A recent ruling by the Securities Appellate Tribunal (“SAT”) has sparked afresh, the debate over how the concept of insider trading is to be understood and applied. This is the first time, the SAT has explicitly interpreted the scope of Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“Insider Trading Regulations”), which is the heart of law on insider trading in India.
Regulation 3 prohibits, since 2002, insiders from dealing in securities while “in possession of” unpublished price-sensitive information. Prior to an amendment in 2002, the provision specified that insiders were prohibited from dealing in securities “on the basis of” unpublished price sensitive information.
“The prohibition contained in regulation 3 of the regulations apply only when an insider trades or deals in securities on the basis of any unpublished price sensitive information and not otherwise. It means that the trades executed should be motivated by the information in the possession of the insider,” the SAT Order notes.
While at first blush, this may seem contrary to the letter of the regulation, the SAT went to elaborate: “If an insider trades or deals in securities of a listed company, it may be presumed that he / she traded on the basis of unpublished price sensitive information in his / her possession unless contrary to the same is established.”
“The burden of proving a situation contrary to the presumption mentioned above lies on the insider,” the SAT said. “If an insider shows that he / she did not trade on the basis of unpublished price sensitive information and that he / she traded on some other basis, he / she cannot be said to have violated the provisions of regulation 3 of the regulations.”
While the Insider Trading Regulations may clearly be read as imposing an absolute ban on any form of dealing in securities, in fighting against the punishment for an alleged breach, it would indeed be open to the defence to show that the action of the insider was contrary to what a reasonable person would do if he were motivated by the unpublished information.
For example, if the unpublished information were to be adverse news, and the insider were to sell before the information were to be made public, it would indeed stand to reason that the insider bought although he would have been able to buy at a lower price after the adverse news hit the street. So also, if the unpublished information were to have a positive impact upon publication, but the insider had sold before publication, it would stand to reason that he can argue that his sale when in possession of the positive information could not have been to profit and should not be punishable.
Courts have often grappled with this issue. The amendment in 2002 to the Insider Trading Regulations indeed lowered the bar to prove insider trading. So long as the regulator could demonstrate that the insider had unpublished price-sensitive information in his possession when he traded, it would be able to bring a charge of insider trading.
However, the amendments also took care that this was not an inexorable immutable proposition. The same amendments provided that if an inanimate corporate body were to have traded when in possession of unpublished price-sensitive information, one of the validly available grounds of defence would be to argue that the person traded on behalf of the corporate was different from the person who had possession of the information.
“A person who is in possession of unpublished price sensitive information 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 unpublished price sensitive information becomes public and would immediately offload the shares post the information becoming public,” the SAT noted. “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 unpublished price sensitive information.” Not unsound logic at all.
The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own.
Email: somasekhar@jsalaw.com
