Supreme Court clarifies “Price Sensitive Information” in Insider Trading Case: SEBI vs. Abhijit Rajan (2022)

Introduction

Date of the Judgment: 19 September 2022
Citation: (2022) INSC 827
Judges: Indira Banerjee, J., V. Ramasubramanian, J. (authored the opinion)

What constitutes “price-sensitive information” in the context of insider trading? The Supreme Court of India recently addressed this crucial question in a case involving the Securities and Exchange Board of India (SEBI) and Mr. Abhijit Rajan. The court examined whether the sale of shares by a company director, prior to the public disclosure of certain information, amounted to insider trading. This judgment clarifies the scope of what is considered “price-sensitive information” and when an insider can be held liable for trading on such information.

Case Background

The case revolves around Mr. Abhijit Rajan, who was the Chairman and Managing Director of Gammon Infrastructure Projects Limited (GIPL) until September 20, 2013. GIPL was awarded a project by the National Highways Authority of India (NHAI) in 2012, with a total cost of Rs. 1648 crores. For this project, GIPL created a special purpose vehicle called Vijayawada Gundugolanu Road Project Private Limited (VGRPPL).

Similarly, Simplex Infrastructure Limited (SIL) was awarded a contract by NHAI worth Rs. 940 crores and formed Maa Durga Expressways Private Limited (MDEPL). GIPL and SIL entered into two shareholder agreements where they would invest in each other’s special purpose vehicles, holding 49% equity in each other’s projects.

However, on August 9, 2013, GIPL’s Board of Directors passed a resolution to terminate these shareholder agreements. Subsequently, on August 22, 2013, Mr. Rajan sold approximately 144 lakh shares of GIPL for about Rs. 10.28 crores. GIPL disclosed the termination of the shareholder agreements to the stock exchanges on August 30, 2013. Mr. Rajan resigned from his position on September 20, 2013.

Based on inputs from the National Stock Exchange, SEBI initiated an inquiry into the share sale, suspecting insider trading. SEBI issued an ex-parte order on July 17, 2014, and a confirmatory order on March 23, 2015, restraining Mr. Rajan from trading. After investigation, SEBI’s Whole Time Member (WTM) on July 13, 2016, held Mr. Rajan guilty of insider trading and directed him to disgorge unlawful gains of Rs. 1.09 crores.

Timeline:

Course of Proceedings

Mr. Rajan challenged the WTM’s order before the Securities Appellate Tribunal. The Tribunal allowed his appeal on November 8, 2019, setting aside the WTM’s order. The Tribunal reasoned that the information regarding the termination of the shareholder agreements was not price-sensitive, as the investment was a small portion of GIPL’s order book and turnover. It also noted that Mr. Rajan had a pressing need to sell the shares for a Corporate Debt Restructuring (CDR) package. The Tribunal also questioned SEBI’s choice of the next day’s price instead of the last trade price.

SEBI then appealed to the Supreme Court against the Tribunal’s order.

Legal Framework

The case is governed by the Securities and Exchange Board of India Act, 1992 (SEBI Act, 1992) and the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (Regulations). These regulations aim to protect investors and regulate the securities market.

Key definitions include:

• Price Sensitive Information: Defined under Regulation 2(ha) as any information relating to a company that, if published, is likely to materially affect the price of its securities. The explanation includes items such as financial results, dividends, issue of securities, expansion plans, mergers, and significant changes in policies or operations.
• Unpublished Information: Defined under Regulation 2(k) as information not published by the company or its agents and is not specific in nature.
• Insider: Defined under Regulation 2(e) as someone connected with the company who is reasonably expected to have access to unpublished price-sensitive information.
• Dealing in Securities: Defined under Regulation 2(d) as subscribing, buying, selling, or agreeing to do so.

Regulation 3 prohibits insiders from dealing in securities while in possession of unpublished price-sensitive information. Regulation 4 states that any insider dealing in securities in contravention of Regulation 3 is guilty of insider trading.

The Supreme Court noted that the regulations were amended in 2002, expanding the definition of “unpublished” and including significant changes in policies as “price-sensitive information.”

Arguments

Arguments by SEBI (Appellant):

• SEBI argued that proportionality is not relevant in insider trading cases, as even small percentages can be significant for large companies.
• Regulations 3 and 4 of the Regulations impose an absolute prohibition on insider trading, which cannot be diluted by considering the value of terminated contracts as a small percentage of the company’s order book or turnover.
• The total value of the terminated contracts was substantial (Rs. 2600 crores), making the information price-sensitive under Regulation 2(ha).
• Explanation (vii) under Section 2(ha) cannot limit the definition of price-sensitive information.
• The de minimis rule does not apply to insider trading.
• Bona fide intentions or necessity cannot justify insider trading.
• SEBI’s order was confined to disgorgement, a restitutionary relief.
• The closing price of the shares on the day of disclosure should not have been considered, but rather the next day’s price.

Arguments by Abhijit Rajan (Respondent):

• The primary object of insider trading regulations is to prevent insiders from taking advantage of asymmetrical access to unpublished price-sensitive information.
• Whether information is price-sensitive depends on its potential to materially impact the price of securities upon publication.
• Courts consider the purpose of the transaction, scale, pattern of trading, and honesty in responses.
• The termination of the agreements resulted in GIPL gaining control of a larger project, making the information favorable, not adverse.
• The value of the terminated contract was small (3.1% to 4.1%), not likely to have a material impact on GIPL’s share price.
• GIPL’s investment in SIL was a tiny fraction of GIPL’s order book and turnover.
• The sale of shares was to meet the CDR package obligations and avoid bankruptcy for the parent company.
• SEBI applied different yardsticks to the respondent and a co-noticee, who was exonerated for selling shares due to a pressing need.

[TABLE] of Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the information regarding the termination of the two contracts can be characterized as “price-sensitive information” under Section 2(ha) of the Regulations.
2. Whether the sale of shares by Mr. Rajan under compelling circumstances falls within the mischief of “insider trading” under Regulation 3(i) read with Regulation 4 of the Regulations.
3. Whether SEBI should have taken into account the last trade price of the day on which information was disclosed instead of the trade price of the next day.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Chintalapati Raju vs. SEBI [ (2018) 7 SCC 443 ] – Supreme Court of India.
• Rajiv Gandhi vs. SEBI [Appeal No.50/2007 decided by the Ld. SAT on 09.05.2008] – Securities Appellate Tribunal.
• Miller vs. Pezzani – US Court of Appeals.
• SEBI vs. Kanaiyalal Baldevbhai Patel [ (2017) 15 SCC 1 ] – Supreme Court of India.
• SEBI vs. Kishore R. Ajmera [ (2016) 6 SCC 368 ] – Supreme Court of India.

Legal Provisions:

• Section 2(ha) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 – Defines “price-sensitive information.”
• Regulation 2(k) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 – Defines “unpublished” information.
• Regulation 3 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 – Prohibits insider trading.
• Regulation 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 – Defines the circumstances under which a person shall be held guilty of insider trading.
• Regulation 2(e) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 – Defines “insider.”
• Regulation 2(d) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 – Defines “dealing in securities.”

[TABLE] of Authorities

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on the following authorities:

• Chintalapati Raju vs. SEBI [(2018) 7 SCC 443]*: The Court approved the minority judgment of the Securities Appellate Tribunal, which considered the compelling circumstances under which the individual was selling shares. This case supported the respondent’s argument that circumstances matter.
• SEBI vs. Kishore R. Ajmera [(2016) 6 SCC 368]*: The Court cited this case to emphasize the importance of considering the immediate and proximate facts and circumstances surrounding the events. This helped in evaluating the respondent’s actions.
• SEBI vs. Kanaiyalal Baldevbhai Patel [(2017) 15 SCC 1]*: The Court referred to this case to highlight that the volume, nature, and timing of transactions should be taken into account. This was used to analyze the respondent’s trading pattern.

The Court held that while the information about the termination of contracts was indeed “price-sensitive,” the sale of shares by Mr. Rajan did not amount to insider trading. The court reasoned that the termination of the agreements actually put GIPL in a more advantageous position. Therefore, a person seeking to profit from insider trading would have waited for the market to react positively to the news. The fact that Mr. Rajan sold his shares before this could happen, due to a pressing need to honor the CDR package, indicated that he did not intend to make unlawful gains. The court emphasized that while the actual gain or loss is immaterial, the motive for making a gain is essential.

The Court observed that the words “likely to materially affect the price” in Regulation 2(ha) gain significance because a profit motive, if not actual profit, should be the motivating factor for insider trading. The Court also noted that the respondent’s sale of shares was not an attempt to take advantage of the situation.

The Court stated, “If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading.” It further added, “the actual gain or loss is immaterial, but the motive for making a gain is essential.” The court also noted, “This is not a case where the respondent has come up with an excuse to justify his action that was intended to give him a financial advantage.”

There were no dissenting opinions in this case.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

• Lack of Profit Motive: The Court was convinced that Mr. Rajan did not sell his shares to make unlawful gains but rather to fulfill his obligations under the CDR package.
• Positive Impact of Information: The Court noted that the information about the termination of contracts was likely to increase the value of GIPL’s shares. A person intending to profit from insider trading would have waited for the information to become public before selling.
• Compelling Circumstances: The urgent need to sell the shares to prevent the parent company from going bankrupt was a significant factor in the Court’s assessment.
• Normal Human Conduct: The Court considered what a prudent person would have done in the same situation and concluded that Mr. Rajan’s actions were not indicative of insider trading.
• Focus on Intent: The Court emphasized that the motive for making a gain is essential, rather than the actual gain or loss.

[TABLE] of Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• Motive is Key: In insider trading cases, the motive for making a gain is more important than the actual gain or loss.
• Price-Sensitive Information: Information that is likely to benefit shareholders is considered price-sensitive, even if it does not immediately lead to a drop in the share price.
• Compelling Circumstances: Courts may consider compelling circumstances when assessing whether an insider intended to profit from unpublished price-sensitive information.
• Normal Human Conduct: The actions of an insider are assessed against what a reasonable person would do in similar circumstances.
• Context Matters: The specific context of a transaction, including the reasons for the sale, is crucial in determining whether insider trading has occurred.

Directions

The Supreme Court did not issue any specific directions in this case. The appeal was dismissed, upholding the decision of the Securities Appellate Tribunal.

Specific Amendments Analysis

The judgment discusses the amendments made to the SEBI (Prohibition of Insider Trading) Regulations in 2002. These amendments expanded the definition of “unpublished” information and included significant changes in policies, plans, or operations of a company within the definition of “price-sensitive information.” The Court noted that prior to the amendments, the definition of unpublished price-sensitive information was contained in a single clause, Regulation 2(k). The amendments brought about two key changes: expanding the definition of “unpublished” and including significant changes in policies as “price-sensitive information.”

Development of Law

Ratio Decidendi: The ratio decidendi of this case is that while information about a company’s policy change may be “price-sensitive,” a sale of shares by an insider does not constitute insider trading if it is not motivated by a desire to profit from that information, especially when the information is likely to benefit the company and the sale is made under compelling circumstances. The court emphasized the importance of intent and the context of the transaction.

This judgment clarifies that the mere possession of unpublished pricesensitive information is not sufficient to establish insider trading. The intent to profit from such information and the context of the transaction are crucial factors that must be considered. It also highlights that the purpose of insider trading regulations is to prevent insiders from taking unfair advantage of asymmetrical access to information, not to penalize genuine transactions made under compelling circumstances.

Conclusion

The Supreme Court’s judgment in SEBI vs. Abhijit Rajan provides a significant clarification on the interpretation of “price-sensitive information” and the application of insider trading regulations. The Court emphasized that the motive for making a gain is essential in determining whether insider trading has occurred. The Court’s decision underscores that the mere possession of unpublished price-sensitive information is not sufficient to establish insider trading. The intent to profit from such information and the context of the transaction are crucial factors that must be considered.

This case also highlights the importance of considering the specific context and circumstances of a transaction when assessing whether an insider has engaged in unlawful trading. The Court’s decision to take into account the compelling circumstances under which Mr. Rajan sold his shares sets a precedent for future insider trading cases, emphasizing the need for a nuanced approach that considers the intent and purpose of the transaction. This ruling provides a more balanced approach to insider trading regulations, ensuring that they are not applied rigidly but with due consideration of the specific facts and circumstances of each case.