Typically when a person is charged with the violations of Regulations pertaining to the insider trading, the following questions are considered by the Regulator:
1. whether the person is an insider as per the Regulations
2. whether there was Unpublished Price Sensitive Information (‘UPSI’)
- Whether the person traded in the securities of the concerned listed entity when in possession of the UPSI
But the Hon’ble Supreme Court in the Securities and Exchange Board of India v. Abhijit Rajan also accepted the importance of motive of the insider to make undeserved gain by encashing on the UPSI that he possessed.
The Court at Para 28 of the aforesaid judgment observed that 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.
Further the Court also distinguished between the motive of making gain by encashing on the UPSI and the mens rea (i.e. Gulity Mind) which is applied in criminal cases in order to determine the culpability of the offender.
Another important observation of the Court in the aforesaid judgment was regarding the non applicability of the theory of proportionality in abovemenioned cases. The Court observed that the magnitude of what an insider did, in relation to the size of the company, may not have a bearing upon the question whether someone indulged in insider trading or not. But what is sought to be encashed by the insider should be an information which if published is likely to materially affect the price of the securities of the company.
Although the aforesaid Judgment is under provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 which has been repealed by the SEBI (Prohibition of Insider Trading) Regulations, 2015, but the principles it enunciates will definitely influence the manner in which the Regulators, Tribunals or Courts deal with the cases pertaining to insider trading.
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