In Civil Appeal No. 563 of 2020-SC- Top Court dismisses SEBI’s appeal against SAT order quashing charges of Insider Trading against Ex-Chairman of Gammon Infrastructure, says sale of shares held by him was somewhat similar to distress sale  Justices V. Ramasubramanian & Indira Banerjee [19-09-2022]

Read Judgment: SECURITIES AND EXCHANGE BOARD OF INDIA v. ABHIJIT RAJAN 

Tulip Kanth
 

New Delhi, September 20, 2022: Confirming the order of the Securities Appellate Tribunal dismissing the charges of Insider Trading against Abhijit Rana, Ex- Chairman & MD of Gammon Infrastructure Projects Limited, the Supreme Court has observed that 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 taken as a sale, devoid of any desire to make unlawful gains.

Dismissing SEBI’s appeal, the Division Bench of Justice V. Ramasubramanian and Justice Indira Banerjee said, “...the information regarding the termination of the two contracts can be characterised 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.”

The factual background of this case was such that in the year 2012 Gammon Infrastructure Projects Limited(GIPL) was awarded a contract by National Highways Authority of India. Similarly, another company by name Simplex Infrastructure Limited (SIL) was awarded a contract by NHAI in Jharkhand and West Bengal. 

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. However, the Board of Directors of GIPL passed a resolution authorizing the termination of both shareholders agreements and GIPL and SIL were to hold 49% equity interest in each other’s projects. 

Later, the respondent sold about 144 lakhs shares held by him in GIPL, for an aggregate value of approximately Rs 10.28 crore. GIPL, then made a disclosure to the National Stock exchange of India and BSE regarding the termination of two shareholders agreements.Thereafter, the respondent resigned from the post of Chairman and Managing Director of GIPL.

Pursuant to the input received from the NSE, 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 and  an ex­parte interim order was passed 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  (SEBI Act, 1992). Consequently, the respondent was restrained from buying, selling or dealing in securities and accessing the security markets directly or indirectly. 

The appeal filed by the respondent was dismissed as withdrawn.In the interregnum, the Whole Time Member (WTM) held the respondent 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 crore. 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 and it was against the said order that SEBI had come up with the appeal.

The Bench considered the fact that the acquisition by GIPL, of an equity interest in SIL’s project was worth Rs 460 crore 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, the  Bench opined that 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 Bench added.

“The reason given by him, which was also accepted by the WTM and the Tribunal was that he had to dispose of his shares as well as certain other properties for the purpose of honouring a CDR package. It was 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”, the Bench said and held that 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.

Referring to the SEBI (Prohibition of Insider Trading) Regulations 1992, the Bench said, “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.”

Noting that the Tribunal found that the closing price of shares rose, after the disclosure of the information which showed that the unpublished price sensitive information was such that it was likely to be more beneficial to the shareholders, after the disclosure was made, the Bench asserted, “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.”

Clarifying that the de minimis Rule has no application to insider trading, as it introduces an element of subjectivity, the Bench observed that 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 information in question. “The fact that the respondent did not wait to take advantage of the situation, convinces us that his intention was not to indulge in insider trading”, the Bench further held.

Stating that an attempt by the insider to encash the benefit of the information is not exactly the same as mens rea, the Bench opined that 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. 

As per the Bench, 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.Refusing to interfere with the order of the Tribunal, the Bench dismissed the appeal.