2025 (3) TMI 274 - AT - SEBI

Insider trading appeal dismissed against connected persons who traded during UPSI period with suspicious activity patterns

Mr. Kunal Ashok Kashyap and Allegro Capital Pvt. Ltd. Versus Securities & Exchange Board of India, Mumbai

Securities Appellate Tribunal at Mumbai dismissed appeal in insider trading case. Appellant No. 1, closely associated with Key Managerial Personnel of ... Insider trading - use of Unpublished Price Sensitive Information - ‘connected persons’ - restraining the appellants from dealing in the securities market and directing to disgorge an amount and to pay penalties mentioned in the order. Whether the noticees are ‘insiders’ in terms of Regulation 2(1)(g) of the PIT Regulations, being ‘connected persons’? - HELD THAT:- Undisputedly, the appellant No. 1 was in close association with KMP of Biocon and Mr. Arun Chandawarkar, CEO and joint MD of Biocon and CFO of Biocon Mr. Sidharth Mittal both were directly involved in the negotiations on the Biocon-Sandoz deal as also in CIMAB licensing deal. Appellant No. 1 was undoubtedly in frequent and regular communication with senior managerial persons of Biocon, who had direct knowledge of UPSI. Keeping the twin sensitive assignment being handled by the appellant No. 1 – (a) advising on CIMAB licensing deal, which allowed him frequent access to CEO and CFO during the year long deal period while these KMPs were also negotiating the Sandoz deal; and (b) handling trading accounts of the CMD and Joint CMD of the company, we hold that the preponderance of probabilities test was correctly applied by the learned WTM. The appellant nos. 1 is a ‘connected person’ in terms of Regulation 2(1)(g)(i) of the PIT Regulations by having access to UPSI, and the appellant No. 2 is a ‘connected person’ in terms of Regulation 2(1)(d)(i) of the PIT Regulations. Possession of Unpublished Price Sensitive Information (UPSI) - Whether the trading behavior of the appellant’s shows that they were in possession of UPSI? - Considering the fact that there was a spike in the trading of Biocon within four days of the said UPSI period suggests that such trades were made based on the knowledge of the UPSI. No error in the finding recorded by the learned WTM that there was a strong ‘preponderance of probability’ that the trades executed by the appellants in Biocon during the UPSI period, were guided by UPSI on account of appellants being ‘insiders’. We are also in agreement with the finding of the learned WTM of holding the appellants as ‘connected persons’ within the meaning of Regulation 2(1)(d)(i) of the PIT Regulations and not on the basis of ‘possession of UPSI’ under the Regulation 2(1)(g)(ii) of the PIT Regulation, which distinguishes ruling in case of Balram Garg [2022 (4) TMI 945 - SUPREME COURT] In our considered view, in case of ‘insider trading’, the evidence cannot be direct but circumstantial, since evidence with respect to communication channel may not be on record. Often such sensitive information in case of ‘connected persons’ falling under 2(1)(d)(i), need not be necessarily through an email or a letter because, in the instant case, appellant was admittedly working closely with joint CMD & CEO and CFO on cross-border licensing deal and was in frequent communication with them for a long period of time, while they were simultaneously working on another cross- border deal (Sandoz-Biocon deal). Appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the judgment were:A. Whether the appellants were 'insiders' under Regulation 2(1)(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, due to being 'connected persons'Rs.B. Whether the trading behavior of the appellants indicated that they were in possession of Unpublished Price Sensitive Information (UPSI)Rs.2. ISSUE-WISE DETAILED ANALYSISA. Whether the appellants were 'insiders' under Regulation 2(1)(g) of the PIT Regulations, being 'connected persons'Rs.- Relevant legal framework and precedents: The SEBI (Prohibition of Insider Trading) Regulations, 2015, particularly Regulation 2(1)(d)(i), defines a 'connected person' as someone associated with a company in a manner that gives them access to UPSI. Regulation 2(1)(g) defines an 'insider' as a 'connected person' or someone having access to UPSI.- Court's interpretation and reasoning: The Tribunal found that appellant No. 1 was closely associated with Key Managerial Persons (KMPs) of Biocon, serving as an independent director in a foundation linked to Biocon's promoters and managing trading accounts for Biocon's CMD and CEO. This established a frequent communication and contractual relationship, qualifying him as a 'connected person' under the regulations.- Key evidence and findings: The appellant was involved in advisory roles on significant deals and had frequent communication with Biocon's senior officials. The Tribunal noted that the appellant's involvement in cross-border collaborations and handling of trading accounts for Biocon's top management supported the inference of access to UPSI.- Application of law to facts: The Tribunal applied the definition of 'connected person' to the appellant's relationships and interactions with Biocon's management, concluding that these connections provided access to UPSI.- Treatment of competing arguments: The appellants argued that there was no direct evidence of UPSI access and that Biocon's confidentiality protocols were robust. However, the Tribunal emphasized the circumstantial evidence and the high probability of access due to the appellant's roles and relationships.- Conclusions: The Tribunal concluded that appellant No. 1 was a 'connected person' with access to UPSI, and appellant No. 2, being controlled by appellant No. 1, was also a 'connected person' under the regulations.B. Whether the trading behavior of the appellants indicated that they were in possession of UPSIRs.- Relevant legal framework and precedents: Under the PIT Regulations, trades by an 'insider' during the UPSI period are presumed to be based on UPSI. The Tribunal referred to the standard of proof as 'preponderance of probability' for insider trading cases.- Court's interpretation and reasoning: The Tribunal analyzed the trading patterns of the appellants, noting significant purchases of Biocon shares during the UPSI period, which indicated trading based on UPSI.- Key evidence and findings: The appellants made substantial trades in Biocon shares just before the public announcement of the Sandoz deal, which led to a significant price increase. This trading behavior, coupled with their access to UPSI, supported the inference of insider trading.- Application of law to facts: The Tribunal applied the presumption under the PIT Regulations that trades by insiders during the UPSI period are based on UPSI, given the appellants' trading behavior and access to sensitive information.- Treatment of competing arguments: The appellants contended that there was no direct evidence of UPSI communication. However, the Tribunal relied on circumstantial evidence and the appellants' trading patterns to uphold the insider trading charge.- Conclusions: The Tribunal upheld the finding that the appellants' trades were based on UPSI, given their status as insiders and the timing and volume of their trades.3. SIGNIFICANT HOLDINGS- Preserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized the standard of proof as 'preponderance of probability' and the reliance on circumstantial evidence in insider trading cases, citing precedents such as SEBI vs. Kishore R. Ajmera.- Core principles established: The judgment reinforced the principle that circumstantial evidence and trading patterns can establish insider trading, even in the absence of direct evidence of UPSI communication.- Final determinations on each issue: The Tribunal dismissed the appeal, affirming the SEBI's findings that the appellants were insiders who traded based on UPSI and upholding the penalties imposed.