Thursday, November 24, 2011

SAT on “Unpublished Price Sensitive Information”

The Securities Appellate Tribunal last week passed an order on an insider trading case, in which it lays down some guidelines as to the scope of “price sensitive information” under the SEBI (Prohibition of Insider Trading) Regulations, 1992. The specific question pertains to whether “the decision taken by a listed investment company to dispose of a part of its investment is “price sensitive information” requiring mandatory disclosure to the stock exchanges” under the SEBI Insider Trading Regulations.
FCGL Industries Limited, a core investment company with over 90% of its assets being investments in associated or group companies, decided to acquire certain mines in Australia, for which it required funding. The board of FCGL decided to liquidate its investment in Gujarat NRE Coke Limited constituting 17.716% of its capital in order to fund FCGL’s acquisition of the Australian mines. While both the mine acquisition transaction and share divestment transaction were approved by FCGL at the same board meeting, its press release only specified the mine acquisition without making public the divestment of shares in Gujarat NRE Coke. The adjudicating officer of SEBI found FCGL guilty of violating the insider trading due to non-disclosure of the divestment of shares as they were found to constitute unpublished price sensitive information.  Accordingly, SEBI imposed penalties on the company and its key directors.
On appeal before the SAT, the key question that came up for consideration was whether FCGL’s sale of shares in Gujarat NRE Coke amounts to “price sensitive information”. Reversing the SEBI adjudicating officer’s order, SAT categorically stated that the divestment was not “price sensitive information”. SAT’s reasoning is contained in the following extract:
Regulation 3 of the regulations would stand violated only if the unpublished information was price sensitive in nature. A reading of the definition of “price sensitive information” … would make it clear that the information which relates to a company and which when published is likely to materially affect the price of its securities would be price sensitive. FCGL is an investment company whose business is only to make investments in the securities of other companies. It earns income by buying and selling securities held by it as investments. This being the normal activity of an investment company, every decision by it to buy or sell its investments would have no effect, much less material, on the price of its own securities. If that were so then no investment company would be able to function because every time it would buy or sell securities held as investments, it would have to make disclosures to the stock exchange(s) where its securities are listed. Such decisions of an investment company, in our opinion, do not affect the price of its securities.
SAT’s order seems to suggest that any transaction carried out by a company in its ordinary course of commercial activity will not elevate itself to something that requires disclosure to the market as “price sensitive information”. In the investment context, the reasoning would apply to entities such as broking companies or market makers that are in the business of buying and selling securities on a regular basis. However, SAT seems to provide the same treatment even for investment holding companies, although the investment and divestment activity may only be intermittent in nature in such companies.
At a broader level, this order is also symptomatic of certain phenomena regarding regulation of insider trading in India. Although the substantive law in the form of SEBI’s Regulations have been strengthened over a period of time, their enforcement has been difficult. The interpretation of the Regulations by courts and appellate authorities has been carried out in a manner that provides generous benefit of doubt to the alleged violators. Such a trend is evident in the manner in which appeals from SEBI’s findings on guilt have been overturned by appellate authorities in landmark cases beginning with the Hindustan Lever case in the late 1990s. While other jurisdictions are witnessing a great thrust towards prevention of insider trading, the track record of SEBI is sustaining its orders on insider trading before SAT continues to be far from desirable, as the FCGL order only proves further.

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