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possession of “unpublished price sensitive information” (UPSI).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to have access to unpublished price sensitive information in respect of
securities of a company, or has received or has had access to such unpublished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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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