Securities and Exchange Board of India vs Abhijit Rajan

HELD:1. It may appear at first blush, that the respondent, who was an insider and who possessed information which was both unpublished and price sensitive, was guilty of the charge of insider trading as he undoubtedly dealt in securities. But the catch lies in understanding the true scope of Explanation (vii) under Regulation 2(ha). The main part of Regulation 2(ha) defines “price sensitive information” to mean any information, which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of a company. The Explanation under Regulation 2(ha) creates a deeming fiction and it makes 7 items of information listed thereunder as price sensitive information. [Paras 24, 25][684-B-D]

2.1. While dealing with a case falling under Explanation (vii) of Regulation 2(ha), one may have to see whether there was any likelihood of the said information materially affecting the price of the securities of the company. Additionally, the activity in which the insider was involved also determines his culpability for violation of Regulation 3. For instance, the sale by a person in possession of price sensitive information, at a time when the price is likely to take a plunge, will certainly be an attempt at taking advantage of or encashing the information. Similarly the purchase by a person in possession of UPSI at a time when the price of the security is about to skyrocket, will certainly be an attempt to take advantage. [Para 27][685-A-B]

2.2. But the above logic cannot be applied to cases which fall on the opposite side of the spectrum. For instance, the sale by a person at a time when the price of the securities is likely to shoot up on account of price sensitive information coming into the public domain or the purchase by a person at a time when the price of the shares is likely to go downward due to price sensitive information getting published, cannot come under the category of insider trading. While it is true that the actual gaining of profit or sufferance of loss in the transaction, may not provide an escape route for an insider against the charge of violation of Regulation 3, one cannot ignore normal human conduct. If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading. In other words, the actual gain or loss is immaterial, but the motive for making a gain is essential. [Para 28][685-C-E]

3. The words, “likely to materially affect the price” appearing in the main part of Regulation 2(ha) gain significance for the simple reason that profit motive, if not actual profit should be the motivating factor for a person to indulge in insider trading. This is why the information in Item No.(vii) of the Explanation under Regulation 2(ha) may have to be examined with reference to the words “likely to materially affect the price”. [Para 29][685F]

4. The cancellation of the shareholders Agreements resulted in GIPL gaining very hugely in terms of order book value. In such circumstances an ordinary man of prudence would expect an increase in the value of the shares of GIPL and would wait for the market trend to show itself up, if he actually desired to indulge in insider trading. But the respondent did not wait for the information about the market trend, after the information became public. The reason given by respondent, which is also accepted by the WTM and the Tribunal is that he had to dispose of his shares as well as certain other properties for the purpose of honouring a CDR package. It is on record that if the CDR package had not gone through sucessfully, the parent company of GIPL, Gammon India Ltd. could have gone for bankruptcy. Therefore, the Tribunal was right in thinking that the respondent had no motive or intention to make undeserved gains by encashing on the unpublished price sensitive information that he possessed. [Paras 32 and 33][686-C-E]

5. The contention of the appellant that SEBI took note of the situation in which the respondent was placed and the dire need that he had to sell the shares and that therefore SEBI confined the final order only to disgorgement, is neither here nor there. This argument is actually an argument of convenience. If a company is likely to gain strength by making a significant change in its policy, the price of its securities is likely to shoot up. Despite such a natural phenomena, if a person sells his stocks without waiting for the market trend to show up, it can only be taken as a sale, devoid of any desire to make unlawful gains, even if it cannot be termed as a distress sale. [Para 39][688-A-C]

6. In the present case, the information regarding the termination of the two contracts can be characterized as price sensitive information, in that it was likely to place the existing shareholders in an advantageous position, once the information came into the public domain. In such circumstances, the sale by the respondent, of the shares held by him in GIPL would not fall within the mischief of insider trading, as it was somewhat similar to a distress sale, made before the information could have a positive impact on the price of the shares. [Paras 44][689-D-E]

Chintalapati Raju v. SEBI (2018) 7 SCC 443 : [2018]

5 SCR 785; SEBI v. Kanaiyalal Baldevbhai Patel (2017)

15 SCC 1 : [2017] 14 SCR 268 and SEBI v. Kishore R. Ajmera (2016) 6 SCC 368 : [2016] 1 SCR 1118 –

referred to.