By Jayant M. Thakur
Chartered Accountant
Background
A recent series of interesting SEBI orders has highlighted
two aspects of insider trading. One is, how broad the law can be and the types
of transactions and acts/omissions that are covered. The other is, how
stringent the punishment can be. These orders of SEBI have now also been
confirmed by the Securities Appellate Tribunal (“SAT”), with some changes.
Nature of Insider Trading as commonly perceived and the recent
Orders
Insider Trading is commonly seen to be of a particular
nature. There is an insider – who could be a director, officer or even auditor,
etc. who has close relations with the Company. He usually occupies a
position of trust and has access to inside information. Such information, if
made public, would result in the price of the shares going up or down. He can
thus profit from such information. This is deemed to be abuse of such trust and
the regulations that prohibit and prescribe punishment for insider trading.
However, as will be seen from the SEBI orders discussed herein, what may constitute
inside information and thus Insider Trading can be something not envisaged from
this common understanding.
Further, these SEBI orders also show that the punishment for
Insider Trading can be more severe than one may commonly expect. As will be
seen here, though the profits would have been in thousands, the penalty imposed
is in tens of lakhs of rupees and even in crores.
Whether information regarding open offer is inside information
The SEBI (Prohibition of Insider Trading) Regulations 2015
(which replaced the earlier 1992 Regulations) consider certain information to
be inside information. If such information is price sensitive and not made
public, then the Regulations require that insiders should not deal on basis of
such information (termed in the Regulations as Unpublished Price Sensitive
Information or “UPSI”). An example of this is receipt of large and profitable
orders by the Company. The head of sales, the Chief Financial Officer, the
Managing Director, etc. who become aware of this development would also
know that once this information is made public, the price of the shares may
rise. The Regulations thus rightly bar them from dealing in the shares of the
Company till such information remains is not shared with public. There can be
more examples of such information – a large dividend payment or bonus issue of
shares is decided on, an acquisition or divestiture of a business is being
considered, etc. However, in each of these cases, the matter concerns
something directly relating to the activities of the Company. When an insider
is entrusted with such confidential and material information, he is duty bound not to make use of it for his profit.
The question that arises is whether even information that
does not directly relate to activities of companies can also be inside
information. If, for example, the Promoters of a Company have entered into an
agreement to sell their shareholding to an acquirer, whether such information
would also be inside information under the Regulations? The peculiar nature of
such information can be seen. The information does not really relate to the
operations of the Company. It is also a proposed transaction by the Promoters
of a company independently of the Company. If the Company is wholly
professionally managed, it is possible that the Company and its officers may
not even come to know, till the last moment, of such agreement. Are the
Promoters duty bound not to trade on basis of such information?
The implications are not far to see. Such an acquisition
would have to result in an open offer from the public by the acquirer under the
SEBI Takeover Regulations. If the open offer price is higher than the current
ruling market price, the public shareholders would profit. However, if the
Promoters, being aware of such deal with the acquirer, acquire the shares from
the market at the ruling price, they may profit from such purchase. The
question is whether such dealing would be Insider Trading under the
Regulations.
SEBI Orders
The Orders dealt with in this article tackle this question
though partly. The Promoters of a listed company had entered into negotiations
with an acquirer whereby they would sell their shares and control over the
Company. The resultant open offer price seems to be, from limited facts given
in the SEBI orders, far higher than the ruling market price. The directors of
the Company were, as per findings of SEBI, aware of such transaction. Yet, they
and certain persons to whom such information was shared by such Directors, made
purchases of the shares from the market at the lower ruling price. Furthermore
they did not inform the stock exchanges promptly at end of board meeting where
such agreement for sale of shares/control was taken up. The resultant public
announcement of open offer was also delayed by a day. SEBI considered these as
violations of the Regulations and levied severe penalties. The Company, its
directors, its Company Secretary, the persons to whom such information was
shared, etc. were all proceeded against. These matters also went in
appeal before SAT. The orders of SEBI for each of these persons and the
decision of the SAT in appeal are discussed below. The decisions of SEBI are
all dated 7th March 2014 and the decision of the Securities
Appellate Tribunal (“SAT”) is dated 30th November 2016. The name of
the Company is Shelter Infra Projects Limited (“the Company”).
When did the UPSI arise?
An important relevant question was, when did the Unpublished
Price Sensitive Information (“UPSI”) arise? It is really from this time that
the insiders are prohibited from dealing in the shares of the Company. Often
developments may be in process. However, there would be a particular stage
after which the development has turned into such definite information that if
made known to the public would materially affect the price of the shares of the
Company. This is also relevant for determining the trading window closure date
too since before UPSI arises, the window should already be closed.
In the present case, the SAT eventually noted that there was
a meeting on 19th June 2009 at which a decision was taken to go
ahead with the agreement of sale of shares/transfer of control. At this
meeting, a decision was also taken to finalise the transaction within a week.
SAT considered this date to be the date when UPSI arose.
Action against the Company Secretary and directors for not
closing trading window
The Regulations, read with Code of Conduct prescribed
thereunder which companies are also required to adopt, provide for closure of
trading window when price sensitive information is expected to be generated.
Thus, for example, during the time when the financial results of the Company
are being compiled, there may be persons in the Company who may have access to
such information. If they deal in the shares of the Company, then it is likely
they would take into account such information and thus enter into trades
favourable to them. The Regulations thus require that the Company should
prohibit trading during such period by specified insiders and such prohibition
is called closure of trading window. The Company Secretary of the Company is
required to notify such closure of trading window.
SEBI initiated action against the Company Secretary and
directors of the Company as the trading window was not closed during the time when
the sale of controlling interest was being decided upon. However, by this time,
the Company Secretary of the Company had passed away. SEBI noted that the
obligation for initiating closure of the trading window under the
Regulations/Code of Conduct was on the Company Secretary. On his death, the
proceedings against him abated. The other directors were also absolved.
On the other hand, a similar action was initiated against the
Company for not closing the trading window and a penalty of Rs. 50 lakh was levied
on it for such default. This penalty was upheld by the SAT on appeal.
Action against directors for dealing in shares of the Company
with (Unpublished Sensitive Information ) UPSI
The SEBI Orders
demonstrated how directors purchased shares while the price sensitive
information regarding proposed takeover was not published. In two cases,
directors were also held to have shared the information with their relatives
who dealt in the shares. The directors were penalised separately for sharing
information and for dealing. Such relatives too were penalised for the dealing.
The Chairman of the
Company and his wife were proceeded against. SEBI made a finding that the
Chairman had not only dealt in the shares himself by purchasing 10,200 shares
but also communicated the UPSI to his wife. The wife in turn also dealt in the
shares by purchasing 5,000 shares. The Chairman, however, died while the
proceedings were in progress and hence the action against him abated. SEBI,
however, levied a penalty of Rs. 1 crore on his wife for her dealing in the
shares. On appeal, SAT, considering the age of the wife and other relevant factors,
reduced the penalty to Rs. 30 lakh.
Another director was held to have shared the information with
a group he was associated with, which group in turn dealt in the shares of the
Company. For sharing such information, SEBI levied a penalty of Rs. 1 crore on
such director. For the persons to whom such UPSI was shared and who dealt in
such shares, a penalty of Rs. 2 crore was levied for such persons put together,
to be payable jointly and severally. Both of such penalties were confirmed by
SAT.
Similarly, a whole time director of the Company was held to
have dealt in the shares of the Company while in possession of UPSI and for
having communicating the UPSI to his son, who, in turn, dealt in the shares of
the Company. The Whole Time Director bought 1,246 shares for Rs. 41310 and sold
the same for Rs. 42151. This also involved violation of the rule of not
entering into opposite transaction within six months of the first transaction.
He was penalised Rs. 30 lakh for communicating UPSI and for dealing in the
shares. His son bought 2000 shares for Rs. 80,824. He was penalised Rs. 20
lakh.
Some such persons argued that they had only purchased shares
but did not sell them and hence did not realise any profits. This argument was
rejected and rightly so. Insider Trading arises when dealing takes place and
that may be merely one side of the transaction – purchase or sale.
Intimating stock exchanges regarding decision of takeover and making the public announcement as required by the
Takeover Regulations
It was found by SEBI that while the Company decided at a
meeting to go ahead with the takeover agreement, it did not promptly inform the
stock exchange as required by the Listing Agreement. Indeed, as SEBI pointed
out, the Company did not send the information to stock exchanges at all.
Further, a public announcement was required to be made under
the Takeover Regulations within four working days of having entered into the agreement for sale of shares/control. The
public announcement was made, however, after 5 working days, which incidentally
came to 7 week days.
A penalty of Rs. 50 lakh was levied by SEBI for not
intimating the stock exchange under the Listing Agreement and a further Rs. 50
lakh for not releasing the public announcement in the prescribed time. The
Company argued that the information was provided through the public
announcement in seven days and even otherwise the penalty for delayed information
is Rs. 1 lakh per day. The SAT, however, took a practical view and accepted the
contention that the public announcement also effectively released the required
information. Hence, the delay was limited to seven days. The SAT also applied
the penalty of Rs. 1 lakh per day u/s. 23(a) of the Securities Contracts
(Regulation) Act, 1956, and limited the penalty to Rs. 7 lakh.
Quantum of penalty
The penalties levied, as is seen, are fairly high. The
amounts involved of purchases are barely in thousands or tens of thousands
while the penalty is in tens of lakhs. It needs to be considered whether it is
disproportionate or whether such high penalties are necessary for punishing the
guilty for and also act as deterrent for others in the future. The Adjudicating
Officer of SEBI has not given any detailed working of how the penalty has been
arrived at. However, as can be seen, except where reduced by the SAT on facts,
the penalties have been confirmed.
Conclusion
The decision ought to make companies and
insiders of the sheer breadth of the Insider Trading Regulations. If one
reviews the definition of “insider” under the Regulations, the actual
implications are even broader. An insider includes any person who has received
any unpublished price sensitive information, irrespective of the source. Thus,
while in the decisions discussed in this article, insiders were close to the
Company and thus had access to inside information. Even the other persons
considered here had relations with such insiders. However, even if that were
not so, the Regulations may apply if even a third party had merely received
such information. For example, an outsider/third party who has inside
information that is price-sensitive would be deemed to be an insider and thus
face a bar on dealing on basis of such information.
