SEBI Vs. Abhijit Rajan (Supreme Court of India)
Introduction: In a significant judgment on insider trading, the Supreme Court of India delivered a ruling in the case of Securities Exchange Board of India (SEBI) v. Abhijit Ranjan. This ruling addresses the crucial test for establishing insider trading, focusing on whether the insider sought to gain from unpublished price sensitive information (UPSI).
ABSTRACT
In a landmark decision on insider trading, the Supreme Court of India (“Supreme Court”) held in Securities Exchange Board of India (“SEBI”) v. Abhijit Ranjan (“Respondent”) that the critical test for establishing a charge of insider trading is whether the ‘insider’ attempted to profit or gain from unpublished price sensitive information (“UPSI”).
Differentiating among mens rea and profit motive, the Supreme Court held that, while mens rea is not an essential requirement in matters governed by the SEBI (Prohibition of Fraudulent and Unfair Trade Practices in the Securities Market) Regulations, 1995, the test to be applied in matters governed by the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“PIT Regulations”) is that of profit motive, i.e., whether the insider’s action
Using this test, the Supreme Court determined that because the Respondent sold his shares before the UPSI became public and before it could have had an advantageous effect on the price of the shares, the sale was akin to a distress sale that was not done with the intent to take advantage of or redeem the benefit of the information, and thus the Respondent’s action did not amount to the mischief of insider trading.
While insider trading allegations will always be resolved on the facts and circumstances of each case, the ruling in this case will have a far-reaching impact on how regulators and courts decide insider trading charges in the future.
FACTS
Until September 20, 2013, Abhijit Rajan (“Respondent”) was the chairman and managing director of Gammon Infrastructure Projects Limited (“GIPL”). Following that, he stepped down as chairman and managing director, but remained a director of GIPL.
The National Highways Authority of India (“NHAI”) granted GIPL a contract in 2012. GIPL established a special purpose vehicle called Vijayawada Gundugolanu Road Project Private Limited (“VGRPPL”) to carry out the project. Similarly, NHAI awarded a contract to Simplex Infrastructure Limited (“SIL”) in Jharkhand and West Bengal. SIL established a special purpose vehicle called Maa Durga Expressways Private Limited (“MDEPL”) to carry out the project.
GIPL and SIL signed into two shareholder agreements. These agreements called for GIPL to make investments in MDEPL and SIL to invest in VGRPPL for each of their projects. The mutual investments were to be structured in such a way that GIPL and SIL would own 49% of each other’s projects.
However, on August 9, 2013, the GIPL board of directors approved the cancellation of both shareholders agreements. On the 22nd of August 2013, the Respondent sold approximately 144 lakh shares (approx.) in GIPL. On August 30, 2013, GIPL informed the National Stock Exchange of India (“NSE”) and the Bombay Stock Exchange (“BSE”) that two shareholder agreements had been terminated.
Following an input from the NSE regarding the aforementioned transaction and the likelihood of trading on the foundation of unpublished price sensitive information (“UPSI”), the Securities and Exchange Board of India (“SEBI”) initiated a preliminary investigation. Following the completion of the preliminary investigation, SEBI issued an ex parte interim order concluding that the Respondent infringed the regulations of The Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and prohibiting the Respondent from buying, selling, or dealing in securities or accessing the security markets directly or indirectly. This ex-parte interim order was further confirmed by a confirmatory order issued after the Respondent was given an opportunity to be heard.
During the interim period, SEBI finished the investigation and issued specific orders on the 21st of March 2016, which was followed by a show cause notice on March 29, 2016. The show cause notice was sent not just to the Respondent, but also to a different firm, ‘Consolidated Infrastructure firm Private Limited’ (“CICPL”) and two of its directors. The noticees filed their replies, and after providing the noticees an opportunity to be heard, the Whole-Time Member (“WTM”) issued an order holding the Respondent liable of insider trading and so accountable to disgorge the number of illicit gains gained by him. The show cause notices issued to the others, namely, CICPL and its directors were closed without any directions, on the ground that no case was made out against them.
The Respondent filed a statutory appeal with the Securities Appellate Tribunal (“Tribunal”), challenging the WTM’s order. The Tribunal granted the appeal by order, and it is against that order that SEBI has filed the above-mentioned appeal in the Supreme Court.
ISSUES
