# SECURITIES AND EXCHANGE BOARD OF INDIA v. ABHIJIT RAJAN

- **Citation:** [2022] 9 S.C.R. 669
- **Court:** Supreme Court of India
- **Decided:** 2022-09-19
- **Case number:** Civil Appeal No. 563 of 2020
- **Bench:** Indira Banerjee, V. Ramasubramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/securities-and-exchange-board-of-india-v-abhijit-rajan-36623
- **Pages:** 21

## Headnote

Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations, 1992 - Regulation 3(i) r/w Regulation 4 -
Securities and Exchange Board of India Act, 1992 - ss. 12A (d),
12A (e),15Z and 30 - Insider trading - Price sensitive information
- Whether information regarding decision of the Board of Directors
of GIPL to terminate the contracts in question can be characterized
as "price sensitive information" and whether sale by respondent of
the equity shares held by him in GIPL, under peculiar and compelling
circumstances in which he was placed, fell within the mischief of
'insider trading' in terms of Regulation 3(i) read with Regulation 4
- Held: On facts, the information regarding termination of the
contracts in question can be characterized as price sensitive
information, in that it was likely to place the existing shareholders
in an advantageous position, once the information came into the
public domain - In such circumstances, the sale by respondent, of
the shares held by him in GIPL would not fall within the mischief of
insider trading, as it was somewhat similar to a distress sale, made
before the information could have a positive impact on the price of
the shares - Respondent had no motive or intention to make
undeserved gains by encashing on the unpublished price sensitive
information that he possessed.
Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations, 1992 - Regulation 3 - Violation of - When -
Held: To find out if a person is guilty of violation of Regulation 3,
the Court should address itself to the following questions namely,
(i) is he an insider; (ii) did he possess or have access to any
information relating to the company; iii) whether such information
was price sensitive; (iv) whether the information was unpublished;
and (v) whether he dealt in securities by subscribing, buying, selling
or agreeing to do any of these things in any securities
[2022] 9 S.C.R. 669
669
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Dismissing the appeal, the Court
HELD:1. It may appear at first blush, that the respondent,
who was an insider and who possessed information which was
both unpublished and price sensitive, was guilty of the charge of
insider trading as he undoubtedly dealt in securities. But the catch
lies in understanding the true scope of Explanation (vii) under
Regulation 2(ha). 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. [Paras 24, 25][684-B-D]
2.1. While dealing with a case falling under Explanation (vii)
of Regulation 2(ha), one may have to see whether there was
any likelihood of the said information materially affecting the price
of the securities of the company. Additionally, the activity in which
the insider was involved also determines his culpability for
violation of Regulation 3. For instance, the sale by a person in
possession of price sensitive information, at a time when the price
is likely to take a plunge, will certainly be an attempt at taking
advantage of or encashing the information. Similarly the purchase
by a person in possession of UPSI at a time when the price of the
security is about to skyrocket, will certainly be an attempt to
take advantage. [Para 27][685-A-B]
2.2. But the above logic cannot be applied to cases which
fall on the opposite side of the spectrum. For instance, the sale
by a person at a time when the price of the securities is likely to
shoot up on account of price sensitive information coming into
the public domain or the purchase by a person at a time when
the price of the shares is likely to go downward due to price
sensitive information getting published, cannot come und

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SECURITIES AND EXCHANGE BOARD OF INDIA
v.
ABHIJIT RAJAN
(Civil Appeal No. 563 of 2020)
SEPTEMBER 19, 2022
[INDIRA BANERJEE AND V. RAMASUBRAMANIAN, JJ.]
Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations, 1992 - Regulation 3(i) r/w Regulation 4 -
Securities and Exchange Board of India Act, 1992 - ss. 12A (d),
12A (e),15Z and 30 - Insider trading - Price sensitive information
- Whether information regarding decision of the Board of Directors
of GIPL to terminate the contracts in question can be characterized
as "price sensitive information" and whether sale by respondent of
the equity shares held by him in GIPL, under peculiar and compelling
circumstances in which he was placed, fell within the mischief of
'insider trading' in terms of Regulation 3(i) read with Regulation 4
- Held: On facts, the information regarding termination of the
contracts in question can be characterized as price sensitive
information, in that it was likely to place the existing shareholders
in an advantageous position, once the information came into the
public domain - In such circumstances, the sale by respondent, of
the shares held by him in GIPL would not fall within the mischief of
insider trading, as it was somewhat similar to a distress sale, made
before the information could have a positive impact on the price of
the shares - Respondent had no motive or intention to make
undeserved gains by encashing on the unpublished price sensitive
information that he possessed.
Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations, 1992 - Regulation 3 - Violation of - When -
Held: To find out if a person is guilty of violation of Regulation 3,
the Court should address itself to the following questions namely,
(i) is he an insider; (ii) did he possess or have access to any
information relating to the company; iii) whether such information
was price sensitive; (iv) whether the information was unpublished;
and (v) whether he dealt in securities by subscribing, buying, selling
or agreeing to do any of these things in any securities
[2022] 9 S.C.R. 669
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Dismissing the appeal, the Court
HELD:1. It may appear at first blush, that the respondent,
who was an insider and who possessed information which was
both unpublished and price sensitive, was guilty of the charge of
insider trading as he undoubtedly dealt in securities. But the catch
lies in understanding the true scope of Explanation (vii) under
Regulation 2(ha). 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. [Paras 24, 25][684-B-D]
2.1. While dealing with a case falling under Explanation (vii)
of Regulation 2(ha), one may have to see whether there was
any likelihood of the said information materially affecting the price
of the securities of the company. Additionally, the activity in which
the insider was involved also determines his culpability for
violation of Regulation 3. For instance, the sale by a person in
possession of price sensitive information, at a time when the price
is likely to take a plunge, will certainly be an attempt at taking
advantage of or encashing the information. Similarly the purchase
by a person in possession of UPSI at a time when the price of the
security is about to skyrocket, will certainly be an attempt to
take advantage. [Para 27][685-A-B]
2.2. But the above logic cannot be applied to cases which
fall on the opposite side of the spectrum. For instance, the sale
by a person at a time when the price of the securities is likely to
shoot up on account of price sensitive information coming into
the public domain or the purchase by a person at a time when
the price of the shares is likely to go downward due to price
sensitive information getting published, cannot come under the
category of insider trading. 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,
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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. [Para 28][685-C-E]
3. The words, "likely to materially affect the price"
appearing in the main part of Regulation 2(ha) gain significance
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". [Para 29][685F]
4. The cancellation of the shareholders Agreements
resulted in GIPL gaining very hugely in terms of order book
value. In such circumstances an ordinary man of prudence would
expect an increase in the value of the shares of GIPL and would
wait for the market trend to show itself up, if he actually desired
to indulge in insider trading. But the respondent did not wait for
the information about the market trend, after the information
became public. The reason given by respondent, which is also
accepted by the WTM and the Tribunal is that he had to dispose
of his shares as well as certain other properties for the purpose
of honouring a CDR package. It is on record that if the CDR
package had not gone through sucessfully, the parent company
of GIPL, Gammon India Ltd. could have gone for bankruptcy.
Therefore, the Tribunal was right in thinking that the respondent
had no motive or intention to make undeserved gains by encashing
on the unpublished price sensitive information that he possessed.
[Paras 32 and 33][686-C-E]
5. The contention of the appellant that SEBI took note of
the situation in which the respondent was placed and the dire
need that he had to sell the shares and that therefore SEBI
confined the final order only to disgorgement, is neither here
nor there. This argument is actually an argument of convenience.
If a company is likely to gain strength by making a significant
change in its policy, the price of its securities is likely to shoot
up. Despite such a natural phenomena, if a person sells his stocks
without waiting for the market trend to show up, it can only be
SECURITIES AND EXCHANGE BOARD OF INDIA v. ABHIJIT
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taken as a sale, devoid of any desire to make unlawful gains,
even if it cannot be termed as a distress sale. [Para 39][688-A-C]
6. In the present case, the information regarding the
termination of the two contracts can be characterized as price
sensitive information, in that it was likely to place the existing
shareholders in an advantageous position, once the information
came into the public domain. In such circumstances, the sale by
the respondent, of the shares held by him in GIPL would not fall
within the mischief of insider trading, as it was somewhat similar
to a distress sale, made before the information could have a
positive impact on the price of the shares. [Paras 44][689-D-E]
Chintalapati Raju v. SEBI (2018) 7 SCC 443 : [2018]
5 SCR 785; SEBI v. Kanaiyalal Baldevbhai Patel (2017)
15 SCC 1 : [2017] 14 SCR 268 and SEBI v. Kishore R.
Ajmera (2016) 6 SCC 368 : [2016] 1 SCR 1118 -
referred to.
Case Law Reference
[2018] 5 SCR 785 referred to
Para 6(e)
[2017] 14 SCR 268 referred to
Para 6(e)
[2016] 1 SCR 1118 referred to
Para 40
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 563 of
2020.
From the Judgment and Orders dated 08.11.2019 of the Securities
Appellate Tribunal, Mumbai in Appeal No. 232 of 2016.
Pratap Venugopal, Ms. Surekha Raman, Akhil Abraham Roy, Vijay
Valsan, M/s K J John And Co., Advs. for the Appellant.
Somasekhar Sundaresan, Divyam Agarwal, Pulkit Sukhramani,
Abhishek V., Ms. Vidhi Jhawar, Advs. for the Respondent.
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The Judgment of the Court was delivered by
V. RAMASUBRAMANIAN, J.
1. The Securities and Exchange Board of India has come up with
the above appeal, challenging an Order of the Securities Appellate
Tribunal, by which the Order of its Whole Time Member (for short
"WTM") directing the respondent to disgorge the amount of unlawful
gains made by him, was set aside.
2. We have heard Mr. Arvind P. Datar, learned senior counsel for
the appellant and Mr. Somasekhar Sundaresan, learned counsel appearing
for the respondent.
3. The background facts leading to the above appeal are as follows:
(i)
The respondent herein was the Chairman and Managing
Director of a company by name Gammon Infrastructure
Projects Limited (hereinafter referred to as "GIPL") till
September 20, 2013. Thereafter, he ceased to be the
Chairman Managing Director, but continued to be a Director
of the Company.
(ii)
In the year 2012 GIPL was awarded a contract by National
Highways Authority of India. The total cost of the project
was Rs.1648 crores. For the execution of the project, GIPL
set up a special purpose vehicle called Vijayawada
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.
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(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 resigned from the post of
Chairman and Managing Director of GIPL.
(ix)
Pursuant to an input received from the National Stock
Exchange, about the aforesaid transaction and the possibility
of the trading having taken place on the basis of unpublished
price sensitive information, SEBI conducted a preliminary
enquiry. After completion of the preliminary enquiry, SEBI
passed an ex-parte interim order on 17.07.2014 holding
prima facie that the respondent violated the provisions of
Section 12A(d) and (e) of The Securities and Exchange
Board of India Act, 1992 (hereinafter referred to as "SEBI
Act, 1992") and consequently restraining the respondent
from buying, selling or dealing in securities and accessing
the security markets directly or indirectly. This ex-parte
interim order was also confirmed by a confirmatory order
dated 23.03.2015, passed after providing an opportunity of
hearing to the respondent. The appeal filed by the
respondent against the said confirmatory order was
dismissed as withdrawn on 4.02.2016.
(x)
In the interregnum, SEBI completed the investigation and
issued certain directions on 21.03.2016, followed by a show
cause notice dated 29.03.2016. The show cause notice was
addressed not only to the respondent herein, but also to
another Company by name Consolidated Infrastructure
Company Private Limited and two of its Directors. The
noticees filed their replies and after giving an opportunity
of hearing to the noticees, the WTM passed an Order dated
13.07.2016. By the said order the WTM held the respondent
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herein guilty of insider trading and hence liable to disgorge
the amount of unlawful gains made by him to the tune of
Rs.1.09 crores. The show cause notices issued to the others,
namely, Consolidated Infrastructure Company Private
Limited and its Directors were closed without any directions,
on the ground that no case was made out against them.
(xi)
Challenging the said order of the WTM, the respondent
filed a statutory appeal before the Securities Appellate
Tribunal. The appeal was allowed by the Tribunal by an
Order dated 08.11.2019 and it is against the said order that
SEBI has come up with the above appeal.
4. The reasons for the Securities Appellate Tribunal allowing the
appeal of the respondent are three-fold, namely, (i) that the information
regarding the termination of the two shareholders agreements, was not
actually a price 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 one-third
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 trading and such a statutory prohibition cannot
be diluted by arguing that the total value of the contracts
terminated by the company was just a minor percentage of
the order book value and the total turnover of the company;
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(c)
that in any case the total value of the contracts terminated
on both sides was nearly Rs.2600 crores (Rs.1648 crores
+ 940 crores) and hence the information relating to the
termination of the contracts was definitely likely to materially
affect the price of the securities of the company under
Regulation 2(ha);
(d)
That Explanation (vi) under Section 2(ha) which speaks
about "significant changes in policies, plans or
operations of the company" cannot limit the scope of the
main part of the definition and in this case as a matter of
fact the price of the share dropped in just one day and the
respondent avoided a loss of Rs.85 lakhs;
(e)
that the de minimis syndicate has no application to insider
trading, as it introduces an element of subjectivity;
(f)
that bona fide intentions or grounds of necessity, such as
those pleaded in this case, cannot frustrate the object of
strict ban on insider trading, especially when the expression
"lawful excuse" as used in about 88 Central Statutes to
justify non-compliance, is conspicuously absent in the Statute
on hand;
(g)
that in any case, SEBI took note of the situation in which
the respondent was placed, warranting the necessity to sell
the shares and hence confined the final order only to
disgorgement, which is merely in the nature of restitutionary
relief;
(h)
that the intimation regarding the termination of the contracts
was given to the Bombay Stock Exchange at 1.05 p.m. and
to NSE at 2.40 p.m. on 03.09.2013 and the trading concluded
at 3:30 p.m. and hence the adoption of the closing price on
03.09.2013 would not correctly determine either the gains
made or the losses averted; and
(i)
that therefore, the question of SEBI taking the closing price
as on 03.09.2013 did not arise.
6. Responding to the above submissions made on behalf of the
appellant, Mr. Somasekhar Sundaresan, learned counsel for the
respondent raised the following contentions:-
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(a)
that the primary object of Insider Trading Regulations
anywhere in the world is to prohibit an insider from taking
advantage of asymmetrical access to unpublished price
sensitive information over others 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;1 (ii)
Rajiv Gandhi vs. SEBI;2 (iii) Miller vs. Pezzani3; and
(iv) SEBI vs. Kanaiyalal Baldevbhai Patel4;
(f)
that in the case on hand, the information in question, namely,
the termination of the Agreements actually resulted in GIPL
gaining total control of a larger project worth Rs.1648 crores
and that in other words what was lost by the termination
was far lesser than what was gained and hence the
information relating to the termination of the Agreements
was actually a favourable and not adverse information;
1 (2018) 7 SCC 443
2 (Appeal No.50/2007 decided by the Ld. SAT on 09.05.2008) - (Civil Appeal 5302 of
2008 against this order was dismissed)
3 (A decision of the US Court of Appeals)-the US Supreme Court refused to entertain
a challenge to it
4 (2017) 15 SCC 1
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(g)
that as seen from SEBI's own computation, the value of
the contract terminated was just 3.1% to 4.1% and hence
it cannot be reasonably expected to have a material impact
on the market price of the shares of GIPL;
(h)
that GIPL's investments in the project of SIL represented
0.05% of GIPL's order book and 0.7% of its turnover;
(i)
that a project with a small percentage of the order book
and a miniscule percentage of the turnover cannot ipso
facto become material for information about it to become
UPSI;
(j)
that on facts, the shares sold by the respondent on
22.08.2013 constituted 0.99% of the share capital of GIPL;
(k)
that what was sold by the respondent was 70% of his total
shareholding in GIPL and the sale was not an isolated one
but coupled with the sale of multiple other assets to raise
money to fund promoters' contribution to the CDR package
of Gammon India Limited, the listed parent company of
GIPL;
(l)
that the failure of the respondent to meet the obligation
towards CDR package would have led to GIL filing for
bankruptcy;
(m)
that every penny of the sale proceeds of the shares, was
transferred by the respondent towards the implementation
of CDR package and hence it is a misconception to think
that he made unlawful gains that ought to be disgorged;
(n)
that SEBI itself has accepted the fact that the sale proceeds
were used for funding the CDR package;
(o)
that SEBI itself exonerated the co-noticee, namely,
Consolidated Infrastructure Company Private Limited, on
the ground that its sale of shares was on account of a
pressing need to meet a margin shortfall to its stock broker;
(p)
that SEBI thus applied two different yardsticks, one in
respect of the respondent and another in respect of the conoticee in the very same proceeding, which necessitated
interference by the Tribunal; and
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(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 we proceed to analyze the points, we must note that
this is an appeal under Section 15Z of SEBI Act, 1992 and we are
concerned in such appeals with "any question of law arising out of
the order of the Tribunal". The focus of Section 15Z is on 'any question
of law' and not 'any substantial question of law'. Keeping this in
mind, we shall now proceed further.
9. The SEBI Act, 1992 is intended, as seen from its preamble, "to
provide for the establishment of a Board to protect the interests of
investors in securities and to promote the development of and to
regulate the securities market". As a matter of fact, the Securities and
Exchange Board of India was established even before the Act was
enacted. Since the Board was already in place, the Parliament enacted
the Act with a view among other things, to vest SEBI with statutory
powers.
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10. In exercise of the powers conferred by Section 30 of the Act,
the Board issued a set of Regulations known as "Securities and
Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992", with the previous approval of the Central
Government. Regulation 2(ha) of these Regulations defines the
expression "price sensitive information" as follows:-
"2(ha) "price sensitive information" means any information which
relates directly or indirectly to a company and which if published
is likely to materially affect the price of securities of company.
Explanation.-The following shall be deemed to be price sensitive
information :-
 (i)
periodical financial results of the company;
 (ii)
intended declaration of dividends (both interim and final);
 (iii) issue of securities or buy-back of securities;
 (iv) any major expansion plans or execution of new projects.
 (v) amalgamation, mergers or takeovers;
 (vi) disposal of the whole or substantial part of the undertaking;
 (vii) and significant changes in policies, plans or operations of
the company."
11. Regulation 2 (k) defines the expression "unpublished" as
follows:
"Unpublished" means information which is not published by the
company or its agents and is not specific in nature.
Explanation.- Speculative reports in print or electronic media
shall not be considered as published information."
12. Regulation 3 imposes a prohibition on dealing, communicating
or counseling on matters relating to insider trading. It reads 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
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(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 defined in Regulation 2(e) as follows:-
"(e) "insider" means any person who,
(i) is or was connected with the company or is deemed to have
been connected with the company and is reasonably expected to
have access to unpublished price sensitive information in respect
of securities of a company, or
(ii) has received or has had access to such unpublished price
sensitive information.
16. The words "dealing in securities" is defined in Regulation
2(d) as follows:-
"(d) "dealing in securities" means an act of subscribing, buying,
selling or agreeing to subscribe, buy, sell or deal in any securities
by any person either as principal or agent."
17. We may note at this stage that the Regulations underwent
sweeping changes through SEBI (Insider Trading) (Amendment)
Regulations 2002, w.e.f. 20.02.2002. Prior to the amendment made in
the year 2002, the words, "unpublished price sensitive information"
were defined through a single definition clause, namely Regulation 2(k)
as follows:-
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"2(k) Unpublished price sensitive information means any
information which related to the following matters or is of concern,
directly or indirectly, to a company, and is not generally known or
published by such company for general information, but which if
published or known, is likely to materially affect the price of
securities of that company in the market -
(i)
financial results (both half-yearly and annual) of the
company;
(ii)
intended declaration of dividend (both interim/final);
(iii)
issue of shares by way of public rights, bonus etc.;
(iv)
any major expansion plans or execution of new projects;
(v)
amalgamations, mergers and takeovers;
(vi)
disposal of the whole or substantially the whole of the
undertaking;
(vii)
such other information as may affect the earnings of the
company."
18. But under the Amendment Regulations, 2002, the word,
"unpublished" alone is defined in Regulation 2(k) and the rest of the
words "price sensitive information" is defined in Regulation 2(ha).
19. The important modifications brought forth under the
Amendment Regulations of 2002 to the definition of what is unpublished
price sensitive information are two-fold namely, (i) that the definition of
words unpublished is expanded; and (ii) that even significant changes in
policies, plans and operations of the company are brought within 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;
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(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 information to any person.
21. In other words, to find out if a person is guilty of violation of
Regulation 3, the Court should address itself to the following questions
namely, (i) is he an insider?; (ii) did he possess or have access to any
information relating to the company?; (iii) whether such information
was price sensitive?; (iv) whether the information was unpublished?;
and (v) whether he dealt in securities by subscribing, buying, selling or
agreeing to do any of these things in any securities?
22. Before we proceed to find an answer to the above questions
in the context of the present appeal we must take note of one important
fact namely, that the price sensitivity of an information has a correlation
directly to the materiality of the impact that it can have on the price of
the securities of the company. An information may materially affect the
price of the security of a company either positively or negatively. The
impact may be beneficial or adverse. The information should have the
potential either to catapult the price of the securities of the company to
a higher level or to make it plunge. The effect can be bullish or bearish.
But the effect should be material and not completely insignificant.
23. Keeping the above parameters in mind if we come to the
facts of the case on hand, it will be clear, (i) that the respondent was
certainly an insider, as he was a Chairman and Managing Director of
GIPL till 20.09.2013 and was a party to the resolution of the Board of
Directors passed on 09.08.2013 authorising the termination of the
shareholders' Agreements; (ii) that the information relating to the
termination of both the shareholders' Agreements that the respondent
had, would certainly fall under the category of "significant changes in
policies, plans or operations of the Company" under Regulation
2(ha)(vii); (iii) that the respondent dealt in securities by selling 144 lakhs
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of shares on 22.08.2013, which was a month before his resignation as
Chairman and Managing Director; and (iv) that the termination of the
shareholders' Agreements on 09.08.2013 was disclosed to the NSE and
BSE on 30.08.2013, after the sale of the shares, which made the
information relating to the termination of the Agreements unpublished as
on the date of the sale.
24. Therefore, it may appear at first blush, that the respondent,
who was an insider and who possessed information 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 information in Item No.(vii) is concerned. In
other words, the likelihood of the price of the securities getting materially
affected, is inherent in Items (i) to (vi) namely,
 "(i) periodical financial results of the company;
 (ii)
intended declaration of dividends (both interim and final);
 (iii) issue of securities or buy-back of securities;
 (iv) any major expansion plans or execution of new projects.
 (v) amalgamation, mergers or takeovers;
 (vi) disposal of the whole or substantial part of the undertaking;"
But such is not the case with the information in Item No.(vii).
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27. Therefore, while dealing with a case falling under Explanation
(vii) of Regulation 2(ha), one may have to see whether there was any
likelihood of the said information materially affecting the price of the
securities of the company. Additionally, the activity in which the insider
was involved also determines his culpability for violation of Regulation
3. For instance, the sale by a person in possession of price sensitive
information, at a time when the price is likely to take a plunge, will
certainly be an attempt at taking advantage of or encashing the
information. Similarly the purchase by a person in possession of UPSI at
a time when the price of the security is about to skyrocket, will certainly
be an attempt to take advantage.
28. But the above logic cannot be applied to cases which fall on
the opposite side of the spectrum. For instance, the sale by a person at a
time when the price of the securities is likely to shoot up on account of
price sensitive information coming into the public domain or the purchase
by a person at a time when the price of the shares is likely to go downward
due to price sensitive information getting published, cannot come under
the category of insider trading. 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.
29. The words, "likely to materially affect the price" appearing
in the main part of Regulation 2(ha) gain significance 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
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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 crores approximately. Similarly,
the acquisition by SIL, of the equity interest in GIPL's project was worth
Rs. 807.52 crores. Therefore, the cancellation of the shareholders
Agreements resulted in GIPL gaining very hugely in terms of order book
value. In such circumstances an ordinary man of prudence would expect
an increase in the value of the shares of GIPL and would wait for the
market trend to show itself up, if he actually desired to indulge in insider
trading. But the respondent did not wait for the information about the
market trend, after the information became public. The reason given by
him, which is also accepted by the WTM and the Tribunal is that he had
to dispose of his shares as well as certain other properties for the purpose
of honouring a CDR package. It is on record that if the CDR package
had not gone through successfully, the parent company of GIPL namely,
Gammon India Ltd., could have gone for bankruptcy.
33. Therefore, the Tribunal was right in thinking that the respondent
had no motive or intention to make undeserved gains by encashing on
the unpublished price sensitive information that he possessed.
34. As a matter of fact, the Tribunal found that the closing price
of shares rose, after the disclosure of the information. This shows that
the unpublished price sensitive information was such that it was likely to
be more beneficial to the shareholders, after the disclosure was made.
Any person desirous of indulging in insider trading, would have waited
till the information went public, to sell his holdings. The respondent did
not do this, obviously on account of a pressing necessity.
35. We agree with the contention of Shri Arvind P. Datar, learned
senior counsel for the appellant, that the allegation of insider trading
cannot be measured in terms of the value of the contracts terminated
and the percentage of shares sold and that the theory of proportionality
cannot be applied in such cases. The magnitude of what an insider did,
in relation to the size of the company, may not have a bearing upon the
question whether someone indulged in insider trading or not. But what is
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sought to be encashed by the insider should be an information which if
published is likely to materially affect the price of the securities of the
company.
36. The contention of Shri Arvind P. Datar, learned senior counsel,
that the total value of the contracts 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.