SEBI UPDATE |BONA FIDE TRADE NOT TO BE CONSIDERED AS INSIDER TRADING
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matter of Shreehas P. Tambe v. SEBI has held that an insider will not be guilty of insider trading despite possessing unpublished price sensitive information (UPSI) as the trade in question was bona fide.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No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information: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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