TaxTMI 
TaxTMI 
2022 (9) TMI 1072
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.... follows: (i) The respondent herein was the Chairman and Managing Director of a company by name Gammon Infrastructure Projects Limited (hereinafter referred to as "GIPL") till September 20, 2013. Thereafter, he ceased to be the Chairman Managing Director, but continued to be a Director of the Company. (ii) In the year 2012 GIPL was awarded a contract by National Highways Authority of India. The total cost of the project was Rs.1648 crores. For the execution of the project, GIPL set up a special purpose vehicle called Vijayawada Gundugolanu Road Project Private Limited ("VGRPPL"). (iii) Similarly, another company by name Simplex Infrastructure Limited (SIL) was awarded a contract by NHAI in Jharkhand and West Bengal and the total cost of the project was Rs.940 crores. For the execution of the project, SIL set up a special purpose vehicle called Maa Durga Expressways Private Limited (MDEPL). (iv) GIPL entered into two shareholders agreements with SIL. Under these agreements, GIPL was to invest in MDEPL and SIL was to invest in VGRPPL for their respective projects. The mutual investments were to be tuned in such a manner that GIPL and SIL would hold....
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....ions, on the ground that no case was made out against them. (xi) Challenging the said order of the WTM, the respondent filed a statutory appeal before the Securities Appellate Tribunal. The appeal was allowed by the Tribunal by an Order dated 08.11.2019 and it is against the said order that SEBI has come up with the above appeal. 4. The reasons for the Securities Appellate Tribunal allowing the appeal of the respondent are threefold, namely, (i) that the information regarding the termination of the two shareholders agreements, was not actually a price sensitive information, since the investment of GIPL in Simplex Project, to the tune of Rs. 4.9 crores constituted only 0.05% of GIPL's order book value at the end of August, 2013 and only 0.7% of its turnover for the financial year; (ii) that in any case the respondent was in dire need to sell the shares at that time for the purpose of CDR (Corporate Debt Restructuring) package and hence he cannot be said to have indulged in trading on the basis of information within his knowledge; and (iii) that there was no reason why SEBI did not take into account the last trade price of 03.09.2013, but chose the price as on 04.09.2013.....
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....he closing price on 03.09.2013 would not correctly determine either the gains made or the losses averted; and (i) that therefore, the question of SEBI taking the closing price as on 03.09.2013 did not arise. 6. Responding to the above submissions made on behalf of the appellant, Mr. Somasekhar Sundaresan, learned counsel for the respondent raised the following contentions: (a) that the primary object of Insider Trading Regulations anywhere in the world is to prohibit an insider from taking advantage of asymmetrical access to unpublished price sensitive information over others who do not have such access; (b) that the question whether an information is price sensitive or not, would depend upon its potency to materially impact, upon publication, the price of the securities; (c) that therefore by its very nature, it is barely a question of fact or at the most, a mixed question of fact and law which will not fall within the scope of Section 15Z of SEBI Act, 1992 warranting interference by this Court; (d) that one of the key factors which the Courts take into account while interpreting the circumstances revolving around transactions such a....
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.... package and hence it is a misconception to think that he made unlawful gains that ought to be disgorged; (n) that SEBI itself has accepted the fact that the sale proceeds were used for funding the CDR package; (o) that SEBI itself exonerated the conoticee, namely, Consolidated Infrastructure Company Private Limited, on the ground that its sale of shares was on account of a pressing need to meet a margin shortfall to its stock broker; (p) that SEBI thus applied two different yardsticks, one in respect of the respondent and another in respect of the conoticee in the very same proceeding, which necessitated interference by the Tribunal; and (q) that therefore the present appeal does not raise a substantial question of law and that in any case the order of the Appellate Tribunal does not call for any interference. 7. From the rival contentions, we think that the questions arising for our determination can be formulated as follows: (i) whether the information regarding the decision of the Board of Directors of GIPL to terminate the aforesaid two contracts can be characterized as "price sensitive information" within the meaning of Section ....
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....rojects. (v) amalgamation, mergers or takeovers; (vi) disposal of the whole or substantial part of the undertaking; (vii) and significant changes in policies, plans or operations of the company." 11. Regulation 2 (k) defines the expression "unpublished" as follows: "Unpublished" means information which is not published by the company or its agents and is not specific in nature. Explanation.- Speculative reports in print or electronic media shall not be considered as published information." 12. Regulation 3 imposes a prohibition on dealing, communicating or counseling on matters relating to insider trading. It reads as follows: " 3. No insider shall - (i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or (ii) communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities : Provided that nothing contained above....
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....ns, mergers and takeovers; (vi) disposal of the whole or substantially the whole of the undertaking; (vii) such other information as may affect the earnings of the company." 18. But under the Amendment Regulations, 2002, the word, "unpublished" alone is defined in Regulation 2(k) and the rest of the words "price sensitive information" is defined in Regulation 2(ha). 19. The important modifications brought forth under the Amendment Regulations of 2002 to the definition of what is unpublished price sensitive information are twofold namely, (i) that the definition of words unpublished is expanded; and (ii) that even significant changes in policies, plans and operations of the company are brought within the definition of the expression "price sensitive information", through a deeming provision in the Explanation under Regulation 2(ha). 20. Therefore in view of the Regulations discussed above, a person can be held guilty of violating Regulation 3, only if the following conditions are satisfied: (i) He must be an insider within the meaning of the word "insider", under Regulation 2(e), by virtue of his past or present connection or deemed connection wit....
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.... shareholders' Agreements that the respondent had, would certainly fall under the category of "significant changes in policies, plans or operations of the Company" under Regulation 2(ha)(vii); (iii) that the respondent dealt in securities by selling 144 lakhs of shares on 22.08.2013, which was a month before his resignation as Chairman and Managing Director; and (iv) that the termination of the shareholders' Agreements on 09.08.2013 was disclosed to the NSE and BSE on 30.08.2013, after the sale of the shares, which made the information relating to the termination of the Agreements unpublished as on the date of the sale. 24. Therefore, it may appear at first blush, that the respondent, who was an insider and who possessed information which was both unpublished and price sensitive, was guilty of the charge of insider trading as he undoubtedly dealt in securities. 25. But the catch lies in understanding the true scope of Explanation (vii) under Regulation 2(ha). As we have seen earlier, the main part of Regulation 2(ha) defines "price sensitive information" to mean any information, which relates directly or indirectly to a company and which if published is likely to materially a....
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....hase by a person at a time when the price of the shares is likely to go downward due to price sensitive information getting published, cannot come under the category of insider trading. While it is true that the actual gaining of profit or sufferance of loss in the transaction, may not provide an escape route for an insider against the charge of violation of Regulation 3, one cannot ignore normal human conduct. If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading. In other words, the actual gain or loss is immaterial, but the motive for making a gain is essential. 29. The words, "likely to materially affect the price" appearing in the main part of Regulation 2(ha) gain significance for the simple reason that profit motive, if not actual profit should be the motivating factor for a person to indulge in insider trading. This is why the information in Item No.(vii) of the Explanation under Regulation 2(ha) may have to be examined with reference to the words "likely to materially affect the price". Keeping this in mind let us now come back to the facts of the case. 30. GIPL was awarded a contract for the execution....
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.... 35. We agree with the contention of Shri Arvind P. Datar, learned senior counsel for the appellant, that the allegation of insider trading cannot be measured in terms of the value of the contracts terminated and the percentage of shares sold and that the theory of proportionality cannot be applied in such cases. The magnitude of what an insider did, in relation to the size of the company, may not have a bearing upon the question whether someone indulged in insider trading or not. But what is sought to be encashed by the insider should be an information which if published is likely to materially affect the price of the securities of the company. 36. The contention of Shri Arvind P. Datar, learned senior counsel, that the total value of the contracts terminated on both sides was nearly Rs.2600/crores (Rs.1648 crores + Rs.940 crores) and that therefore the information relating to the termination of the contracts was surely likely to materially affect the price of the securities of the company, is unsustainable for the simple reason that the net effect of the termination of both the contracts, for GIPL was a positive advantage of about Rs.800 crores. We have already provided in pa....
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....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. 40. In SEBI vs. Kishore R. Ajmera (2016) 6 SCC 368, 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 in that light, this Court held in Para 26 as follows : - " It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding th....