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TMI Blog2022 (9) TMI 1072X X X X Extracts X X X X X X X X Extracts X X X X ..... . In SEBI vs. Kishore R. Ajmera [ 2016 (2) TMI 723 - SUPREME COURT] this Court was concerned with the question as to what is the degree of proof required to hold a broker liable for fraudulent/manipulative practices under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 as well as the Conduct Regulations of 1992. After taking note of the fact that SEBI Act and the Regulations framed thereunder are intended to protect the interest of investors and that the provisions of the Act and the Regulations have to be understood and interpreted An attempt by the insider to encash the benefit of the information is not exactly the same as mens rea. Therefore, the Court can always test whether the act of the insider in dealing with the securities, was an attempt to take advantage of or encash the benefit of the information in his possession. This is the test we have applied to the case on hand. In Chintalapati Srinivasa Raju [ 2018 (5) TMI 931 - SUPREME COURT] this Court approved the minority judgment of the Securities Appellate Tribunal (in para 20), which took note of the compelling circumstances under which the individual w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yawada Gundugolanu Road Project Private Limited ( VGRPPL ). (iii) Similarly, another company by name Simplex Infrastructure Limited (SIL) was awarded a contract by NHAI in Jharkhand and West Bengal and the total cost of the project was Rs.940 crores. For the execution of the project, SIL set up a special purpose vehicle called Maa Durga Expressways Private Limited (MDEPL). (iv) GIPL entered into two shareholders agreements with SIL. Under these agreements, GIPL was to invest in MDEPL and SIL was to invest in VGRPPL for their respective projects. The mutual investments were to be tuned in such a manner that GIPL and SIL would hold 49% equity interest in each other s projects. (v) However, on 9.08.2013 the Board of Directors of GIPL passed a resolution authorizing the termination of both shareholders agreements. (vi) On 22.8.2013, the respondent sold about 144 lakhs shares (approx.) held by him in GIPL, for an aggregate value of approximately Rs.10.28 crores. (vii) On 30.08.2013 GIPL made a disclosure to the National Stock exchange of India and BSE regarding the termination of two shareholders agreements. (viii) On 20.09.2013 the respondent resigne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sensitive information, since the investment of GIPL in Simplex Project, to the tune of Rs. 4.9 crores constituted only 0.05% of GIPL s order book value at the end of August, 2013 and only 0.7% of its turnover for the financial year; (ii) that in any case the respondent was in dire need to sell the shares at that time for the purpose of CDR (Corporate Debt Restructuring) package and hence he cannot be said to have indulged in trading on the basis of information within his knowledge; and (iii) that there was no reason why SEBI did not take into account the last trade price of 03.09.2013, but chose the price as on 04.09.2013. 5. Assailing the order of the Securities Appellate Tribunal, it is argued by Mr. Arvind P. Datar, learned senior counsel for the appellant: (a) that proportionality is a dangerous and subjective ground in matters involving insider trading, especially since onethird of the total number of directors of a listed company are independent directors and even transactions involving thousands of crores might be a minor proportion to the turnover, if the company is very large in size; (b) that Regulations 3 and 4 contain an absolute prohibition against insider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s who do not have such access; (b) that the question whether an information is price sensitive or not, would depend upon its potency to materially impact, upon publication, the price of the securities; (c) that therefore by its very nature, it is barely a question of fact or at the most, a mixed question of fact and law which will not fall within the scope of Section 15Z of SEBI Act, 1992 warranting interference by this Court; (d) that one of the key factors which the Courts take into account while interpreting the circumstances revolving around transactions such as the one in question, is the purpose for which the transaction was effected; (e) that apart from looking into the purpose of the transaction, Courts have also taken into account other circumstances such as the scale of the transaction, pattern of trading and honesty in responses during the proceedings as is evident from the decisions in (i) Chintalapati Raju vs. SEBI; (2018) 7 SCC 443 (ii) Rajiv Gandhi vs. SEBI; (Appeal No.50/2007 decided by the Ld. SAT on 09.05.2008) (Civil Appeal 5302 of 2008 against this order was dismissed) (iii) Miller vs. Pezzani (A decision of the US Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated interference by the Tribunal; and (q) that therefore the present appeal does not raise a substantial question of law and that in any case the order of the Appellate Tribunal does not call for any interference. 7. From the rival contentions, we think that the questions arising for our determination can be formulated as follows: (i) whether the information regarding the decision of the Board of Directors of GIPL to terminate the aforesaid two contracts can be characterized as price sensitive information within the meaning of Section 2(ha) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 1992, (hereinafter referred to as the Regulations ); (ii) whether the sale by the respondent of the equity shares held by him in GIPL, under peculiar and compelling circumstances in which he was placed, would fall within the mischief of insider trading in terms of Regulation 3(i) read with Regulation 4 of the Regulations; (iii) whether SEBI should have taken into account the last trade price of the day on which information was disclosed instead of the trade price of the next day; Question Nos.1 2 8. Before w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: 3. No insider shall (i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or (ii) communicate or counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities : Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law. 13. Regulation 4 declares the circumstances under which a person shall be held guilty of insider trading. It reads as follows : - 4. Any insider who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of insider trading. 14. Interestingly, the Regulations do not define the words, insider trading . But Regulation 4 declares a person guilty of insider trading if, (i) he happens to be an insider; and (ii) if he deals in securities in contravention of Regulation 3. 15. The word insider is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the definition of the expression price sensitive information , through a deeming provision in the Explanation under Regulation 2(ha). 20. Therefore in view of the Regulations discussed above, a person can be held guilty of violating Regulation 3, only if the following conditions are satisfied: (i) He must be an insider within the meaning of the word insider , under Regulation 2(e), by virtue of his past or present connection or deemed connection with the company and he is also reasonably expected either to have had access to UPSI or has received such information; (ii) The information that such a person received or has had access or reasonably expected to have had access should be unpublished, in the sense that it was not published by the company or its agent or though published, it was not specific in nature; (iii) Such unpublished information should fall within the definition of the expression price sensitive information within the meaning of Section 2(ha) of the Regulations; and (iv) He must have indulged in trading, either by dealing in securities of the company or in communicating or counseling or procuring directly or indirectly any such inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion which was both unpublished and price sensitive, was guilty of the charge of insider trading as he undoubtedly dealt in securities. 25. But the catch lies in understanding the true scope of Explanation (vii) under Regulation 2(ha). As we have seen earlier, the main part of Regulation 2(ha) defines price sensitive information to mean any information, which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of a company. The Explanation under Regulation 2(ha) creates a deeming fiction and it makes 7 items of information listed thereunder as price sensitive information. 26. It may be interesting to note that out of the 7 items of information listed under the Explanation, all the others except Item No.(vii) are likely to have an impact directly upon the financial strength of the company. Item No.(vii) stands apart, in that it is very broad and general in nature. While nothing more is required to show that the information listed in Items (i) to (vi) of the Explanation under Regulation 2(ha) is likely to materially affect the price of securities of a company, the same is not the case insofar as the informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the simple reason that profit motive, if not actual profit should be the motivating factor for a person to indulge in insider trading. This is why the information in Item No.(vii) of the Explanation under Regulation 2(ha) may have to be examined with reference to the words likely to materially affect the price . Keeping this in mind let us now come back to the facts of the case. 30. GIPL was awarded a contract for the execution of a project, whose total cost was admittedly Rs. 1648 crores. SIL was awarded a contract for a project whose cost was Rs. 940 crores. Both GIPL and SIL created Special Purpose Vehicles and then they entered into two shareholders Agreements. Under these Agreements, GIPL and SIL will have to make investments in the Special Purpose Vehicles created by each other, in such a manner that each of them will hold 49% equity interest in the other's project. 31. It means that GIPL could have acquired 49% equity interest in the project worth Rs. 940 crores and SIL would have acquired 49% equity interest in a project worth Rs. 1648 crore. 32. In arithmetical terms, the acquisition by GIPL, of an equity interest in SIL s project was worth Rs. 460 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts terminated on both sides was nearly Rs.2600/crores (Rs.1648 crores + Rs.940 crores) and that therefore the information relating to the termination of the contracts was surely likely to materially affect the price of the securities of the company, is unsustainable for the simple reason that the net effect of the termination of both the contracts, for GIPL was a positive advantage of about Rs.800 crores. We have already provided in paragraph 32 above, the simple arithmetics of the whole transaction, which put GIPL in a more advantageous position after the termination of the contract. 37. It is true that the de minimis Rule has no application to insider trading, as it introduces an element of subjectivity. This is why we have not gone on the basis that GIPL s investments in the project of SIL represented 0.05% of GIPL s order book value and 0.7% of its turnover. We have gone on the basis that the termination of both the contracts put GIPL in a more advantageous position, in which one would have expected the price of the securities to soar. The normal human conduct would be to wait for this event to happen. This event could have happened only after the publication of the inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the Conduct Regulations of 1992. After taking note of the fact that SEBI Act and the Regulations framed thereunder are intended to protect the interest of investors and that the provisions of the Act and the Regulations have to be understood and interpreted in that light, this Court held in Para 26 as follows : - It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion. 41. While dealing with yet another case arising out of allegations of violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, this Court held in Kanaiyalal Baldevbhai Patel (Supra) (para58) that the volume, the nature of the trading and the timing of the transactions may have to be taken into account to find out whether there was an attempt at encashing the benefit of the information that the insider was in possession. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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