Insider Trading
Op EdsOP. ED.

The Supreme Court of India in Balram Garg v. SEBI,1 had the occasion to consider the burden of proof that the Securities and Exchange Board of India (SEBI) should discharge to establish a charge of insider trading. The substance of SEBI’s case is that three close relatives (hereinafter “relatives”) of the Chairman and the Managing Director of a listed company traded the shares of the company based on some unpublished price sensitive information (UPSI) they received from the Chairman and the Managing Director. According to SEBI, the Chairman and the Managing Director communicated the UPSI violating the prohibition in the SEBI Act and SEBI (Prohibition of Insider Trading) Regulations, 20152. Similarly, their relatives violated the Act and Regulations by trading while in possession of that information.

Insider trading the legal framework

The SEBI Act, Section 12-A(e)3 and the SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibit an insider from dealing with securities while they are in possession of material non-public price-sensitive information/unpublished price sensitive information (UPSI).4 Nor shall an insider in possession of such information communicate that information to anyone else.5 A person becomes an insider in two ways. Firstly, if a person is a connected person,6 he is an insider. A connected person is one who is associated with the company in a manner that allows him to access UPSI. Secondly, a person in possession of or having access to UPSI is also an insider.7 The distinction between the two, relevant for our discussion is that connected persons are presumed to be in possession of the UPSI; but in the case of others, SEBI has to prove that such persons were in possession of the UPSI.

The Chairman and the Managing Director are clearly connected persons to the company and hence they are insiders. They are presumed to be in possession of UPSI. They can neither trade based on UPSI nor disclose UPSI to others. The allegation is that the Chairman and the Managing Director communicated the UPSI to their close relatives violating the Prohibition of Insider Trading Regulations. As far as the relatives are concerned one has to determine whether they are immediate relatives within the meaning of the Regulations. A connected person’s spouse, parents, siblings, and children are also treated as immediate relatives if they are financially dependent on or consult connected persons for trading in securities.8 Immediate relatives are treated as connected persons.9 Therefore, immediate relatives are also presumed to possess UPSI. Secondly, a relative becomes an insider (like anyone else) if they are in possession of UPSI, even when they do not qualify as immediate relatives.

What did the Court hold?

In the backdrop of the provisions described above, SEBI had to prove against the Chairman and the Managing Director that they communicated UPSI to their relatives. As far as the relatives are concerned, SEBI had to prove either that the relatives were immediate relatives or that they traded while in possession of the UPSI. In other words, even if there was no evidence that the relatives had received any UPSI, SEBI could still succeed against the relatives if SEBI could show that they were immediate relatives of the connected persons. On the other hand, the Chairman and the Managing Director would try to demonstrate that they did not communicate any UPSI to the relatives. Similarly, the relatives would try to demonstrate that they were not immediate relatives and there was no evidence to show that they were in possession of UPSI.

In this case, two pieces of information qualify to be UPSI. The first one is the company’s decision to buy back its shares. The second UPSI is the withdrawal of the buy-back offer on account of the non-receipt of the no-objection certificate from the lead bank. The allegation was that the relatives or their associates traded in the share of the company while they were in possession of UPSI. The allegations were based on the trading pattern and time of the relatives. One of the relatives had been selling the company’s shares before the announcement of the buy-back at a lower price. But she stopped selling the shares before the announcement of the buy-back offer and avoided losses. She again sold her shares before the withdrawal of the buy-back offer and avoided loss. Further, a company that is fully owned by two of the relatives took a short position with respect to the shares of the company immediately before the withdrawal of the buy-back offer to gain from the fall in share price after the withdrawal. But apart from these circumstances, SEBI did not have any letters, e-mails, or witnesses to prove that the connected persons communicated UPSI to their relatives.

The Court held that the above circumstances fall short of proving the allegations. The burden of proof was on SEBI to show that the Chairman and the Managing Director communicated frequently with the relatives and that the relatives were in actual possession of the UPSI. Mere circumstantial evidence such as the trading pattern and timing was not sufficient to hold them guilty. It was necessary for SEBI to establish the communication and possession of UPSI through cogent evidence like letters, e-mails, or witnesses. As far as the relatives in question are concerned, they do not qualify as immediate relatives. The Court found that the Chairman and the Managing Director, and the relatives were estranged. Moreover, the relatives had resigned from the positions they held in the company. The relatives were financially independent and did not consult the Chairman and the Managing Director to make their decisions. For these reasons, relatives do not qualify as immediate relatives (and hence they themselves are not connected persons). Hence, they cannot be presumed to be in possession of the UPSI. The SEBI must have established through cogent evidence that they had been in possession of UPSI when they traded.

Going forward what does the judgment mean?

A recent blog post argued that this case marks the evolution of a “new standard of proof” in insider trading matters.10 It is not wholly unreasonable for the court to expect that mere circumstances are not sufficient to hold one guilty of insider trading. The decision will have no application to the standard of proof applicable in the case of immediate relatives. They will be treated on par with connected persons and will be presumed to be in possession of UPSI. But as far as others are concerned mere trading patterns and timing are not sufficient proof of possession of UPSI. The charge of communicating UPSI against the connected persons will not be sustained unless there is evidence to show the actual communication of the UPSI.

But the question is if not the circumstantial evidence of trade timing and pattern, what other material could SEBI find out in an insider trading? If the court is looking for material evidence such as written communication or witnesses directly proving communication of UPSI, it will not be hard for the violators to ensure that there is no such material or witness. When the tipper and tippee are intimate, it would be even more challenging to find such material evidence to prove the actual communication of UPSI.11 The doubt that remains is whether SEBI has the wherewithal and power to gather the kind of evidence required.


† Manager (Law) at Indian Oil Corporation Limited. Author can be reached at <varghesegthekkel@gmail.com >.

1. 2022 SCC Online SC 472.

2. SEBI (Prohibition of Insider Trading) Regulations, 2015.

3. Securities and Exchange Board of India Act, 1992, S. 12-A.

4. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 4(1).

5. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 3(1).

6. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(d)(i).

7. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(g).

8. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(f).

9. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(d)(ii)(a).

10. See Shruti Rajan, “Insider Trading: Evolving a New Standard of Proof”, IndiaCorpLaw, <https://indiacorplaw.in/2022/05/insider-trading-evolving-a-new-standard-of-proof.html>.

11. It is to avoid SEBI having to prove actual possession of UPSI in the case of close family members that the immediate relatives of connected persons are also treated as the connected persons. But the Court in the case concluded that they are not immediate relatives.

SEBI
Tribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): The proceedings against Varun Beverages’ Ravi Kant Jaipuria came to an end after a settlement of Rs.55,90,000 was reached between SEBI’s Internal Committee and Jaipuria’s Authorized Representatives.

Adjudicating Officer Barnali Mukherjee left it open to SEBI to take enforcement actions, in terms of Regulation 28 of the SEBI  (Settlement  Proceedings)  Regulations,  2018, including restoring or initiating the proceedings in respect to which the settlement order was passed against the applicants, if:

  1. any representations made  by  the  applicant  in  the  settlement  proceedings  is subsequently found to be untrue; or
  2. The applicant breaches any of the clauses / conditions of undertakings/ waivers filed during the current settlement proceedings.

 

Factual Background

Varun Beverages and Pepsico entered into strategic partnership and concluded the same on December 21, 2017. In a press release dated January 04, 2018, it was disclosed that the VBL and Pepsico are going for strategic partnership for larger portfolio of Tropicana, Gatorade and Quaker value added dairy. Right after the press release there was a hike of 9.13% in one trading day.

Two more entities, namely, Spank Management Services Pvt. Ltd (owned and controlled by Patanjali Govind Keswani) and Fenton Investment Pvt. Ltd.(owned and controlled by Arvind Singhania) traded in scrip of VBL during Unpublished Price Sensitive Information(UPSI) period i.e. the period until it was disclosed by the company to Stock Exchange.The directors/ owners of these entities were connected to Lemon Tree Hotels Ltd. where the noticee was also a director. Patanjali Govind Keswani was the chairman and managing director of Lemon Tree Hotel Pvt. Ltd. Based on their connection with the noticee, both Spank and Fenton were suspected entities.It was alleged that the Noticee, being an insider and was in possession of UPSI, has communicated UPSI to Arvind Singhania (Fenton) and to Patanjali Govind Keswani (Spank), violating Section 12A(e) of the SEBI Act,1992  read with Regulation 3(1) of SEBI PIT Regulations, 2015.

Fenton placed an order to buy 15000 shares of VBL during UPSI period and Spank palced an order to buy 17685 shares during UPSI period. These shares were sold on January 05, 2018, immediately after the announcement was made public, post UPSI period.

SEBI observed that as per Regulation 2(1)(n)(iv) of SEBI PIT Regulations, 2015, this type of strategic partnership was constituted Price Sensitive Information(PSI) as a hike of 9.13% was seen in one day. As the period until it was disclosed by the company to Stock Exchange is considered as UPSI, hence, the period from December 21, 2017 to January 04, 2018 will be UPSI period in the case at hand. Ravi Kant Jaipuria was in possession of UPSI as he was privy to the discussion period from March 2017 to January 04, 2018.

SEBI conducted an investigation for the period December 05, 2017 to February 28, 2018. It then  appointed an Adjudicating Officer on October 11, 2021 to enquire and adjudge under the Section  15G(ii) of the SEBI ACT. The Settlement terms were placed before the High Powered Advisory Committee (HPAC) on May 10, 2022 and the committee stated that the adjudication proceedings may be settled on payment of the aforesaid amount and the same was communicated to applicant on June 10, 2022.

In light of the fact that Ravi Kant Jaipuria has remitted the respective settlement fees by way of online transfer on June 10, 2022 and the receipt of the same has been confirmed by SEBI on June 17, 2022, the adjudicating authority disposed off the ajudication proceedings initiated against Ravi Kant Jaipuria.

[Varun Beverages Limited, In re, Settlement Order No: SO/BM/DS/2022-23/6779, Order dated 21.06.2022]

 

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai (SAT): While lifting the restriction of buying or selling any securities, laid down by SEBI on employees of Infosys for allegedly violating the insider trading regulations, the Coram of Justice Tarun Agarwala (Presiding Officer) and Justice M.T. Joshi (Judicial Member) reiterated the settled law that burden of proof is always upon the prosecution, SEBI to prove that he had access to UPSI.

Instant appeal had been filed questioning the confirmatory order confirming the ex-parte ad-interim order whereby the appellant was restrained from buying or selling any securities, either directly or indirectly, till further orders.

Factual Background


SEBI had conducted an examination in respect of the trading activities of two partnership firm – M/s Capital One Partners and M/s Tesora Capital in the scrip of M/s Infosys Ltd.

Prima Facie it was observed that corporate announcement of audited financial results was made by Infosys on 15th July, 2020. The information relating to the financial results was an Unpublished Price Sensitive Information (UPSI) which came into existence on 29-6-2020 and came to an end on 15-7-2020 when the results were announced.

Further, it was found that the appellant was a Senior Corporate Counsel of Infosys and, being an officer/employee of Infosys, was reasonably expected to have access to the UPSI and, on a preponderance of probability basis, the appellant was in possession of UPSI and thus, was an insider under Regulation 2(1)(g) of the PIT Regulations.

On pre-liminary examination it was revealed that the appellant was in close connection with another employee Mr Venkata Subramaniam who was a Senior Principal and was designated person who was reasonably expected to and be in possession of UPSI and therefore, Mr Venkata was also an insider.

The appellant was closely connected to Mr Amit Bhutra, who was a partner in Capital One partner and Tesora Capital and passed on the UPSI to his cousin who in turn traded in the scrip of the Company prior to the announcement of the financial results. The examination further revealed that the two partnership firms through their trading had generated proceeds of Rs 279.51 lakhs in Capital Once Partners and Rs 26.82 lakhs in Tesora Capital.

Hence, an ex-parte ad-interim order was passed against the appellant.

Analysis and Decision


The WTM prima facie concluded that the appellant was an insider and since he was working as a Senior Corporate Counsel, he was expected to have access to UPSI or expected to be in possession of UPSI, being a connected person.

In Coram’s opinion, the impugned order confirming the ex-parte ad-interim order could not be sustained for the following reasons:

  • Under Regulation 3(5) of the PIT Regulations, 2015 all listed companies are mandated to maintain SD database containing details of all the persons with whom UPSI is exchanged alongwith the date and time stamping and verifiable audit trails. A specific finding has been given by the WTM that the SD data base which captures details of only those designated persons who had direct access to UPSI does not include the name of the appellant or of the designated person Mr. Venkata Subramaniam. Therefore, prima facie appellant 1 and other noticee Mr Venkata apparently did not have direct access to UPSI.
  • WTM further notes that there were 600 odd employees in Infosys who were classified as designated persons and further found that such classification as designated persons itself does not mean per se that such designated persons ipso facto were in possession of UPSI coupled with the fact that Mr. Venkata’s name was not found in the SD data base and, therefore, he had no direct access to UPSI.
  • Further, the telephonic conversation between the appellant and Mr. Venkata alognwith proof of certain emails exchanged between them indicates that the telephone calls were relating to some official matters regarding their respective domain of responsibilities in the Company. The telephone call discussions were relating to maternity benefits through Employees‟ State Insurance Corporation rather than through Infosys and, consequently, the initial burden upon the appellant stood discharged, namely, that he was not having any UPSI nor UPSI was passed on from Mr. Venkata to appellant in this telephonic conversation.
  • Burden of proof was wrongly placed upon the appellant that he did not pass on UPSI to Mr Amit Bhutra. It is settled law that the burden of proof is always upon the prosecution, namely, SEBI to prove that he had access to UPSI or that he was an insider.
  • In any case, the onus had been successfully discharged and continuation of the interim order on prima facie suspicion or preponderance of probability or reasonably expected to have access to UPSI appears to be farfetched only on the strength that the appellant was an employee in the Company and expected to have inside information.

Hence, in absence of evidence, the continuation of the interim order was unjustified especially when the appellant did not trade in the scrip and there was not any finding that he was a party to unlawful gain.

Therefore, debarring a person from accessing the securities market was not justified. The confirmatory order, as well as the interim order, cannot be sustained or quashed. [Pranshu Bhutra v. SEBI, Appeal No. 689 of 2021, decided on 25-4-2022]


Advocates before the Tribunal:

Mr. Mustafa Doctor, Senior Advocate with Mr. Anirudh Hariani, Mr. Anil Choudhary, Mr. Rahul Das and Ms. Sudarshana Basu, Advocates i/b. Finsec Law Advisors for the Appellant.

Mr. Shiraz Rustomjee, Senior Advocate with Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Aditi Palnitkar and Ms. Moksha Kothari, Advocates i/b. Vidhii Partners for the Respondent.

Appeal No. 689 of 2021:

Mr. Pramod Nair, Senior Advocate with Ms. Aakansha Luhach and Ms. Payal Saraogi, Advocates for the Appellant.

Mr. Shiraz Rustomjee, Senior Advocate with Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Aditi Palnitkar and Ms. Moksha Kothari, Advocates i/b. Vidhii Partners for the Respondent.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): The Coram of Santosh Kumar Mohanty (Whole Time Member) lifted restrictions imposed on 10 Entities who were alleged in insider trading, though the Tribunal added that the said relaxation was being granted subject to the outcome of appeal proceedings filed by SEBI against SAT Order before Supreme Court.

For conducting a preliminary examination in the scrip of Zee Entertainment Enterprises Ltd., SEBI’s purpose was to ascertain as to whether certain entities have traded in the said scrip while they were in possession of unpublished price sensitive information pertaining to audited financial results of ZEEL for the quarter ended on June 30, 2020, in contravention of the provisions of the SEBI Act read with PIT Regulations.

Pursuant to SEBI’s interim order, Entities in compliance with the direction issued therein, opened escrow accounts and deposited the proceeds as directed in the said order.

Analysis, Findings and Decision

Tribunal noted that the preliminary examination revealed prima facie that certain persons/entities traded in the scrip of ZEEL while they were in possession of UPSI about the Company and the genesis to the said observation was in the fact that Mr Bijal Shah, was holding an important post of Head of Financial Planning and Analysis, Strategy and Investor Relations and was also a designated person of ZEEL.

Further, Mr Bijal Shah was also noted to have been dealing with the aspects of financial performance and was part of all important meeting/discussion pertaining to the financial results of the Company and therefor was an insider under the PIT Regulations. He was also said to have been in connection with Mr Gopal Ritolia and Mr Jatin Chawla

Adding to the above, interim recorded that the trading pattern of the Entities during the UPSI period was marked by abnormal positions in the scrip of ZEEL and all of their trading positions were largely unidirectional during the UPSI period which were noticed to have been squared off substantially after the disclosure of the UPSI.

As per the Interim Order, Mr Gopal Ritolia and Mr Jatin Chawla were noticed to have started taking a bullish position in the scrip of ZEEL from the same day onwards, i.e., August 11, 2020, and have followed a similar trading pattern in the scrip of ZEEL during UPSI period as has been followed by the other Entities in the present proceedings.

The interim order following the doctrine of preponderance of probabilities prima facie observed that Mr Bijal Shah had apparently communicated the UPSI to Mr Jatin Chawala who in turn communicated the said UPSI to Entity 1 who further communicated it to Entity 1. The said entities were cousin brother, thereby enhancing the probabilities of sharing of the said UPSI based on which, trades were executed in the trading accounts of entities 3 to 9, wherein consistently bullish position was taken in the scrip of ZEEL.

In view of the above-stated chain of events and trading activities in the scrip of ZEEL, the entities were prima facie found to be in violation of relevant provisions of SEBI Act and PIT Regulations.

Further, this Coram noted that the entities have deposited a sum of Rs 14.22 crores in terms of the directions issued in the Interim Order.

Subsequent to such deposit of funds, the bank accounts of Entities have been unfrozen and restored to normalcy for all kinds of banking transactions.

“…considering the fact that in today’s age of technology with mushrooming applications that enable seamless calls and messages which provide service of end- to-end encryption assuring complete anonymity, it will be a simplistic assumption to state that the Entities would have communicated the UPSI with each other through the regular telephone calls only.”

Entities did not bring forward any document before the Tribunal warranting to interfere with the Prima Facie observations about their inter se connection and close relationship, made in the Interim Order.

In the present case, the UPSI was prima facie seen to have been received by the Entities from Jatin Chawla, who was further seen to have received it from a person Mr Bijal Shah, a senior official of the ZEEL who was integrally associated with the said price sensitive information of the Company.

“….even in the absence of any direct evidence, such matters of insider trading allegations are to be tested on the circumstantial evidence including the facts surrounding the conduct of parties and abnormal trading practices adopted by them which defy normal logic and business prudence. What is needed in such matters, is to appreciate from a factual matrix, the preponderance of probabilities of happening of such an event.”

The explanations and documentary evidence adduced before the Coram by the Entities to justify their action of indulging in those trades in the scrip of ZEEL during the UPSI period, did not carry adequate strength to dislodge the factual and circumstantial evidence mustered in the Interim Order to make a Prima facie charge of violations of PIT Regulations against them.

Tribunal gave liberty to the entities to submit all such justification before the fact-finding authority so as to justify that the trading behavior displayed by them in the scrip of ZEEL is normal and similar to the trading strategy adopted by them in various other scrips and that their trading strategy of 50-day Exponential Moving Average had been followed by them consistently in several other scrips as well.

While concluding, the Tribunal found that entities in the present matter were all regular and habitual traders and the UPSI which was received by the two cousin brothers Mr Amit B Jajoo and Mr Manish K Jajoo was immediately put to use for monetary gain in as many as seven trading accounts, all belonging to their family members, which glaringly exposed the propensity an illicit intent of the entities to commit violations of securities law.

Therefore, the restrictions on the Entities vide the interim Order deserves to be continued.

Though, keeping in view the pendency of an appeal on this subject matter before the Hon’ble Supreme Court of India and pending completion of investigation in the matter and with a view to remain in compliance with the order of the SAT issued in the case of the aforesaid five entities, Tribunal was inclined to grant similar interim reliefs to the Entities from the restrain imposed on them vide directions no. 106.1 and 106.4 of the Interim Order.

Lastly, the Tribunal remarked that, 

“It is however clarified here that the funds deposited by the Entities in an interest-bearing escrow account will remain in the said account with lien in favour of SEBI until further orders”

[Insider Trading in the shares of Zee Entertainment Enterprises Ltd., In Re., 2022 SCC OnLine SEBI 19, decided on 18-2-2022]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): S.K. Mohanty, Whole Time Member, in a detailed order held that the Managing Director, Abhay Bhutada along with the other entities, was involved in insider trading, and resultantly restrained the entities from the securities market, impounded their bank accounts among other things.  Further stated that if the Entities had any open position in any exchange traded derivative contracts, they can square off such open positions within three months from the date of order or at the expiry of such contracts, which ever is earlier.

In the pertinent matter, SEBI conducted preliminary examination into the trading scrip of Magma (a non-banking finance company)  to ascertain as to whether certain entities traded in the said scrip while they were in possession of the basis of Unpublished Price Sensitive Information ( UPSI) which were later alleged as contravention of the provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act, 1992”) read with the SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereinafter referred to as “PIT Regulations, 2015”).

The Tribunal in a detailed order of 46 pages, gave brief findings explaining the role of each entity in the manipulative, unusually abnormal trading pattern, wherein the relations between the entities was further established by the phone records and the transactions into the bank accounts.

The Court made several observations, such as:

– factual findings on the connections, phone calls and funds transfers amongst various Entities as well as transmission of UPSI from Entity no. 1 to other Entities as dealt with in detail in preceding paragraphs, it can now be prima facie held that the Entities, by pursuing a modus operandi, have carried out insider trading activities in the scrip of Magma, wherein each Entity has played his / her respective part in pursuance of the said modus operandi. Entity no. 1 by communicating UPSI to Entity nos. 2, 6 and 8 enabled them to engage themselves or facilitate other Entities to indulge in insider trading activities, and as is clearly borne out from the activities of Entity nos. 2, 6 and 8, they have quite apparently engaged themselves in insider trading activities.

-that this was a ‘compelling case of preponderance of probabilities leading to a prima-facie observation’.

-the sudden spurt of exuberance on the part of Entity no. 3 as an investor/trader in securities market towards a specific scrip i.e. the scrip of Magma and consequently such an abnormal trading in the scrip of the said Company during the UPSI period as demonstrated above, preponderantly indicates that the trades executed by Entity nos. 2 and 3 from the trading account of Entity no. 3 were prima facie based on or influenced by the possession of UPSI, by both the Entities.

-from the aforementioned business connections and financial dealings, apparently it becomes obvious that Entity no. 1 and 6 have known to each other for many years and both the Entities shared certain commercial relationships over the years.

-the trading done in the accounts of Entity nos. 6 and 7 in the scrip of the Company appears to be significantly influenced by the possession of UPSI by Entity no. 6.

-the fact that the trading account of Entity no. 6 with HDFC Securities from where the trades in the scrip of Magma were executed by Entity no. 6, was opened only on February 08, 2021 i.e. just one day prior to the trading in Magma, raises stoutly a bonafide suspicion about the abnormal trading pattern followed by these two Entities in the scrip of Magma.

-It is evident from the banking transactions noted in the paragraph above more so from such large amount of funds transfer in favour of Entity no. 1 from a company in which Entity no. 8 is the significant beneficial owner (SBO), that Entity no. 8 is sharing a close relationship with Entity no. 1.

-the funds for the buy trades executed in the scrip of Magma by Entity nos. 4 and 5 were sourced from premature withdrawal of Fixed Deposits and taking credit from the Overdraft account by Entity no. 4 and his wife

And held, I find that the pictorial representation (Figure 2) given below this paragraph very well illustrates the connections enjoyed and funds transfers made by different Entities amongst themselves as well as the trades executed by certain Entities in the scrip of Magma during the UPSI period based on or influenced by possession of UPSI which was prima facie transmitted by Entity no. 1 to other Entities. In my view the pictorial illustration provided below is fairly self-speaking and makes a very strong prima facie case of insider trading indulged in by the Entities based on preponderance of probabilities emerging out of the factual details about possession as well as communication of UPSI and use thereof for the insider trading in the scrip of Magma which have been explained at length in the preceding paragraphs of this order”.

Ensuingly impounded the bank accounts:

(i) Entity nos. 1, 6, 7 and 8 shall be jointly and severally liable for an amount of ₹8,32,80,941.

(ii) Entity nos. 4, 5 and 6 shall be jointly and severally liable for an amount of ₹3,49,95,920.

(iii)Entity no. 2 and 3 shall be jointly and severally liable for an amount of ₹1,76,03,579.

[Magma Fincorp Limited (now known as Poonawalla Fincorp Limited), In re, WTM/SM/ISD /13379/2021-22,decided on 15-09-2021


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Soma Majumdar, Adjudicating Officer, in six separate Adjudication Orders, while holding the Noticees liable for the alleged acts as per the submissions and the factors mentioned in Section 15J of the SEBI Act, 1992 (the Act) imposed a penalty of Rs 1,00,000/- each, under Section 15A(b) of the Act.

In the instant matter Titan Company Limited (TCL) intimated SEBI about the contravention of SEBI (Prevention of Insider Trading) Regulations, 2015 (PIT Regulations) and Company’s Code of Conduct for Prevention of Insider Trading by some of its designated persons/employees. After which, SEBI conducted an investigation in the scrip of TCL and observed certain violations by the designated persons of TCL.

The investigation revealed that the Noticees had traded in the shares of Titan during the period. Details of their trading are as under:-

Calendar Quarter Traded value at NSE Cash segment (Rs.) Traded value at NSE Derivatives segment (Rs.)

 

 

Traded value at BSE cash segment (Rs.) Total traded value (BSE +NSE) (Rs.)

 

 

Jayraj P.

 

April to June 2018

1,79,267

 

28,74,413 0 30,53,680

 

Arjun Vishwakarma

 

April to June 2018

40,62,132 0 0 40,62,132

 

Mekat George

 

April to June 2018

 

23,58,143

 

0 3,68,573 27,26,177

 

Punit Juneja

 

April to June 2018

0 32,50,200 0 32,50,200
 

 

Muniraj Radhakrishnan

 

April to June 2018

 

 

37,826

 

 

 

33, 03,600

 

 

0

 

 

33,41,426

 

Gangadhar Sudheer Kallihal

 

 

11,57,850 0 0 11,57,850

 

 

 

 

July to September 2018

 

19,32,221 0 0 19,32,221

Therefore, the issues before the Tribunal were:

1) Whether the Noticees have violated Regulation 7(2) (a) of PIT Regulations?

2) Does the violation, if any, attract monetary penalty under Section 15A (b) of the Act?

3) If yes, then what should be the quantum of monetary penalty?

The Noticees had contended that they were not aware about the Act, PIT regulations and the Company’s code of conduct for prevention of insider trading.

Answering in affirmation and denying the submissions so put forth by the Noticees, the Tribunal stated,

“As postulated by legal maxim ‘ignorantia juris non excusat’, ignorance of law is no excuse and everyone is presumed to know the law of the land. A person cannot defend his illegal actions by stating that he was not aware his actions were illegal, even if he honestly believed that they were not breaking the law”.

[Titan Company Limited, In re, Order/SM/DD/2021-22/ 13075, decided on 24-08-2021]


Combined Adjudication Order for:

Order/SM/DD/2021-22/ 13075

Order/SM/DD/2021-22/13074

Order/SM/DD/2021-22/ 13073

Order/SM/DD/2021-22/ 13076

Order/SM/DD/2021-22/ 13072

Order/SM/DD/2021-22/13078


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): Madhabi Puri Bach, (Whole Time Member) considering the impending danger to the interests of the investors passed an interim ex-parte order restraining all the 15 entities including Zee Entertainment Enterprises Ltd (ZEEL) from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever until further orders.

The 15 entities were — Bijal Shah, Gopal Ritolia, Jatin Chawla, Amit Bhanwarlal Jajoo, Manish Kumar Jajoo, Gomati Devi Ritolia, Daljit Gurucharan Chawla, Monika Lakhotia, Pushpadevi Jajoo, Bhawarlal Ramniwas Jajoo, Bhawarlal Jajoo HUF, Ritesh Kumar Kamalkishore Jajoo, Successure Partners, Yash Anil Jajoo and Vimla Somani.

In the pertinent matter the issue came to light after the alert system of the SEBI had generated insider trading alerts for the scrip of Zee Entertainment Enterprises Ltd. (hereinafter referred to as “ZEEL” / “Company”) for the month of August 2020 around the corporate announcement of audited financial results of ZEEL for the quarter ended June 30, 2020 made to BSE and NSE.

All the said entities had significant concentration in the scrip of ZEEL only around the announcement as compared to the earlier periods. It was observed that the Noticees were connected entities in taking long positions in the scrip in the cash and derivatives segments of ZEEL prior to the announcements and had sold the shares and squared off their open position in the scrip, subsequent to the announcement. Meanwhile, Noticees had prima facie generated substantial proceeds. The entities had used the trading accounts of their family members in order to avoid regulatory detection.

The Tribunal was of the opinion that,

“Considering the facts and circumstances of this case and violations as prima facie found in this case and prima facie repetitive and common trading pattern in the scrip of ZEEL by Noticees No. 2 to 5 during the period close to corporate announcements by ZEEL and the use of connected entities accounts to engage in prima facie insider trading activities, I am convinced that this is a fit case where, pending detailed examination, effective and expeditious preventive action is required to be taken by way of ad interim ex–parte order to protect the interests of investors and preserve the safety and integrity of the securities market. Such action needs to be taken to prevent any further harm to investors”.

And while restraining the 15 entities involved and giving due consideration to the impending danger to the interest of the potential investors, stated,

“Since the conduct of the aforementioned Noticees, do not, prima facie, appear to be in the interest of investors and the securities market, necessary action has to be taken against them immediately, else it may lead to loss of investors’ trust in the securities market. The insider trading activity not only causes notional monetary loss to investors but also has the effect of interfering with the development of securities market, as investor tend to lose faith in the securities market. The same is detrimental to the development of the securities market and qualifies as an “irreparable injury. The objective of SEBI as enshrined in the SEBI Act is not only the protection of investors but also orderly development of securities market”.[Zee Entertainment Enterprises Ltd., In re; 2021 SCC OnLine SEBI 199; decided on 12-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): Suresh B Menon, Adjudicating Officer, imposed a monetary penalty of Rs three lakh on Viaan Industries and its promoters under the provision of Section 15A(b) of the SEBI Act, for violating Regulations 7(2), 7 SEBI 7(2) (a)  and 7 (2) (b) of the Prohibition of Insider Trading Regulations, 2015 (PIT).

In the pertinent matter, on October 29, 2015, Viaan Industries Limited (VIL) made a preferential allotment of 5,00,000 equity shares to four persons and in the said preferential allotment 1,28,800 shares each were allotted to Noticee no. 1 & 2 viz., Ripu Sudan Kundra and Shilpa Shetty Kundra, respectively. Both the noticees were required to make the necessary disclosure to the company in terms of the provisions of Regulation 7(2) (a) of the PIT Regulations, as the relevant transactions in question through the aforementioned preferential allotment exceeded Rupees 10 Lakh in value. And the Company was required to make the necessary disclosures to the stock exchange within two trading days of the receipt of the disclosures from Noticee no. 1 and 2 or from becoming aware of such information pertaining to the transactions. But during the course of investigation, it was observed that the Noticees allegedly failed to make the relevant disclosures required under Regulations 7 (2) (a) and 7 (2) (b) of the PIT Regulations within the stipulated time period. Thereafter, it was further observed that even when the disclosure was so made it was after a delay of more than 3 years.

The notices submitted that “the delay in making the necessary disclosures under the PIT (Prohibition of Insider Trading) Regulations was due to inadvertence and without any malafide intention.”

The adjudicating officer, while rejecting the submission, stated that, “the disclosure requirements mandated under the respective regulations serve very important purposes. The stock exchange is informed so that the investing public will come to know of the position enabling them to stick on with or exit from the company. Timely disclosures of the details of the shareholding of the persons acquiring substantial stake is of significant importance as such disclosures also enable the regulators to monitor such acquisitions. In the instant matter, the acquisition of shares by the promoters through the preferential allotment having value of more than Rs 10 Lakh is of relevance from an investors’ perspective”.

Therefore, considering the available records and facts and circumstances of the case at hand imposed a monetary penalty upon the Noticees under section 15 A (b) of the SEBI Act.[Viaan Industries Limited, In re, Order/SBM/KL/2021-22/12740-12742, decided on 28-07-2021]


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): G. Mahalingam (Whole Time Member) held that while directors are not prohibited from trading in units of the schemes managed by the Asset Management Company, they should ensure that such trading conforms to ethical and moral standards and legal norms expected to be complied by a person entrusted with quasi-fiduciary responsibilities.

Unfair trade Practice or Fraudulent?

Whether the redemption of units in some schemes of a mutual fund by a director of the Asset Management Company of the Mutual Fund and his immediate family, at a time when the said schemes were facing significant redemption pressure (schemes were later wound up) and the director was allegedly in possession of material non-public information relating to the same, would fall within the scope of ‘fraudulent’ or ‘unfair trade practice’ as defined under SEBI(Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

Background

Franklin Templeton Mutual Fund (FT-MF) is s SEBI registered mutual fund. Franklin Templeton Asset Management Company Ltd. (“FT–AMC”) is the Asset Management Company and Franklin Templeton Trustee Services Pvt. Ltd. (“Trustees”) acts as the Trustee of FT–MF.

Vide notice dated 23-04-2020, Trustees informed the unit holders of certain schemes of FT-MF that it was winding up the schemes in conformity with the provisions of Regulation 39(2)(a) of the SEBI (Mutual Fund) Regulations, 1996.

SEBI ordered Forensic Audit/Inspection in terms of Regulation 66 of the Mutual Fund Regulations and found that Noticee’s 1, 2 and 3 had redeemed units in the Impugned Debt Schemes during the period. In view of the same, SEBI issued a Show Cause Notice.

Analysis, Law and Decision

Insider trading Regulations

 Insider Trading Regulations, when they were notified in 1992, primarily sought to prohibit ‘insiders’ connected to the issuer of the security from trading on the basis of superior information obtained during the course of their employment or association with the issuer; whereas the PFUTP Regulations covered other forms of trading done by exploiting information asymmetries by any person, even though he may not be an ‘insider’ or connected to an ‘insider’.

Board noted that Courts have recognized that certain types of trades executed on the basis of superior information would fall within the definition of ‘fraud’ under PFUTP Regulations 2003.

Laws dealing with information asymmetries (PIT Regulations and PFUTP Regulations) essentially seek to address the issues arising out of disparities in access to material information, that is otherwise not legally available to general investors, and to prevent those persons having access to such superior information from exploiting the informational advantage, in order to protect the integrity of the market and maintain investor confidence.

Bench noted that Noticee 1 could reasonably be expected to be privy to material non-public information and it was held that redemption of units was done while being in possession of material non-public information.

Board expressed that the timing of the trades is also crucial circumstantial, evidence in the present matter.

Trades by Noticee  2, who is the wife of Noticee 1, was undertaken on March 23, 2020, and March 24, 2020- i.e. the trades were done in close proximity to the dates when Noticee 1 started redeeming his investments as well as that of Noticee 3. It is further seen that on March 24, 2020, both Noticee 1, on behalf of Noticee 3, and Noticee 2 were redeeming units.

It needs to be borne in mind that Noticee  2 was also experienced finance professional in her own right. Given her experience, she was expected to be aware of the sensitivity of the transactions undertaken by Noticee 1, being a key functionary of the AMC with access to material non-public information and its implications.

Given the facts and circumstances under which Noticee 2 had redeemed the units, it leads the Bench to conclude that such redemptions were done on the basis of material non-public information Noticee  1 had in respect of the Impugned Debt Schemes.

Whether the redemptions can be considered as fraudulent trades?

SEBI held that it found it difficult to hold that redemption of units by the Noticees satisfies the parameters of ‘fraud’ as defined under regulation 2(1)(c) read with regulation 3(a) of the PFUTP Regulations 2003, also the conduct of the Noticees did not satisfy the requirements for sustaining the charge under regulation 4(2)(q) of PFUTP Regulations 2003. 

Whether the redemptions can be considered as an Unfair trade practice? 

‘Unfair trade practice’ is not defined under the PFUTP Regulations 2003.

Supreme Court in the decision of SEBI v. Kanaiyalal Baldevbhai Patel, (2017) 15 SCC 1 has observed that the scope of the term ‘unfair trade practise’ is wider than that of the term ‘fraud’ and activities which do not satisfy the parameters of ‘fraud’ could independently have proceeded under Regulation 4(1) if it can be considered as an ‘unfair trade practice’.

Bench expressed that the primary purpose for having laws prohibiting trading on the basis of asymmetric access to information is to foster confidence in the securities markets. Such trading by directors of a company is also a breach of the fiduciary duty as the insider effectively converted corporate information for private profits to the detriment of the other investors.

SEBI expressed that Regulations 18(25)(B)(vi) and 18(27)(vi), respectively, required the Trustees and the independent directors of the AMC/Trustee to put in place a ‘code of ethics’ which were designed to prevent fraudulent, deceptive or manipulative practices by insiders in connection with personal securities transactions. It was further noted that the AMC had formulated a Policy on Conflict of Interest.

Policy, which listed the obligations of the relevant persons, inter alia, requires employees and directors to “not [participate] in decision making in case person [is] having actual perceived or potential conflicts of interest in the transaction” and also requires them to “pro-actively report any actual perceived or potential conflicts of interest.”

Board added that Noticee 1 being a person having wide experience in securities market, it was expected that his conduct would be line with the quasi-fiduciary responsibility that a director of an AMC owed to the unitholders of the mutual fund.

On making an investment in the impugned debt schemes, Noticee 1 should have upfront declared his investments to AMC and should have sought to recuse himself from any decision related to the Impugned Debt Schemes and should have also refrained himself from accessing any non-public information relating to the schemes, material or non-material.

Therefore, the conduct of Noticee 1 in redeeming units in the Impugned Debt Schemes while in possession of material non-public information was not in line with the high ethical standards expected of a person vested with such quasi-fiduciary responsibilities and the same was also not in compliance with the ‘code of ethics’ and the ‘Conflict of Interest Policy’ of the AMC which clearly spelt out restrictions on dealing in securities while in possession of material non-public information.

Redemption of units by a director of the asset management company of a mutual fund while being privy to material non-public information cannot be considered as fair conduct.

Conclusion

Redemption of units by the Noticee 1 on his own behalf and on behalf of Noticee 3 while being privy to material non-public information was an ‘unfair trade practice’ and in contravention of Regulation 4(1) of PFUTP 2003.

Facts and circumstances and timing of the redemptions made by Noticee 2 lead to a distinct likelihood that the said redemptions were also based on material non-public information passed on by Noticee 1.

Since during the course of proceedings, Noticee 3 expired, proceedings against were abated.

However, since Noticee 1 had done the transactions on behalf of Noticee 3, the directions of disgorgement will be applicable to the corpus standing in the name of Noticee 3 also.

Directions

  1. Noticee 1 and Noticee 2 shall be restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of one (1) year from the date of this order. During the period of restraint, Noticee 1 and Noticee 2 shall not liquidate their existing holding of securities including the units of mutual funds.
  2. Noticee 1 and Noticee 2 shall jointly and severally transfer the amounts mentioned within a period of forty-five (45) days, from the date of receipt of this order. In case of failure to do so, simple interest at the rate of 12% per annum shall be applicable from the expiry of the said 45 days till the date of actual transfer;
  3. Noticee 1 shall be liable to pay a monetary penalty of Rs 4 crores for the redemptions undertaken on his own behalf and on behalf of Noticee 3, and Noticee 2 shall be liable to pay a monetary penalty of Rs 3 crores for the redemptions from her account, under Section 15HA of the SEBI Act, 1992;
  4. Noticee 1 and Noticee 2 shall pay their respective penalties within a period of forty-five (45) days, from the date of receipt of this order. In case of failure to do so, simple interest at the rate of 12% per annum shall be applicable from the expiry of the said 45 days till the date of actual payment.

[Franklin Templeton Mutual Fund, In Re.,  2021 SCC OnLine SEBI 131, decided on 7-06-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): Madhabi Puri Buch (Whole Time Member), prima facie found two Infosys employees and 6 others violating the SEBI (Prohibition of Insider Trading) Regulations, 2015 [insider trading regulations] and hence all have been restrained from buying, selling or dealing in securities pending detailed examination and until further orders.

Background

 SEBI alert system-generated insider trading alerts for the scrip of Infosys Limited for the period of July 15, 2020.

Based on the SEBI alerts, a preliminary examination was conducted to ascertain whether certain persons/entities traded in the scrip of INFY while they were in possession of/ on the basis of unpublished price sensitive information in contravention of provisions of SEBI Act read with SEBI (Prohibition of Insider Trading) Regulations, 2015 [PIT Regulations]?

INFY Scrip is in Future and Option Segment and a part of SENSEX and NIFTY.

As per the SEBI Examination, it was found that Noticee 1 to 5 had prima facie violated the provisions of SEBI Act and PIT Regulations.

Venkata/Noticee 8, Senior Principal, Corporate Accounting Group of INFY, had been identified as a Designated Person by INFY for the purpose of UPSI and by virtue of that he was reasonably expected to have access to and be in possession of the UPSI. Thus, Venkata is an insider. Pranshu who was connected with Venkata is also an insider.

Venkata had communicated the UPSI to Pranshu and Pranshu had procured UPSI from Venkata and thereby Venkata and Pranshu had prime facie violated the provision of SEBI Act and PIT Regulations.

 Analysis & Finding

Issue No. 1: Whether information relating to the financial results of INFY including basic financial parameters of profit & loss (P&L) and balance sheet (BS) as well as key financial and operational parameters which contribute to various elements of the P&L and BS for the quarter ending June 30, 2020 was UPSI. If so, what was the UPSI Period?

Issue No. 2: Whether Pranshu, Amit and Bharath are insiders in terms of PIT Regulations, 2015?

Issue No. 3: Whether Amit and Bharath, while in possession of and on the basis of UPSI, had traded in the scrip of INFY on behalf of Capital One?

Issue No. 4: Whether Amit, while in possession of and on the basis of UPSI, had traded in the scrip of INFY on behalf of Tesora?

Issue No. 5: Based on the answers to issue Nos. 1 to 4, whether there are the relevant provisions of SEBI Act and PIT Regulations that have been violated by Noticee No. 1 to 5 and who all are prima facie liable for the same?

Issue No. 6: Whether Venkata is an insider and whether there is prima facie evidence that he had also communicated the UPSI to Pranshu? If yes, then what are the relevant provisions of SEBI Act and PIT Regulations that have been violated by them?

Issue No. 7: On the determination of the above issues, whether urgent directions, if any, should be issued in the present matter?

Understanding Price Sensitive Information & its implication

Positive UPSI:

If an insider was in possession of positive UPSI about a Company, and traded while in possession of such UPSI, he would be expected to buy the shares of the Company before such information became public. Once the information became public, since it was positive in nature, it would be expected that the share price of the company would go up and the insider would then sell the shares at such higher price, thereby making a profit using the UPSI.

It may be noted though, that the policy of the PIT Regulation is to prevent dealing in securities, while in possession of UPSI irrespective of whether the UPSI is positive or negative and irrespective of whether profit is made or not.

Negative UPSI:

If the UPSI happened to be negative, then the insider would be expected to sell the shares of the Company at a particular price before the UPSI became public (including short selling if he did not already hold the shares).

What is Delta?

A metric called the “Delta” of the positions is such a metric that is used by the market and the traders to monitor their overall net position across all their trades/positions.

This metric nets out all the camouflage and all the complexity, and gives a simple measure of how much approximate profit the insider stands to make if his directional view based on the UPSI turns out to be rights and equally, how much loss stands to make if his directional view turns out to be wrong.

Issue Wise findings

Issue No. 1:

Regulation 2(1)(n) of PIT Regulations defines “unpublished price sensitive information”.

Regulation 2(1)(n) of PIT Regulations:

 

“unpublished price sensitive information” means any information relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: –

  1. financial results; ……

 Bench found that the information relating to the financial results of INFY which contributed to the various elements of the P&L and B&S for the quarter ended on June 30, 2020 was Price Sensitive Information and on account of the same being unpublished until July 25, 2020 it was Unpublished Price Sensitive Information (UPSI).

Pursuant to UPSI being available publicly on July 15, 2020 there was a sudden rise in price of INFY scrip that could not be attributed to a general risk in the market.

Based on Structured Digital Database (SDD) it was prima facie found that the UPSI had come into existence on June 29, 2020.

SEBI found no material on record to discredit the assertion of the Company about timing of existence of UPSI.

In Board’s opinion, UPSI was made public on July 15, 2020, hence the UPSI Period will be from June 29, 2020 to July 15, 2020.

Issue No. 2:

It was noted that frequent telephonic communication happened between Amit and Pranshu on 7 occasions and out of which the largest duration call was made on July 9, 2020.

On noting various factors, SEBI prima facie was of the view that:

(a) Pranshu is a connected person on account of being an officer/employee of INFY (Senior Corporate Counsel) that allows him, directly or indirectly, access to the UPSI / he is reasonably expected to have access to the UPSI and on the preponderance of probability basis he is in possession of the UPSI

(b) Pranshu has communicated the UPSI to Amit in some form and manner and Amit has procured the UPSI from Pranshu in some form and manner; and

(c) Amit has communicated the UPSI to Bharath and Bharath has procured the UPSI from Amit in some form and manner.

SEBI’s finding on this issue:

  • Pranshu,being an officer/employeeofINFY(SeniorCorporateCounselofINFY),is a connected person under Regulation 2(1)(d) of PIT Regulations and is reasonably expected to have access to the UPSI and on preponderance of probability basis he is in possession of the UPSI. Therefore, Pranshu is an insider as per Regulation 2(1)(g)(i) & (ii) of PIT Regulations.
  • Amit has been connected with Pranshu, (an employee of INFY) (a) through frequent telephonic communication; (b) Pranshu had fund transaction with Mahrishi and Mahrishi had fund transaction with Shyama Devi Bhutra (Mother of Amit) and (c) Ram Bilas Bhutra (Father of Pranshu) and Amit are directors in Mahrishi. Thus, Amit is a connected person under Regulation 2(1)(d) of PIT Regulations and is reasonably expected to have access to the USPI and on preponderance of probability basis he is in possession of the UPSI. Hence, Amit had procured UPSI from Pranshu and was in possession of the UPSI. Therefore, Amit is an insider as per Regulation 2(1)(g)(i) of PIT Regulations.
  • Bharath and Amit are both working partners of Capital One Partners. Bharath, being in constant touch with Amit through (a) professional relationship and (b) telephonic communication. Thus, by virtue of that relationship it gives Bharath, directly or indirectly, access to unpublished price sensitive information through Amit. Hence, Bharath had procured the UPSI from Amit and on preponderance of probability basis he is in possession of the UPSI. Therefore, Bharath is an insider as per Regulation 2(1)(g)(ii) of PIT Regulations.

Issue No. 3:

Yes, Prima Facie it was observed that both Amit and Bharath being insiders, while in possession of the UPSI, during the UPSI period, had  placed orders/trading instruction on behalf of Capital One for trading the securities of INFY.

Prima Facie, it was also found that trades of Capital Once in the securities of INFY were not only executed while in possession of the but also on the basis of the UPSI.

Issue No. 4:

Amit, Manish and Ankush are working partners of Tesora having 35%, 35% and 30% share respectively in profit or loss arising out of business income.

Board prima facie opined that Amit was an insider and had access to and possession of the UPSI. Amit being an insider, while in possession of the USPI, during the UPSI period, had placed orders / trading instructions on behalf of Tesora for trading in the securities of INFY.

Trades of Tesora in the securities of INFY were not only executed while in possession of the UPSI but also on the basis of the UPSI.

Issue No. 5

Pranshu a prima facie insider, on July 02, 2020  and on July 09, 2020 (i.e. one day prior to the start of trading by Capital One) had spoken to Amit (working partner of Capital One).

Coupled with Pranshu’s connection with Amit through Mahrishi and the fact that on July 10, 2020 Capital One started building significant position in the scrip of INFY, prima facie, it lead to the conclusion, on preponderance of probability basis, that Pranshu, who was prima facie had access to and in possession of the UPSI, had communicated the UPSI to Amit in some form or manner. Hence, Pranhsu Bhutra has prima facie violated the provision of Section 12A (e) of SEBI Act, 1992 and Regulations 3(1) of PIT Regulations.

Amit prima facie had procured the UPSI from Pranshu and communicated the same to Bharath. He traded on behalf of Capital Once and Tesora prima facie while in possession of an on the basis of the UPSI. Hence, Amit Bhutra violated the provisions of Section 12A (d) & (e) of SEBI Act, 1992 and Regulations 3(1), 3(2) & 4(1) of PIT Regulations.

Even Bharath C Jain prima facie violated the provision of Section 12A (d) & € of SEBI Act, 1992 and Regulations 3(2) & 4(1) of PIT Regulations.

Amit and Bharath were both working partners of Capital One and both had, prima facie, while in possession of and on the basis of the UPSI, placed orders / given trading instructions on behalf of Capital One.

From July 10, 2020, Capital One had started building a significant position / delta in the scrip of INFY. Due to the said trading, Capital One had generated proceeds of Rs. 2,79,51,432/-.

Hence, Capital One prima facie violated the provision of Section 12A (d) & (e) of SEBI Act, 1992 and Regulations 4(1) of PIT Regulations.

A partner of Capital One who indulges in such conduct / omission, is also liable under securities laws, if his act/omission is in violation of any provision under securities law.

Board noted that,

As per Section 27 of SEBI Act, for a contravention of law committed by the firm, apart from the firm, the partners of firm, who, at the time of contravention was committed

(a) were in charge of, and responsible to the firm for the conduct of the business of the firm; or

(b) were having knowledge of the said contravention of law; or

(c) had failed to exercised due diligence to prevent the said contravention of law; or

(d) had contributed to the contravention of law through their consent or connivance of or neglect, are also liable for said contravention of law committed by the firm and punished accordingly.

Prima Facie in respect of trading carried out in the name of Capital One in the scrip of INFY was a violation of securities laws and the partners Amit Bhutra and Bharath C Jain were in charge of the affairs. Hence as per Section 27 of SEBI Act both of them were severally and jointly liable with Capital One for the violations of provisions of SEBI Act and PIT Regulations committed by Capital One and consequently for impounding of proceeds generated through prima facie  insider trading.

Tesora Capital

Amit was the working partner of Tesora and prima facie while in possession of and on the basis of the UPSI had placed orders/given trading instructions on behalf of Tesora. Hence, prima facie Tesora had violated the provisions of Section 12A (d) & (e) of SEBI Act, 1992 and Regulations 4(1) of PIT Regulations.

Section 25 of IPA deals with situations where the act of the firm has caused loss / injury to a third party.

The liability of acting partners and non-acting partners (collectively known as firm) for the injury to the third party is an outcome of joint and several liability of such partners under IPA, irrespective of whether that the conduct (act of omission or commission of the firm) which gave rise to the loss/injury to the third party is also in violation of any provision under securities law.

In view of Section 27 of SEBI Act, Mr. Amit Bhutra is, prima facie, liable, jointly and severally with Tesora for proceeds of Rs 26,81,916/- generated by Tesora through prima facie insider trading activity.

As per Section 25 of IPA read with Section 2(a) of IPA, Mr Manish C Jain and Mr.Ankush Bhutra were, prima facie, liable, jointly and severally with Tesora and Mr Amit Bhutra for proceeds of Rs 26,81,916 /- generated by Tesora through prima facie insider trading activity.

Issue 6:

Prima facie Venkata was a connected person under Regulation 2(1)(d) of PIT Regulations and also a Designated Person for the UPSI, and thus had access to and possession of the UPSI, hence prima facie  was also an insider as per Regulation 2(1)(g)(i) of PIT Regulations.

Further, long duration call between Venkata and Pranshu on July 02, 2020 (i.e. few days after the UPSI came into existence) and on July 09, 2020 (i.e. one day prior to the start of trading by Capital One), prima facie lead to the conclusion on preponderance of probability basis, that Venkata, who was in possession of the UPSI, had prima facie communicated the UPSI to Pranshu in some form or manner.

Therefore, Venkata Subramaniam V. V. prima facie violated the provision of Section 12A(e) of SEBI Act, 1992 and Regulation 3(1) of PIT Regulations.

Pranshu, who was prima facie in frequent communication with Venkata through phone calls during the UPSI period, prima facie was a connected person under Regulation 2(1)(d) of PIT Regulations. Pranshu had a long duration call with Venkata on July 02, 2020 (i.e. few days after the UPSI came into existence) and on July 09, 2020 (i.e. one day prior to the start of trading by Capital One). This prima facie leads to the conclusion, on preponderance of probability basis that Pranshu had prima facie procured UPSI from Venkata.

Therefore, Pranshu was once again found to be an insider under Regulation 2(1)(g)(ii) of PIT Regulations and Pranhsu Bhutra prima facie violated the provision of Section 12A (e) of SEBI Act, 1992 and Regulations 3(2) of PIT Regulations.

Issue 7:

Coram held that since the conduct of the aforementioned entities, do not, prima facie, appear to be in the interest of investors and the securities market, necessary action has to be taken against them immediately, else it may lead to loss of investors’ trust in the securities market.

Board observed that considering the facts and circumstances of this case and violations as prima facie found in this case and prima facie repetitive trading pattern in the scrip of INFY by Capital One and Tesora during the period close to the announcement of financial results for the quarters ended December 31st 2019, March 31st 2020, June 30th 2020 and September 30th 2020, this is a fit case where, pending detailed examination, effective and expeditious preventive and remedial action is required to be taken by way of ad interim ex – parte order to protect the interests of investors and preserve the safety and integrity of the securities market.

Order

SEBI issued the following directions:

71.1.  Mr. Pranshu Bhutra, Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital and Mr. Venkata Subramaniam V. V are restrained from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever until further orders;

71.2.  Mr. Manish C Jain and Mr. Ankush Bhutra are restrained from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever until the compliance of direction mentioned at paragraph 71.5 below;

71.3.  If Mr. Pranshu Bhutra, Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital,Mr. Venkata Subramaniam V. V,Mr. Manish C Jain and Mr. Ankush Bhutra have any open position in any exchange traded derivative contracts, as on the date of the order, they can close out / square off such open positions within 3 months from the date of order or at the expiry of such contracts, whichever is earlier. The said entities are permitted to settle the pay-in and pay-out obligations in respect of transactions, if any, which have taken place before the close of trading on the date of this order;

71.4.  The bank accounts of Capital One Partners, Mr. Amit Bhutra and Mr.Bharath C Jain to the extent of amount mentioned above is impounded. Further, Capital One Partners, Mr. Amit Bhutra and Mr. Bharath C Jain are directed to open an escrow account with a nationalized bank, jointly and severally and deposit the impounded amount mentioned therein which has been prima facie found to be proceeds generated from the prima facie insider trading, in this Order, within 15 days from the date of service of this order. The escrow account/s shall be an interest-bearing escrow account and shall create a lien in favour of SEBI. Further, the monies kept therein shall not be released without permission from SEBI;

71.5.  The bank accounts of Tesora Capital, Mr. Amit Bhutra, Mr. Manish C Jain and Mr. Ankush Bhutra to the extent of amount mentioned in table no. 13 at paragraph 58 above is impounded. Further, Tesora Capital, Mr. Amit Bhutra, Mr. Manish C Jain and Mr. Ankush Bhutra are directed to open an escrow account with a nationalized bank, jointly and severally and deposit the impounded amount mentioned therein which has been prima facie found to be proceeds generated from the prima facie insider trading, in this Order, within 15 days from the date of service of this order. The escrow account/s shall be an interest bearing escrow account and shall create a lien in favour of SEBI. Further, the monies kept therein shall not be released without permission from SEBI;

71.6.  Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital, Mr. Manish C Jain and Mr. Ankush Bhutra are directed not to dispose of or alienate any assets, whether movable or immovable, or any interest or investment or charge on any of such assets held in their name, jointly or severally, including money lying in bank accounts except with the prior permission of SEBI until the impounded amount is deposited in the escrow account..

71.7.  Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital, Mr. Manish C Jain and Mr. Ankush Bhutra are directed to provide a full inventory of all assets held in their name, jointly or severally, whether movable or immovable, or any interest or investment or charge on any of such assets, including details of all bank accounts, Demat accounts and mutual fund investments, immediately but not later than 5 working days from the date of receipt of this order;

71.8.  The banks where Capital One Partners, Tesora Capital, Mr. Amit Bhutra, Mr. Bharath C Jain, Mr. Manish C Jain and Mr. Ankush Bhutra are holding bank accounts, jointly or severally, are directed to ensure that till further directions, except for compliance of direction at paragraph 71.4 & 71.5, no debits are made in the said bank accounts without the permission of SEBI. The banks are directed to ensure that all the above directions are strictly enforced. On production of proof of deposit of entire amount mentioned in column 4 of table no. 13 in respect of serial No.1 entities by any of the entities mentioned in column 2 corresponding to serial No.1 of table no. 13, in the escrow account, SEBI shall communicate to the banks to defreeze the accounts corresponding to all the entities mentioned in the column No. 2 of table no. 13 corresponding to serial No.1. Similarly on production of proof of deposit of entire amount mentioned in column 4 of table no. 13 in respect of serial No.2 entities by any of the entities mentioned in column 2 corresponding to serial No.2 of table no. 13, in the escrow account, SEBI shall communicate to the banks to defreeze the accounts corresponding to all the entities mentioned in the column No. 2 of table no. 13 correspondings to serial No.2. However, in case of entities who are falling in both serial no.1 and 2 and full deposit of amount mentioned in column no.4 of serial no.1 and 2 has not been made, such persons bank account shall remain frozen till the entire amount mentioned in column no.4 of serial no.1 and 2 are deposited.

71.9. The Depositories are directed to ensure, that till further directions, no credits are made in the demat accounts of the Noticee No. 1 to 8, held individually or jointly. The depositories are further directed to ensure that till further direction except for compliance of direction mentioned at paragraphs 71.3, 71.4 and 71.5, no debits are made in the demat accounts of the said Noticees, held individually or jointly.

71.10.The Registrar and Transfer Agents are also directed to ensure that till further directions, no credits are permitted and that except for compliance of direction at paragraph 71.4 and 71.5 the securities / mutual funds units held in the name of the Noticee No. 1 to 8, jointly or severally, are not transferred/redeemed.

[Insider Trading in Shares of Infosys Ltd.,  In Re., 2021 SCC OnLine Sebi 126, decided on 31-05-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Authority (SAT): A Coram of Tarun Agarwala, J. (Presiding Officer), Dr C.K.G Nair (Member) and M.T. Joshi, J.( Judicial Member) has set aside an order passed by SEBI’s insider trading charges against employees of stockbroking firm who had ‘forwarded as received’ messages on Whatsapp regarding unpublished quarterly results of leading companies.

The pertinent question involved was:

Whether a “forwarded as received” WhatsApp message circulated on a group regarding quarterly financial results of a Company closely matching with the vital statistics, shortly after the in-house finalization of the financial results by the Company and some time before the publication/disclosure of the same by the concerned Company, would amount to an unpublished price sensitive information under the provisions of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations, 2015).

The counsel for the appellant argued that merely passing of the information without any trading in the scrips of the concerned company, would not amount to a violation of PIT Regulations. Further, that the respondents failed to prove any preponderance of probabilities that the impugned messages were unpublished price sensitive information, that the appellants knew that it was unpublished price sensitive information and with the said knowledge they or any of them had passed the said information to other parties.

SEBI while answering in affirmation had penalised the appellant for releasing Unpublished Price Sensitive Information related to financial results of Asian Paints through WhatsApp messages. Besides, other analysts from other brokerages were also fined. The Adjudicating Officer in all the proceedings before him answered the question in the affirmative and imposed a 10 penalty of Rs. 1500000/, on the appellants in each of the proceedings.

The Appellate Tribunal refuting the same, was of the opinion, “…that merely passing of the information without any trading in the scrips of the concerned company, would not amount to violation of PIT Regulations…”. Also took note of the fact, “…that trading having possession of unpublished price sensitive information is prohibited. However, since Regulation 3, PIT Regulations, 2015, clearly prohibits passing of unpublished price sensitive information otherwise than for valid reasons. However, in the facts of the case, in our view, the respondents failed to prove any preponderance of probabilities that the impugned messages were unpublished price sensitive information, that the appellants knew that it was unpublished price sensitive information and with the said knowledge they or any of them had passed the said information to other parties. Resultantly the Coram set aside the order.[Shruti Vora v. SEBI, Misc. Application No.347 of 2020 and Appeal No. 309 of 2020, decided on 22-03-2021]


Counsel for the Appellants

Somasekhar Sundaresan with Kunal Katariya, Sahebrao Wamanrao Buktare, and Ravi Vijay Ramaiya, Chartered Accountant i/b. Shah & Ramaiya Chartered Accountants for the Appellant Shruti Vora.

 Kunal Katariya with Sahebrao Wamanrao Buktare, and Ravi Vijay Ramaiya, Chartered Accountant i/b. Shah & Ramaiya Chartered Accountants for the Appellant Neeraj Kumar Agarwal.

Pesi Modi with Kunal Katariya,  Sahebrao Wamanrao Buktare and Ravi Vijay Ramaiya, Chartered Accountant i/b. Shah & Ramaiya Chartered Accountants for the Appellant Parthiv Dalal.

 Deepak Dhane, with Ramakant Kini, i/b Sterling Associates for the Appellant.

Counsel for the Respondent

Zal Andhyarujina with Suraj Choudhary, Nidhi Singh,  Maithalli Parikh,  Kinjal Bhatt,  Hersh Choudhary, i/b. Vidhii Partners for the Respondent.

Case BriefsInternational Courts

European Court of Justice: The Grand Chamber presided by K. Lenaerts, President, addressed the reference question concerning interpretation of Articles 47 and 48 of the Charter of Fundamental Rights of the European Union to determine lawfulness of penalties imposed on one DB for offences of insider dealing and failure to cooperate in the context of an investigation conducted by Consob (National Companies and Stock Exchange Commission, Italy).

The Dispute in the Main Proceedings

By decision dated 02-05-2012, Consob, imposed two financial penalties of EUR 200 000 and EUR 100 000 respectively on DB, for an administrative offence of insider trading committed, under two heads, namely insider dealing and the unlawful disclosure of inside information. It had also imposed on him a financial penalty of EUR 50 000 on the ground that the person concerned had declined to answer questions put to him when he appeared at hearing.

In that court’s view, right to remain silent and to avoid self-incrimination, based on the provisions of the Constitution, of European Union (EU) law and of international law, could not justify a refusal by the person concerned to appear at hearing ordered by Consob nor to delay the hearing.

Questions Referred for Opinion

Constitutional Court of Italy had pointed out that, although Article 30(1) of Regulation No 596/2014 had required Member States to ensure that the competent authorities had  power to take appropriate sanctions and other measures, Article 30(1)(b) had prescribed that Member States should not apply such sanctions or measures to natural persons who, in an investigation concerning an offence that was punishable by administrative sanctions of a criminal nature, refuse to provide the competent authority with answers which might establish their liability for such an offence, or their criminal liability.

In the above circumstances, the Constitutional Court decided to stay the proceedings and to refer the following questions to the Court for a preliminary ruling:

(1) Whether Article 14(3) of Directive 2003/6, and Article 30(1)(b) of Regulation No 596/2014 were to be interpreted as permitting Member States to refrain from penalising individuals who had refused  to answer questions put to them by the competent authorities and which might establish their liability for an offence that was punishable by administrative sanctions of a “punitive” nature?

(2) If the answer to the first question was to be in the negative, whether Article 14(3) of Directive 2003/6, and Article 30(1)(b) of Regulation No 596/2014 compatible with Articles 47 and 48 of the [Charter] – including in the light of the case-law of the European Court of Human Rights on Article 6 of the ECHR?

Considerations on the Questions Referred

 The Court of Justice observed that Articles 47 and 48 of the Charter enshrine right to a fair trial and presumption of innocence. The Bench noticed,

“Second paragraph of Article 47 corresponds to Article 6(1) of the ECHR (European Convention on Human Rights) and Article 48 of the Charter is ‘the same’ as Article 6(2) and (3) of the ECHR.”

In that regard, the Court relied on European Court of Human Rights’ observation that, even though Article 6 of the ECHR did not explicitly mention right to silence, that right was a generally recognised international standard which lie at the heart of the notion of a fair trial. By providing the accused with protection against improper coercion by the authorities, that right contribute to avoiding miscarriages of justice.

On Article 30(1)(a) and 30(1)(b) of Regulation No 596/2014 the Court reached to the findings that while the wording of those two provisions did not explicitly rule out the possibility that the Member States’ obligation to determine the penalties to be applied in such a case also applies to the situation where a person so heard had refused to provide the said authority with answers that were capable of establishing that person’s liability for an offence that would be  punishable by administrative sanctions of a criminal nature, or that person’s criminal liability, neither was there anything in the wording of Article 14(3) of Directive 2003/6 that would preclude an interpretation of that provision to the effect that that obligation would not apply in such a case.

Reliance was placed on Saunders v. United Kingdom, (1996) 23 EHRR 313, wherein it had been emphasised that,

“The right to silence cannot reasonably be confined to statements of admission of wrongdoing or to remarks which directly incriminate the person questioned, but rather also covers information on questions of fact which may subsequently be used in support of the prosecution and may thus have a bearing on the conviction or the penalty imposed on that person.”

Furthermore, even if, in the present case, the penalties imposed on DB by the supervisory authority at issue in the main proceedings were not to be criminal in nature, the need to respect the right to silence in an investigation procedure conducted by that authority could also stem from the fact, noted by the referring court, that, in accordance with national legislation, the evidence obtained in those proceedings may be used in criminal proceedings against that person in order to establish that a criminal offence was committed.

Hence, it must be held that the safeguards afforded by the second paragraph of Article 47 and Article 48 of the Charter, with which European Union (EU) institutions, as well as Member States, must comply when they implement EU law, include, inter alia, right to silence of natural persons. That right preclude, penalties being imposed on such persons for refusing to provide the competent authority under Directive 2003/6 or Regulation No 596/2014 with answers which might establish their liability for an offence that would be punishable by administrative sanctions of criminal nature, or their criminal liability.

In the light of Articles 47 and 48 of the Charter of Fundamental Rights of the European Union, must be interpreted as allowing Member States not to penalise natural persons who, in an investigation carried out in respect of them by the competent authority under that directive or that regulation, refuse to provide that authority with answers that were capable of establishing their liability for an offence that would be punishable by administrative sanctions of a criminal nature, or their criminal liability.[DB v. Consob, C‑481/19, decided on 02-02-2021]


Kamini Sharma, Editorial Assistant has put this story together.

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): S.K. Mohanty, (Whole Time Member) has barred two promoters of NDTV, namely Mr Prannoy Roy and Mrs Radhika Roy (the Noticees) from the securities market for 2 years and directed them to disgorge illegal gains of more than Rs 16.97 crore for indulging in insider trading under Sections 11(1), 11(4) and 11B of the SEBI Act, 1992. These directions came after a probe was launched by SEBI to check various allegations of insider trading between September 2006 to June 2008.

The SEBI noted that both the noticees were in possession of unpublished sensitive information (PSI-6) with respect to proposed reorganisation of the company. The discussions around reorganisation of the company started around 7-09-2007, and was finally disclosed to the public on 16-04- 2008. During this time, SEBI noted Mr Roy was the chairman and whole-time director whereas, his spouse, Mrs Roy was the managing director. Both were privy to the sensitive information with respect to reorganisation of the company.

On 17-04-2008, the noticees sold their shares making a profit of more than 16.97 crores when the trading window for them was closed.

SEBI found them to have contravened Regulation 3(i) and Regulation 4 of the PIT Regulations, 1992 read with Regulation 12 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Section 12A(d) and (e) of the SEBI Act, 1992; and the NDTV’s Code of Conduct and regulation 12(2) read with 12(1) of the PIT Regulations, 1992. NDTV’s code of conduct for prevention of insider trading prohibited them from trading at least till 24 hours after the information was disclosed to the stock exchanges.

The Noticees were directed to disgorge the amount of wrongful gain of ₹16,97,38,335/- as computed in the show cause notice, along with interest at the rate of 6% per annum from April 17, 2008, till the date of actual payment of disgorgement amount alongwith interest, within 45 days from the date of coming into force of this order.  They were also restrained from accessing the securities market and further prohibited them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for a period of 2 years.[In the matter of New Delhi Television Ltd. WTM/SM/IVD/ID2/9711/2020-21, decided on  27-11-2020]


Nilufer Bhateja, Associate Editor has put this story together

New releasesNews

Insider Trading: Law and Practice by Armaan Patkar is a pioneering work on the subject, serves as a comprehensive guide to the law and practice of insider trading regulation in India, in the light of global developments.

Special Features:

  • Covers nearly 1,000 Indian and foreign cases
  • Global jurisprudence and good practices for establishing Chinese Walls- a topic on which Indian literature is negligible has been discussed in detail.
  • The chapter are arranged subject-wise to suit the principle-bases nature of the 2015 Regulation.
  • It also examines enforcement principles, including principles of Civil, criminal and Officer Liability under the SEBI Act, 1992, and the applicable standards of proof.
  • Provides a summary of all informal guidance letters issued by SEBI.
  • Specific chapters are dedicated to key terms “insiders”, “unpublished price sensitive information”, the prohibition on insider trading, communication of inside information, and compliance requirements.

  REVIEWS

Armaan’s book provides a welcome guide to the law and practice of insider trading regulation in India. It provides easy reading, flows logically, and will certainly form a very useful source of well-thought material for both practitioners and students.

—Zia Mody

Founder and Managing Partner

AZB & Partners

The book is a worthy and perceptive legal commentary on the SEBI (Prohibition of Insider Trading) Regulations, 2015. It covers the legislative and policy backdrop of insider trading regulations in India and meticulously traces the important milestones over the years. The book also contains an insightful analysis of relevant laws in other jurisdictions helping the reader draw learnings from a comparative perspective. It will be of immense use for students, practitioners and researchers in understanding and interpreting a  complex area of law.

—Shri U.K. Sinha

Former Chairman

Securities and Exchange Board of India

While insider trading law in India has undergone a rapid transformation in the last couple of decades, a systematic analysis of the legal regime has been rather elusive. This book performs, and that too admirably, the task of filling that important gap. It represents a comprehensive account of insider trading law in India, but set elegantly in the context of global developments. It combines jurisprudential analyses with a study of practical implications. It is a sine qua non for anyone engaged in the field of securities regulation, whether a student, academic or practitioner.

—Umakanth Varottil

Associate Professor

Faculty of Law, National University of Singapore

This book is a pioneering work that will be useful to academics and practitioners globally as a handbook for Indian insider trading law especially how it is similar to, and more importantly, how it differs from global practice.

—Murali Neelakantan

Former Partner, Ashurst

Former Global General Counsel, Cipla


Table Of Contents

1. An Introduction to Insider Trading
2. Development of Insider Trading Regulation
3. Legislative and Regulatory Framework in India
4. Insiders
5. Unpublished Price Sensitive Information
6. Other Definitions and Interpretation
7. Prohibition on Insider Trading
8. Communication of UPSI
9. Compliance Requirements
10. Enforcement

APPENDICES

1. SEBI Informal Guidance Letters Relating to Insider Trading

2. Report of the High-Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992


Op EdsOP. ED.

Introduction

The Securities and Exchange Board of India (SEBI) has always been fraught with the arduous task of curbing insider trading but the difficulty in detecting and prosecuting the perpetrators still remains a challenge. This is primarily due to the fact that there is a dearth of clinching primary evidence which can prove the complicity of ones who commit insider trading thus, in turn having an adverse impact on the success rates and investigation timelines of such cases. SEBI has tried to eliminate this hindrance in the past by seeking powers to intercept and tap phone calls[1] to aid its investigation and surveillance machinery[2]. Moreover, it has also sought to grant immunity to whistleblowers or levy a lesser penalty on those who come forward with full and true disclosure of alleged violations. However, these measures have either not seen the light of day or their full-fledged execution is still a far-fetched thought.

On 10-6-2019, SEBI released a discussion paper[3] which proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. This paper presses the fact that mere regulator’s watch on illegal transactions is not enough to practically eliminate trading on the basis of unpublished price sensitive information (UPSI). In the current scenario, insiders are finding new ways to venture into illegal transactions including transactions through proxy which further makes tracking and proving any claims against such transactions even more taxing. Therefore, in a bid to uphold the sanctity of the securities market and to ensure better tracking, SEBI is intending to introduce an informant mechanism which brings informants to the forefront. The proposed mechanism will have a dedicated reporting window and also seeks to achieve near-absolute confidentiality with regards to the identity of the informants in order to alleviate any kind of deterrence stemming out from fear of discrimination, retaliation and prejudice.

This mechanism is not a sui generis phenomenon, as is evident from the effective application of similar mechanisms adopted by other countries to address the issue of insider trading. The European Union (EU) Market Abuse Regulation provides for a reporting mechanism on similar lines. The proposed mechanism is also somewhat similar to the vigil mechanism prescribed under Section 177(9) of the Companies Act, 2013.

Need

The Committee on fair market conduct has made several recommendations to strengthen the legal framework for prevention of insider trading. Further, in Sahara India[4] vide its order dated 31-8-2012, the Supreme Court stated that Section 11(1) of the SEBI Act, 1992 casts an obligation to protect the interest of the investors in securities by such measures as it thinks fit. However, the Nifty WhatsApp leak incident[5] which witnessed price sensitive data of several Nifty companies being circulated through WhatsApp messages ahead of their scheduled disclosure to exchanges, proved to be the final nail in the coffin. The issue was even more perturbing because most of the leaked data matched those numbers to the tune of the last digit which were released subsequently. SEBI, on the other hand did not have any inkling on the source of the leak, as it did not have direct evidence against the individuals involved in the alleged insider trading.

Hence, SEBI finds it difficult to establish its claims that trading took place while in possession of UPSI. Establishing transmission of UPSI and proving flow of such information makes prosecution of defaulters very difficult for SEBI.

In the light of the aforementioned recommendations and cases, it is indisputable that there is an inherent exigency of measures which restrain instances of insider trading. So in this regard, the proposed informant mechanism will be beneficial as the company employees are likely to be acquainted with the unscrupulous activities of the management which are necessary to be established so that the irregularities may be exposed and timely action can be taken.

Proposed Features[6]

Voluntary Information Disclosure Form (VIDF) — Any informant having complete, original and credible information relating to an act of insider trading can inform SEBI either directly or through an advocate by submitting the VIDF. The informant can keep his identity confidential by submitting the VIDF through an advocate but the confidentiality may be compromised under the following circumstances—

(i) Non-compliance with the given regulations.

(ii) If the nature of the information is such that the informant is required to be examined.

(iii) When it is required in court proceedings.

(iv) For verification at the time of granting rewards.

Lastly, the source of original information has to be provided along with the undertaking that the information has not been sourced from any employee of SEBI.

Office of Informant Protection (OIP) — The OIP will be set up as an independent office and shall be separate from the inspection and investigation departments of SEBI. The OIP will be responsible for devising the policy relating to receipt and registration of VIDF, assessing the veracity of the information received and analysing the application of regulations. Once the information is processed, the same shall be forwarded to the relevant department, which would in turn suggest suitable enforcement action and recover amounts by way of disgorgement. Thereafter, the OIP will make a final decision with regards to issue of grant reward to the informant. The OIP will also be maintaining a hotline that will smoothen the process of submitting information.

Reward — The informant will be rewarded by SEBI only if the information provided by him is true, credible, complete and original. Further, the action taken on the basis of that information should lead to the disgorgement of five crore INR. The quantum of the reward set by SEBI shall be 10% of the monies collected but shall not exceed one crore INR. Moreover, an interim reward not exceeding ten lakhs INR shall be given at the stage of issuance of the final order by SEBI against the person directed to disgorge.

Protection against Victimisation — Listed companies and intermediaries would be required to alter their internal codes of conduct so as to incorporate provisions which ensure that no employee faces suspension, termination, demotion or discrimination, directly or indirectly, on grounds of filing VIDF or assisting SEBI.

Vexatious/Frivolous Complaints — If the OIP determines that any information submitted is of a vexatious or frivolous nature then SEBI may initiate appropriate action against the informant concerned under the securities and other applicable laws.

Amnesty — In cases where an informant facing enforcement action wilfully cooperates and assists SEBI, he/she may be eligible for a reward and settlement with confidentiality in the proceedings that may be initiated against him under the proposed amnesty clause.

Analysis

At first sight, the discussion paper seems to be heavily sourced from the United States Securities and Exchange Commission’s (SEC) framework for protection of whistleblowers which was systematised under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,[7] and the three essential pillars of whistleblower protection policy which are anonymity, bounty and job security.

Under American law, the non-inclusion of the internal reporting requirement in the informant mechanism has been criticised as it tempts the employees to bypass internal compliance in pursuit of rewards. However, it is suggested that the internal compliance committee of a company should be combined with the informant mechanism so that SEBI does not face the same obstructions which regulators in US face owing to the short-sighted policy existing there in this regard.

Moreover, the discussion paper nowhere mentions the liability standards of the legal advisors if the confidentiality of the informant is compromised despite their best efforts. On the contrary, under American law, no liability shall be apportioned on the legal advisors in these cases.

Another shortcoming of the proposed discussion paper is that, it cuts down the smaller but more frequently occurring transactions from its purview. This goes against the very objective of the discussion paper which is to incentivise proactive reporting of insider trading. Hence, it will be better for SEBI to deploy additional resources and make insider trading investigations even more robust.

Additionally, the exception where informant’s confidentiality may be revealed on account of him being required to be present in court proceedings may, in turn, dilute the number of takers in cases where the informant is in a position to furnish primary evidence and is likely to be required for the enforcement as well.

Lastly, to achieve the objective of the discussion paper the upper limit imposed on the quantum of reward should be removed so that the employees are tempted and a proactive reporting mechanism is achieved. Conversely, under the Dodd-Frank Wall Street Reforms and Consumer Protection Act of 2010, there is no upper limit imposed on the quantum of reward and it varies from a range of 10%-30% of the total amounts collected[8] unlike as proposed in the discussion paper.

Conclusion

The discussion paper indicates SEBI’s intention to tighten its grasp on tracking down insider trading and take fitting action. The regulators appear optimistic that the increased protection and potential for financial awards available to the informants will foster increased transparency and a culture of accountability within the financial market.

SEBI must consider extending the informant mechanism to fraudulent and unfair trade practices. Lastly, this amendment would be a big weapon in the arsenal of SEBI as direct evidence gathered will leave fewer lacunae, reducing the chances of overturning of a SEBI order at the appellate stage.


  Fifth-year student, BA LLB (Hons.), National University of Advanced Legal Studies, Kochi.

††  Fourth-year student, BA LLB (Hons.), National University of Advanced Legal Studies, Kochi.

[1]  Report of Committee on Fair Market Conduct, available at <https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html>.

[2] Report of Committee on Fair Market Conduct, available at <https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html>.

[3]  Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, available at <https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html>.

[4] Sahara India Real Estate Corpn. Ltd. v. SEBI, (2013) 1 SCC 1 : (2012) 174 Comp Cas 154.

[5] NSE, BSE Write to Companies over WhatsApp Earnings Leak, available at <https://www.livemint.com/Money/kIFXwlUs6s8wjFhkYYkjzI/NSE-BSE-write-to-companies-over-WhatsApp-earnings-leak.html>.

[6]  Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism, available at <https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html>.

[7]  S. 922, Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.

[8]  S. 922, Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010.

Case BriefsSupreme Court

Supreme Court: Dealing with the legality of ‘non-intermediary frontrunning’ in security market under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP 2003), the bench of NV Ramana and Ranjan Gogoi, JJ held that non-intermediary front running may be brought under the prohibition prescribed under regulations 3 and 4 (1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied.

In the matter where both the judges gave separate but concurring opinions, Ramana, J said:

“The information of possible trades that the company is going to undertake is the confidential information of the company concerned, which it has absolute liberty to deal with. Therefore, a person conveying confidential information to another person (tippee) breaches his duty prescribed by law and if the recipient of such information knows of the breach and trades, and there is an inducement to bring about an inequitable result, then the recipient tippee may be said to have committed the fraud.”

He further added that in order to establish charges against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) of FUTP 2003, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did.

Gogoi, J, in his opinion on the applicability of the said regulations on the tippees said:

“To attract the rigor of Regulations 3 and 4 of the 2003 Regulations, mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. Merely because the operation of the aforesaid two provisions of the 2003 Regulations invite penal consequences on the defaulters, proof beyond reasonable doubt is not an indispensable requirement.”

The Court was hearing a batch of cases dealing with insider trading. The question before the Court was to decide whether the person, to who the information has been leaked, may be said to have committed fraud. Considering facts of the cases i.e. the volume of shares sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on different dates, the Court held that the conduct of the respondents was in breach of the code of business integrity in the securities market. [SEBI v. Kanaiyalal Baldevbhai Patel, 2017 SCC OnLine SC 1148, decided on 20.09.2017]