Thursday, December 17, 2015

Presumption in Insider Trading

Given the evidentiary problems in insider trading cases, SEBI has resorted to the use of presumptions in its enforcement of the SEBI (Prohibition of Insider Trading) Regulations, 1992. Some of the issues that arose due to this approach have been discussed in the past. These issues have resurfaced more recently in a short order of the Securities Appellate Tribunal (SAT) in the case of Reliance Petroinvestments Limited (RPL).

This case involved trading by RPL in the shares of Indian Petrochemicals Corporation Limited (IPCL). An adjudicating officer of SEBI came to the conclusion that RPL was a deemed connected person (and therefore an insider) with reference to IPCL and that it was “reasonably expected to have access to Unpublished Price Sensitive Information (UPSI)”. On this count, the adjudicating officer imposed a penalty.

On appeal, SAT quashed and set aside the adjudicating officer’s order and restored it for adjudicating in the light of SAT’s observations. The primary issue that arose related to the presumption on insider trading under the 1992 Regulations. The presumption of insider trading has been the subject matter of various orders of SEBI and SAT, including in Rajiv B. Gandhi v. SEBI, wherein it was held that “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an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the unpublished price sensitive information in his possession unless he establishes to the contrary”. In other words, this is a rebuttable presumption.

However, in the present case, SAT found that RPL had placed on record various documents and made submissions to rebut the presumption. It also found that the adjudicating officer proceeded merely on the basis of the presumption without having regard to the evidence to the contrary. Hence, the order was set aside.

Although from a legal standpoint this is a simple and straightforward evidentiary issue, it highlights the difficulties in insider trading actions. In the recent reforms pertaining to SEBI’s regulations, some of these issues have been taken on board. While all of these aspects were left open to interpretation in the 1992 Regulations, the SEBI (Prohibition of Insider Trading) Regulations, 2015 explicitly deal with the issue in the form of note to Regulation 4(1) as follows:

NOTE: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the regulation. He traded when in possession of unpublished price sensitive information is what would need to be demonstrated at the outset to bring a charge. 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.

Although this brings in greater clarity, and arguably imposes a greater burden on insiders to discharge in rebutting the presumption, it remains to be seen whether SEBI’s efforts in insider trading actions would be better supported by such a presumption.


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