One can’t be accused of insider trading if transaction entered likely to result in loss: SC

Case Details: Securities and Exchange Board of India v. Abhijit Rajan - [2022] 142 taxmann.com 373 (SC)

Judiciary and Counsel Details

• • Indira Banerjee & V. Ramasubramanian, JJ.

Facts of the Case

In the instant case, the question arose before the Supreme Court whether one can be accused of insider trading if transaction entered into by him is surely likely to result in loss or not?

An appeal was filed against the order of the Securities Appellate Tribunal (SAT) whereby the order of a Whole Time Member (WTM) of SEBI directing the respondent to disgorge the amount of unlawful gains made by him was set aside.

The respondent was the Chairman and Managing Director of the company – Gammon Infrastructure Projects Limited (GIPL). GIPL was awarded a contract for the execution of a project, whose total cost was admittedly Rs. 1648 crores. Similarly, another company Simplex Infrastructure Limited (SIL) was awarded a contract for a project whose cost was Rs. 940 crores.

Both GIPL and SIL created Special Purpose Vehicles and then they entered into two shareholders Agreements. Under these Agreements, GIPL and SIL will have to make investments in the Special Purpose Vehicles created by each other, in such a manner that each of them will hold 49% equity interest in the other’s project.

However, the Board of Directors of GIPL passed a resolution authorising termination of both shareholder agreements. The respondent sold about 144 lakhs shares (approx.) held by him in GIPL, for an aggregate value of approximately Rs 10.28 crores. Therefore, the cancellation of the shareholder’s agreements resulted in GIPL gaining very hugely in terms of order book value.

The SEBI passed an ex-parte interim order holding prima facie that the respondent violated the provisions of sections 12A(d) and (e) of the SEBI Act, 1992. Consequently, restrained the respondent from buying, selling or dealing in securities.

In addition to this, the WTM passed an order whereby the respondent was held guilty of insider trading and also held liable to disgorge the amount of unlawful gains to the tune of Rs. 1.09 crores.

The respondent filed an appeal before the SAT. The respondent contended that he had to dispose of his shares as well as certain other properties for the purpose of honouring a CDR package. Further, it was on record that if the CDR package had not gone through successfully, the parent company of GIPL namely, Gammon India Ltd., could have gone into bankruptcy.

The SAT allowed the appeal. Thereafter, an appeal was made to the Supreme Court against the order passed by the WTM of SEBI.

Supreme Court Held

The Supreme Court held 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”.

Further, 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, however, the motive for making a gain is essential. The words, “likely to materially affect the price” appearing in the main part of Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 gain significance for the simple reason that profit motive should be the motivating factor for a person to indulge in insider trading.

In view of the above, the Court concluded that one can’t be accused of insider trading if transaction entered into by him is surely likely to result in loss.