Summary
The respondent, then Chairman and Managing Director of Gammon Infrastructure Projects Ltd (GIPL), was party to a board resolution of 9 August 2013 terminating two cross-investment shareholders' agreements with Simplex. Before the termination was disclosed to the stock exchanges, he sold about 144 lakh GIPL shares to fund the promoters' contribution to the corporate debt restructuring package of the parent, Gammon India. SEBI's Whole Time Member found insider trading and ordered disgorgement of Rs. 1.09 crore, but the Securities Appellate Tribunal set the order aside. The Supreme Court dismissed SEBI's appeal. The termination was price-sensitive, but because it left GIPL better off, the share price was expected to rise on disclosure. Selling before disclosure, out of pressing necessity, showed no attempt to encash the information. A motive to gain is essential.
Issues
- Whether information about the board's decision to terminate the two shareholders' agreements was price-sensitive information under Regulation 2(ha) of the 1992 Insider Trading Regulations
- Whether the respondent's sale of shares under compelling circumstances, before that information was published, amounted to insider trading under Regulations 3 and 4
Provisions considered
- Regulation 2(ha) and its Explanation, SEBI (Prohibition of Insider Trading) Regulations, 1992Items (i) to (vi) of the Explanation are inherently likely to affect price. For the general item on significant changes in policies, plans or operations, it must still be seen whether the information was likely to materially affect the price, upward or downward. (¶¶ 10, 22, 25, 26, 27, 29)
- Regulations 2(e), 2(k), 3 and 4, SEBI (Prohibition of Insider Trading) Regulations, 1992An insider dealing in securities while possessing unpublished price-sensitive information is guilty of insider trading, but a sale made when the information was expected to raise the price on publication showed no attempt to encash it. (¶¶ 12, 13, 15, 20, 21, 23, 28, 44)
- Section 15Z, Securities and Exchange Board of India Act, 1992An appeal to the Supreme Court lies on 'any question of law' arising from the Tribunal's order, not only a substantial question of law. (¶ 8)
Held
- Price sensitivity depends on the materiality of the information's likely impact, positive or negative, on the share price. For the residual category of significant changes in policies, plans or operations, that likelihood is not deemed and must be examined. (¶¶ 22, 25, 26, 27)
- Actual gain or loss is immaterial, but a motive to gain is essential. Selling when the information is likely to push the price up on publication, or buying when it is likely to push the price down, cannot be insider trading. The test is whether the insider attempted to take advantage of or encash the information, which is not the same as mens rea. (¶¶ 27, 28, 29, 41, 42)
- The respondent was an insider, and the information was unpublished and price-sensitive. But terminating the agreements left GIPL with a net advantage of about Rs. 800 crore in order-book value, so a prudent person would expect the price to rise and would wait. His sale before publication, made to save the parent company's CDR package and akin to a distress sale, showed no intent to encash the information. (¶¶ 23, 30, 31, 32, 33, 34, 37, 38, 39, 44)
- Insider trading cannot be measured by proportionality to the company's size, and the de minimis rule has no application. Although the Act recognises no 'lawful excuse', the decision does not rest on necessity alone but on the absence of any attempt to exploit the information. Mitigation recognised by the Whole Time Member did not take away the defence (Chintalapati Srinivasa Raju). (¶¶ 35, 36, 37, 38, 43)
Result
Appeal dismissed. The Tribunal's order setting aside the disgorgement direction was upheld; the question of the reference price was left undecided; no order as to costs.