[By Siddharth Sharma]
The author is a student of Institute of Law (Nirma University).
Introduction
In the world of the securities market, insider trading is one of the most heard and frowned upon terms. The term insider trading in its simplest connotation implies the advantage churned out of some confidential information, where the information lies with the person due to the position or privilege he holds in an entity and the information is of such nature which has the potential to either soar the value of the securities or plunge it. The indulgence in selling and purchasing of securities on the basis of such information that is generally not available to the public consequently results in insider trading Across jurisdictions, the practice of insider trading has been considered to be both immoral as well as illegal in nature.
This article analyses the judgment of the Supreme Court of India in the case of SEBI v. Abhijit Ranjan. The Apex Court through its judgement in the aforesaid case has changed the yardstick for holding a person guilty of insider trading to some extent. The article further delves into the question of whether this decision of the apex court is an overreach.
The Factual Matrix of the Case
The respondent in the present case, Mr. Abhijit Ranjan was the chairman and managing Director of Gammon Infrastructure Projects Limited (GIPL) till 20th September 2013 and thereafter he continued only as director of the company. In the year 2012, a special purpose vehicle (SPV), Vijayawada Gundugolanu Road Project Pvt. Ltd. (VGRPPL), was created for the execution of the project worth Rs 1648 Crores which was awarded to GIPL by the National Highway Authority of India (NHAI). Simplex Infrastructure Limited (SIL) was similarly awarded a contract worth Rs. 940 Crores by NHAI for a project in Jharkhand and West Bengal. For the execution of this project, SIL set up an SPV called Maa Durga Expressway Private Ltd. (MDEPL). Thereafter two shareholders agreement was signed between SIL and GIPL, pursuant to these agreements SIL had to invest in VGRPPL and similarly GIPL had to make an investment in MDEPL. The structure of this investment effectively meant that each of the parties would have 49% stakes in each other’s project.
However, on 09.08.2013, the abovementioned agreements between the parties were terminated by the GIPL Board. Later, the respondent on 22.08.2013 sold a total of 114 lakhs of his shares of GIPL worth Rs. 10.28 crore. The disclosure regarding the termination of the shareholder’s agreement was made to the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) was made on 30/08/ 2013. The Securities and Exchange Board of India (SEBI), based on the input of the NSE regarding the transaction and the possibility of the trade being concluded based on unpublished price sensitive information (UPSI), conducted a preliminary enquiry, wherein it prima facie held that the respondent violated the provisions of Section 12A(d) and (e) of the SEBI Act, 1992. This was later confirmed, upon hearing the respondent, by its order dated 23.03.2015.
Further, notices were served upon to the respondent and another company named, Consolidated Infrastructure Company Pvt Ltd (CICPL) along with its two directors. Upon receiving the replies and hearing the notices, an order holding the respondent guilty of insider trading was passed and he was made liable to disgorge Rs. 1.09 crores, which is the said amount of unlawful gain from the trade. However, the other noticee i.e., CICPL. Subsequently, a statutory appeal was filed by the respondent which was ruled in its favour and thus the SEBI went to appeal against it before the apex court, which is the present case.
The Bone of Contention
The apex court in this appeal by the SEBI formulated primarily a three-pronged issue for consideration.
Two of the main issues were:
(i) Whether the decision of the board to terminate the aforesaid agreements can be characterized as ‘Price Sensitive Information’ within the meaning of section 2h(a) of the SEBI (Prohibition of Insider Trading) Regulations, 1992.
(ii) Whether the said sale of the shares by the Respondent would amount to insider trading under Regulation 3(i) and Regulation 4.
A. Unpublished Prince Sensitive Information
The expression Price Sensitive Information has been defined under Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. It is defined as ‘any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.’ The explanation to regulation 2(ha) provides 6 specific pieces of information which are to be characterized as price sensitive, whereas the seventh sub-point of explanation mentions a relatively broad entry i.e., significant changes in policies, plans or operations of the country.
The term ‘unpublished’ has been defined under regulation 2k as ‘information which is not published by the company or its agents and is not specific in nature. Further, regulation 3 prohibits dealing, communicating or counselling on matters related to insider trading. Any person who enters into a transaction of securities in contravention of the provisions mentioned under regulation 3/3A was made to be held guilty of the mischief of insider trading. Therefore, for rendering a person guilty of insider trading two essentials are to be fulfilled in accordance with Regulation 4, they are a) the person happens to be an insider b) the transaction in securities should be in violation of regulation 3/3A.
The apex court held in its judgement that the information which resided with the respondent would definitely fall within the category of Unpublished Price Sensitive Information as it found the information regarding the termination of the said agreements capable enough to materially affect the price of the security in the market where the effect of such information could either be beneficial or have an adverse effect.
B. Guilt of Insider Trading: Introduction of a New Element
While the apex court affirmatively answered the essentials with regard to the said information being rendered to be a UPSI and that of insider trading, in view of this ordinarily the respondent would have been held guilty of the mischief of insider trading. However, the apex court moved away from the traditional and strict reading of regulation while deciding the present case. Introducing new dynamics on the question of guilt, the Supreme Court delved into the proposition that whether there was a motive for making an unlawful gain.
The court thus expanded the interpretation of the words “like to materially affect the price” which is mentioned in regulation 2(ha)” and held that for the purpose of construing guilt of insider trading on a person, minting of actual profit is not essential but rather the intention of minting profit by indulging in trade based upon such information.
Pursuant to this reasoning the court found that the respondent did not actually have the motive to make an unlawful gain as the information which he held with himself would have shot up the price of GIPL in the ordinary course and thus he could have made more profit by holding up to the disclosure of the information in the market rather than selling the share before such disclosure. The supreme court, while approving the decision of the appellate tribunal thus held that the respondent was not guilty of insider trading.
A Case of Judicial Overreach?
The scheme of SEBI Regulations on insider trading, particularly Regulation 3 and its sub-regulation provides for certain defences which can be employed by the person accused of insider trading for example trade was done for a legitimate purpose. Further, regulation 3(3) provides for scenarios where the procurement of USPI is allowed in transactions. It is essential to point out that, the concept of profit motive is not mentioned explicitly in either of the regulations with regard to insider trading. The only statutory requirement for holding a person guilty of insider trading is the essentials mentioned in regulations 3,3A and 4. It is therefore outside the realm of the statute in concern here, to include a subjective concept of profit motive while adjudging whether a person is guilty or not. It is also interesting to note that though the court itself had, in this very case declined to employ the de minimis principle as it considered that this would bring subjectivity, despite this the court introduced the element of profit motive which itself is filled with subjectivity.
It is also noteworthy that a similar line of defence was suggested by the NK Sodhi Committee in its draft of the 2015 regulation, where a person accused could take the excuse of the trade which was made was contrary to the nature of UISP that lied with him. However, this defence did not make it into the regulations when they were notified by the Government. Therefore, it is imperative that the decision to exclude such a defence was a conscious executive decision and thus there appears an overreach.