Apart from the evidentiary aspects of the insider trading, which are quite challenging (as discussed on this Blog and in this episode on CNBC), the substantive aspects of the violation are equally daunting for regulators as they require several prongs to be established. At the same time, it is sufficient for the alleged violator to demonstrate the failure of any one of the prongs to demolish the regulator’s case. For example, under India’s Insider Trading Regulations, SEBI is required to establish that (i) the noticee was an “insider” (as defined), (ii) s/he was in possession of unpublished information that was price sensitive in nature, and (iii) s/he traded while in possession of such information.
One of the defences usually employed by alleged insiders is to demonstrate that the information in question was already known to the markets, and hence no longer amounts to “unpublished price sensitive information” (UPSI). Quite often, they have succeeded. In one such case, the Securities Appellate Tribunal overturneda ruling of SEBI in which Mr. Anil Harish and Mrs. Ratna Harish were found to be guilty of insider trading in connection with the shares of Valecha Engineering Limited.
Mr. Anil Harish was the chairman of Valecha Engineering, and the allegation was that he engaged in purchase of shares of the company during August 2009 prior to an announcement that the company was awarded projects worth Rs. 172 crores. The key question was whether that information in question was UPSI. The SAT’s conclusion was that it was not. The reasons were as follows:
It is the case of the appellants that the company is in the business of undertaking infrastructure projects. Since it is the business of the company to carry out these projects, the orders bagged by it are in the nature of stock in trade in the business and it is not an unusual occurrence. However, the company has laid down a policy in accordance with the general condition under regulation 36(7) of the Listing Agreement between the company and the stock exchanges that when the company reaches a level of orders of 100 crores, it informs the stock exchanges. This has been the practice of the company for a number of years and is not an exceptional occurrence. The company has followed a constant practice of informing the stock exchange as and when orders of about Rs.100 crores are received. …
The SAT came to the conclusion whether information amounts to UPSI depends on the facts and circumstances of each case. Reliance was placed on the previous SAT order in the case of Gujarat NRE Mineral Resources (discussed here) where “it was held that earning income by buying and selling securities held in investment is the normal activity of the investment company …”. Hence, the SAT held in Mr. Anil Harish’s case:
On the same analogy, when a company which is in the business of infrastructure projects, bags an order in the normal course of its business, although it may be required to give intimation to the stock exchanges under Regulation 36(7) of the Listing agreement, the information need not necessarily be price sensitive.
Moreover, it was found that the information regarding the company’s tenders was generally known to the market, as the tenders were drawn and awarded by government departments which followed transparency norms.
The conclusion that can be drawn from SAT’s order is that the information was neither price sensitive nor did it remain unpublished at the timing of trading. On both counts, the ruling went in favour of the appellant.
This adds to the list of cases where appellants have been successful in overturning orders of insider trading passed against them by SEBI. This also demonstrates the substantive legal hurdles placed on the regulator in successfully pursuing insider trading violations. Although the Insider Trading Regulations have been constantly amended over the last few years to ease the burden of the regulator, these efforts have not materialised into more robust enforcement of the regulations.