Friday, November 27, 2015

Disclosures under Non-Disclosure Agreements?

[The following guest post is contributed by Yogesh Chande and Malek-ul-Ashtar Shipchandler of Shardul Amarchand Mangaldas. Views expressed herein are personal and solely that of the authors.]

A recent post titled “Confidentiality Agreements in M&A Transactions” (available here) discussed confidentiality agreements in the context of a US based M&A transaction. From a view point of insider trading laws vis-à-vis conceptualizing and drafting confidentiality agreements in Indian M&A transactions, Regulation 3(4) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”) is of significance.

Regulation 3(4) of the Insider Trading Regulations mandates the execution of a non-disclosure agreement (“NDA”) for purposes of communicating, providing, allowing access to or procuring unpublished price sensitive information (“UPSI”) between parties to a transaction which under Regulation 3(3) of the Insider Trading Regulations (i) triggers an open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) and (ii) which does not trigger an open offer under the Takeover Regulations.

Regulation 3(3) of the Insider Trading Regulations states:

“Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would:–

(i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company;

(ii) not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.”

Regulation 3(4) of the Insider Trading Regulations states:

“For purposes of sub-regulation (3) the board of directors shall require the parties to execute agreements to contract confidentiality and non-disclosure obligations on the part of such parties and such parties shall keep information so received confidential, except for the purpose of sub-regulation (3), and shall not otherwise trade in securities of the company when in possession of unpublished price sensitive information.”

The Insider Trading Regulations do not appear to envisage an otherwise very common scenario: (i) what happens if an investor is provided with UPSI in connection with a proposed transaction that does not consummate? or (ii) what happens if a target company allows multiple due diligences to be conducted on itself wherein more than one investor is allowed access to UPSI of the target company to conduct its due diligence and subsequently only one investor consummates the transaction with the target company?

In such situations, the investor (and its lawyers, auditors and consultants who have received UPSI during the due diligence) who is not going ahead with the proposed transaction assumes a precarious situation: the investor being privy to the UPSI is barred from trading in the securities of the target company. It therefore becomes imperative to answer the question as to when such investor can resume trading in the target company’s securities. Trading restrictions can only be lifted when investors have been “cleansed” of the UPSI that they received, i.e., when the UPSI in their possession no longer gives them an informational edge over other market participants.

If either of the transactions contemplated under Regulations 3(3) of the Insider Trading Regulations do go ahead, the cleansing process is automatic viz.

(i) the note to Regulation 3(3)(i) of the Insider Trading Regulation states:

NOTE: It is intended to acknowledge the necessity of communicating, providing, allowing access to or procuring UPSI for substantial transactions such as takeovers, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. In an open offer under the takeover regulations, not only would the same price be made available to all shareholders of the company but also all information necessary to enable an informed divestment or retention decision by the public shareholders is required to be made available to all shareholders in the letter of offer under those regulations.”


(ii) Regulation 3(3)(ii) states of the Insider Trading Regulations states:

“not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.”

On the other hand, if the transaction does not occur or is postponed, practically speaking, companies are unlikely to announce aborted or postponed transactions. Thus, the investor who is in possession of UPSI finds itself in a grim situation of not knowing whether the information they have received still constitutes UPSI or whether they can resume trading.

To “cleanse” such investor: (i) the target company should be required to make a public disclosure of the UPSI provided to such investors or (ii) the UPSI must no longer remain relevant (e.g. the UPSI has been outmoded by subsequent events that have been disclosed).

With respect to point (i) in the immediately preceding paragraph, the NDA could encapsulate a provision stating to the effect that in the event the proposed transaction is aborted or delayed by “x” number of days, the target company must make the UPSI shared during the negotiation/due diligence stage with the investor “generally available” (as defined under Regulation 2(1)(e) of the Insider Trading Regulations) and that in an event the target company fails to do so, the investor would have full prerogative to make such UPSI “generally available” in order to “cleanse” itself. The NDA could also specify the kind of information that would be treated as UPSI or indicate a folder on the virtual data room which comprises only of UPSI (since the definition of UPSI under Regulation 2(1)(n) of the Insider Trading Regulations is indicative and not exhaustive) – this would avoid conflicts between the investor and target company in determining what information is UPSI at the time of dissemination, if a proposed transaction is aborted/delayed and the investor wishes to “cleanse” itself.

- Yogesh Chande & Malek-ul-Ashtar Shipchandler

The Arbitration Ordinance - Leaving India Vulnerable to Another White Industries

(The following guest post is contributed by Kartikey Mahajan, a disputes resolution lawyer based in Singapore and Visiting Fellow, CARTAL (NLU Jodhpur). The views expressed here are personal and do not represent the views of any institution with which Kartikey is associated)

The Indian Arbitration and Conciliation Act, 1996 (“Act”) has been recently amended by way of an Ordinance dated 23 October 2015 (“Ordinance”). Much has been written about the Ordinance (including this Blog - here, here  and here) as almost every law firm has come out with client alerts.

Needless to say that under the Indian parliamentary system, the Ordinance requires parliamentary approval in due course to make Modi Government’s attempt of reforming the dispute resolution process a true reality. I see this period until the formal parliamentary approval can be given as a window of opportunity to correct an omission, which cost India dearly in the past. I refer to the award of White Industries v Republic of India (“White Industries”) and how the Ordinance failed to remedy the lacunae that cost India millions.

In the background leading to White Industries, an ICC award was delivered in favor of White Industries. White Industries sought to enforce this award under section 48 of the Act before the Delhi High Court. On the other hand, Coal India (the other party under the ICC award) applied to the Calcutta High Court to set aside the ICC award. There was inordinate delay by the Indian courts in the disposal of both the Set Aside and Enforcement Applications, which was ultimately considered by the investment tribunal to be a breach of India’s investment treaty obligations.

The Ordinance has made a number of changes to the setting aside proceedings of domestic awards (see section 18 of the Ordinance which amends section 34 of the Act). First, it proposes that an application to set aside an arbitral award is required to be decided within twelve months of the notice of such application being served on the opposite party. Second, the statutory provision for automatic stay on enforcement of an award during the pendency of a challenge has been deleted. Therefore, now an award can be enforced during the pendency of a challenge, unless stay on enforcement is specifically sought and granted by the court with jurisdiction over the arbitration. Lastly, the Ordinance has narrowed the meaning of public policy to exclude ‘patent illegality’ as a ground for challenging international commercial arbitration awards seated outside India.

With respect to reforms in enforcement of foreign awards, the Ordinance proposes that (1) foreign arbitral awards be enforced by High Courts and not by any lower court in India; (2) removal of the “patent illegality” ground in the definition of “public policy” to resist the enforcement of a foreign arbitral award (see section 22 of the Ordinance which amends section 48 of the Act). Accordingly, Indian courts are now precluded from reviewing the merits of the dispute during enforcement proceedings on this ground.

In light of the above, the Ordinance in its current form tries to prevent another White Industries by fixing a specific time limit for setting aside proceedings. However, it fails to address the situation in cases of enforcement proceedings. It is highly desirable, that the Indian Government fixes a time limit for dealing with enforcement applications, like it has done for the setting aside applications under the Ordinance. This will not only ensure that the Government will adopt a consistent stand with respect to different Parts of the Act but at the same time prevent India from remaining vulnerable to another White Industries like situation.

 - Kartikey Mahajan

Thursday, November 26, 2015

A Rule of Reason for Self-Trades?

[The following guest post is contributed by Nikunj Agarwal, a 4th year student at RML National Law University, Lucknow and Arjun Agarwal, a 3rd year student at WB National University of Juridical Sciences, Kolkata. The authors can be contacted at]


It is one of the well-known principles of securities regulation that the primary objective of such regulation is to ensure that the market information is accurate and dissemination of such information is not prejudicial or beneficial only to a particular group over others. Then, zealous pursuit by a capital market regulator to ensure that the quality of information in the market is accurate can only be commended. However, sometimes zealousness translates into rigidity and a conscious choice to overlook the obvious alternatives. It seems that is the case with ‘self trade restriction’ in securities markets in India. ‘Wrongful’ self trades are essentially concerned with manipulation of information about market liquidity and price of the scrip. Therefore, execution of such trades is considered unfair and fraudulent and therefore a breach of the basic norms of securities laws. It also seems obvious that the person entering into any commercial transaction has to ensure that his conduct is not violative of any law of the land.

However, the conundrum of Indian securities law is that the regulator has assumed that every self trade is wrongful and ipso jure violative of securities laws. Further, the problem snowballs when a self trade, on quantitative basis, cannot manipulate price or liquidity information in the market but is still held wrongful and in violation of securities laws. The worst case scenario in Indian law is where self trade occurs due to technical inadvertent matching with no intention to effect or has no actual effect on relevant information in the market and yet it is categorized as wrongful and violative of securities laws.

In this post, we submit that although the law states that self trades are ‘per se’ illegal, there are specific instances where Securities and Exchange Board of India (“SEBI”) and Securities Appellate Tribunal (“SAT”) have departed from a mechanical application of the stated ‘per se rule’. In these cases, a more pragmatic approach, similar to the ‘rule of reason’ approach in competition law, has been adopted. It is here where the subject matter of crucial analysis lies: does the regulator understand every self trade to be ‘wrongful’? In the course of our analysis we will establish that law is still in a state of confusion as regards unintentional technical violations. In such instances, there might be absence of ‘material market harm’ such as where matched trades constitute very low fraction of the total trading volume in the scrip whereby the materiality of market effect is negligible. If the ‘per se rule’ is the applicable law, then even such instances shall be violative of the SEBI (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations, 2003 (PFUTP Regulations”). However, if the aim and objective of the regulations is to address fraudulent and unfair trading in the securities markets, then penalizing such accidental self trades would be beyond the scope of the regulations.

The Necessity of ‘Intent’

The element of fraud appears to be a pre-requisite in all the parts of Regulations 3 and 4 of the PFUTP Regulations. Further, since the term ‘fraud’ has been principally defined under Regulation 2(c), though inclusively, to mean such trades which are entered into in order to ‘induce others’, it would be difficult to call such trades fraudulent within the meaning of the PFUTP Regulations.

Furthermore, since these trades are accidental in nature, no meaningful deterrence could be achieved where the defaulters could do nothing to prevent such matches from occurring in the future. This clearly means that a distinction must be made between ‘wrongful self trades’ and ‘non-wrongful self trades’. The latter do not mean legitimate or ‘lawful self trades’.

The aim of securities laws must rightfully be to eliminate all avoidable market aberrations. But, pursuing this goal by means of punishing every market aberration might not always serve the purpose. Self trades, if material and substantial, affect market information regarding particular securities. Therefore, as long as a fictitious rule of ‘theoretical market harm’ whereby even single self trade of even one share is deemed to adversely affect the market, any adverse consequence on market information cannot be identified in such instances.

The Varying Standards

The authorities appear to have taken an equivocating stand by applying opposite legal standards in different cases. In Balwinder Singh v. SEBI, the SAT observed that “self trades/wash trades are per se not allowed under SEBI Act/Rules, since these do not result in actual/beneficial ownership of shares and only result in increase in volumes in particular scrip, which create illusion of increased trading in these scrip and may mislead investors in trading in these scrips and disturb/distort securities market”.

In Anita Dalal v. SEBI, the SAT observed:

Self trades admittedly are illegal. This Tribunal has held in several cases that self trades call for punitive action since they are illegal in nature. In M/s. Jayantilal Khandwala & Sons Pvt. Ltd. vs. Securities and Exchange Board of India, this Tribunal has held that “one cannot buy and sell shares from himself. Such transactions are obviously fictitious and meant only to create false volumes on the trading screen of the exchange”.

Further, in HJ Securities Pvt Ltd v. SEBI, the SAT noted that “Simply because the number of such self trades is not large by itself cannot justify execution of self trades”.

The above ruling must be contrasted with observations of the SAT in Smt. Krupa Sanjay Soni v. SEBI where it had taken a view that "a few instances of self trades in themselves would not, ipso facto, amount to an objectionable trades”.  But, in Systematix Shares & Stocks (India) Limited v. SEBI, the SAT observed that “it has been held in several cases by this Tribunal that self trades are fictitious and reprehensible. Trades, where beneficial ownership is not transferred, are admittedly manipulative in nature.” It is pertinent to note here that the SAT seems to have read the law to mean that ‘self trades ipso jure amount to manipulative conduct and therefore punishable under securities laws’.


It is submitted that while framing the test whether to penalize a self trade, the correct approach is to adopt a two-pronged analysis. In the first stage, it must be analyzed whether intention to manipulate or commit fraud is present. Such analysis must inevitably be subjective and intention must not be presumed only by the fact that self trade has happened. If intention is established, for the purpose of establishing liability, a further enquiry into ‘materiality of market harm’ should not be conducted. This is the direct mandate of the PFUTP Regulations since even where no market harm arises, a demonstrated manipulative and fraudulent activity must be punished under the regulations.

In the second approach, where intention to commit fraud or manipulate the market is found lacking and where the entire transaction was not a product of manipulative activity, the true crux of the problem lies. In such cases, the SAT seems to have taken an approach that if the volume of shares traded is large and material impact on market information can be established, such transaction must be punished. In a very recent decision of Re: Bharatiya Global Infomedia Limited and Ors, SEBI adopted the abovementioned approach to find liability for self trades.

It is submitted that the requirements of Regulation 4(2) are very specific in nature. The test laid down in the regulation demand a manipulative intent to affect market information. Even if we read clause (a) as a strict liability clause, the test would be to prove ‘misleading appearance of trading’. However, in cases where the shares traded are highly liquid and self trades happen due to mere technical reasons, the requirements of Regulation 4 are not met. It seems absurd to read a strict liability offence in a regulation meant to punish unfair and manipulative activities. As long as self trade is defined in the regulations is read and understood as a strict liability offence, the approach of the tribunal appears to be ultra vires the regulations.

The requirements of intention and materiality must not be so confused so that one is presumed to lead to the other. As already stated, though securities laws must aim at restricting self trades, it is not the same thing as punishing every instance of self trade as manipulative and unfair trade practice. The reasoning adopted by the SEBI and the SAT for penalizing technical self trades is available in the HJ Securities judgment where the tribunal held that “The appellant is free to adopt any business model but he has to ensure that whatever business model he adopts, it is in conformity with the regulatory framework” Even if the regulations are read to incorporate ‘a duty to prevent market harm’, such duty must be located in the text of specific provision under the regulations.

In instances where all reasonable precautions were taken and yet self trades happen due to technical reasons or inadvertently it seems difficult to invoke the ‘duty to prevent’ to find a violation of the regulations.  Invocation of ‘materiality of adverse market effect’ as a new and innovative standard to find a violation of the regulations would be clearly outside the scope and objective of the regulations. Therefore, it is plausible to say that substantiality or materiality of the adverse market effect caused by the self trade should not be invoked as an independent element in finding a liability for violation of the regulations. The standard of substantiality or materiality must be invoked as a supplementary but not independent standard for violation of the regulations.


Therefore, it is submitted that to suggest that ‘self trades are per se illegal’ is both factually and legally incorrect and a rule of reason must be adopted to identify ‘wrongful self trades’ punishable under the PFUTP Regulations. Certainly, the self trades which do not qualify as ‘wrongful’ do not become ‘valid’ and are still subject to restrictions and reprehensions under the securities laws but, as long as a deeming fiction is incorporated into the law, they cannot be branded as manipulative and fraudulent.

- Nikunj Agarwal & Arjun Agarwal