SECURITIES AND EXCHANGE BOARD OF INDIA VERSUS ABHIJIT RAJAN

SECURITIES AND EXCHANGE BOARD OF INDIA VERSUS ABHIJIT RAJAN  

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No.563 of 2020
SECURITIES AND EXCHANGE BOARD OF INDIA     ...APPELLANT(S)
VERSUS
ABHIJIT RAJAN              ...RESPONDENT(S)
J U D G M E N T
V. Ramasubramanian
1. The Securities and Exchange Board of India has come up with the
above appeal, challenging an Order of the Securities Appellate Tribunal,
by   which   the   Order   of   its   Whole   Time   Member   (for   short   “WTM”)
directing the respondent to disgorge the amount of unlawful gains made
by him, was set aside.
2. We have heard Mr. Arvind P. Datar, learned senior counsel for the
appellant and Mr. Somasekhar Sundaresan, learned counsel appearing
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for the respondent.
3. The background facts leading to the above appeal are as follows:
(i)  The   respondent  herein  was   the   Chairman   and
Managing Director of a company by name Gammon
Infrastructure Projects Limited (hereinafter referred to
as  “GIPL”)   till   September   20,   2013.   Thereafter,   he
ceased   to   be   the   Chairman   Managing   Director,   but
continued to be a Director of the Company.
(ii) In   the   year   2012   GIPL   was   awarded   a   contract   by
National Highways Authority of India. The total cost of
the project was Rs.1648 crores. For the execution of
the   project,   GIPL   set   up   a   special   purpose   vehicle
called Vijayawada Gundugolanu Road Project Private
Limited (“VGRPPL”).
(iii) Similarly,   another   company   by   name   Simplex
Infrastructure Limited (SIL) was awarded a contract by
NHAI in Jharkhand and West Bengal and the total cost
of the project was Rs.940 crores. For the execution of
the project, SIL set up a special purpose vehicle called
Maa Durga Expressways Private Limited (MDEPL).
(iv) GIPL entered into two shareholders agreements with
SIL. Under these agreements, GIPL was to invest in
MDEPL  and  SIL  was  to  invest  in  VGRPPL  for  their
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respective projects. The mutual investments were to be
tuned in such a manner that GIPL and SIL would hold
49% equity interest in each other’s projects.
(v)  However, on 9.08.2013 the Board of Directors of GIPL
passed a resolution authorizing the termination of both
shareholders agreements.
(vi)  On 22.8.2013, the respondent sold about 144 lakhs
shares (approx.) held by him in GIPL, for an aggregate
value of approximately Rs.10.28 crores.
(vii)    On 30.08.2013 GIPL made a disclosure to the National
Stock   exchange   of   India   and   BSE   regarding   the
termination of two shareholders agreements.
(viii) On 20.09.2013 the respondent resigned from the post
of Chairman and Managing Director of GIPL.
(ix)  Pursuant to an input received from the National Stock
Exchange,   about   the   aforesaid   transaction   and   the
possibility of the trading having taken place on the
basis of unpublished price sensitive information, SEBI
conducted a preliminary enquiry. After completion of
the   preliminary   enquiry,   SEBI   passed   an   ex­parte
interim order on 17.07.2014 holding  prima facie  that
the   respondent   violated   the   provisions   of   Section
12A(d) and (e) of The Securities and Exchange Board of
India Act, 1992 (hereinafter referred to as “SEBI Act,
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1992”)   and   consequently   restraining   the   respondent
from   buying,   selling   or   dealing   in   securities   and
accessing the security markets directly or indirectly.
This ex­parte interim order was also confirmed by a
confirmatory   order   dated   23.03.2015,   passed   after
providing an opportunity of hearing to the respondent.
The appeal filed by the respondent against the said
confirmatory   order   was   dismissed   as   withdrawn   on
4.02.2016.
(x)  In the interregnum, SEBI completed the investigation
and issued certain directions on 21.03.2016, followed
by a show cause notice dated 29.03.2016. The show
cause notice was addressed not only to the respondent
herein,   but   also   to   another   Company   by   name
Consolidated Infrastructure Company Private Limited
and two of its Directors. The noticees filed their replies
and   after   giving   an   opportunity   of   hearing   to   the
noticees, the WTM passed an Order dated 13.07.2016.
By the said order the WTM held the respondent herein
guilty of insider trading and hence liable to disgorge
the amount of unlawful gains made by him to the tune
of Rs.1.09 crores. The show cause notices issued to the
others,  namely,  Consolidated Infrastructure Company
Private Limited and its Directors were closed without
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any directions, on the ground that no case was made
out against them.
(xi) Challenging the said order of the WTM, the respondent
filed a statutory appeal before the Securities Appellate
Tribunal. The appeal was allowed by the Tribunal by
an Order dated 08.11.2019 and it is against the said
order that SEBI has come up with the above appeal.
4. The   reasons   for   the   Securities   Appellate   Tribunal   allowing   the
appeal of the respondent are three­fold, namely, (i) that the information
regarding the termination of the two shareholders agreements, was not
actually a price sensitive information, since the investment of GIPL in
Simplex Project, to the tune of Rs. 4.9 crores constituted only 0.05% of
GIPL’s order book value at the end of August, 2013 and only 0.7% of its
turnover for the financial year; (ii) that in any case the respondent was
in dire need to sell the shares at that time for the purpose of CDR
(Corporate Debt Restructuring) package and hence he cannot be said to
have   indulged   in   trading   on   the   basis   of   information   within   his
knowledge; and (iii) that there was no reason why SEBI did not take into
account the last trade price of 03.09.2013, but chose the price as on
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04.09.2013.  
5. Assailing the order of the Securities Appellate Tribunal, it is argued
by Mr. Arvind P. Datar, learned senior counsel for the appellant:­
(a)  that   proportionality   is   a   dangerous   and   subjective
ground in matters involving insider trading, especially
since one­third of the total number of directors of a
listed   company   are   independent   directors   and   even
transactions involving thousands of crores might be a
minor proportion to the turnover, if the company is very
large in size;
(b) that Regulations 3 and 4 contain an absolute prohibition
against insider trading and such a statutory prohibition
cannot be diluted by arguing that the total value of the
contracts terminated by the company was just a minor
percentage   of   the   order   book   value   and   the   total
turnover of the company;
(c) that   in   any   case   the   total   value   of   the   contracts
terminated   on   both   sides   was   nearly   Rs.2600   crores
(Rs.1648 crores + 940 crores) and hence the information
relating to the termination of the contracts was definitely
likely to materially affect the price of the securities of the
company under Regulation 2(ha);
(d) That Explanation (vi) under Section 2(ha) which speaks
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about “significant changes in policies, plans or operations
of the company” cannot limit the scope of the main part
of the definition and in this case as a matter of fact the
price   of   the   share   dropped   in   just   one   day   and   the
respondent avoided a loss of Rs.85 lakhs;
(e) that   the  de   minimis  syndicate   has   no   application   to
insider   trading,   as   it   introduces   an   element   of
subjectivity; 
(f) that bona fide intentions or grounds of necessity, such
as those pleaded in this case, cannot frustrate the object
of   strict   ban   on   insider   trading,   especially   when   the
expression “lawful excuse” as used in about 88 Central
Statutes   to   justify   non­compliance,   is   conspicuously
absent in the Statute on hand;
(g) that in any case, SEBI took note of the situation in
which   the   respondent   was   placed,   warranting   the
necessity to sell the shares and hence confined the final
order   only   to   disgorgement,   which   is   merely   in   the
nature of restitutionary relief;
(h) that   the   intimation   regarding   the   termination   of   the
contracts was given to the Bombay Stock Exchange at
1.05 p.m. and to NSE at 2.40 p.m. on 03.09.2013 and
the   trading   concluded   at   3:30   p.m.   and   hence   the
adoption of the closing price on 03.09.2013 would not
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correctly determine either the gains made or the losses
averted; and
(i) that therefore, the question of SEBI taking the closing
price as on 03.09.2013 did not arise.
6. Responding   to   the   above   submissions   made   on   behalf   of   the
appellant,   Mr.   Somasekhar   Sundaresan,   learned   counsel   for   the
respondent raised the following contentions:­
(a) that the primary object of Insider Trading Regulations
anywhere in the world is to prohibit an insider from
taking advantage of asymmetrical access to unpublished
price sensitive information over others who do not have
such access;
(b) that   the   question   whether   an   information   is   price
sensitive   or   not,   would   depend   upon   its   potency   to
materially   impact,   upon   publication,   the   price   of   the
securities;
(c) that therefore by its very nature, it is barely a question
of fact or at the most, a mixed question of fact and law
which will not fall within the scope of Section 15Z of
SEBI Act, 1992 warranting interference by this Court;
(d) that one of the key factors which the Courts take into
account while interpreting the circumstances revolving
8
around transactions such as the one in question, is the
purpose for which the transaction was effected;
(e) that   apart   from   looking   into   the   purpose   of   the
transaction, Courts have also taken into account other
circumstances   such   as   the   scale   of   the   transaction,
pattern of trading and honesty in responses during the
proceedings   as   is   evident   from   the   decisions   in
(i) Chintalapati   Raju  vs.  SEBI;
1
(ii) Rajiv   Gandhi
vs.  SEBI;
2
(iii) Miller  vs.  Pezzani3
;  and (iv) SEBI  vs.
Kanaiyalal Baldevbhai Patel4
;
(f) that in the case on hand, the information in question,
namely,  the   termination   of   the   Agreements   actually
resulted in GIPL gaining total control of a larger project
worth Rs.1648 crores and that in other words what was
lost by the termination was far lesser than what was
gained   and   hence   the   information   relating   to   the
termination of the Agreements was actually a favourable
and not adverse information;
(g) that as seen from SEBI’s own computation, the value of
the   contract   terminated   was   just   3.1%   to   4.1%   and
hence   it   cannot   be   reasonably   expected   to   have   a
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 entertain a challenge to it
4 (2017) 15 SCC 1
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material impact on the market price of the shares of
GIPL;
(h) that   GIPL’s   investments   in   the   project   of   SIL
represented 0.05% of GIPL’s order book and 0.7% of its
turnover;
(i) that a project with a small percentage of the order book
and a miniscule percentage of the turnover cannot ipso
facto become material for information about it to become
UPSI;
(j) that  on   facts,  the  shares  sold  by  the  respondent  on
22.08.2013 constituted 0.99% of the share capital of
GIPL;
(k) that what was sold by the respondent was 70% of his
total   shareholding   in   GIPL   and   the   sale   was   not   an
isolated one but coupled with the sale of multiple other
assets to raise money to fund promoters’ contribution to
the CDR package of Gammon India Limited, the listed
parent company of GIPL;
(l) that the failure of the respondent to meet the obligation
towards CDR package would have led to GIL filing for
bankruptcy; 
(m) that every penny of the sale proceeds of the shares, was
transferred   by   the   respondent   towards   the
implementation   of   CDR   package   and   hence   it   is   a
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misconception   to   think   that   he   made   unlawful   gains
that ought to be disgorged;
(n) that   SEBI   itself   has   accepted   the   fact   that   the   sale
proceeds were used for funding the CDR package;
(o) that   SEBI   itself   exonerated   the   co­noticee,  namely,
Consolidated   Infrastructure   Company   Private   Limited,
on the ground that its sale of shares was on account of a
pressing need to meet a margin shortfall to its stock
broker;
(p) that SEBI thus applied two different yardsticks, one in
respect of the respondent and another in respect of the
co­noticee   in   the   very   same   proceeding,   which
necessitated interference by the Tribunal; and 
(q) that   therefore   the   present   appeal   does   not   raise   a
substantial question of law and that in any case the
order of the Appellate Tribunal does not call for any
interference.
7. From the rival contentions, we think that the questions arising for
our determination can be formulated as follows:
(i) whether the information regarding the decision of the
Board of Directors of GIPL to terminate the aforesaid two
contracts can be characterized as “price sensitive information”
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within the meaning of Section 2(ha) of the Securities and
Exchange   Board   of   India   (Prohibition   of   Insider   Trading)
Regulations 1992, (hereinafter referred to as the ‘Regulations’);
(ii) whether the sale by the respondent of the equity shares
held   by   him   in   GIPL,   under   peculiar   and   compelling
circumstances in which he was placed, would fall within the
mischief of ‘insider trading’ in terms of Regulation 3(i) read
with Regulation 4 of the Regulations;
(iii) whether SEBI should have taken into account the last
trade price of the day on which information was disclosed
instead of the trade price of the next day;
Question Nos.1 & 2
8. Before we proceed to analyze the points, we must note that this is
an appeal under Section 15Z of SEBI Act, 1992 and we are concerned in
such appeals with “any question of law arising out of the order of the
Tribunal”. The focus of Section 15Z is on ‘any question of law’ and not
‘any substantial question of law’. Keeping this in mind, we shall now
proceed further. 
9. The SEBI Act, 1992 is intended, as seen from its preamble, “to
provide   for   the   establishment   of   a   Board   to   protect   the   interests   of
12
investors in securities and to promote the development of and to regulate
the securities market”. As a matter of fact, the Securities and Exchange
Board of India was established even before the Act was enacted. Since
the Board was already in place, the Parliament enacted the Act with a
view among other things, to vest SEBI with statutory powers.
10. In exercise of the powers conferred by Section 30 of the Act, the
Board issued a set of Regulations known as “Securities and Exchange
Board of India (Prohibition of Insider Trading) Regulations, 1992”, with
the previous approval of the Central Government. Regulation 2(ha) of
these Regulations defines the expression “price sensitive information” as
follows:­
“2(ha) “price sensitive information” means any information
which relates directly or indirectly to a company and which if
published is likely to materially affect the price of securities
of company.
Explanation.—The   following   shall   be   deemed   to   be   price
sensitive information  :­ 
   (i)    periodical financial results of the company; 
   (ii)   intended declaration of dividends (both interim and     
          final); 
   (iii)  issue of securities or buy­back of securities; 
   (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 
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undertaking; 
   (vii) and significant changes in policies, plans or operations
of the  company.”
11. Regulation 2 (k) defines the expression “unpublished” as follows:
“Unpublished” means information which is not published by
the company or its agents and is not specific in nature.
Explanation.– Speculative reports in print or electronic media
shall not be considered as published information.”
12. Regulation 3 imposes a prohibition on dealing, communicating or
counseling on matters relating to insider trading.  It reads as follows:­
“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   exchange   when   in   possession   of   any
unpublished price sensitive information; or
(ii) communicate   or   counsel   or   procure   directly   or
indirectly   any   unpublished   price   sensitive
information to any person who while in possession
of   such   unpublished   price   sensitive   information
shall not deal in securities : 
Provided that nothing contained above shall be applicable
to any communication required in the ordinary course of
business or profession or employment or under any law.”
13. Regulation 4 declares the circumstances under which a person
shall be held guilty of insider trading. It reads as follows:­
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“4. Any insider who deals in securities in contravention of
the provisions of regulation 3 or 3A shall be guilty of insider
trading.”
14. Interestingly, the Regulations do not define the words, “insider
trading”. 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 in
contravention 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
have been connected with the company and is reasonably
expected   to   have   access   to   unpublished   price   sensitive
information in respect of securities of a company, or 
(ii) has received or has had access to such unpublished price
sensitive information.
16. The words “dealing in securities” is defined in Regulation 2(d) as
follows:­
“(d)   “dealing   in   securities”   means   an   act   of   subscribing,
buying, selling or agreeing to subscribe, buy, sell or deal in
any securities by any person either as principal or agent.”
17. We   may   note   at   this   stage   that   the   Regulations   underwent
sweeping   changes   through   SEBI   (Insider   Trading)   (Amendment)
Regulations 2002, w.e.f. 20.02.2002. Prior to the amendment made in
15
the year 2002, the words, “unpublished price sensitive information” were
defined through a single definition clause, namely Regulation 2(k) as
follows:­
“2(k)   Unpublished   price   sensitive   information   means   any
information which related to the following matters or is of
concern,  directly  or indirectly,  to  a  company,  and  is not
generally known or published by such company for general
information, but which if published or known, is likely to
materially affect the price of securities of that company in
the market – 
(i)  financial results (both half­yearly and annual) of the
company; 
(ii)  intended declaration of dividend (both interim/final); 
(iii)  issue of shares by way of public rights, bonus etc.; 
(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 the
undertaking; 
(vii) such other information as may affect the earnings of
the company.”
18. But   under   the   Amendment   Regulations,   2002,   the   word,
“unpublished” alone is defined in Regulation 2(k) and the rest of the
words “price sensitive information” is defined in Regulation 2(ha).
19. The important modifications brought forth under the Amendment
Regulations   of   2002   to   the   definition   of   what   is   unpublished   price
sensitive information are two­fold namely, (i) that the definition of words
16
unpublished   is   expanded;   and  (ii)  that   even   significant   changes   in
policies, plans and operations of the company are brought within the
definition   of   the   expression   “price   sensitive   information”,   through   a
deeming provision in the Explanation under Regulation 2(ha).
20. Therefore in view of the Regulations discussed above, a person can
be held guilty of violating Regulation 3, only if the following conditions
are satisfied:­
(i) He must be an insider within the meaning of the word
“insider”,   under   Regulation   2(e),   by   virtue   of   his   past   or
present connection or deemed connection with the company
and he is also reasonably expected either to have had access
to UPSI or has received such information; 
(ii) The information that such a person received or has had
access or reasonably expected to have had access should be
unpublished, in the sense that it was not published by the
company or its agent or though published, it was not specific
in nature; 
(iii) Such   unpublished   information   should   fall   within   the
definition of the expression “price sensitive information” within
the meaning of Section 2(ha) of the Regulations; and
(iv) He must have indulged in trading, either by dealing in
17
securities of the company or in communicating or counseling
or procuring directly or indirectly any such information to any
person.
21. In other words, 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 any
information relating to the company?;  (iii)  whether such information
was price sensitive?;  (iv)  whether the information was unpublished?;
and  (v) whether he dealt in securities by subscribing, buying, selling or
agreeing to do any of these things in any securities?
22. Before we proceed to find an answer to the above questions in the
context of the present appeal we must take note of one important fact
namely, that the price sensitivity of an information has a correlation
directly to the materiality of the impact that it can have on the price of
the securities of the company.  An information may materially affect the
price of the security of a company either positively or negatively. The
impact may be beneficial or adverse. The information should have the
potential either to catapult the price of the securities of the company to
18
a 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 the facts of
the case on hand, it will be clear, (i)  that the respondent was certainly
an insider, as he was a Chairman and Managing Director of GIPL till
20.09.2013 and was a party to the resolution of the Board of Directors
passed on 09.08.2013 authorising the termination of the shareholders’
Agreements; (ii) that the information relating to the termination of both
the shareholders’ Agreements that the respondent had, would certainly
fall   under   the   category   of   “significant   changes   in   policies,   plans   or
operations of the Company” under Regulation 2(ha)(vii);  (iii)  that the
respondent   dealt   in   securities   by   selling   144   lakhs   of   shares   on
22.08.2013, which was a month before his resignation as Chairman and
Managing Director; and  (iv)  that the termination of the shareholders’
Agreements   on   09.08.2013   was   disclosed   to   the   NSE   and   BSE   on
30.08.2013, after the sale of the shares, which made the information
relating to the termination of the Agreements unpublished as on the
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date of the sale.
24. Therefore, it may appear at first blush, that the respondent, who
was   an   insider   and   who   possessed   information   which   was   both
unpublished and price sensitive, was guilty of the charge of insider
trading as he undoubtedly dealt in securities.
25.  But the catch lies in understanding the true scope of Explanation
(vii) under Regulation 2(ha).  As we have seen earlier, the main part of
Regulation   2(ha)   defines   “price   sensitive   information”   to   mean   any
information, which relates directly or indirectly to a company and which
if published is likely to materially affect the price of securities of a
company.   The Explanation under Regulation 2(ha) creates a deeming
fiction and it makes 7 items of information listed thereunder as price
sensitive information.
26. It may be interesting to note that out of the 7 items of information
listed under the Explanation, all the others except Item No.(vii) are likely
to have an impact directly upon the financial strength of the company.
Item No.(vii) stands apart, in that it is very broad and general in nature.
20
While nothing more is required to show that the information listed in
Items (i) to (vi) of the Explanation under Regulation 2(ha) is likely to
materially affect the price of securities of a company, the same is not the
case insofar as the information in Item No.(vii) is concerned.  In other
words, the likelihood of the price of the securities getting materially
affected, 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 buy­back of securities; 
   (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;” 
But 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   any
likelihood of the said information materially affecting the price of the
securities of the company.  Additionally, the activity in which the insider
was involved also determines his culpability for violation of Regulation
3.  For instance, the sale by a person in possession of price sensitive
information, at a time when the price is likely to take a plunge, will
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certainly   be   an   attempt   at   taking   advantage   of   or   encashing   the
information.  Similarly the purchase by a person in possession of UPSI
at a time when the price of the security is about to skyrocket, will
certainly be an attempt to take advantage.
28. But the above logic cannot be applied to cases which fall on the
opposite side of the spectrum.  For instance, 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.  While it is true that
the actual gaining of profit or sufferance of loss in the transaction, may
not provide an escape route for an insider against the charge of violation
of Regulation 3, one cannot ignore normal human conduct.  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, but the motive for making a gain is essential.
22
29. The words, “likely to materially affect the price” appearing in the
main part of Regulation 2(ha) gain significance for the simple reason
that profit motive, if not actual profit should be the motivating factor for
a person to indulge in insider trading.  This is why the information in
Item No.(vii) of the Explanation under Regulation 2(ha) may have to be
examined with reference to the words “likely to materially affect the
price”.  Keeping this in mind let us now come back to the facts of the
case.
30. GIPL was awarded a contract for the execution of a project, whose
total cost was admittedly Rs. 1648 crores. 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. 
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31. It means that GIPL could have acquired 49% equity interest in the
project worth Rs. 940 crores and SIL would have acquired 49% equity
interest in a project worth Rs. 1648 crore.
32.   In arithmetical terms, the acquisition by GIPL, of an equity
interest in SIL’s project was worth Rs. 460 crores approximately.
Similarly,   the   acquisition   by  SIL,  of   the  equity   interest   in  GIPL's
project was worth Rs. 807.52 crores. Therefore, the cancellation of the
shareholders   Agreements   resulted   in   GIPL   gaining   very   hugely   in
terms of order book value. In such circumstances an ordinary man of
prudence would expect an increase in the value of the shares of GIPL
and would wait for the market trend to show itself up, if he actually
desired to indulge in insider trading. But the respondent did not wait
for the information about the market trend, after the information
became public. The reason given by him, which is also accepted by
the WTM and the Tribunal is that he had to dispose of his shares as
well as certain other properties for the purpose of honouring a CDR
package.   It is on record that if the CDR package had not gone
24
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
respondent had no motive or intention to make undeserved gains by
encashing on the unpublished price sensitive information that he
possessed.
34. As a matter of fact, the Tribunal found that the closing price of
shares rose, after the disclosure of the information.  This shows that
the unpublished price sensitive information was such that it was
likely to be more beneficial to the shareholders, after the disclosure
was made.  Any person desirous of indulging in insider trading, would
have waited till the information went public, to sell his holdings.  The
respondent   did   not   do   this,   obviously   on   account   of   a   pressing
necessity.
35. We agree with the contention of Shri Arvind P. Datar, learned
senior counsel for the appellant, that the allegation of insider trading
cannot be measured in terms of the value of the contracts terminated
and   the   percentage   of   shares   sold   and   that   the   theory   of
25
proportionality cannot 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   the   question   whether   someone   indulged   in
insider trading or not.   But what is sought to be encashed by the
insider   should   be   an   information   which   if   published   is   likely   to
materially affect the price of the securities of the company.
36. The contention of Shri Arvind P. Datar, learned senior counsel,
that the total value of the contracts terminated on both sides was
nearly Rs.2600/­ crores (Rs.1648 crores + Rs.940 crores) and that
therefore the information relating to the termination of the contracts
was surely likely to materially affect the price of the securities of the
company, is unsustainable for the simple reason that the net effect of
the   termination   of   both   the   contracts,   for   GIPL   was   a   positive
advantage   of   about   Rs.800   crores.   We   have   already   provided   in
paragraph 32 above, the simple arithmetics of the whole transaction,
which put GIPL in a more advantageous position after the termination
of the contract.
26
37. It is true that the de minimis Rule has no application to insider
trading, as it introduces an element of subjectivity.  This is why we
have not gone on the basis that GIPL’s investments in the project of
SIL represented 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 put GIPL in a more advantageous position, in which one
would have expected the price of the securities to soar.  The normal
human conduct would be to wait for this event to happen.  This event
could have happened only after the publication of the information in
question.  The fact that the respondent did not wait to take advantage
of the situation, convinces us that his intention was not to indulge in
insider trading.
38. Shri Arvind P. Datar, learned senior counsel is right in pointing
out that in as many as 88 Central Statutes, the expression “lawful
excuse” is used as a justification for non­compliance.  But the same is
not used in SEBI Act, 1992 or the Regulations issued thereunder.
Therefore, we have not tested the conduct of the respondent solely on
the argument of necessity.  But we have taken note of the admitted
27
position that the respondent had to save the parent company going
bankrupt, by selling his stock, at a time when he had every reason to
wait for the information regarding the termination of the contracts to
go public.  This is not a case where the respondent has come up with
an   excuse   to   justify   his   action   that   was   intended   to   give   him   a
financial advantage.  This is a case where a man of ordinary prudence
would   have   expected   the  price  of  the   shares   to   go  up,   after   the
information became public, due to the impact that the information
was likely to have on the turnover/net worth of the company.
39. The contention of the appellant that SEBI took note of the situation
in which the respondent was placed and the dire need that he had to
sell the shares and that therefore SEBI confined the final order only to
disgorgement, is neither here nor there.  This argument is actually an
argument of convenience.  It so happened in this case that according to
SEBI the closing price of the stock on 03.09.2013 showed favourable
position for the respondent and SEBI was able to calculate as though
the   respondent   made   a   profit.     But   if   a   company   is   likely   to   gain
strength by making a significant change in its policy, the price of its
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securities is likely to shoot up.  Despite such a natural phenomena, if a
person sells his stocks without waiting for the market trend to show up,
it can only be taken as a sale, devoid of any desire to make unlawful
gains, even if it cannot be termed as a distress sale.  
40. In  SEBI  vs.  Kishore R. Ajmera5
, this Court was concerned with
the question as to what is the degree of proof required to hold a broker
liable for fraudulent/manipulative practices under SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 as well as the Conduct Regulations of 1992.   After
taking   note   of   the   fact   that   SEBI   Act   and   the   Regulations   framed
thereunder are intended to protect the interest of investors and that the
provisions of the Act and the Regulations have to be understood and
interpreted in that light, this Court held in Para 26 as follows:­
“It is the judicial duty to take note of the immediate
and proximate facts and circumstances surrounding
the   events   on   which   the   charges/allegations   are
founded and to reach what would appear to the Court
to   be   a   reasonable   conclusion   therefrom.   The   test
would always be that what inferential process that a
reasonable/prudent man would adopt to arrive at a
conclusion.”
5 (2016) 6 SCC 368
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41. While dealing with yet another case arising out of allegations of
violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to  Securities Market) Regulations,  2003, this  Court held  in
Kanaiyalal  Baldevbhai  Patel  (Supra) (para­58) that the volume, the
nature of the trading and the timing of the transactions may have to be
taken   into   account   to   find   out   whether   there   was   an   attempt   at
encashing   the   benefit   of   the   information   that   the   insider   was   in
possession.  It is no doubt true that the Court clarified in paragraph 62
of its decision in Kanaiyalal Baldevbhai Patel (supra) that mens rea is
not   an   indispensable   requirement   to   attract   the   rigor   of   FUTP
Regulations, 2003.   This Court held that the correct test is one of
preponderance of probabilities.  
42. But   an   attempt   by   the   insider   to   encash   the   benefit   of   the
information is not exactly the same as mens rea.  Therefore, the Court
can   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
the information in his possession.  This is the test we have applied to
the case on hand.
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43. In Chintalapati Srinivasa Raju  (supra), this Court approved the
minority judgment of the Securities Appellate Tribunal (in para 20),
which   took   note   of   the   compelling   circumstances   under   which   the
individual was selling shares.  The fact that this has been taken note of
by 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 the information
regarding the termination of the two contracts can be characterised as
price sensitive information, in that it was likely to place the existing
shareholders in an advantageous position, once the information came
into   the   public   domain.     In   such   circumstances,   our   answer   to
Question No.2 would be that the sale by the respondent, of the shares
held 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
information could have a positive impact on the price of the shares.
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45. In view of our answers to Question Nos. 1 and 2, we are of the view
that there is no necessity to go into Question No.3.   Our answers to
Question Nos. 1 and 2 are sufficient to hold that the impugned order of
the Tribunal does not call for any interference.  Therefore, the appeal is
dismissed.  There will be no order as to costs.
…..…………....................J.
    (Indira Banerjee)
.…..………......................J
(V. Ramasubramanian)
NEW DELHI
SEPTEMBER 19, 2022
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