Insider trading is essentially the wrong of trading in securities with the advantage of having asymmetrical access to unpublished information which when published would impact the price of securities in the market. The SEBI (Prohibition of Insider Trading) Regulations, (“Insider Trading Regulation”) have undergone considerable modifications over the last three decades. Over the years, jurisprudence dealing with ‘Insider Trading’ has developed significantly and the recent judgements of the Hon’ble Supreme Court of India (“Supreme Court”) has liberally interpreted the regulations. In this write up, we shall briefly discuss the recent rulings of the Hon’ble Supreme Court and their effects on the on-going and future Insider Trading cases.
The most recent ruling of the Hon’ble Supreme Court is in the case of Shruti Vora v. SEBI. The matter pertains to forwarding of Whatsapp messages right before the publication of the Financial Statements, but before the in-house finalisation of the same, the contents of which were bizarrely in a close proximity to the actual Financial Statements of the 6 Companies in the matter. The question arose whether such “forwarded as received” information comes under the ambit of “Unpublished Price Sensitive Information” as under the PIT Regulations and whether transmission of such messages onwards would attract the rigours of Regulation 3(1) of the Insider Trading Regulations.
The Adjudicating Officer (AO) had ruled such information as UPSI and a penalty was imposed. However, in the appeal, the Appellants brought to the SAT’s notice, that the vogue practice in the market regarding the making of an estimate ahead of the disclosure of the financial results which captures the concept of Heard on Street through which unsubstantiated information is widely shared. This information is perused and published by News Agencies like CNBC. Reuters, Bloomberg etc.
The catch, however, as per SAT was that the Ld. AO has time and again shown an inability in deciphering the originator of the text messages. Furthermore, the Tribunal held that there were numerous messages mined from the Appellant’s phone, however, out of those numerous messages only the financial statements of 6 Companies only matched. Moreover, these messages were forwarded to several persons within minutes of receipt. The Tribunal further held that the financial results could have been a product of brokerage houses or any such public source not known to the Investigating Authority and hence, information available in the public domain cannot be termed as UPSI. Ultimately, SAT was of the view that in absence of a linkage between the potential source of the unpublished price-sensitive information (“UPSI”) and the person allegedly in possession of the UPSI, the same information cannot be termed as UPSI.
SEBI preferred an appeal from the SAT Order under Section 15Z of the SEBI Act, however, the Hon’ble Apex Court vide its order dated September 26, 2022, dismissed the Appeal leaving all the questions of law open.
The basis for SAT’s findings was that the investigation did not reveal the originator of the forwarded messages and hence there was no link between the originator and the persons forwarding the financial results. However, in our view, such a basis for determination of UPSI while deciding an issue relating to Regulation 3(1) of Insider Trading Regulations may not be sufficient. An analysis of materiality of the forwarded information and the actual cause as to why these appellants were involved in forwarding financial results of listed companies to investors at large is something which should have been looked into.
The International Organization of Securities Commissions in its report on Insider Trading (2003) noted that in addition to prohibitions against trading on inside information or tipping others about such information, some jurisdictions have adopted general regulations prohibiting a person’s improper “use” of inside information.
In our view, the analysis ought to have been more intricate, as such rulings have a direct bearing on the entire market infrastructure. Hence, in the interest of market, the courts may have to analyze the ‘use’ of unpublished information by persons in future.
The second recent judgment of the Supreme Court on insider trading is in the case of SEBI vs Abhijit Rajan. In this case, the Respondent, was the managing director of Gammon Infra Projects Limited (“GIPL”). GIPL was awarded a contract by National Highway Authority of India worth ₹648 crores. Another company Simplex Infrastructure Ltd (“SIL”) was also awarded a contract by NHAI worth ₹940 crores. Both the companies had individually created SPVs to execute the projects. Both companies entered into a shareholder’s agreement to hold 49% equity in the SPV of the other. These contracts were later terminated.
Subsequent to the termination and before the information relating to termination was made public, Rajan sold about 70% of his holding in GIPL. The Regulator found this transaction to be in violation of the Insider Trading Regulations as Rajan traded while he was in possession of UPSI. Rajan challenged this order of the WTM before SAT. The Appeal was allowed by the Tribunal and set aside the order of the AO. SEBI challenged the order of SAT before the Supreme Court.
While rejecting all the reasons leading to the SAT judgment, the Supreme Court rejected SEBI’s appeal on a slightly different footing. The Supreme Court held that the contract size of Gammon was bigger and hence, the news of termination would constitute a positive UPSI. Therefore, the trading pattern of the Respondent in selling his holdings, when the share price was about to surge demonstrates that there was no ill-will to take advantage of or encashing the information.
In our view, the endeavour of SEBI as a regulator is exclude the element of subjectivity and exceptions [except for those listed in the proviso to Reg.4(1)] and have a strict enforcement regime wherein entities are restrained from indulging in trading while in possession of UPSI. However, the Appellants herein have succeeded in bringing in an element of subjectivity which creates room for situations where trading while in possession of UPSI may be permitted. The Supreme Court has balanced equities and ruled on principles of equity.
In another recent Insider Trading case of Balram Garg vs SEBI, Supreme Court dealt with the question of evidentiary burden in cases of Insider Trading. In this case the three close relatives (“relatives”) of the Chairman and the Managing Director of a listed company traded in the shares of the company based on some UPSI they allegedly received from the Chairman and the Managing Director. According to SEBI, the Chairman and the Managing Director communicated the UPSI thereby violating the prohibition in the Act and Regulations. Similarly, their relatives violated the Act and Regulations by trading while in possession of such UPSI.
The supreme court held that the decision of selling the shares and the timings thereof were purely a personal and commercial decision undertaken by the Appellant and nothing more could be read into those decisions. Hence, solely a pattern of trading could not determine the fact that there was the communication of UPSI. The Court illustrated that it is only through producing cogent materials (letters, emails, witnesses, etc.) that the said communication of UPSI could be proven and not by deeming the communication to have happened owing to the alleged proximity between the parties. The Supreme Court further interpreted Regulation 3 of the Insider Trading Regulations and held that the presumption under Regulation 4 is not applicable to Regulation 3 and in absence of any material available on record to show frequent communication, there could not be a presumption of communication of UPSI.
In our view, the Supreme Court has taken the narrower view in this case and increased the burden of proof to a higher degree in Insider Trading cases. The view taken by the Supreme Court in this case is different from the view taken by the Supreme Court in the matter of SEBI vs Kishore Ajmera, where the Apex Court held that in absence of direct evidence, the courts cannot be helpless and must rely on attending circumstances. The same view is taken by the Apex Court in the case of Abhijit Rajan (supra), wherein the court relied on Kishore Ajmera while accepting that attending circumstances must be considered.
In light of the recent judgements on insider trading, Supreme Court and SAT have rejected the use of circumstantial evidence in determining insider trading violations, however, they have given due regard to attending circumstances while exonerating entities. These cases, in their own way, mark the evolution of a ‘new standard of proof’ to be maintained by SEBI in insider trading matters but at the same time create an ambiguity in terms of application of the law. Some further analysis of the materiality of the alleged UPSI, its use and trading behaviour of the entities is necessary while determining insider trading violations.
Nishit Dhruva is the Managing Partner, Ravishekhar Pandey is a Senior Associate and Shahbaz Malbari is an Associate at MDP & Partners. The authors are practitioners in the Financial Regulator Sphere and appear on behalf of Securities and Exchange Board of India before Appellate Forums