A narrative appears to be emerging that the judgment treats the recognized circumstances for insider trades as exhaustive. However, the Court does not appear to have gone that far. Its emphasis is on the requirement that the parties should be in possession of the same UPSI, or UPSI of a similar nature, while undertaking the transaction. The judgment therefore needs to be read as clarifying the nature and commonality of the UPSI involved, rather than as laying down an exhaustive list of permissible circumstances.
Regulation 4(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 starts with a clear prohibition: an insider shall not trade in securities while in possession of unpublished price sensitive information (“UPSI”).
Note to reg. 4(1) of SEBI PIT states that when a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition. The proviso then sets out defense in which an insider may demonstrate innocence.
The Supreme Court’s recent decision in SEBI v. Rajeev Vasant Sheth[1] (Tara Jewels) has held that the use of the word “including” in the proviso to reg. 4(1) of SEBI PIT means that the recognised defences are not exhaustive but any other defence must be “of the same and similar nature as already provided therein.”
The more difficult question is: what would make such a defence “same or similar” in nature?
The emergence of a thematic approach
| Provison under reg. 4(1) | Theme | Situation that can fit in the theme. |
| The transaction is an off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision. | Price discovery mechanism is not affected by these transactions as: 1. Trades that do not impact share price directly due to they not affecting demand and supply of shares in open market. 2. Trades between individuals having same UPSI. | Off market trades undertaken by between two investors. Gift, block deal etc. These trades need to be in compliance with spot trade provisions under SCRA. |
| The transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision. |
| The transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction. | Compelling obligation to undertake trade | Trade executed pursuant to a loan agreement mandating promoter funding, court order etc. |
| The transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations. | Price of trade is pre-determined or date of trade is pre-decided. | |
| The trades were pursuant to a trading plan set up in accordance with regulation 5. |
| In the case of non-individual insiders: – (a) the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and (b) appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached; | Person trading and person in possession of UPSI is different and there is chinawall between these two individuals. |
The article is written by Mr. Makarand M. Joshi – Founder Partner!