree of proof required to hold a broker liable for fraudulent/manipulative practices under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 as well as the Conduct Regulations of 1992. After taking note of the fact that SEBI Act and the Regulations framed thereunder are intended to protect the interest of investors and that the provisions of the Act and the Regulations have to be understood and interpreted An attempt by the insider to encash the benefit of the information is not exactly the same as mens rea. Therefore, the Court can always test whether the act of the insider in dealing with the securities, was an attempt to take advantage of or encash the benefit of the information in his possession. This is the test we have applied to the case on hand. In Chintalapati Srinivasa Raju [2018 (5) TMI 931 - SUPREME COURT] this Court approved the minority judgment of the Securities Appellate Tribunal (in para 20), which took note of the compelling circumstances under which the individual was selling shares. The fact that this has been taken note of by WTM as a mitigating factor, while passing a mere restitutionary order, does not take away the validity of the defence taken by the respondent. We are of the view on Question No.1 that the information regarding the termination of the two contracts can be characterised as price sensitive information, in that it was likely to place the existing shareholders in an advantageous position, once the information came into the public domain. In such circumstances, our answer to Question No.2 would be that the sale by the respondent, of the shares held by him in GIPL would not fall within the mischief of insider trading, as it was somewhat similar to a distress sale, made before the information could have a positive impact on the price of the shares. Appeal is dismissed Issues Involved:1. Whether the information regarding the termination of the two shareholders agreements can be characterized as 'price sensitive information' within the meaning of Section 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.2. Whether the sale of equity shares by the respondent under compelling circumstances falls within the mischief of 'insider trading' as per Regulation 3(i) read with Regulation 4 of the Regulations.3. Whether SEBI should have considered the last trade price of the day on which the information was disclosed instead of the trade price of the next day.Issue-wise Detailed Analysis:1. Price Sensitive Information:The court examined whether the information about the termination of the two shareholders agreements was 'price sensitive' under Regulation 2(ha) of the SEBI Regulations. The main part of Regulation 2(ha) defines 'price sensitive information' as any information that, if published, is likely to materially affect the price of securities. The explanation under Regulation 2(ha) lists seven items deemed as price sensitive. The court noted that while items (i) to (vi) inherently impact the financial strength of a company, item (vii) ('significant changes in policies, plans or operations') is broader and requires examining whether the information is likely to materially affect the price of securities. The court found that the respondent, being an insider and possessing unpublished information about the termination of the agreements, was initially seen as guilty of insider trading. However, the court emphasized that the termination resulted in a positive advantage for the company, likely to increase the share price, and thus, the respondent's sale of shares did not aim to exploit the unpublished information for gain.2. Insider Trading:The court analyzed whether the respondent's sale of shares under compelling circumstances constituted insider trading. The court acknowledged that the respondent, as an insider, had access to unpublished price-sensitive information. However, it highlighted that the respondent sold the shares to honor a Corporate Debt Restructuring (CDR) package and avoid the parent company's bankruptcy. The court found that the sale was not motivated by a desire to gain from the unpublished information, as the respondent did not wait for the information to become public, which would have likely increased the share price. The court concluded that the respondent's actions were driven by necessity rather than an intent to engage in insider trading.3. Trade Price Consideration:Given the court's conclusions on the first two issues, it found no need to address whether SEBI should have considered the last trade price of the day the information was disclosed instead of the next day's trade price. The court's findings on the absence of insider trading rendered this issue moot.Conclusion:The court held that the information regarding the termination of the two contracts was price-sensitive but noted that the respondent's sale of shares was akin to a distress sale made before the information could positively impact the share price. The sale did not fall within the mischief of insider trading. Consequently, the court dismissed the appeal, affirming the Securities Appellate Tribunal's decision to set aside the SEBI order against the respondent.