2025 (11) TMI 1721 - AT - SEBI

Appeal succeeds against SEBI insider trading penalty under PIT Regulation 4(1) proviso (ii) for block deal

Rajesh Bhatia, Ms. Geeta Bhatia Versus Securities & Exchange Board of India, Mumbai

SAT allowed the appeal, setting aside SEBI's findings of insider trading and related penalties. The tribunal held that the appellants, though insiders and ... Eligibility for benefit of exception provided in proviso (ii) to Regulation 4(1) of the PIT Regulations - Insider Trading - unfair gains by individuals with access to non-public, material information - UPSI relating to transaction-1 - Restraining the appellants from accessing the securities market - violation of Regulations 3(1) and 4(1) of SEBI (PIT) Regulations, 2015 and Section 12A (d) and (e) of SEBI Act, 1992. Whether the appellants’ case is covered under the exceptions given in the proviso to Regulation 4(1), as the transaction of sale of 9% equity was carried out by both parties through the block deal window, while they were allegedly in possession of the UPSI relating to possible merger? - HELD THAT:- In the instant case, the sale of 9% equity in THEAL was undertaken through the block deal window mechanism on December 3, 2015 for which due disclosure was also made on the same day. Undisputedly, both the appellant No. 1 and No. 2 being the promoter-directors of THEAL may be held as insiders with regard to any information relating to THEAL that may be held as UPSI, being connected persons within regulation 2(1)(d)(i). Appellant No. 2 additionally gets covered under regulation 2(1)(d)(ii), being immediate relative of appellant No. 1. Appellant’s case is covered within the exception provided for Block deal, considering the underlying objectives of PIT regulations. The transaction No. 1 is a single transaction for both parties, which gets concluded before the alleged UPSI relating to ‘possible merger with ZLL’ became generally available to public. This is in contrast with other insider trading cases in which buy/sale takes place by an insider guided by UPSI, (from/to an uninformed investor) during the UPSI period. Once the UPSI is made public, the insider may make second transaction that allows/may allow unlawful gain to him. Evidently, there is no allegation that the counter-party (Zee group companies) did not have access to UPSI and may have suffered unlawful loss in any way as there was no information asymmetry. Ostensibly, no outsider was affected by this transaction. The respondent has not raised any objection on whether the appellant’s case is covered under the said exception or not, but submitted that as the said exception for the block deal cases has been included in the regulation 4(1) by the SEBI (PIT) (Amendment) Regulations, 2018 w. e. f. April 01, 2019, it is applicable only prospectively. Undisputedly, no unlawful gains have been made by the appellant nor intended qua the seller or any other investors. On the other hand, once the UPSI relating to ‘Exploration of merger with ZEE Learning Ltd.’ became public, the Market price of THEAL rose to 9.98% in anticipation of the start-up (THEAL) likely to be part of a large conglomerate. The appellant rather lost an opportunity to make lawful gains by holding on to their 9% equity in THEAL. Thus, we hold that the appellant is eligible for benefit of exception provided in proviso (ii) to Regulation 4(1) of the PIT Regulations. In view of this, we answer to this question in affirmative. Whether the trading of 9% shares in THEAL was guided by the UPSI in respect of likely merger with ZLL? - HELD THAT:- It is improbable to have discussion on both the 9% equity sale and ‘Merger’ as part of the agreed agenda in the same meeting, since both options have different implications for sellers and buyers. The equity sale enabled sellers to quickly discharge the debts of five financial institutions, which was their priority, while allowing them to continue to have control over THEAL and operate play schools. In the 2nd option of Merger of THEAL with ZLL, appellants would not have received cash in short run, which was their urgent need and, it is likely that their role in the merged entity would have been restricted. Thus, the possibility of strategically discussing both agenda items simultaneously does not look practical. In our view, not much needs to be read into the fact of Zee patriarch Mr. Goel spontaneously making a proposal to also consider merger of THEAL with ZLL, during the meeting held for discussing 9% of equity of THEAL for ZEE group. The proposal was not concrete, was without any authorization by ZLL and not accepted by appellant no. 1 during the meeting. The transaction No. 1 was independent and based on conscious trading decision by both parties and hence cannot be held to be in any way, guided by the information relating to transaction No. 2. Moreover, had the transaction No. 1 been guided by the UPSI relating to ‘likely merger’, there was no prudent reason for the appellants to carry out equity sale transaction before such an information was made public. In our considered view, the trading behaviour i.e. transactions through block deal mechanism before the UPSI made public, also substantiates the plea of the appellants that the trade was not guided by the information relating to ‘exploration of merger’. Appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the appellants' sale of 9% equity through the block deal window, while allegedly in possession of unpublished price sensitive information (UPSI) relating to a possible merger, fell within the exception under the proviso to Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015. 1.2 Whether the trading of 9% shares in the company by the appellants on 3 December 2015 was in fact guided by UPSI concerning a likely merger with another listed company, so as to constitute prohibited insider trading. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of the block deal exception under the proviso to Regulation 4(1) of the SEBI (PIT) Regulations, 2015 Legal framework 2.1 The Court noted that Regulation 4(1) of the PIT Regulations imposes a general prohibition on trading while in possession of UPSI, but permits an insider to prove innocence by demonstrating specified exceptional circumstances. Originally, the exceptions included, inter alia, off-market inter-se transfers between insiders who are in possession of the same UPSI without breach of Regulation 3. 2.2 By an amendment effective from 1 April 2019, an additional express exception was inserted for transactions carried out through the block deal window mechanism between persons in possession of the same UPSI without breach of Regulation 3, where both parties have made a conscious and informed trade decision (proviso (ii) to Regulation 4(1)). 2.3 The enabling proviso uses the expression 'including the following', making the catalogue of exceptional circumstances illustrative and not exhaustive, thereby allowing proof of innocence in other analogous circumstances. Interpretation and reasoning 2.4 The Court reiterated that the primary objective of insider trading regulations is to prevent unfair gains by insiders having access to non-public, material information at the expense of uninformed investors. Where there is information symmetry between counterparties, there is no unlawful gain for one at the expense of the other and no prejudice to outsiders. 2.5 The Court observed that in off-market or block deal transactions between parties having the same UPSI without violating Regulation 3, the mischief sought to be prevented by insider trading regulations is not attracted because no uninformed investor is involved. In block deals in particular, accurate prior agreement on price, quantity and timing between the two parties is essential; otherwise, execution within the narrow time window is impossible. 2.6 In the instant case, the appellants, as promoters-directors, were 'insiders' under Regulation 2(1)(d)(i), and appellant No. 2 was also an 'immediate relative' under Regulation 2(1)(d)(ii). The sale of 9% equity was executed on 3 December 2015 through the block deal window to six entities of a particular corporate group, within the short, specified block deal window, at an agreed price and quantity, with requisite disclosures made the same day. 2.7 The Court held that successful execution of such a block deal itself demonstrated that both sides had taken a conscious and informed trade decision in advance. If the appellants were in possession of UPSI, then, by necessary implication, the counterparty group entities were also in possession of the same UPSI; there was no allegation or material indicating any information asymmetry between sellers and buyers. 2.8 It was further noted that there was no allegation or material suggesting that any outsider or uninformed investor suffered prejudice or that any unlawful gain was made qua the counterparty or any other investor as a result of this block deal. Once the later information regarding exploration of merger became public, the market price of the shares rose, and the appellants in fact lost a potential lawful gain by not holding the shares till after the announcement. 2.9 On the respondent's contention that the block deal exception, introduced with effect from 1 April 2019, could apply only prospectively, the Court held that the amendment is a beneficial one, aimed at aligning the regulation with its underlying objective and at removing hardship in situations where both parties have the same UPSI and no outsider is affected. 2.10 Relying on the principle enunciated by the Supreme Court in CIT v. Vatika Township (P) Ltd., the Court held that beneficial amendments may be read retrospectively where they are clarificatory of the underlying policy. It rejected the argument that absence of specific reference to PIT Regulations in earlier precedent rendered this principle inapplicable, holding that what governs is the nature and object of the amendment. 2.11 Given that the proviso to Regulation 4(1) is inclusive, and that no unlawful gain or prejudice to outsiders was established, the Court accepted that the appellants' transaction, even though undertaken prior to 1 April 2019, fell within the scope and rationale of the subsequently inserted exception for block deals. Conclusions 2.12 The sale of 9% equity through the block deal window between the appellants and the six group entities is covered by the exception under proviso (ii) to Regulation 4(1) of the PIT Regulations. 2.13 The beneficial amendment introducing the block deal exception was held applicable in the appellants' favour, having retrospective operation in light of its object and the inclusive nature of the proviso. 2.14 On this basis, the appellants were held entitled to prove their innocence; their trades could not be treated as violative of Regulation 4(1) in the facts of the case. Issue 2 - Whether the appellants' trading was guided by UPSI relating to a likely merger, constituting insider trading Interpretation and reasoning 2.15 The Court accepted that if UPSI regarding a likely merger existed and the appellants traded while in possession of such UPSI, insider trading restrictions would be attracted. The question, however, was whether such UPSI existed in a concrete and material form and whether it actually guided the 3 December 2015 sale. 2.16 The factual matrix established that the appellants had outstanding loans from five financial institutions amounting to approximately Rs. 64 crores and that the primary purpose of selling 9% equity was to repay these debts. A meeting was arranged with the promoter of the acquiring group through an intermediary, and pursuant to that meeting, a block deal for 40 lakh shares at an agreed consideration was executed on 3 December 2015. The sale proceeds were promptly applied to discharge the debt within two days, and pre-clearance and stock exchange disclosures were duly made. The genuineness and veracity of Transaction No. 1 (the equity sale) were thus not in dispute. 2.17 The allegation was that the sale was 'guided' by UPSI relating to a 'likely merger' (Transaction No. 2). The respondent relied principally on a later disclosure (11 March 2017) and on a post-hearing submission (12 January 2021) in which appellant No. 1 acknowledged that, during the November 2015 meeting, the other promoter had discussed the possibility of merging the two companies and had 'offered to merge' them. 2.18 The Court found that these materials only showed that a possibility or offer of merger was mentioned or discussed, but there was no independent evidence that a merger formed part of a concrete, authorised, agreed agenda or mandate at the meeting. There was no board resolution or authorisation from the acquiring company empowering its promoter to negotiate a merger, nor any contemporaneous documentation from that company indicating that a merger proposal had been formally considered or approved at that stage. 2.19 No statement of the acquiring group promoter was on record affirming that he had been mandated by the acquiring company to discuss or negotiate a merger. Further, the respondent had not proceeded against the promoter or the six buying entities for any alleged transfer of UPSI in relation to the acquiring company's proposed merger, which, in the Court's view, was inconsistent with the hypothesis that there was an authorised mandate to pursue a merger at that time. 2.20 The Court also noted that letters submitted by the six group buying companies during the SEBI inquiry were not supplied to the appellants. While the appeal included a grievance on this non-disclosure, the Court, for purposes of assessing the existence and nature of UPSI, treated this withholding as an indication that there was no clear material confirming a formal mandate to discuss a merger at that juncture. 2.21 On a preponderance of probabilities, the Court inferred that the scheduled purpose of the November 2015 meeting was to discuss the sale of 9% equity in order to meet the appellants' urgent cash requirement, and that any mention of a merger was likely a spontaneous counter-offer by the acquiring group promoter. Appellant No. 1 did not accept this proposal in the meeting and stated that such a matter would have to be decided by the board. 2.22 The Court considered it commercially and practically improbable that both a significant equity sale (intended to generate immediate liquidity to repay debt while retaining control) and a merger (which would not generate short-term cash and could dilute the appellants' role in the merged entity) would form part of a coordinated, strategic agenda in the same meeting. The two options had divergent implications and objectives, and simultaneous pursuit of both as cohesive agenda items did not appear realistic. 2.23 The Court further reasoned that, in typical insider trading scenarios under the PIT Regulations, insiders trade with uninformed counterparties during the UPSI period and realise unlawful gains when the UPSI becomes public. In contrast, here the transaction was a block deal between presumptively informed parties, with no uninformed party involved. Additionally, the appellants sold before any public announcement of the possible merger, foregoing the price appreciation that materialised after the information was made public, which was inconsistent with the allegation that the sale was motivated by UPSI. 2.24 There was, therefore, no credible evidentiary basis to hold that any concrete, material UPSI relating to a likely merger existed on 30 November 2015 in a form that could have guided the decision to sell 9% equity, or that the impugned sale on 3 December 2015 was in fact undertaken 'on the basis of' or 'guided by' such UPSI. Conclusions 2.25 The Court held that the information relating to a 'likely merger' did not stand established as concrete, material UPSI that guided the 3 December 2015 sale of 9% equity. 2.26 The impugned trading of 9% shares was not guided by UPSI concerning the possible merger and did not constitute prohibited insider trading under Regulations 3(1) and 4(1), or a violation of Section 12A(d) and (e) of the SEBI Act. 2.27 In view of the above findings on both issues, the impugned order imposing market access restrictions and monetary penalties on the appellants was set aside and the appeal allowed.