2025 (11) TMI 1561 - AT - SEBI

Appeal Allowed: AT Clears Appellant of Insider Trading, Finds No UPSI or Connection Under SEBI PIT Regulations

The AT allowed the appeal and set aside the findings of insider trading. It held that a mere presumption of a high probability of detection of fraud on ... Guilty of ‘insider trading’ in the scrip - presumption of high probability of detection of fraud - fraudulent issue of Letter of Undertakings (LOUs) - definition of “connected persons” within the meaning of regulation 2 (1)(d)(i) of PIT Regulations, 2015 - violation of Sections 12A(d) and 12A(e) of the SEBI Act and Regulation 4(1) of the PIT Regulations - preponderance of probabilities - Whether it can be held that on the date of retirement of Mr. Gokulnath Shetty, there came into existence the UPSI being ‘Information related to the scenario of high probability of detection of the fraudulent transactions involving LOUs issued by PNB on behalf of the Gitanjali Group, leading to such information coming into the public domain’? - HELD THAT:- The probability of detection of fraud on the happening of certain uncertain events, cannot be treated as a concrete or credible Information for the purpose of PIT Regulations. We note that the GGL has not made any entry of such an information as UPSI in the Structured Digital Data base (SDD) in terms of Regulations 5C and the respondent has not charged the company in this regard. Further, in terms of Principle-1 of schedule A of PIT Regulations, such a suspicion of high probability cannot be held as Credible or concrete Information. With regard to commencement of the UPSI period from May 31, 2017, it cannot be held that the probability of detection of fraud was high only on or after the date of retirement of Mr. Shetty. In our view, such a probability was equally high considering that Mr. Shetty was liable for transfer from that position, which is likely in a Public Sector Bank, considering their transfer policy and administrative grounds. Further, PSBs have their own surveillance mechanism and checks in the form of annual audit or vigilance inspections, which could have exposed the fraud even prior to Mr. Shetty’s retirement on May 31, 2017. Moreover, there is a possibility that like Mr. Shetty, his successor could also have followed the same path to facilitate roll over of LOUs for both groups. Thus, the presumption of high probability of detection of fraud consequent upon certain event (superannuation of Mr. Shetty) cannot be held as an Information per se, which could be treated as UPSI under the PIT regulations. In view of this, we decide this question in Negative. Connected person within the meaning of regulation 2(1)(d)(i) - Whether based on such limited ‘business connection’ alone, can it be held that the connection of the appellant with the company GGL is such that is expected to put him in possession of UPSI? - Under regulation 2(1)(f) of the PIT Regulations, 2015, mere existence of relationship is not sufficient to term a person as an “immediate relative” unless there is financial dependence and/or consultation in financial matters. Appellant is not a partner in the core business of GGL of export of diamond/ Jewellary. The appellant is only a shareholder with 5.75% stake in GGL and not a director therein. Under the circumstances, there is no reason why the Noticee No.1 would have divulged the secret information relating to the fraud committed on PNB by him and his nephew regarding issue of LOUs for exports to an unrelated party based in Belgium, which could have pre-disposed exposure of the fraud by GGL group and Nirav Modi group, which was well concealed till then. This could have rather put them at risk of legal actions by various Government agencies. Thus, we hold that though the appellant had a business relationship with the company, the same is not reasonably expected to allow him access to UPSI. Hence, the appellant cannot be treated as ‘connected person’ under Regulation 2(1)(g)(i). In view of this, we decide this question in negative. Whether there was any communication of UPSI by Noticee No. 1 with Noticee No. 2? - In view of the, preponderance of probabilities suggests that there is no reasonable ground to assume that the noticee No. 1 may have shared UPSI with the appellant. Undisputedly, the Ld. WTM has not brought on record any evidence which may suggest that the said UPSI was actually communicated, directly or indirectly, by the noticee No.1 to appellant. Hence, there is no case for holding appellant as an insider under Regulation 2(1)(g)(ii) either. Whether the trading of GGL shares by the appellant was guided by the UPSI? - Appellant has submitted that trading by appellant was not exceptional since even other investors of GGL had sold and purchased shares of GGL during the month of December 2017 and January 2018. Further, he and other investors of preferential warrants of GGL, sold the shares when they found that it was the right moment for selling the same. We find merit in the plea, since at the time of such sale, there was rise in market price, as evident by profit of 3.88% earned by the appellant. Furthermore, we find sound reasoning in the argument of the appellant that had he known about the fraud, subsequent to such information, he would not have signed the agreement of taking over Tatva Project by one of the companies in which he was a shareholder i.e. 'LIDL' from Gitanajali Infra development Co. in the month of January 2018. We find no merit in the allegation that the trading by appellant was guided by the access to UPSI. Appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether, on the retirement of a bank employee, there came into existence Unpublished Price Sensitive Information consisting of a 'high probability of detection' of fraudulent Letters of Undertaking issued to a listed company, so as to qualify as UPSI under the PIT Regulations. (2) Whether the appellant fell within the definition of 'connected person' under Regulation 2(1)(d)(i) of the PIT Regulations in relation to the listed company. (3) Whether any UPSI regarding fraudulent LOUs and their likely detection was communicated by the alleged tipper (a promoter of the listed company) to the appellant. (4) Whether the appellant's trades in the shares of the listed company in December 2017 were carried out while in possession of, and guided by, such UPSI. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Characterisation and existence of UPSI based on 'high probability of detection of fraud' from the bank employee's retirement Legal framework (as discussed): The PIT Regulations define 'unpublished price sensitive information' as information that is not generally available and which, upon becoming generally available, is likely to materially affect the price of securities. The Tribunal referred to the term 'information' and its ordinary meaning (Cambridge and Merriam-Webster dictionaries) and to Principle 1 of Schedule A of the PIT Regulations, which requires 'credible' and 'concrete' information for insider trading controls. The Tribunal also noted that the Structured Digital Database (SDD) requirements under Regulation 5C oblige recording of UPSI by the company. Interpretation and reasoning: The Tribunal noted that the Whole Time Member had treated 'high probability of detection of fraudulent transactions involving LOUs issued by PNB' after the retirement of the concerned bank officer as the UPSI and fixed May 31, 2017 as the commencement of the UPSI period. The Tribunal held that a mere 'probability' about occurrence or detection of an uncertain future event is a subjective notion and does not amount to 'information' in the sense of definite facts, data, news, or knowledge. A scenario of possible detection upon a future contingency cannot be considered 'concrete or credible' information. The Tribunal further reasoned that the probability of detection of the fraud was not uniquely tied to the retirement date: such probability was equally present due to possibilities of transfer of the officer, regular audits, vigilance inspections in public sector banks, or continuation of the same practice by his successor. The company had also not recorded any such 'probability of detection' as UPSI in its SDD, and no violation was alleged against the company on that count, suggesting that even the regulator did not treat it as UPSI. On these premises, treating 'high probability of detection' on retirement as UPSI was found unsustainable. Conclusion: The Tribunal held that a presumption of 'high probability of detection of fraud' consequent upon the bank officer's retirement does not constitute 'information' for the purposes of the PIT Regulations and therefore cannot be treated as UPSI. The issue was decided in the negative. Issue (2): Whether the appellant was a 'connected person' with the listed company under Regulation 2(1)(d)(i) PIT Regulations Legal framework (as discussed): Regulation 2(1)(d)(i) defines 'connected person' as any person who is or has, during the six months prior to the concerned act, been associated with a company directly or indirectly in any capacity (including frequent communication, contractual, fiduciary, employment, professional or business relationship) that allows or is reasonably expected to allow access to UPSI. The Note clarifies that a connected person is one whose connection is expected to put him in possession of UPSI. Interpretation and reasoning: The WTM had relied on: (i) alleged frequent communication between the promoter and the appellant; (ii) their association through shareholding in a group company (JTPL); and (iii) transfer of Rs. 12.35 crores via a subsidiary of the listed company and another entity for funding the appellant's warrant subscription. The Tribunal observed that: (a) the appellant is a Belgium resident and no concrete evidence of 'frequent communication' was produced; (b) the alleged loan of Rs. 12.35 crores was doubted by the WTM but no adverse legal consequence was drawn, and in any event the appellant had invested a much larger amount (Rs. 37.03 crores) from his own funds; (c) both sides had only a limited 'business connection' through a failed real estate transaction routed through JTPL, with the appellant neither being a director nor a partner in the core diamond/jewellery export business for which the LOUs were issued; and (d) the appellant merely held about 5.75% shareholding in the listed company, without any role in its management. The Tribunal reasoned that such limited business connection, particularly with parties in different jurisdictions, is not sufficient to create a relationship reasonably expected to give access to UPSI regarding a concealed bank fraud. The Tribunal also found no rational basis for the promoter to share a highly sensitive fraudulent LOU scheme with an unrelated foreign investor, given the risk of exposure and legal consequences. Conclusion: The Tribunal held that although there was some business relationship, it was not of a nature reasonably expected to allow access to UPSI. The appellant could not be treated as a 'connected person' under Regulation 2(1)(d)(i). The issue was decided in the negative. Issue (3): Whether UPSI was communicated by the promoter (Noticee No. 1) to the appellant (Noticee No. 2) Legal framework (as discussed): The WTM had alleged violation of Regulation 3(1) of the PIT Regulations, which prohibits communication of UPSI by any insider except for legitimate purposes, performance of duties or discharge of legal obligations. The Tribunal also referred to the concept of an 'insider' under Regulation 2(1)(g)(ii), which includes any person in receipt of UPSI in the course of business, fiduciary or employment relationship. Interpretation and reasoning: The WTM inferred communication of UPSI from the appellant's trading pattern and asserted that the promoter shared UPSI regarding 'high probability of detection of fraud' to help the appellant avoid losses. The Tribunal noted that the promoter, despite allegedly possessing the UPSI and being the primary architect of the fraud, did not offload his own 26.09% shareholding (including pledged shares) during the alleged UPSI period. It held that it was commercially irrational for the promoter to risk exposing the fraud by tipping a significant outside shareholder whose mass selling could depress the share price, harming the promoter's own interests. Further, the Tribunal accepted the submission that the appellant's group company continued to invest in the promoter's real estate project (Tatva Project through LIDL) in January 2018, which was inconsistent with the appellant already being informed of a major bank fraud. Most significantly, the Tribunal found that there was no evidence, direct or circumstantial beyond mere trading pattern, to show any actual communication of UPSI by the promoter to the appellant. On the balance of probabilities, such communication was held not to be reasonably inferable. Conclusion: The Tribunal held that there was no reliable basis to conclude that any UPSI was communicated by the promoter to the appellant. Consequently, the appellant could not be treated as an insider under Regulation 2(1)(g)(ii) on that ground. The issue was decided in the negative. Issue (4): Whether the appellant's trades in the shares of the listed company were guided by UPSI Interpretation and reasoning: The WTM had concluded that, being a connected person, the appellant had access to UPSI and that the December 2017 trades were therefore guided by UPSI, relying mainly on: (i) the fact that the appellant opened the trading account a day before selling; and (ii) absence of other trades by the appellant in the relevant period. The Tribunal held that these factors alone, without any prior history of regular trading by the appellant in Indian markets, have no real evidentiary value. The appellant, being a Belgium national and essentially a one-time investor, could not be presumed to have a pattern of trading merely because he did not trade in other scrips. The Tribunal also accepted the appellant's contention that other preferential allottees and investors traded in the scrip during December 2017-January 2018 and that the appellant's sales coincided with a price rise, yielding a modest profit of about 3.88%, indicating opportunistic profit-taking rather than loss avoidance based on secret negative information. The Tribunal further noted the appellant's continued exposure to the promoter's projects through LIDL in January 2018 as being inconsistent with prior knowledge of impending exposure of a major fraud. Since the foundational premises (existence of UPSI, connected person status, and actual communication of UPSI) were themselves found unsustainable, the inference that the trades were 'guided by UPSI' necessarily failed. Conclusion: The Tribunal held that there was no merit in the allegation that the appellant's trading in December 2017 was undertaken while in possession of or guided by UPSI. This issue was decided in the negative. Overall Disposition The Tribunal, having answered all framed issues against the regulator, set aside the findings of insider trading, allowed the appeal, and vacated the directions of disgorgement, market restraint, scrip-specific restraint and monetary penalty. No order as to costs was made.