INTRODUCTION
Insider trading refers to the act of using Unpublished Price Sensitive Information (UPSI) for trading purposes. It does not matter whether the securities trading leads to a profit or loss, in any case, it will be called as insider trading. Insider trading offences in India are dealt with under the SEBI (Prohibition of Insider Trading) Regulations, 2015. It gives out definitions and as well as the directions in case such an offence is committed.
The main aim of this article is to analyse the landmark case of V.K. Kaul v. The Adjudicating Officer Securities and Securities Exchange Board of India.[1] This case was decided on 8th of October 2012 by the Securities Appellate Tribunal. The deciding bench of the case included Hon’ble Justice P.K. Malhotra and Hon’ble Justice S.S.N. Moorthy. Since the case occurred in 2008 and it was decided in 2012, the SEBI Regulations 1992 were applicable in this case.
CASE SUMMARY
In this case, Ranbaxy Laboratories Limited (Ranbaxy hereinafter) was the parent company of Solrex Pharmaceuticals Limited (Solrex hereinafter). Also, Solrex was directly under the authority of Ranbaxy[2].
The appellant, Mr. V.K Kaul was the non-executive independent director of Ranbaxy from 1st of January 2008 to 18th of December 2008. Solrex made huge investments in the scrip of Orchid from 31st of March 2008 onwards.
It was alleged that Mr. V.K. Kaul was in possession of UPSI and he provided this UPSI to his wife for the purposes of earning benefit as a part of insider trading. The wife of Mr. V.K. Kaul, Mrs. Bala Kaul bought 35,000 shares on 27th and 28th of March 2008 at a price of Rs. 131.47 and sold the shares on 10th of April 2008 at a higher price of Rs.219.94.[3]
According to SEBI, the decision of Solrex to buy the shares of Orchid was a UPSI which was known only to the insiders. SEBI also presented enough evidence in the form of phone calls made between Mr. Malvinder Mohan Singh, Mr. Umesh Sethi and the appellant. Both Mr. Malvinder Mohan Singh and Mr. Umesh Sethi had direct access to the UPSI. Further, SEBI established that the appellant had mala fide intentions as he tried to conceal the fact that he was in contact with Mr. Malvinder Mohan Singh and Mr. Umesh Sethi.[4]
The SAT upheld the charges of insider trading levied against Mr. V.K. Kaul for violating Section 12A(d) and (e) of the SEBI India Act, 1992 and also upheld the fine of Rs. 50 lakhs and Rs. 10 Lakhs respectively under section 15G(i) of the Act[5].
CASE ANALYSIS
- Unpublished Price Sensitive Information:
Mr. Kaul falls within the purview of Section 2(c)(i) of the SEBI (PIT) Regulations, 1992 due to the fact that he was the non-executive independent director of Ranbaxy and hence can be known as a “connected person.” In addition to this, he also falls within the purview of section 2 (e)(i) of the said act as he was privy to the UPSI.
Now, the very first claim of the appellant was that under Section 2(k) and (ha) of the SEBI Regulations, 1992, the investment related information cannot be classified as UPSI. It was said that according to section 2(ha), “price sensitive information” is defined as any such information that might affect the price of the securities of the company once it gets published. They also argued that under section 2(k), only the corporation has the authority to disseminate such information. According to the appellant, because the information does not relate to Solrex but the target company, and the target company was unaware of it hence couldn’t publish it and thus it should not be considered as UPSI. [6]
In my opinion, this argument is quite flawed. The reason for believing so is that, the phrase used in section 2(ha) is “any information which relates directly or indirectly to a company.” In addition to this, Section 2(e) also discusses the high likelihood of a connected person of “the company” to have the knowledge of UPSI with respect to “a company’s” securities. As a result, it is not necessary for that information to belong to the same company whose security prices would be affected if such information was published; as long as it belongs to either of the companies and would affect the company’s security prices, it would be considered “price sensitive information.” [7]
In the present case, Solrex will be considered as “the company” and Orchid as “a company.” Now, as per the facts, the resolution passed on 20th of March 2008 by the Board of Directors of Rexcel and Solus to open a join demat account in the name of both companies on behalf of Solrex. As discussed in the judgement, the board came to the conclusion that this account was opened for the purposes of investing in Orchid and thus this information will be known as UPSI as per the SEBI Regulations, 1992.
It is pertinent to note here that, had the case been brought into notice after the PIT 2015 Act came into force the information would still be considered as UPSI as per section 2(n) of the 2015 regulations.
- Circumstantial Evidence:
The court relied on United States of America v. Raj Rajaratnam, [8] in this case, a test for reliance on circumstantial evidence was laid down like access to the information, relationship between tipper and tippee, timing of contact, timing of trades, pattern of trades and attempt to conceal the trades or relationship.[9] The court further relied on Dilip Pendse v. SEBI [10] and added that because the accusation of insider trading is severe, the preponderance of probability in proving such a charge would be greater. In the present case, the board while investigating found the timeline of the investment made by Bala Kaul to be pre-planned. Mrs. Bala Kaul invested on 27 and 28th of March which is after the resolution was passed by the BOD to open a demat account and invest in the target company. Further, the telephonic conversations between Mr V.K. Kaul, Mr. Malvinder Mohan Singh and Mr. Umesh Sethi from 24th of March to 26th of March gives a clear picture that they were in contact before the investment was made. Furthermore, Mr. V. K. Kaul tried to conceal these telephonic conversations as he denied the fact that he was in constant touch with Mr. Malvinder Singh and Mr. Umesh Sethi.[11] In addition to this, the sequence of events and the bank transactions clearly lead us to believe that Mr. V.K. Kaul was involved in insider trading. Further, the fact that the securities bought were sold by 10th of Aril at a higher rate leads to the conclusion that it was insider trading as discussed in the judgement.
The appellant’s argument that the board cannot drive a conclusion based on circumstantial evidence is baseless as in the present case the circumstantial evidences were establishing a chain of events that only leads to one logical conclusion that the appellant was involved in insider trading beyond any reasonable doubt. Furthermore, as per Evidence Act, section 106 the burden of proof was on Mr. V.K. Kaul to prove that he did not use the UPSI and his transactions were not done with a mala fide intention to gain profit. He failed to disprove these charges and thus was rightly convicted for the offence of insider trading.[12]
- Lacunas
According to Regulation 3,[13] an insider having the knowledge of UPSI has a fiduciary duty to not disclose this information to anyone outside ordinary course of business of the company. As per Regulation 3(i), the insider is prohibited to deal in securities of a listed company having such sensitive information either on his behalf or on behalf of someone else. Furthermore, Regulation 4[14] mention that if such a trading takes place the insider would be guilty of insider trading.
It is my opinion that in India, these two regulations are used in a very broad sense which leaves room for ambiguity. This is quite evident from the case at hand. It is apparent that the regulations were not used in a stricter sense as Mr. Malvinder Mohan Singh and Mr. Umesh Sethi went scot-free. At this stage, let us consider the U.S laws in this regard, which are covered under the Securities Exchange Act, 1934. As per Section 10(b),[15] the “tipper” and the “tippee” both are held liable for insider trading. The statute recognizes that, under certain instances, the tipper may actually benefit by sharing such UPSI with the tippee, and hence makes both parties liable for insider trading under its provisions. Furthermore, the situation in the United States has developed to the point where the courts no longer need the tipper to demonstrate a personal benefit from disclosing such UPSI. The explanation is that the tipper has a commitment not to distribute such UPSI unlawfully. This is because, once transmitted or received, such UPSI transfers the fiduciary obligation to them, rendering them accountable if they improperly disclose such information.[16] Had the SEBI incorporated the “tipper” and “tippee” concept in its regulations, both Mr. Malvinder Singh and Mr. Umesh Sethi would have been held liable.
It is pertinent to note here that, there would not have been any liability on Mr. Malvinder Singh and Mr. Umesh Sethi even if the 2015 PIT Regulations were applied in the given case. This is because the 2015 Regulations make disclosing of UPSI or any communication related to it as “illegal,” however it does not impose any liability on the person who is communicating such information. SEBI under the Regulation 3[17] has simply put forth an “obligation” and “prohibition” on communication of such information. So, it can be said that in India the current laws in this regard are still quite broad. It gives leeway to the connected persons and insiders who are in possession of UPSI to trade with mala fide intention and make unlawful gain from the transactions and then to escape the liability by hiding under the veil of Regulation 3[18] which only provides for communication information but not bringing under its ambit the person communicating that information.
In addition to this, the penalty imposed on Mr. V.K. Kaul under Section 15G(i)[19] in my opinion is quite less. He was found guilty of violating Section 12A(d) and (e) of the SEBI Act and was imposed with a penalty of Rs. 50L and 10L respectively. Section 15G clearly states that the penalty for insider trading should not be less than 10 Lakhs but may extend to 25 Crores or three times the amount of profits made out by committing the offence. For the case at hand, the profit made was Rs. 30,96,450[20] to be exact and the penalty imposed on Mr. Kaul was approximately double of this which is quite less. As per the Section 15G of the Act it should have been at least three times the profit earned but this rule was again not followed in a stricter sense.
Conclusion and Suggestions
The laws and standards in existence are insufficient to address the issue of insider trading. Moreover, SEBI’s investigational approach to enforcing these regulations is ineffective.
In this paper it was discussed that even though the present case is considered to be landmark in the history of insider trading cases in India there are certain gaps that the judgement does not address. The only way these gaps can be filled is by amending the current laws to reduce the ambiguity and be more precise so that all the people involved in the offence of committing insider trading are held liable. SEBI should work on hiring more officers so that the workload is reduced and each case is given importance as per the gravity of the offence committed. SEBI also lacks the authority to wiretap phone calls, even though it was finally given the authority to examine phone calls.[21]
Moreover, the application of the kid gloves concept, meaning, giving as little penalty as possible in the occurrence of an offence should be done away with as it is just leading more insider trading cases to happen. In this regard, SEBI should be given more authority in imposing heavier penalties so that there is a sense of fear in the people committing this offence, that if they are caught, they would have to pay high penalties.
To conclude, SEBI should be inspired by the laws and rules established by the SEC of the U.S in order to build progressive and comprehensive regulations to handle with such offenses in an effective manner.
[1] (2012) 116 SCL 24.
[2] V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 2].
[3] V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 3].
[4] V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 15].
[5] V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 1].
[6] Minda P, ‘V.K Kaul Vs. Adjudicating Officer, SEBI (Case Comment)’ https://aishwaryasandeep.com/2022/01/27/v-k-kaul-vs-adjudicating-officer-sebi-case-comment/ accessed 11 April 2022.
[7] Conforming with the arguments presented by Mr. Janak Dwarkadas in V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 5].
[8] (2009) Cr. 1184 (RJH).
[9] United States of America v. Raj Rajaratnam (2009) Cr. 1184 (RJH) [para 38].
[10] Order dated19/11/2009.
[11] V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 10].
[12] V.K. Kaul v. The Adjudicating Officer Securities and Exchange Board of India (2012) 116 SCL 24 [para 16].
[13] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992.
[14] Ibid.
[15] Securities Exchange Act, 1934 of United States of America.
[16] Salman v. United States (2016) 137 S. Ct 420, 425.
[17] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.
[18] Ibid.
[19] Securities and Exchange Board of India Act, 1992.
[20] Number of shares * (selling rate of each share- buying rate of each share) = 35000 * (219.94-131.47).
[21] Indian Council of Investors v. Union of India PIL NO. 29 OF 2013.
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