Securities and Exchange Board of India

JUSTICE N.K. SODHI, PRESIDING OFFICER

ARUN BHARGAVA AND UTPAL BHATTACHARYA, MEMBER

APPEAL NO. 50 OF 2007

May 9, 2008

Regulation 3 of the SEBI (Insider Trading) Regulations, 1992 - Prohibition on dealing, communicating or counseling on matter relating to insider trading - Appellant No. 1 was Company Secretary and Chief Financial Officer of company - Appellant No. 2 was his wife and appellant No. 3 was his sister - Shares of company in question were listed on BSE and NSE - Appellant as Chief - Financial Officer of company was primarily responsible for preparation of accounts of company including its balance sheets -Having regard to dates and timing of trades executed by appellants no. 2 and 3 in scrip of company and in view of their close relationship with appellant, Adjudicating Officer came to conclusion that they were insiders within meaning of regulations - He further opined that trades were executed on basis of unpublished price sensitive information which was in possession of appellant as Chief Financial Officer and Company Secretary of company - Adjudicating Officer, thus, held appellants guilty of insider trading and imposed penalty - Whether when an insider trades or deals in securities of a listed company, it would be presumed that he traded on basis of unpublished price sensitive information in his possession unless he establishes to contrary - Held, yes - Whether, therefore, presumption that arises is rebuttable and onus would be on insider to show that he did not trade on basis of unpublished price sensitive information and that he traded on some other basis - Held, yes - Whether, since, in instant case, appellants had not only failed to rebut presumption raised against them under regulation 3 but had not even attempted to offer an explanation as to basis which prompted them to trade, they were rightly held guilty of insider trading - Held, yes - Whether, therefore, penalty imposed on appellants did not call for any interference in appeal - Held, yes

FACTS

The appellant No. 1 was the Company Secretary and Chief Financial Officer of the company. The appellant No. 2 was his wife and appellant No. 3 was his sister. The shares of the company were listed, among others, on the National Stock Exchange of India Ltd. and the Bombay Stock Exchange Ltd. The appellant as the Chief Financial Officer of the company was primarily responsible for the preparation of the accounts of the company including its balance sheets.

Having regard to the dates and timing of the trades executed by appellant nos. 2 and 3 in the scrip of the company and in view of their close relationship with appellant, the Adjudicating Officer came to the conclusion that they were insiders within the meaning of the Regulations. He further opined that the trades were executed on the basis of the unpublished price sensitive information which was in possession of the appellant as the Chief Financial Officer and Company Secretary. Thus, by impugned order, he held the appellants guilty of insider trading and imposed a penalty of Rs. 5 lakh on each of them.

On appeal :

Held

On a plain reading of regulation 3 it appears that the prohibition contained therein shall apply only when an insider trades or deals in securities on the basis of any unpublished price sensitive information and not otherwise. The words ‘on the basis of’ are significant and mean that the trades executed should be motivated by the information in possession of the insider. To put it differently, the information in possession of the ‘insider’ should be the factor or circumstances that should induce him to trade in the scrip of the company. It is then that he will be said to have dealt with or traded ‘on the basis of’ that information. If an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the unpublished price sensitive information in his possession unless he establishes to the contrary. Facts necessary to establish the contrary being especially within the knowledge of the insider, the burden of proving those facts is upon him. The presumption that arises is rebuttable and the onus would be on the insider to show that he did not trade on the basis of the unpublished price sensitive information and that he traded on some other basis. He shall have to furnish some reasonable or plausible explanation of the basis on which he traded. If he can do that, the onus shall stand discharged or else the charge shall stand established. [Para 8]

In view of the interpretation placed above on regulation 3 and on the admitted facts of the case, there would be a presumption that the appellants being insiders, traded on the basis of the unpublished price sensitive information in possession of the appellant and the onus of rebutting that presumption was on them. They had not only failed to rebut the presumption but had not even attempted to offer an explanation as to the basis which prompted them to trade. Faced with this situation, the appellants contended that at no stage of the proceedings were they asked for an explanation as to the basis of their trade and, therefore, there was no occasion for them to offer an explanation. This contention could not be accepted. The appellants were clearly informed in the show-cause notice that they had sold certain shares on the basis of unpublished price sensitive information. In view of this specific allegation and considering the fact that the appellants were insiders there was a presumption against them and it was for them to have offered an explanation to rebut that presumption. The facts which prompted the appellants to trade in the scrip of the company while in possession of unpublished price sensitive information were only within their knowledge and it was for them to spell out those facts to rebut the presumption raised by regulation 3 against them. So many so, the appellants were asked during the course of the hearing to tell the reasons which prompted / motivated the appellants to trade in the scrip, being insiders. They were unable to offer any explanation. It was, thus, clear that the appellants had failed to discharge the onus of rebutting the presumption raised against them under regulation 3. They must, therefore, fail. [Para 9]

In the result, it was held that the appellants were guilty of insider trading. The penalty levied on them was not on the higher side keeping in view the seriousness of the charge and, therefore, it did not call for any interference in appeal. The appeal was, accordingly, dismissed. [Para 11]