SECURITIES AND EXCHANGE BOARD OF INDIA versus ABHIJIT RAJAN on 19 September 2022

[2022] 9 S.C.R. 669

SECURITIES AND EXCHANGE BOARD OF INDIAv.

ABHIJIT RAJAN

(Civil Appeal No. 563 of 2020)

SEPTEMBER 19, 2022

[INDIRA BANERJEE AND V. RAMASUBRAMANIAN, JJ.]

Securities and Exchange Board of India (Prohibition of InsiderTrading) Regulations, 1992 – Regulation 3(i) r/w Regulation 4 –Securities and Exchange Board of India Act, 1992 – ss. 12A (d),12A (e),15Z and 30 – Insider trading – Price sensitive information– Whether information regarding decision of the Board of Directorsof GIPL to terminate the contracts in question can be characterizedas “price sensitive information” and whether sale by respondent ofthe equity shares held by him in GIPL, under peculiar and compellingcircumstances in which he was placed, fell within the mischief of‘insider trading’ in terms of Regulation 3(i) read with Regulation 4– Held: On facts, the information regarding termination of thecontracts in question can be characterized as price sensitiveinformation, in that it was likely to place the existing shareholdersin an advantageous position, once the information came into thepublic domain – In such circumstances, the sale by respondent, ofthe shares held by him in GIPL would not fall within the mischief ofinsider trading, as it was somewhat similar to a distress sale, madebefore the information could have a positive impact on the price ofthe shares – Respondent had no motive or intention to makeundeserved gains by encashing on the unpublished price sensitiveinformation that he possessed.

Securities and Exchange Board of India (Prohibition of InsiderTrading) Regulations, 1992 – Regulation 3 – Violation of – When –Held: To find out if a person is guilty of violation of Regulation 3,the Court should address itself to the following questions namely,(i) is he an insider; (ii) did he possess or have access to anyinformation relating to the company; iii) whether such informationwas price sensitive; (iv) whether the information was unpublished;and (v) whether he dealt in securities by subscribing, buying, sellingor agreeing to do any of these things in any securities

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670SUPREME COURT REPORTS

ADismissing the appeal, the Court

HELD:1. It may appear at first blush, that the respondent,who was an insider and who possessed information which wasboth unpublished and price sensitive, was guilty of the charge ofinsider trading as he undoubtedly dealt in securities. But the catchBlies in understanding the true scope of Explanation (vii) underRegulation 2(ha). The main part of Regulation 2(ha) defines “pricesensitive information” to mean any information, which relatesdirectly or indirectly to a company and which if published is likelyto materially affect the price of securities of a company. TheExplanation under Regulation 2(ha) creates a deeming fiction andCit makes 7 items of information listed thereunder as price sensitiveinformation. [Paras 24, 25][684-B-D]

2.1. While dealing with a case falling under Explanation (vii)of Regulation 2(ha), one may have to see whether there wasany likelihood of the said information materially affecting the priceDof the securities of the company. Additionally, the activity in whichthe insider was involved also determines his culpability forviolation of Regulation 3. For instance, the sale by a person inpossession of price sensitive information, at a time when the priceis likely to take a plunge, will certainly be an attempt at takingEadvantage of or encashing the information. Similarly the purchaseby a person in possession of UPSI at a time when the price of thesecurity is about to skyrocket, will certainly be an attempt totake advantage. [Para 27][685-A-B]

2.2. But the above logic cannot be applied to cases whichFfall on the opposite side of the spectrum. For instance, the saleby a person at a time when the price of the securities is likely toshoot up on account of price sensitive information coming intothe public domain or the purchase by a person at a time whenthe price of the shares is likely to go downward due to pricesensitive information getting published, cannot come under theGcategory of insider trading. While it is true that the actual gainingof profit or sufferance of loss in the transaction, may not providean escape route for an insider against the charge of violation ofRegulation 3, one cannot ignore normal human conduct. If a personenters into a transaction which is surely likely to result in loss,H

he cannot be accused of insider trading. In other words, the actualgain or loss is immaterial, but the motive for making a gain isessential. [Para 28][685-C-E]

3. The words, “likely to materially affect the price”appearing in the main part of Regulation 2(ha) gain significancefor the simple reason that profit motive, if not actual profit shouldbe the motivating factor for a person to indulge in insider trading.This is why the information in Item No.(vii) of the Explanationunder Regulation 2(ha) may have to be examined with referenceto the words “likely to materially affect the price”. [Para 29][685-F]

4. The cancellation of the shareholders Agreementsresulted in GIPL gaining very hugely in terms of order bookvalue. In such circumstances an ordinary man of prudence wouldexpect an increase in the value of the shares of GIPL and wouldwait for the market trend to show itself up, if he actually desiredto indulge in insider trading. But the respondent did not wait forthe information about the market trend, after the informationbecame public. The reason given by respondent, which is alsoaccepted by the WTM and the Tribunal is that he had to disposeof his shares as well as certain other properties for the purposeof honouring a CDR package. It is on record that if the CDRpackage had not gone through sucessfully, the parent companyof GIPL, Gammon India Ltd. could have gone for bankruptcy.Therefore, the Tribunal was right in thinking that the respondenthad no motive or intention to make undeserved gains by encashingon the unpublished price sensitive information that he possessed.[Paras 32 and 33][686-C-E]

5. The contention of the appellant that SEBI took note ofthe situation in which the respondent was placed and the direneed that he had to sell the shares and that therefore SEBIconfined the final order only to disgorgement, is neither herenor there. This argument is actually an argument of convenience.If a company is likely to gain strength by making a significantchange in its policy, the price of its securities is likely to shootup. Despite such a natural phenomena, if a person sells his stockswithout waiting for the market trend to show up, it can only be AB

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Ataken as a sale, devoid of any desire to make unlawful gains,even if it cannot be termed as a distress sale. [Para 39][688-A-C]

6. In the present case, the information regarding thetermination of the two contracts can be characterized as pricesensitive information, in that it was likely to place the existingBshareholders in an advantageous position, once the informationcame into the public domain. In such circumstances, the sale bythe respondent, of the shares held by him in GIPL would not fallwithin the mischief of insider trading, as it was somewhat similarto a distress sale, made before the information could have aCpositive impact on the price of the shares. [Paras 44][689-D-E]

Chintalapati Raju v. SEBI (2018) 7 SCC 443 : [2018]5 SCR 785; SEBI v. Kanaiyalal Baldevbhai Patel (2017)15 SCC 1 : [2017] 14 SCR 268 and SEBI v. Kishore R.Ajmera (2016) 6 SCC 368 : [2016] 1 SCR 1118 –referred to.D

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 563 of2020.

FFrom the Judgment and Orders dated 08.11.2019 of the SecuritiesAppellate Tribunal, Mumbai in Appeal No. 232 of 2016.

Pratap Venugopal, Ms. Surekha Raman, Akhil Abraham Roy, VijayValsan, M/s K J John And Co., Advs. for the Appellant.

Somasekhar Sundaresan, Divyam Agarwal, Pulkit Sukhramani,GAbhishek V., Ms. Vidhi Jhawar, Advs. for the Respondent.

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The Judgment of the Court was delivered by

V. RAMASUBRAMANIAN, J.

1. The Securities and Exchange Board of India has come up withthe above appeal, challenging an Order of the Securities AppellateTribunal, by which the Order of its Whole Time Member (for short“WTM”) directing the respondent to disgorge the amount of unlawfulgains made by him, was set aside.

2. We have heard Mr. Arvind P. Datar, learned senior counsel forthe appellant and Mr. Somasekhar Sundaresan, learned counsel appearingfor the respondent.

3. The background facts leading to the above appeal are as follows:

(i) The respondent herein was the Chairman and ManagingDirector of a company by name Gammon InfrastructureProjects Limited (hereinafter referred to as “GIPL”) tillSeptember 20, 2013. Thereafter, he ceased to be theChairman Managing Director, but continued to be a Directorof the Company.

(ii) In the year 2012 GIPL was awarded a contract by NationalHighways Authority of India. The total cost of the projectwas Rs.1648 crores. For the execution of the project, GIPLset up a special purpose vehicle called VijayawadaGundugolanu Road Project Private Limited (“VGRPPL”).

(iii) Similarly, another company by name Simplex InfrastructureLimited (SIL) was awarded a contract by NHAI inJharkhand and West Bengal and the total cost of the projectwas Rs.940 crores. For the execution of the project, SILset up a special purpose vehicle called Maa DurgaExpressways Private Limited (MDEPL).

(iv) GIPL entered into two shareholders agreements with SIL.Under these agreements, GIPL was to invest in MDEPLand SIL was to invest in VGRPPL for their respectiveprojects. The mutual investments were to be tuned in sucha manner that GIPL and SIL would hold 49% equity interestin each other’s projects.

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(v) However, on 9.08.2013 the Board of Directors of GIPLpassed a resolution authorizing the termination of bothshareholders agreements.

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(vi) On 22.8.2013, the respondent sold about 144 lakhs shares(approx.) held by him in GIPL, for an aggregate value ofBapproximately Rs.10.28 crores.

(vii) On 30.08.2013 GIPL made a disclosure to the National Stockexchange of India and BSE regarding the termination oftwo shareholders agreements.

(viii) On 20.09.2013 the respondent resigned from the post ofCChairman and Managing Director of GIPL.

(ix) Pursuant to an input received from the National StockExchange, about the aforesaid transaction and the possibilityof the trading having taken place on the basis of unpublishedprice sensitive information, SEBI conducted a preliminaryDenquiry. After completion of the preliminary enquiry, SEBIpassed an ex-parte interim order on 17.07.2014 holdingprima facie that the respondent violated the provisions ofSection 12A(d) and (e) of The Securities and ExchangeBoard of India Act, 1992 (hereinafter referred to as “SEBIEAct, 1992”) and consequently restraining the respondentfrom buying, selling or dealing in securities and accessingthe security markets directly or indirectly. This ex-parteinterim order was also confirmed by a confirmatory orderdated 23.03.2015, passed after providing an opportunity ofhearing to the respondent. The appeal filed by theFrespondent against the said confirmatory order wasdismissed as withdrawn on 4.02.2016.

(x) In the interregnum, SEBI completed the investigation andissued certain directions on 21.03.2016, followed by a showcause notice dated 29.03.2016. The show cause notice wasGaddressed not only to the respondent herein, but also toanother Company by name Consolidated InfrastructureCompany Private Limited and two of its Directors. Thenoticees filed their replies and after giving an opportunityof hearing to the noticees, the WTM passed an Order dated13.07.2016. By the said order the WTM held the respondentH

SECURITIES AND EXCHANGE BOARD OF INDIA v. ABHIJITRAJAN [V. RAMASUBRAMANIAN, J.]

herein guilty of insider trading and hence liable to disgorgethe amount of unlawful gains made by him to the tune ofRs.1.09 crores. The show cause notices issued to the others,namely, Consolidated Infrastructure Company PrivateLimited and its Directors were closed without any directions,on the ground that no case was made out against them.

(xi) Challenging the said order of the WTM, the respondentfiled a statutory appeal before the Securities AppellateTribunal. The appeal was allowed by the Tribunal by anOrder dated 08.11.2019 and it is against the said order thatSEBI has come up with the above appeal.

4. The reasons for the Securities Appellate Tribunal allowing theappeal of the respondent are three-fold, namely, (i) that the informationregarding the termination of the two shareholders agreements, was notactually a price sensitive information, since the investment of GIPL inSimplex Project, to the tune of Rs. 4.9 crores constituted only 0.05% ofGIPL’s order book value at the end of August, 2013 and only 0.7% of itsturnover for the financial year; (ii) that in any case the respondent wasin dire need to sell the shares at that time for the purpose of CDR(Corporate Debt Restructuring) package and hence he cannot be saidto have indulged in trading on the basis of information within hisknowledge; and (iii) that there was no reason why SEBI did not takeinto account the last trade price of 03.09.2013, but chose the price as on04.09.2013.

5. Assailing the order of the Securities Appellate Tribunal, it isargued by Mr. Arvind P. Datar, learned senior counsel for the appellant:- (a)that proportionality is a dangerous and subjective ground inmatters involving insider trading, especially since one-thirdof the total number of directors of a listed company areindependent directors and even transactions involvingthousands of crores might be a minor proportion to theturnover, if the company is very large in size; (b)that Regulations 3 and 4 contain an absolute prohibitionagainst insider trading and such a statutory prohibition cannotbe diluted by arguing that the total value of the contractsterminated by the company was just a minor percentage ofthe order book value and the total turnover of the company; A

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A(c)that in any case the total value of the contracts terminatedon both sides was nearly Rs.2600 crores (Rs.1648 crores+ 940 crores) and hence the information relating to thetermination of the contracts was definitely likely to materiallyaffect the price of the securities of the company underRegulation 2(ha); B

(d) That Explanation (vi) under Section 2(ha) which speaksabout “significant changes in policies, plans oroperations of the company” cannot limit the scope of themain part of the definition and in this case as a matter offact the price of the share dropped in just one day and theCrespondent avoided a loss of Rs.85 lakhs; (e)that the de minimis syndicate has no application to insidertrading, as it introduces an element of subjectivity; (f)that bona fide intentions or grounds of necessity, such asDthose pleaded in this case, cannot frustrate the object ofstrict ban on insider trading, especially when the expression“lawful excuse” as used in about 88 Central Statutes tojustify non-compliance, is conspicuously absent in the Statuteon hand;

E(g)that in any case, SEBI took note of the situation in whichthe respondent was placed, warranting the necessity to sellthe shares and hence confined the final order only todisgorgement, which is merely in the nature of restitutionaryrelief; F(h)that the intimation regarding the termination of the contractswas given to the Bombay Stock Exchange at 1.05 p.m. andto NSE at 2.40 p.m. on 03.09.2013 and the trading concludedat 3:30 p.m. and hence the adoption of the closing price on03.09.2013 would not correctly determine either the gainsmade or the losses averted; andG

(i) that therefore, the question of SEBI taking the closing priceas on 03.09.2013 did not arise.

6. Responding to the above submissions made on behalf of theappellant, Mr. Somasekhar Sundaresan, learned counsel for therespondent raised the following contentions:-H

(a) that the primary object of Insider Trading RegulationsAanywhere in the world is to prohibit an insider from takingadvantage of asymmetrical access to unpublished pricesensitive information over others who do not have suchaccess; (b)that the question whether an information is price sensitiveor not, would depend upon its potency to materially impact,upon publication, the price of the securities; B

(c) that therefore by its very nature, it is barely a question offact or at the most, a mixed question of fact and law whichwill not fall within the scope of Section 15Z of SEBI Act,C1992 warranting interference by this Court; (d)that one of the key factors which the Courts take intoaccount while interpreting the circumstances revolvingaround transactions such as the one in question, is thepurpose for which the transaction was effected; D

(e) that apart from looking into the purpose of the transaction,Courts have also taken into account other circumstancessuch as the scale of the transaction, pattern of trading andhonesty in responses during the proceedings as is evidentfrom the decisions in (i) Chintalapati Raju vs. SEBI;[1](ii)Rajiv Gandhi vs. SEBI;[2](iii) Miller vs. Pezzani[3]; and(iv) SEBI vs. Kanaiyalal Baldevbhai Patel[4]; E

(f) that in the case on hand, the information in question, namely,the termination of the Agreements actually resulted in GIPLgaining total control of a larger project worth Rs.1648 croresand that in other words what was lost by the terminationwas far lesser than what was gained and hence theinformation relating to the termination of the Agreementswas actually a favourable and not adverse information; F

1 (2018) 7 SCC 443

2 (Appeal No.50/2007 decided by the Ld. SAT on 09.05.2008) – (Civil Appeal 5302 of 2008 against this order was dismissed)

3 (A decision of the US Court of Appeals)-the US Supreme Court refused to entertaina challenge to it 4 (2017) 15 SCC 1

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678SUPREME COURT REPORTS

(g) that as seen from SEBI’s own computation, the value ofthe contract terminated was just 3.1% to 4.1% and henceit cannot be reasonably expected to have a material impacton the market price of the shares of GIPL; A

(h) that GIPL’s investments in the project of SIL representedB0.05% of GIPL’s order book and 0.7% of its turnover;

(i) that a project with a small percentage of the order bookand a miniscule percentage of the turnover cannot ipsofacto become material for information about it to becomeUPSI; C

(j) that on facts, the shares sold by the respondent on22.08.2013 constituted 0.99% of the share capital of GIPL;

(k) that what was sold by the respondent was 70% of his totalshareholding in GIPL and the sale was not an isolated onebut coupled with the sale of multiple other assets to raiseDmoney to fund promoters’ contribution to the CDR packageof Gammon India Limited, the listed parent company ofGIPL;

(l) that the failure of the respondent to meet the obligationtowards CDR package would have led to GIL filing forEbankruptcy; (m)that every penny of the sale proceeds of the shares, wastransferred by the respondent towards the implementationof CDR package and hence it is a misconception to thinkthat he made unlawful gains that ought to be disgorged; F

(n) that SEBI itself has accepted the fact that the sale proceedswere used for funding the CDR package; (o)that SEBI itself exonerated the co-noticee, namely,Consolidated Infrastructure Company Private Limited, onthe ground that its sale of shares was on account of aGpressing need to meet a margin shortfall to its stock broker; (p)that SEBI thus applied two different yardsticks, one inrespect of the respondent and another in respect of the co-noticee in the very same proceeding, which necessitatedinterference by the Tribunal; andH

SECURITIES AND EXCHANGE BOARD OF INDIA v. ABHIJITRAJAN [V. RAMASUBRAMANIAN, J.]

(q) that therefore the present appeal does not raise a substantialquestion of law and that in any case the order of theAppellate Tribunal does not call for any interference.

7. From the rival contentions, we think that the questions arisingfor our determination can be formulated as follows:

(i) whether the information regarding the decision of the Boardof Directors of GIPL to terminate the aforesaid twocontracts can be characterized as “price sensitiveinformation” within the meaning of Section 2(ha) of theSecurities and Exchange Board of India (Prohibition ofInsider Trading) Regulations 1992, (hereinafter referredto as the ‘Regulations’);

(ii) whether the sale by the respondent of the equity sharesheld by him in GIPL, under peculiar and compellingcircumstances in which he was placed, would fall withinthe mischief of ‘insider trading’ in terms of Regulation3(i) read with Regulation 4 of the Regulations;

(iii) whether SEBI should have taken into account the last tradeprice of the day on which information was disclosed insteadof the trade price of the next day; Question Nos.1 & 2

8. Before we proceed to analyze the points, we must note thatthis is an appeal under Section 15Z of SEBI Act, 1992 and we areconcerned in such appeals with “any question of law arising out ofthe order of the Tribunal”. The focus of Section 15Z is on ‘any questionof law’ and not ‘any substantial question of law’. Keeping this inmind, we shall now proceed further.

9. The SEBI Act, 1992 is intended, as seen from its preamble, “toprovide for the establishment of a Board to protect the interests ofinvestors in securities and to promote the development of and toregulate the securities market”. As a matter of fact, the Securities andExchange Board of India was established even before the Act wasenacted. Since the Board was already in place, the Parliament enactedthe Act with a view among other things, to vest SEBI with statutorypowers.

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A10. In exercise of the powers conferred by Section 30 of the Act,the Board issued a set of Regulations known as “Securities andExchange Board of India (Prohibition of Insider Trading)Regulations, 1992”, with the previous approval of the CentralGovernment. Regulation 2(ha) of these Regulations defines theexpression “price sensitive information” as follows:-B

“2(ha) “price sensitive information” means any information whichrelates directly or indirectly to a company and which if publishedis likely to materially affect the price of securities of company.

Explanation.—The following shall be deemed to be price sensitiveCinformation :-

(i) periodical financial results of the company;

(ii) intended declaration of dividends (both interim and final);

(iii) issue of securities or buy-back of securities; D (iv) any major expansion plans or execution of new projects.

(v) amalgamation, mergers or takeovers;

(vi) disposal of the whole or substantial part of the undertaking;

(vii) and significant changes in policies, plans or operations ofEthe company.”11. Regulation 2 (k) defines the expression “unpublished” asfollows:

“Unpublished” means information which is not published by thecompany or its agents and is not specific in nature.FExplanation.– Speculative reports in print or electronic mediashall not be considered as published information.”

12. Regulation 3 imposes a prohibition on dealing, communicatingor counseling on matters relating to insider trading. It reads as follows:- G“3. No insider shall –

(i) either on his own behalf or on behalf of any other person,deal in securities of a company listed on any stock exchangewhen in possession of any unpublished price sensitiveinformation; or H

(ii) communicate or counsel or procure directly or indirectly anyunpublished price sensitive information to any person whowhile in possession of such unpublished price sensitiveinformation shall not deal in securities :

Provided that nothing contained above shall be applicable to anycommunication required in the ordinary course of business orprofession or employment or under any law.”

13. Regulation 4 declares the circumstances under which a personshall be held guilty of insider trading. It reads as follows:- “4. Any insider who deals in securities in contravention of theprovisions of regulation 3 or 3A shall be guilty of insider trading.”

14. Interestingly, the Regulations do not define the words, “insidertrading”. But Regulation 4 declares a person guilty of insider trading if,(i) he happens to be an insider; and (ii) if he deals in securities incontravention of Regulation 3.

15. The word “insider” is defined in Regulation 2(e) as follows:- “(e) “insider” means any person who,

(i) is or was connected with the company or is deemed to havebeen connected with the company and is reasonably expected tohave access to unpublished price sensitive information in respectof securities of a company, or

(ii) has received or has had access to such unpublished pricesensitive information.

16. The words “dealing in securities” is defined in Regulation2(d) as follows:- “(d) “dealing in securities” means an act of subscribing, buying,selling or agreeing to subscribe, buy, sell or deal in any securitiesby any person either as principal or agent.”

17. We may note at this stage that the Regulations underwentsweeping changes through SEBI (Insider Trading) (Amendment)Regulations 2002, w.e.f. 20.02.2002. Prior to the amendment made inthe year 2002, the words, “unpublished price sensitive information”were defined through a single definition clause, namely Regulation 2(k)as follows:- A

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A“2(k) Unpublished price sensitive information means anyinformation which related to the following matters or is of concern,directly or indirectly, to a company, and is not generally known orpublished by such company for general information, but which ifpublished or known, is likely to materially affect the price ofsecurities of that company in the market –B

(i) financial results (both half-yearly and annual) of thecompany;

(ii) intended declaration of dividend (both interim/final);

(iii) issue of shares by way of public rights, bonus etc.; C

(iv) any major expansion plans or execution of new projects;

(v) amalgamations, mergers and takeovers;

(vi) disposal of the whole or substantially the whole of theundertaking; D

(vii) such other information as may affect the earnings of thecompany.”

18. But under the Amendment Regulations, 2002, the word,“unpublished” alone is defined in Regulation 2(k) and the rest of thewords “price sensitive information” is defined in Regulation 2(ha).E

19. The important modifications brought forth under theAmendment Regulations of 2002 to the definition of what is unpublishedprice sensitive information are two-fold namely, (i) that the definition ofwords unpublished is expanded; and (ii) that even significant changes inpolicies, plans and operations of the company are brought within theFdefinition of the expression “price sensitive information”, through adeeming provision in the Explanation under Regulation 2(ha).

20. Therefore in view of the Regulations discussed above, a personcan be held guilty of violating Regulation 3, only if the following conditionsare satisfied:- G

(i) He must be an insider within the meaning of the word “insider”,under Regulation 2(e), by virtue of his past or present connectionor deemed connection with the company and he is also reasonablyexpected either to have had access to UPSI or has received suchinformation; H

(ii) The information that such a person received or has had accessor reasonably expected to have had access should be unpublished,in the sense that it was not published by the company or its agentor though published, it was not specific in nature;

(iii) Such unpublished information should fall within the definitionof the expression “price sensitive information” within themeaning of Section 2(ha) of the Regulations; and

(iv) He must have indulged in trading, either by dealing in securitiesof the company or in communicating or counseling or procuringdirectly or indirectly any such information to any person.

21. In other words, to find out if a person is guilty of violation ofRegulation 3, the Court should address itself to the following questionsnamely, (i) is he an insider?; (ii) did he possess or have access to anyinformation relating to the company?; (iii) whether such informationwas price sensitive?; (iv) whether the information was unpublished?;and (v) whether he dealt in securities by subscribing, buying, selling oragreeing to do any of these things in any securities?

22. Before we proceed to find an answer to the above questionsin the context of the present appeal we must take note of one importantfact namely, that the price sensitivity of an information has a correlationdirectly to the materiality of the impact that it can have on the price ofthe securities of the company. An information may materially affect theprice of the security of a company either positively or negatively. Theimpact may be beneficial or adverse. The information should have thepotential either to catapult the price of the securities of the company toa higher level or to make it plunge. The effect can be bullish or bearish.But the effect should be material and not completely insignificant.

23. Keeping the above parameters in mind if we come to thefacts of the case on hand, it will be clear, (i) that the respondent wascertainly an insider, as he was a Chairman and Managing Director ofGIPL till 20.09.2013 and was a party to the resolution of the Board ofDirectors passed on 09.08.2013 authorising the termination of theshareholders’ Agreements; (ii) that the information relating to thetermination of both the shareholders’ Agreements that the respondenthad, would certainly fall under the category of “significant changes inpolicies, plans or operations of the Company” under Regulation2(ha)(vii); (iii) that the respondent dealt in securities by selling 144 lakhs A

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Aof shares on 22.08.2013, which was a month before his resignation asChairman and Managing Director; and (iv) that the termination of theshareholders’ Agreements on 09.08.2013 was disclosed to the NSE andBSE on 30.08.2013, after the sale of the shares, which made theinformation relating to the termination of the Agreements unpublished ason the date of the sale.B

24. Therefore, it may appear at first blush, that the respondent,who was an insider and who possessed information which was bothunpublished and price sensitive, was guilty of the charge of insider tradingas he undoubtedly dealt in securities.

C25. But the catch lies in understanding the true scope of Explanation(vii) under Regulation 2(ha). As we have seen earlier, the main part ofRegulation 2(ha) defines “price sensitive information” to mean anyinformation, which relates directly or indirectly to a company and whichif published is likely to materially affect the price of securities of acompany. The Explanation under Regulation 2(ha) creates a deemingDfiction and it makes 7 items of information listed thereunder as pricesensitive information.

26. It may be interesting to note that out of the 7 items of informationlisted under the Explanation, all the others except Item No.(vii) are likelyto have an impact directly upon the financial strength of the company.EItem No.(vii) stands apart, in that it is very broad and general in nature.While nothing more is required to show that the information listed inItems (i) to (vi) of the Explanation under Regulation 2(ha) is likely tomaterially affect the price of securities of a company, the same is notthe case insofar as the information in Item No.(vii) is concerned. InFother words, the likelihood of the price of the securities getting materiallyaffected, is inherent in Items (i) to (vi) namely, “(i) periodical financial results of the company;

(ii) intended declaration of dividends (both interim and final);

(iii) issue of securities or buy-back of securities; G

(iv) any major expansion plans or execution of new projects.

(v) amalgamation, mergers or takeovers;

(vi) disposal of the whole or substantial part of the undertaking;”

HBut such is not the case with the information in Item No.(vii).

27. Therefore, while dealing with a case falling under Explanation(vii) of Regulation 2(ha), one may have to see whether there was anylikelihood of the said information materially affecting the price of thesecurities of the company. Additionally, the activity in which the insiderwas involved also determines his culpability for violation of Regulation3. For instance, the sale by a person in possession of price sensitiveinformation, at a time when the price is likely to take a plunge, willcertainly be an attempt at taking advantage of or encashing theinformation. Similarly the purchase by a person in possession of UPSI ata time when the price of the security is about to skyrocket, will certainlybe an attempt to take advantage.

28. But the above logic cannot be applied to cases which fall onthe opposite side of the spectrum. For instance, the sale by a person at atime when the price of the securities is likely to shoot up on account ofprice sensitive information coming into the public domain or the purchaseby a person at a time when the price of the shares is likely to go downwarddue to price sensitive information getting published, cannot come underthe category of insider trading. While it is true that the actual gaining ofprofit or sufferance of loss in the transaction, may not provide an escaperoute for an insider against the charge of violation of Regulation 3, onecannot ignore normal human conduct. If a person enters into a transactionwhich is surely likely to result in loss, he cannot be accused of insidertrading. In other words, the actual gain or loss is immaterial, but themotive for making a gain is essential.

29. The words, “likely to materially affect the price” appearingin the main part of Regulation 2(ha) gain significance for the simplereason that profit motive, if not actual profit should be the motivatingfactor for a person to indulge in insider trading. This is why the informationin Item No.(vii) of the Explanation under Regulation 2(ha) may have tobe examined with reference to the words “likely to materially affectthe price”. Keeping this in mind let us now come back to the facts ofthe case.

30. GIPL was awarded a contract for the execution of a project,whose total cost was admittedly Rs. 1648 crores. SIL was awarded acontract for a project whose cost was Rs. 940 crores. Both GIPL andSIL created Special Purpose Vehicles and then they entered into twoshareholders Agreements. Under these Agreements, GIPL and SIL willhave to make investments in the Special Purpose Vehicles created by A

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Aeach other, in such a manner that each of them will hold 49% equityinterest in the other’s project.

31. It means that GIPL could have acquired 49% equity interestin the project worth Rs. 940 crores and SIL would have acquired 49%equity interest in a project worth Rs. 1648 crore.B

32. In arithmetical terms, the acquisition by GIPL, of an equityinterest in SIL’s project was worth Rs. 460 crores approximately. Similarly,the acquisition by SIL, of the equity interest in GIPL’s project was worthRs. 807.52 crores. Therefore, the cancellation of the shareholdersAgreements resulted in GIPL gaining very hugely in terms of order bookCvalue. In such circumstances an ordinary man of prudence would expectan increase in the value of the shares of GIPL and would wait for themarket trend to show itself up, if he actually desired to indulge in insidertrading. But the respondent did not wait for the information about themarket trend, after the information became public. The reason given byhim, which is also accepted by the WTM and the Tribunal is that he hadDto dispose of his shares as well as certain other properties for the purposeof honouring a CDR package. It is on record that if the CDR packagehad not gone through successfully, the parent company of GIPL namely,Gammon India Ltd., could have gone for bankruptcy.

33. Therefore, the Tribunal was right in thinking that the respondentEhad no motive or intention to make undeserved gains by encashing onthe unpublished price sensitive information that he possessed.

34. As a matter of fact, the Tribunal found that the closing priceof shares rose, after the disclosure of the information. This shows thatthe unpublished price sensitive information was such that it was likely toFbe more beneficial to the shareholders, after the disclosure was made.Any person desirous of indulging in insider trading, would have waitedtill the information went public, to sell his holdings. The respondent didnot do this, obviously on account of a pressing necessity.

35. We agree with the contention of Shri Arvind P. Datar, learnedGsenior counsel for the appellant, that the allegation of insider tradingcannot be measured in terms of the value of the contracts terminatedand the percentage of shares sold and that the theory of proportionalitycannot be applied in such cases. The magnitude of what an insider did,in relation to the size of the company, may not have a bearing upon thequestion whether someone indulged in insider trading or not. But what isH

sought to be encashed by the insider should be an information which ifpublished is likely to materially affect the price of the securities of thecompany.

36. The contention of Shri Arvind P. Datar, learned senior counsel,that the total value of the contracts terminated on both sides was nearlyRs.2600/- crores (Rs.1648 crores + Rs.940 crores) and that thereforethe information relating to the termination of the contracts was surelylikely to materially affect the price of the securities of the company, isunsustainable for the simple reason that the net effect of the terminationof both the contracts, for GIPL was a positive advantage of about Rs.800crores. We have already provided in paragraph 32 above, the simplearithmetics of the whole transaction, which put GIPL in a moreadvantageous position after the termination of the contract.

37. It is true that the de minimis Rule has no application to insidertrading, as it introduces an element of subjectivity. This is why we havenot gone on the basis that GIPL’s investments in the project of SILrepresented 0.05% of GIPL’s order book value and 0.7% of its turnover.We have gone on the basis that the termination of both the contracts putGIPL in a more advantageous position, in which one would have expectedthe price of the securities to soar. The normal human conduct would beto wait for this event to happen. This event could have happened onlyafter the publication of the information in question. The fact that therespondent did not wait to take advantage of the situation, convinces usthat his intention was not to indulge in insider trading.

38. Shri Arvind P. Datar, learned senior counsel is right in pointingout that in as many as 88 Central Statutes, the expression “lawful excuse”is used as a justification for non-compliance. But the same is not used inSEBI Act, 1992 or the Regulations issued thereunder. Therefore, wehave not tested the conduct of the respondent solely on the argument ofnecessity. But we have taken note of the admitted position that therespondent had to save the parent company going bankrupt, by sellinghis stock, at a time when he had every reason to wait for the informationregarding the termination of the contracts to go public. This is not a casewhere the respondent has come up with an excuse to justify his actionthat was intended to give him a financial advantage. This is a case wherea man of ordinary prudence would have expected the price of the sharesto go up, after the information became public, due to the impact that theinformation was likely to have on the turnover/net worth of the company.

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A39. The contention of the appellant that SEBI took note of thesituation in which the respondent was placed and the dire need that hehad to sell the shares and that therefore SEBI confined the final orderonly to disgorgement, is neither here nor there. This argument is actuallyan argument of convenience. It so happened in this case that accordingto SEBI the closing price of the stock on 03.09.2013 showed favourableBposition for the respondent and SEBI was able to calculate as thoughthe respondent made a profit. But if a company is likely to gain strengthby making a significant change in its policy, the price of its securities islikely to shoot up. Despite such a natural phenomena, if a person sellshis stocks without waiting for the market trend to show up, it can only beCtaken as a sale, devoid of any desire to make unlawful gains, even if itcannot be termed as a distress sale.

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40. In SEBI vs. Kishore R. Ajmera[5], this Court was concernedwith the question as to what is the degree of proof required to hold abroker liable for fraudulent/manipulative practices under SEBID(Prohibition of Fraudulent and Unfair Trade Practices relating toSecurities Market) Regulations, 2003 as well as the Conduct Regulationsof 1992. After taking note of the fact that SEBI Act and the Regulationsframed thereunder are intended to protect the interest of investors andthat the provisions of the Act and the Regulations have to be understoodand interpreted in that light, this Court held in Para 26 as follows:-E

“It is the judicial duty to take note of the immediate and proximatefacts and circumstances surrounding the events on which thecharges/allegations are founded and to reach what would appearto the Court to be a reasonable conclusion therefrom. The testwould always be that what inferential process that a reasonable/Fprudent man would adopt to arrive at a conclusion.”

41. While dealing with yet another case arising out of allegationsof violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practicesrelating to Securities Market) Regulations, 2003, this Court held inKanaiyalal Baldevbhai Patel (Supra) (para-58) that the volume, theGnature of the trading and the timing of the transactions may have to betaken into account to find out whether there was an attempt at encashingthe benefit of the information that the insider was in possession. It is nodoubt true that the Court clarified in paragraph 62 of its decision inKanaiyalal Baldevbhai Patel (supra) that mens rea is not anH5 (2016) 6 SCC 368

indispensable requirement to attract the rigor of FUTP Regulations, 2003.This Court held that the correct test is one of preponderance ofprobabilities.

42. But an attempt by the insider to encash the benefit of theinformation is not exactly the same as mens rea. Therefore, the Courtcan always test whether the act of the insider in dealing with the securities,was an attempt to take advantage of or encash the benefit of theinformation in his possession. This is the test we have applied to thecase on hand.

43. In Chintalapati Srinivasa Raju (supra), this Court approvedthe minority judgment of the Securities Appellate Tribunal (in para 20),which took note of the compelling circumstances under which theindividual was selling shares. The fact that this has been taken note ofby WTM as a mitigating factor, while passing a mere restitutionary order,does not take away the validity of the defence taken by the respondent.

44. Therefore, we are of the view on Question No.1 that theinformation regarding the termination of the two contracts can becharacterised as price sensitive information, in that it was likely to placethe existing shareholders in an advantageous position, once the informationcame into the public domain. In such circumstances, our answer toQuestion No.2 would be that the sale by the respondent, of the sharesheld by him in GIPL would not fall within the mischief of insider trading,as it was somewhat similar to a distress sale, made before the informationcould have a positive impact on the price of the shares.

45. In view of our answers to Question Nos. 1 and 2, we are ofthe view that there is no necessity to go into Question No.3. Our answersto Question Nos. 1 and 2 are sufficient to hold that the impugned orderof the Tribunal does not call for any interference. Therefore, the appealis dismissed. There will be no order as to costs.

Bibhuti Bhushan Bose

Appeal dismissed.

(Assisted by : Shubhanshu Das, LCRA)

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