2012 (1) TMI 350 - AT - Companies Law

Insider trading - Selling the shares during the unpublished price sensitive information ( UPSI) period - Violation of the PIT Regulations 1992 - according to the Board, the appellant was deemed to be a connected person with the company and its directors who had access to US PI and hence an insider. The appellant is alleged to have traded in the scrip of the company based on the (UP SI) relating to financial results. Hence, it was alleged that the appellant had violated regulation 3(i), (ii) and 4 of the regulations. After considering the reply of the appellant and granting personal hearing, the adjudicating officer found the appellant guilty and, by the impugned order, imposed penalty as stated above. Hence, this appeal. HELD THAT - the appellant in the present case has placed sufficient material on record to show that she has not traded on the basis of US PI. It is also a matter of record that the appellant used to trade regularly in the shares of the company and her trades were genuine transactions carried out by her in the normal course of business. the appellant that where an entity is privy to USPI, it will tend to purchase shares and not sell the shares prior to the US PI becoming public if the information is positive. In this case declaration of financial results, dividend and bonus were positive information but the appellant not only bought but also sold the shares not only during the period when the price sensitive information was unpublished but also prior to and after the information becoming public. A person who is in possession of US PI which, on becoming public is likely to cause a positive impact on the price of the scrip, would only buy shares and would not sell the shares before the US PI becomes public and would immediately offload the shares post the information becoming public. This is not so in the case under consideration. The trading pattern of the appellant, as shown in the chart above, does not lead to the conclusion that the appellant s trades were induced by the US PI. Further, appellants in that appeal only purchased the shares while in possession of US PI and there was no trading by them prior to or after the information becoming public. In the case in hand the charge of trading on the basis of US PI has not only been denied by the appellant, it has also been able to demonstrate through her trading pattern that the trading was not based on the US PI. the appeal is allowed and impugned order set aside with no order as to costs.

Summary

Issues Involved:
1. Whether the appellant is guilty of insider trading under regulations 3(i) and 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992.
2. Whether the appellant is a "connected person" and had access to unpublished price-sensitive information.
3. Whether the appellant traded based on unpublished price-sensitive information.

Issue-wise Detailed Analysis:

1. Whether the appellant is guilty of insider trading under regulations 3(i) and 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992:
The primary question was whether the appellant violated regulations 3(i) and 4 by engaging in insider trading. The Securities and Exchange Board of India (SEBI) had imposed a penalty of Rs. 8 lakhs on the appellant for allegedly trading based on unpublished price-sensitive information. The Tribunal examined the appellant's trading pattern and found that the appellant had not only bought but also sold shares during the period when the information was unpublished, as well as before and after the information became public. This trading behavior did not align with typical insider trading, where an insider would buy shares before positive information is published and sell them immediately after the information becomes public. Therefore, the Tribunal concluded that the appellant did not trade based on unpublished price-sensitive information and thus was not guilty of insider trading.

2. Whether the appellant is a "connected person" and had access to unpublished price-sensitive information:
The appellant was deemed a "connected person" due to her relationship with Uttam Kumar Kothari, a promoter of the company, and her residence at the same address as the company's chairman and managing director. However, the appellant argued that her husband had relinquished his interest as a promoter in 2005 and was only a shareholder without access to day-to-day company operations. The Tribunal noted that the appellant's address was different from the chairman's, although on the same plot, and accepted the appellant's argument that she could not be deemed a "connected person" with access to unpublished price-sensitive information.

3. Whether the appellant traded based on unpublished price-sensitive information:
The Tribunal scrutinized the appellant's trading activities and found that her trades were consistent with her regular trading behavior and not influenced by unpublished price-sensitive information. The appellant provided evidence that her trades were genuine transactions carried out in the normal course of business. The Tribunal emphasized that the burden of proof lies on the insider to demonstrate that trades were not based on unpublished price-sensitive information. The appellant successfully showed that her trading was independent of the corporate announcements and driven by her commercial wisdom. Consequently, the Tribunal concluded that the appellant did not trade based on unpublished price-sensitive information.

Conclusion:
The Tribunal allowed the appeal and set aside the impugned order, concluding that the appellant had not violated the insider trading regulations. The appellant's trading pattern did not indicate that she acted on unpublished price-sensitive information, and her relationship with the company's promoters did not automatically make her a "connected person" with access to such information. The Tribunal's decision was based on a thorough examination of the appellant's trading activities and the relevant legal provisions.