Thursday, April 11, 2013

SEBI Adjudication Order in the IPCL Insider Trading Case

SEBI’s adjudicating officer yesterday passed an order exonerating Mr. Manoj H. Modi (MHM) and Mrs. Smita M. Modi (SMM) for insider trading charges in connection with the shares of Indian Petrochemicals Corporation Limited (IPCL). It deals with two primary legal questions as they were applied to the facts of the case, i.e. (i) whether MHM and SMM are “insiders” with respect to IPCL; and (ii) whether the trading was when in possession of “unpublished price sensitive information” (UPSI). The adjudicating officer returned negative findings on both counts.

Earlier, SEBI had issued a show cause notice to the parties alleging that they purchased 100,000 shares of IPCL on three dates between February 28, 2007 and March 2, 2007 when in possession of price sensitive information. The allegation was on the basis that MHM was a consultant to Mr. Mukesh Ambani, the chairman of IPCL and therefore an insider, and that SMM being MHM’s wife was also an insider. It was alleged that IPCL issued a notice to the stock exchange on March 2, 2007 indicating its proposal to issue interim dividend, and that it issued another notice on March 7, 2007 that it was considering an amalgamation of IPCL with Reliance Industries Limited. Both the interim dividend and amalgamation proposals are with the definition of UPSI.

After hearing the parties, the adjudicating officer first considered the question of whether MHM was an “insider”. The officer examined the definition of “insider” in Regulation 2(e) of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (the PIT Regulations), which reads as follows:

2 (e). “insider” means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or has received or has had access to such unpublished price sensitive information;

For this definition to be attracted, two factors must be satisfied cumulatively, i.e. first that the person is connected or deemed to be connected, and second that he is reasonably expected to have access to UPSI. In this particular case, it was found that MHM was only a consultant to Mr. Ambani for new ventures, at that point in time Reliance’ retail venture, and not for all matters generally. Given this, the adjudicating officer found that MHM cannot be reasonably expected to have access to UPSI with reference to IPCL. Since he did not fall within the definition of an insider, his wife SMM cannot be said to be a deemed connected person, and hence she is not an insider either.

While the interpretation applied by the adjudicating officer regarding the two factors to be satisfied for connected or deemed connected persons as insiders is appropriate, one additional test that has been applied by SEBI in the past is to consider from the last limb of the definition above whether a person “has had access to such [UPSI]”. This involves a factual determination of whether the person has in fact received UPSI even without being a connected or deemed connected person. In this case, SEBI did not go down the path of investigating this aspect in greater detail.

Even though the adjudicating officer came to the conclusion that MHM and SMM are not “insiders”, he went further to examine whether the individuals can be said to have traded while in possession of UPSI. Apart from relying upon the parties’ statement that the interim dividend and amalgamation proposals were known only to very few individuals within the company, and that MHM and SMM could not have had access to that, the adjudicating officer went on to pay sufficient regard to whether the information regarding those two proposals were price sensitive. He relied on the general sentiment in the market, following the relevant Budget announcement by the Government, that several companies would declare interim dividend and that this was not unique to IPCL. Moreover, emphasis was placed on the fact that MHM and SMM were regular in carrying on trading in shares and that these trades were not unusual. This is consistent with the observation of the Securities Appellate Tribunal (SAT) in the Manoj Gaur Case.

While on the face of the order, it seems that the evidence was insufficient to pursue insider trading charges, it again indicates the difficulties that regulators face in India in successfully prosecuting insider trading, where the evidentiary burden is unduly onerous on the regulators. Fortunately, these matters are under active consideration by the committee appointed by SEBI to relook at the PIT Regulations, and hopefully a more robust regime would emerge.

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