The Securities Appellate Tribunal (SAT) in the matter of Shreehas P. Tambe v. SEBI has held that an insider will not be guilty of insider trading despite possessing unpublished price sensitive information (UPSI) as the trade in question was bona fide.
Facts: The appellant was key managerial
personnel in Biocon Ltd. (Biocon) SEBI observed a
rise in the script of Biocon pursuant to a public announcement
regarding a global collaboration between Biocon and Sandoz. This
announcement caused the scrip of Biocon to fluctuate by 5.6%. SEBI
thereafter conducted an investigation following which a Show Cause
Notice was issued to the appellant (SCN) alleging
that the appellant had violated Regulation 4(1) and Regulation
7(2)(a) of the SEBI (Prohibition of Insider Trading Regulations),
2015 (PIT Regulations) and Section
12A(d) of the Securities and Exchange Board of India Act, 1992
(SEBI Act) as the appellant being an insider had
sold 17,440 shares on 19 December 2019 while he was in possession
of UPSI and had failed to make the necessary disclosures as
required. The said SCN was replied to by the appellant denying the
allegations therein following which the Whole Time Member
(WTM), after considering the material on record
came to the conclusion that the UPSI period began from 20 December
2017 and the appellant sold the shares while in possession of UPSI
and the same was in violation of Regulation 4(1) and Regulation
7(2)(a) of the PIT Regulations. The WTM therefore debarred the
appellant from accessing the securities market for three months and
imposed a penalty of Rs 2,00,000/.
Issue): Whether a bona fide trade, undertaken
by a person who is in possession of UPSI at the relevant time would
violate Regulation 4(1) of the PIT Regulations?
Regulation 4 (1) No insider shall trade in securities that are
listed or proposed to be listed on a stock exchange when in
possession of unpublished price sensitive information:
Contention of the Parties: The appellant contended
that he was not part of the proposed collaboration with Sandoz and
was not aware and therefore he had no knowledge of UPSI and that
the trades executed by the appellant were bona fide trades and were
made for the purpose of paying an advance to the developer of a
residential flat which was purchased by the appellant.
The respondent contended that the appellant was prohibited under
the Clause 6 of the Minimum Standards for Code of Conduct to
Regulate, Monitor and Report Trading by insiders as specified by
Schedule B of the PIT regulations to trade while in possession of
UPSI despite which he traded and has therefore violated Regulation
4(1) of the PIT Regulations.
Held: The SAT agreed with the decision of WTM that
the appellant was an insider. However, the SAT also held that the
appellant should receive the benefit of the proviso to Regulation
4(1) of the PIT Regulations, which allows persons that have traded
while they were in possession of UPSI to prove their innocence. The
same was given on the fact that the appellant had not only obtained
pre-clearance but had also used the sales proceeds for purchasing
an apartment pursuant to an MOU dated 16 December 2017 entered into
with the developer. The SAT therefore held that the trades were
bona fide and not motivated by the UPSI. Pertinently, SAT also held
that the appellant was not guilty of insider trading despite being
in possession of the UPSI.
SAT further stated that it arrived at this view without considering
as to whether the appellant had traded while he was in possession
of UPSI or whether he had knowledge about the collaboration and
even presuming that the appellant traded while in possession on
UPSI. It held that the appellant was entitled to the benefit of the
proviso to Regulation 4(1) of the PIT Regulations.
The SAT therefore held that the appellant had not violated
Regulation 4(1) of the PIT Regulations and consequently there was
no violation of the Code of Conduct. However the SAT upheld the
imposition of penalty of Rs 1,00,000/- (Rupees One Lakh) as the
appellant had failed to make a disclosure within the time period
under Regulation 7(2)(a) of the PIT Regulations.
MHCO Comment: This case provides further clarity on the application of the proviso to Regulation 4(1) of the PIT Regulations and therefore provides an opportunity to the defaulting party to prove their innocence by demonstrating the circumstances under which he has traded. The case also provides a benchmark as to what could be considered as a bona fide trade under the PIT Regulations.
This update was released on 17 Mar 2023.
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