2025 (1) TMI 17 - AT - SEBI

Persons/entities traded in the scrip of IAL while in possession of Unpublished Price Sensitive Information ( UPSI ) - higher price rise seen - contravention of provisions of Section 12A of the SEBI Act and PIT Regulations, 2015 - information of a stock split considered as Unpublished Price Sensitive Information (UPSI) or not? - - HELD THAT - Splitting of stock per se is a Price sensitive information, since splitting of stock is an important decision for a company, (requiring approval of general body of shareholders under Section 61 of the companies Act, 2013), which is intended to improve the liquidity of stock and its affordability, which is likely to make an impact on price. In our considered view, splitting of shares results in shares of smaller face value, which makes the shares affordable, and thereby allows new sets of shareholders to come into picture with the resulting impact on demand and liquidity, that is likely to influence the price trends. Instances of three cases of stock split brought out by the respondent show that it resulted in price rise on the day of split, compared to the previous day. In our view the appellant s argument that there was insignificant price rise of 1.46% on BSE and of 1.25% on NSE on June 27, 2016 upon disclosure of the information compared to the previous trading day, is not relevant as it is the likelihood of materially affecting the price of the securities, which is the main factor to determine price sensitivity of information and not actual price rise. Lastly, in appellant s own admission, the information regarding stock split was UPSI, which in their view, came into existence on June 26, 2017 and was hence disclosed on the same date. If it were not a price sensitive information, there was no need to close the trading window. On which day UPSI commenced ? - It is evident that in the meeting held on November 22, 2016, the discussion was in the nature of a general briefing on the concept of stock split, without any specific reference to securities of IAL. Hence it cannot be held that the UPSI period started from November 22, 2016. Nevertheless, in subsequent one to one meeting between the MD and CFO held March 20, 2017, the discussion specifically included analysis of budget for next fiscal, along with sensitivity analysis to many scenarios including but not limited to impact of demonetization, GST, share split, dividends, etc. . Since this discussion was specifically with regard to the stock split for company IAL, it may be construed that the UPSI period started from March 20, 2017. Whether the appellants can be held as insiders within the meaning of PIT regulations? - None of the reasonings, directly or indirectly, suggest that appellants were in possession of or had access to the aforesaid UPSI at the time of trading in IAL scrip. With regard to the first reasoning relating to the pre-IPO allocation of preferential shares of IAL in 2014 for Rs. 49.99 crores, the Ld. Senior advocate for the appellants furnished a list of all such allottees, which was filed in compliance of the Companies (Share capital and debenture) Rules, 2014. The list shows that apart from the Appellant No. 2 and her husband, there were more than 80 such allottees, who had subscribed to the preferential allotment. The last column of the prescribed form makes disclosure of such allottees as Unrelated party or promoter / promoter group . Majority of such preferential allottees including appellant No. 2 and her husband were shown as unrelated party . Therefore, in our view, in contrast with the promoters , such unrelated parties cannot be held as connected persons , unless otherwise provided in the regulation. It is generally seen that prior to listing, subscription to its capital comes through reaching out to potential investors, directly or indirectly, since till the company remains unlisted, the benefit of the faceless digital platform of Stock exchange is not available to it. The assumption that in that process relationship is built among the investors, which may make them insiders is only an assumption and lacks credence. We have already held that there is no evidence suggesting that the appellants had access to or mere in possession of UPSI. Therefore, it cannot be held that trades made by the appellants during the alleged UPSI period were motivated by knowledge of UPSI. Thus, there is no evidence or inkling of communication of UPSI by insiders of IAL to the appellants. In view of this, there is no merit in the allegations that appellants traded in IAL based on knowledge of UPSI in their possession. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment revolves around the following core legal questions:

• Whether the information of a stock split could be considered as Unpublished Price Sensitive Information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015, and if so, when did the UPSI period commence?
• Whether the appellants can be classified as 'insiders' within the meaning of the SEBI regulations, and if they had access to UPSI while trading in the shares of Infibeam Avenues Ltd. (IAL)?
• Whether the appellants' trading activities were motivated by the possession of UPSI, and if the penalties and disgorgement imposed by SEBI were justified?
• Whether the procedural aspects, including the provision of a redacted investigation report, violated the principles of natural justice?

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Whether the information of stock split could be inferred as UPSI in nature?

• Relevant legal framework and precedents: The definition of UPSI under the SEBI (PIT) Regulations includes any information not generally available that is likely to materially affect the price of securities. The case references ICICI Bank Ltd. Vs. SEBI, which emphasizes the materiality and ex-ante possibility of impacting prices.
• Court's interpretation and reasoning: The Tribunal agreed with the respondent that a stock split is inherently price-sensitive information, as it affects liquidity and affordability, potentially impacting price trends. However, the Tribunal found that the UPSI did not commence on November 22, 2016, as initially claimed, since the presentation on that date was a general briefing without specific reference to IAL's securities.
• Key evidence and findings: The Tribunal concluded that the UPSI period started on March 20, 2017, when discussions specifically included the impact of a stock split for IAL.
• Conclusions: The Tribunal held that the stock split information was UPSI, but the UPSI period commenced on March 20, 2017, not November 22, 2016.

Issue B: Whether the appellants can be held as 'insiders' within the meaning of PIT regulations?

• Relevant legal framework and precedents: An 'insider' under the SEBI regulations is defined as a person in possession of or having access to UPSI. The Tribunal referenced the case of Balram Garg vs. SEBI, emphasizing the need for foundational facts to establish a presumption of insider status.
• Court's interpretation and reasoning: The Tribunal found no evidence that the appellants had access to UPSI, as the connections alleged by SEBI were insufficient to establish insider status. The Tribunal noted that the appellants' past investment in IAL and the share broking services provided by ASSPL did not imply access to UPSI.
• Key evidence and findings: The Tribunal highlighted the lack of evidence for communication of UPSI between IAL insiders and the appellants.
• Conclusions: The Tribunal concluded that the appellants could not be classified as insiders, as there was no evidence of access to UPSI.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "What is relevant for disclosure is the materiality and the ex-ante possibility of impacting prices of the securities, which may not come true ex-post due to several other factors affecting the company concerned or/and the securities market in general."
• Core principles established: The judgment reinforced the principle that UPSI must be specific to a company's securities and that mere potential or general discussions do not constitute UPSI. It also emphasized the need for concrete evidence to establish insider status and access to UPSI.
• Final determinations on each issue: The Tribunal set aside the SEBI order, concluding that the appellants were not insiders and did not trade based on UPSI. The penalties and disgorgement imposed by SEBI were deemed unjustified.

The Tribunal allowed the appeal, set aside the impugned order, and imposed no costs.