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Motive or intention necessary to establish undeserved gains through insider trading

Cause Title : Securities And Exchange Board Of India vs Abhijit Rajan, Civil Appeal No.563 of 2020, Supreme Court Of India

Date of Judgment/Order : September 19, 2022

Corum : V. Ramasubramanian & Indira Banerjee, JJ

Citied:

  1. Chintalapati Raju vs SEBI
  2. Rajiv Gandhi vs SEBI
  3. Miller vs. Pezzant
  4. SEBI vs Kanaiyalal Baldevbhai Patel
  5. SEBI vs. Kishore R. Ajmera

Background

In the year 2012 Gammon Infrastructure Projects Limited (GIPL) was awarded a contract by National Highways Authority of India. The total cost of the project was Rs.1648 crores. The respondent herein was the Chairman and Managing Director. GIPL entered into two shareholders agreements with Simplex Infrastructure Limited (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 49% equity interest in each other's projects. However, on 9.08.2013 the Board of Directors of GIPL passed a resolution authorizing the termination of both shareholders agreements.

On 22.8.2013, the respondent sold about 144 lakhs shares (approx.) held by him in GIPL, for an aggregate value of approximately Rs. 10.28 crores. On 30.08.2013 GIPL made a disclosure to the National Stock exchange of India and BSE regarding the termination of two shareholders agreements. On 20.09.2013 the respondent resigned from the post of Chairman and Managing Director of GIPL.

SEBI conducted a preliminary enquiry on the possibility of the trading having taken place on the basis of unpublished price sensitive information and passed an ex-parte interim order on 17.07.2014 which subsequently became a confirmatory order, holding prima facie that the respondent violated the provisions of Section 12A(d) and (e) of The Securities and Exchange Board of 66 India Act, 1992 (SEBI Act) and consequently restraining the respondent from buying, selling or dealing in securities and accessing the security markets directly or indirectly and hence liable to disgorge the amount of unlawful gains made by him to the tune of Rs.1.09 crores.

The Respondent filed an appeal before SAT which was allowed and SEBI took the issue to the Supreme Court.

SAT's reasons were:-

  1. that the information regarding the termination of the two shareholders agreements, was not actually a price sensitive
  2. 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; 

Judgment

Regulation 3 imposes a prohibition on dealing, communicating or counselling on matters relating to insider trading. Interestingly, the Regulations do not define the words, "insider trading". But Regulation 4 declares a person guilty of insider trading if, (i) he happens to be an insider; and (ii) if he deals in securities in contravention of Regulation 3.

The court after going through the relevant regulations, observed that to find out if a person is guilty of violation of Regulation 3, the Court should address itself to the following questions namely, (i) is he an insider?; (ii) did he possess or have access to any information relating to the company?; (iii) whether such information was price sensitive?; (iv) whether the information was unpublished?; and (v) whether he dealt in securities by subscribing, buying, selling or agreeing to do any of these things in any securities?

The court observed that while at the first blush, it may appear 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, 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 affect the price of securities of a company. The Explanation under Regulation 2(ha) creates a deeming fiction and it makes 7 items of information listed thereunder as price
sensitive information.

For instance, the sale by a person in possession of price sensitive information, at a time when the price is likely to take a plunge, will certainly be an attempt at taking advantage of or encashing the information. Similarly the purchase by a person in possession of unpublished price sensitive information, at a time when the price of the security is about to skyrocket, will certainly be an attempt to take advantage. But the above logic cannot be applied to cases which fall on the opposite side of the spectrum. For instance, the sale by a person at a time when the price of the securities is likely to shoot up on account of price sensitive information coming into the public domain or the purchase 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.
 
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. 

The acquisition by GIPL, of an equity interest in SIL's project was worth Rs. 460 cores approximately. Similarly, the acquisition by SIL, of the equity interest in GIPL's project was worth Rs. 807.52 crores. Therefore, the cancellation of the shareholders Agreements resulted in GIPL gaining very hugely in terms of order book value. In such circumstances an ordinary man of prudence would expect an increase in the value of the shares of GIPL and would wait for the market trend to show itself up, if he actually desired to indulge in insider trading. But the respondent did not wait for the information about the market trend, after the information became public. The reason given by him, which is also accepted by the WTM and the Tribunal is that he had to dispose of his shares as well as certain other properties for the purpose of honouring a CDR package. It is on record that if the CDR package had not gone through successfully, the parent company of GIPL namely, Gammon India Ltd., could have gone for bankruptcy.
33. Therefore, the Tribunal was right in thinking that the respondent had no motive or intention to make undeserved gains by encashing on the unpublished price sensitive information that he possessed.

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