By Jayant M. Thakur
Chartered Accountant
BACKGROUND
SEBI had levied a penalty of Rs. 40 crores
for insider trading on the promoters against a profit of about Rs. 14 crores.
Recently, SAT confirmed this hefty penalty. The case proves how SEBI is able to
unravel facts to the last transaction and establish relations between several
parties involved in insider trading. The case also establishes SEBI’s intention
to act tough in such cases by levying stiff penalties on promoters acting
through associates. However, the case also has some grey areas. The issues are
as follows:
(i) When can price-sensitive information be
said to have arisen, particularly in case of complex transactions?
(ii) Whether purchase on negotiated terms of
a large quantity of shares from a person can be said to be a case of insider
trading?
(iii) How are the profits of insider trading
calculated – profits actually made, or should an attempt be made to quantify
the impact of price-sensitive information on the price?
(iv) Should profits made by insider trading
be disgorged and handed over to the party who may have suffered a loss?
The present case was about a tender with
electricity bodies where it may be difficult even for the management to be 100%
sure and whether initial success necessarily means ‘confirmed outcome’.
BASIC FACTS OF THE CASE
The case concerns dealings in the shares of
ICSA (India) Limited. The findings were that the promoters (consisting of
husband and wife and certain companies belonging to their group) purchased,
through certain persons, 15.86 lakh shares in February, 2009. These shares were
purchased when certain price-sensitive information was not made public.
According to SEBI’s order the price-sensitive information related to the
company being successful bidders to large contracts aggregating to Rs. 464.17
crores with various electricity bodies. The purchase price was approx. Rs. 75
per share. The shares were sold at a significant profit of about Rs. 14 crores.
The transactions were routed through persons
who could be described as ‘associates’. These associates were funded by the
promoters’ group for purchasing the shares. The shares so purchased were either
transferred to the promoter entities or sold in the market and the sale
proceeds transferred to the promoters.
SEBI’s penalty also included a penalty for
giving misleading information about the relations between the promoters and the associates and making misleading disclosures relating to
shares pledged by the promoters / associates.
The penalty of Rs. 40 crores levied for such
insider trading, etc., has been upheld by SAT.
SEBI’s order is dated 15th
October, 2015. The SAT order is dated 12th July, 2019 (Appeal No.
509 of 2015).
ALLEGATIONS
SEBI alleged
that there was price-sensitive information related to the company being
successful bidders of contracts with certain electricity bodies amounting to
Rs. 464 crores. Under the SEBI (Prohibition of Insider Trading) Regulations,
1992 (Insider Trading Regulations), insiders are prohibited from dealing in
shares of the company while having access to or being in possession of
unpublished price-sensitive information. The promoters and their group entities
were alleged to be aware of this price-sensitive information and indulged in
the purchase of a large quantity of shares before publishing this information.
The purchasers were funded by the promoter’s
group entities. The shares so acquired were either sold by the associates or
transferred to group companies. The profit made was also transferred to group
companies.
SEBI further alleged that incorrect
information was given about shares pledged by the group companies and associates.
DEFENCE BY THE PROMOTERS
The promoters denied that they had financed the
purchase of shares or that the various transactions through the associates
amounted to insider trading. They stated that only a preliminary outcome had
been received in respect of the bids when the shares were purchased and at that
stage one could not be certain that the contracts would be granted to the
company. They explained the whole process of grant of bids, including
preliminary acceptance and certain processes thereafter, and that until final
award took place, ‘price-sensitive information’ could not be said to
have arisen.
They also stated that a large foreign
shareholder had desired to sell the shares and that to avoid a negative impact
on the market his shares were purchased. It was also stated that the reason for
making purchases through the associates was that if the promoters had
themselves purchased the shares, a negative image would have been created
giving an impression of promoters increasing their holding in the company.
They also denied that they had given
misleading disclosures relating to promoters or of the relations between the
parties.
RULING BY SEBI
SEBI presented detailed facts of
transactions including how funds were transferred by group entities of the
promoters to the associates. It was also shown how shares were sold and monies
transferred or shares were simply transferred to the promoter entities.
SEBI also established how the promoter
himself was very closely involved with the contract bidding, and hence it was
clear that he was aware of the progress regarding receiving the contract.
On facts, too, from the data provided by the
promoters, it was shown that largely, once the preliminary bids were
successful, an eventual successful outcome was fairly certain. However, even
otherwise, the information at that stage was too price-sensitive.
The promoters were also held guilty of
providing misleading information of relations between the parties. Further,
SEBI held that the promoters had given misleading information relating to
pledging of shares by promoters.
Penalties were thus levied on various
entities involved. For ‘insider trading’, a penalty of Rs. 40 crores was levied
on the promoters and group entities / associates. For providing misleading
information, a penalty of Rs. 20 lakhs was levied on the promoters and one
associate. For giving misleading disclosure of promoter holdings, an aggregate
penalty of Rs. 38 lakhs was levied.
RULING BY SAT
The Securities Appellate Tribunal (SAT)
after extensively considering the arguments and the facts held that
(a) On the matter of price-sensitive
information, on facts, that is, after considering comparable cases and their
earlier rulings, the nature of bids and the awarding process, even the preliminary
outcome of a bid amounted to price-sensitive information and promoters’ dealing
in shares was in violation of the Insider Trading Regulations.
(b) On the amount of penalty, SAT noted that
SEBI had powers to levy penalty up to three times the gains made. Thus, the
penalty levied of Rs. 40 crores on profits on insider trading of Rs. 14 crores
was within the limit prescribed under law.
However, SAT reversed both the penalties
levied relating to providing of misleading information regarding associates’
pledging of shares.
OBSERVATIONS AND COMMENTS
The case presents some interesting aspects –
regarding how trades are done and how meticulous is SEBI’s investigation.
Despite there being some grey areas, the ruling should place promoters on guard
and about the dilemma they face whilst dealing in the shares of a company.
The manner in which trading was done was
curious and perhaps added to the complexity of the case. The promoters did not
themselves purchase the shares but provided finance to associates who acted (as
held by SEBI / SAT) more or less as a front / representatives. They used the
funds to buy the shares and then transferred the shares / sales proceeds to the
promoters. Hence, penalty was levied jointly and severally on all the concerned
parties. A side-effect of this was that even the associates, who may have been
parties of small means, were made liable to ensure payment of penalty.
The amount of penalty is fairly huge. The
profits made were Rs. 14 crores. The maximum possible penalty was Rs. 42
crores, i.e., three times the profits. Thus, by levying a penalty of Rs. 40
crores, the maximum limit of the penalty was almost touched. And SAT had no
hesitation in upholding it.
The grey area is about the time when
price-sensitive information can be said to have arisen. Both the SEBI and the
SAT orders deal with this aspect in detail. However, the dilemma remains as to
at what stage can a company and insiders be held to be confident that the
orders would be received. The matter becomes even more complex since companies
are required to share material information at the appropriate stage. The
dilemma is this: share too early and you may be held to be providing
misleading information if eventually the bid is rejected; share too late and
you may be accused of withholding and delaying release of price-sensitive /
material information. Considering that such analyses are always in hindsight,
the dilemma is compounded.
However, at least one aspect is clear – that
insiders should act with caution. Refraining from trading during this period
would be a wise decision because the Insider Trading Regulations themselves
provide for mandatory closure of the trading window for the period when such
information is ripening. For example, a long period of trading window closure
is mandated during the time when financial results of a company are being
finalised. Importantly, even preliminary success in bids is price-sensitive
information.
The next question is – should the person who
has suffered because of such insider trading be compensated? Insider trading is
often said to be a victimless crime. However, in some cases the victim may be
obvious. In the present case, can it be said that the foreign seller who sold a
large quantity of shares would not have sold the shares if he was aware that a
large order was virtually possible? In such a case, should not the profits made
by the promoters be disgorged and handed over to the seller?
This is the one question that often comes up
also in cases of frauds and price manipulation, etc. In the author’s view, this
is one area where both the law and practice lack clarity.
Finally, compliments are due to SEBI for the
meticulous gathering and analysis of information. White-collar violations are
often said to be sophisticated. Insider trading cases are even more notorious
for the sheer difficulty in proving guilt. In this case, though the
transactions were routed through associates, SEBI analysed the data and brought
out the whole linkages of relations and financial dealings between the parties.
This ought to serve as a lesson to promoters, especially in view of the hefty
penalty levied.
