For "Insider Trading", Mere Possession Of Sensitive Information Not Enough; Actual Profit Motive Essential : Supreme Court

The Supreme Court has held that merely because a person was in possession of unpublished price sensitive information at the time go trading in securities, it cannot be held that the transaction becomes the mischief of "insider trading", unless it is established that there was an intention to take advantage of the information.A distress sale of shares will not become "insider trading" merely because the person was in possession of unpublished price sensitive information."An attempt by the insider to encash the benefit of the information is not exactly the same as mens rea.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", the Court held.Profit motive, if not actual profit, should be the motivating factor for a person to indulge in insider trading, the Court held."While it is true that the actual gaining of profit or sufferance of loss in the transaction, may not provide an escape route for an insider against the charge of violation of Regulation 3, one cannot ignore normal human conduct. If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading. In other words, the actual gain or loss is immaterial, but the motive for making a gain is essential".Holding so ,a Division Bench refused to set aside the order of the Securities Appellate Tribunal (SAT) that exonerated Abhijit Rajan, the former Chairman and Managing Director of Gammon Infrastructure Projects Limited, of charges of insider trading. Concluding that Rajan had no motive or intention to make undeserved gains by encashing on the unpublished price-sensitive information in his possession, the apex court dismissed the appeal preferred by the Securities and Exchange Board of India (SEBI). [Securities and Exchange Board of India v. Abhijit Rajan (Judgement on 19.09.2022)] The Bench comprised of Justices Indira Banerjee and V. Ramasubramanian.Background Facts The respondent was the Chairman and Managing Director of Gammon Infrastructure Projects Limited (GIPL). GIPL was awarded a contract by the National Highways Authority of India (NHAI) for the execution of a project worth Rs 1648 crores. In the meantime, another company, Simplex Infrastructure Limited (SIL) was also awarded a contract by NHAI for a project, the total cost of which was Rs 940 crores. Both GIPL and SIL created special purpose vehicles (SPV) to execute these projects. Subsequently, two shareholders agreements were brokered between the companies requiring each to invest in the SPV administered by the other, in such a manner that both of them would hold 49% equity interest in the other's project. However, these agreements were terminated in 2013 by a resolution passed by the Board of Directors under Rajan's leadership. Subsequent to the termination of the agreements, Rajan sold about 70% of his shareholding in GIPL along with other assets to raise money for the corporate debt restructuring (CDR) package of the company and save it from bankruptcy. However, he came under the scanner of SEBI because the sale of the shares was concluded before the information about the termination of the two agreements was made public. The market regulator held him guilty of insider trading and directed him to disgorge the amount of "unlawful gains" made by him to the tune of Rs 1.09 crores. This order was set aside by the appellate tribunal on the following grounds: The information regarding the termination of the two shareholders agreements was not price-sensitive information, since the investment of GIPL constituted only 0.05% of GIPL's order book value and only 0.7% of its turnover for the financial year.Rajan was in dire need to sell the shares at that time for the purpose of the CDR package and hence, it could not be said that he indulged in trading on the basis of the information within his knowledge.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. Aggrieved by this order, SEBI preferred an appeal before the Supreme Court under Section 15Z of the Securities and Exchange Board of India (SEBI) Act, 1992.Summary of arguments Senior Advocate Arvind P. Datar, appearing for SEBI, argued Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 contained an absolute prohibition against insider trading which could not be measured in terms of the value of the contracts terminated and the percentage of shares sold. Next, he submitted that since the total value of the contracts terminated on both sides was nearly Rs 2600 crores, the information relating to the termination of the contracts would be likely to materially affect the price of the securities. He also urged the Court to not consider intentions ...

For "Insider Trading", Mere Possession Of Sensitive Information Not Enough; Actual Profit Motive Essential : Supreme Court

Awstika Das

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