In an intriguing development in the Satyam fraud case, the Supreme Court of India, vide order dated May 14, 2018, has exonerated Srinivasa Raju (“Appellant”) of all allegations of insider trading under the SEBI (Prohibition of Insider Trading Regulations), 1992 (“1992 Regulations”). The Supreme Court set aside the Securities Appellate Tribunal (“SAT”) order, which in turn upheld the SEBI WTM order directing the Appellant to disgorge unlawful gains made by trading in the shares of Satyam Computer Systems Limited (“SCSL”) while in possession of unpublished price sensitive information (“UPSI”).
The Supreme Court held that Regulation 2(e) of the 1992 Regulations defines an insider as a person who is a connected person or deemed to be connected person, and is reasonably expected to have access to UPSI of the company. It held that the expression “reasonably expected” cannot be a mere ipse dixit, and there must be material to show that such person can reasonably be expected to have access to UPSI. In analyzing whether the Appellant can be ‘reasonably expected’ to have UPSI, the SC distinguished between executive and non-executive director and observed that non-executive directors are not involved in the day to day affairs of the company. Appreciating the fact that the Appellant was a non-executive director of SCSL when the UPSI was in existence, the SC held that the Appellant cannot be reasonably expected to be in possession of UPSI.
The SAT order hinged on the assertion that the Appellant was a promoter of SCSL and was a co-brother of Ramalinga Raju, the primary accused in the Satyam fraud case, and therefore, the Appellant can reasonably be expected to have access to UPSI. Accepting the contention of the Appellant that the filings made to the stock exchanges, whereby he was identified as one of the promoters, were fraudulent and made without his consent, the SC held that merely being a co-brother of Ramalinga Raju cannot lead to an inference that the Appellant was reasonably expected to have access to UPSI.
For cases under the SEBI (Prohibition of Insider Trading) Regulations, 2015, where a determination of ‘reasonable expectation’ of having access to UPSI is to be made, this ruling of the Supreme Court clarifies the circumstances under which such determination can be validly made. Further, the Supreme Court has rightly disregarded the bearing that a relationship of ‘co-brother’ has on reasonable expectation of access to UPSI.