On February 02, 2023, the Securities Appellate Tribunal (SAT/ Tribunal), in the matter of Quantum Securities Pvt. Ltd. v. SEBI and two other connected matters (Order), held that in order to penalise an entity for insider trading, it is essential to demonstrate that the entity’s trades in the shares of a company were motivated by unpublished price sensitive information (UPSI)about the company, in its possession.
SEBI had initiated an investigation into the allegations of insider trading in the shares of New Delhi Television Limited (NDTV Ltd.). During the investigation period, it was observed that Mr. Sanjay Dutt (Mr. Dutt)was engaged as a consultant by NDTV Ltd. Further, during the alleged UPSI periods, Mr. Dutt’s wife, Mrs. Prenita Dutt (Mrs. Dutt) and certain companies in which Mr. Dutt or Mrs. Dutt held shares and were promoter-directors (Companies) had traded in the shares of NDTV Ltd.Subsequently, a show cause notice (SCN) was issued to the aforementioned parties and thereafter, the Whole Time Member of SEBI passed an order against them (WTM Order). Mr. Dutt was held liable for communicating the UPSI to the other parties, and the rest were held liable for dealing in the shares of NDTV Ltd. based on the UPSI during 5 different UPSI periods. Being aggrieved by the same, the parties appealed against the WTM Order before the SAT.
After considering the matter, SAT set aside the WTM’s orders against Mrs. Dutt and certain other entities (fully or partially); quashed the WTM Order; and remanded the matter to SEBI to reconsider the issues afresh for certain parties on the following basis.
Firstly, one of the alleged deemed PSIs pertained to the board of NDTV Ltd. (Board) deciding to evaluate options for the reorganisation of the company at the relevant time (PSI-6). After evaluating the facts related to PSI-6, SAT opined that the Board had merely decided to evaluate options for the reorganisation of NDTV Ltd. and no specific plan had been contemplated. SATheld that the mere thought of exploring a future possibility of demerger or split or re-organization of a company by the Board could not be categorised as aPSI. Therefore, it was held that PSI-6 could not be equated to a deemed PSI as defined under Explanation (vii) of Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations 1992), namely, “significant changes in policies, plans or operations of the company”. Since Mrs. Dutt and certain other entities had traded in the shares of NDTV Ltd. during PSI-6, the orders against them were set aside by SAT.
Secondly, with respect to the other parties, SAT remanded the matter to SEBI for reconsideration as the WTM had failed to take into account certain submissions of the parties, before passing the WTM Order. The two relevant submissions were related to i) the inordinate delay of more than 10years in the issuance of the SCN had caused grave prejudice to parties, and ii)the trades undertaken by them were not motivated by any UPSI related to NDTV Ltd. In the WTM Order, it was held that given their association with Mr. Dutt,Mrs. Dutt and the Companies were deemed to have possession of UPSI. Further,SEBI adopted a strict interpretation of Regulation 3 of the PIT Regulations1992 and held that as the entities had traded in the shares of NDTV Ltd., while in possession of UPSI, they had indulged in insider trading. SEBI did not go into the issue of whether the alleged trades were undertaken to take advantage of any UPSI that may have been in the possession of the parties.
Relying upon its earlier judgement in the matter of Abhijit Rajan v. SEBI, which was subsequently affirmed by the Hon’ble Supreme Court, SAT held that topenalise an entity for insider trading, it is imperative to establish that the entity’s trades were motivated by UPSI. However, in the present case,SEBI had altogether failed to take into consideration the submission of the parties that their trades were not influenced/ motivated by any UPSI related to NDTV Ltd. In Abhijit Rajan v. SEBI,SAT had held that in order to hold a person liable for insider trading, it is necessary to establish that the person had traded in the shares of a company based on UPSI related to the company.
This Order will add to the list of judicial pronouncements which emphasize the importance of establishing that a person’s trades were motivated by UPSI to hold him liable for insider trading. The purposive interpretation adopted by SATin this Order and also by the Supreme Court in SEBI v. Abhijit Rajan reintroduces the relevance of motive in insider trading violations, which continues to run contrary to the Explanation to Regulation 4(1) of the extant new PIT Regulations 2015 which provides that if a person trades in securities while in possession of UPSI, it will be presumed that his trades were motivated by such information. The deemed presumption of insider trading under PIT Regulation 2015, exempts SEBI from considering crucial factors such as an alleged insider’s trading pattern and the same has led to the passing of erroneous orders in the past.
In our view, given the grave nature of the offence, which can cause adverse economic and reputation harm toindividuals and entities, SEBI should establish a higher standard of proof before holding a person liable for insider trading. Factors such as the alleged insider’s trading pattern, the direction of the person’s trade vis-à-vis the nature of the UPSI and his motive to make unlawful gains or avoid losses, should be taken into consideration to determine whether a person should be held liable for insider trading.
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