IndiaCorpLaw

Pledges in the Context of Insider Trading Regulations – Part 1

[The
following guest post is contributed by Vinod
Kothari
and Abhirup Ghosh of
Vinod Kothari & Co.]

There are several lurking questions in context
of insider trading regulations. The Securities and Exchange Board of India
(“SEBI”) on 24 August 2015 issued a Guidance
Note
on the SEBI (Prohibition of Insider Trading) Regulations, 2015
(“Guidance Note”) in which some questions pertaining to pledges were also
answered. However, there was no generic clarity on matters pertaining to
pledges. This post seeks to examine pledges in context of SEBI
(Prohibition of Insider Trading) Regulations, 2015
(“Regulations”) and
particularly to address questions as to the compliances required in respect of
each stage of a pledge.

There are four aspects of a pledge in respect of
which the question as to whether there is a “trade”, the meaning of which as
construed from the definition of “trading” as per Para 2(l) of the Regulations,
may be considered. These are: (a) creation of a pledge; (b) invocation of a
pledge; (c) sale of pledged property by the pawnee; (d) release of a pledge.

Meaning of “trading”

The term “trading” has been defined in Para 2(l)
of the Regulations, in the following manner:

(l) “trading” means and includes
subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell,
deal in any securities, and “trade” shall be construed accordingly;

The definition carries elements of an exhaustive
definition, which is apparent from the use of the expression “means” –
therefore, it is unclear if the definition can be extended to cover what is not
explicitly covered in it.

The definition may be analysed as follows:
trading means –

(a)        Either of these:

(i)        Buying;

(ii)       Selling;

(iii)      Dealing, or

(b)       Agreeing to either of these:

(i)        Buying;

(ii)       Selling;

(iii)      Dealing.

The words “buying” and “selling” are generally
clear and unambiguous. In case of “sale”, there is a transfer of property,
along with other features. According to Benjamin,[1] to constitute a valid
“sale”, there must be a concurrence of the following elements –

1.   Parties competent to contract;

2.   Mutual assent;

3.   A thing, the absolute or general property of which
is transferred from the seller to the buyer;

4.   A price in money is paid or promised.

Some of the other authoritative text books
define “sale” in the following manner:  


Blackstone[2]
defines sale as –

“sale or exchange is a
transmutation of property from one man to another, in consideration of some
price or recompense in value.”

Halsbury’s
Laws of England[3]
defines sale as –

“Sale is the transfer of
the ownership of a thing from one person to another for a money price. Where       the consideration for the transfer
consists of other goods, or some other valuable consideration, not being money,
the transaction is called exchange or barter; but in certain circumstances it
may be treated as one of sale. The law relating to contracts of exchange or
barter is undeveloped, but the courts seem inclined to follow the maxim of
civil law, permutatio vicina est emptioni, and to deal with such contracts as
analogous to contracts of sale. It is clear, however, that statutes relating to
sale would have no application to transactions by way of barter.”

Williston
on Sales[4] defines “sale of
goods” as –

“an
agreement whereby the seller transfers the property in goods to the buyer for a
consideration called the price.”

As is evident from the definition of the “sale” contained
in the various authoritative books quoted above, a sale involves – (i) transfer
of property; and (ii) consideration in money.

“Buying” on the other hand is the reciprocal of
“selling” – hence, the meaning of “buying” has each of the elements of sale
discussed above.

It is the word “deal” which is broad, and may
stretch itself across different dimensions based on requirements. The meaning
of “deal” as per Black’s Law Dictionary[5] is as follows:

To traffic; to transact business; to trade.

Therefore, the word “deal” may include any form
of a transaction which parties may conduct in course of trade practices. Thus,
the expression “deal” obtains a contemporaneous meaning, including within its
sweep each of the different types of ways in which parties may, in course of
trade, “deal” with a particular object. For example, the context in the present
case is securities. So, securities may be sold, pledged, mortgaged, or may be the
subject matter of a securities lending transaction, or securities ready-forward
trade, etc.

Meaning of a pledge:

The term “pledge” has been defined in Section
172 of the Indian Contract Act, 1872 in the following manner –

172. “Pledge” “pawnor”, and
“pawnee” defined. – The bailment of goods as security for payment of
a debt or performance of a promise is called “pledge”. The bailor is in this
case called the “pawnor”. The bailee is called the “pawnee”.

A pledge is certainly a form of security
interest; however, unlike mere lien, a pledge carries possessory interest as
well. That is, the pledgee acquires the bailment of goods. Further, under Section
176 of the Indian Contract Act, 1872, the pawnee has the right to cause a sale
of the pledged article where the pawnor makes a default.

Pledge and mortgage:

A mortgage is defined in Section 58 of the
Transfer of Property Act, 1882 to mean the following –

(a)       A
mortgage is the transfer of an interest in specific immoveable property for the
purpose of securing the payment of money advanced or to be advanced by way of
loan, an existing or future debt, or the performance of an engagement which may
give rise to a pecuniary liability.

The
transferor is called a mortgagor, the transferee a mortgagee; the principal
money and interest of which payment is secured for the time being are called
the mortgage-money, and the instrument (if any) by which the transfer is
effected is called a mortgage-deed.

There is a transfer of specific interest in
property in case of a mortgage. The mortgagor is the transferor, and the
mortgagee is the transferee. The mortgagor vests specific interest in the
property in favour of the mortgagee, thereby making the mortgagee the holder of
a specific interest. The specific interest may be limited to (a) such interest,
for example, usufructuary interest as may be passed by the mortgagor; (b) right
to cause a sale or cause a transfer of property in terms of the mortgage deed;
(c) right to become absolute owner by foreclosure of the mortgagor’s right of
redemption, etc.

Whereas in case of pledge, there is, no doubt, a
right of sale, conferred by Section 176 of the Indian Contracts Act, 1872.
There is also a right of possession, as pledge is essentially a possessory
interest. Hence, a pledge may be considered transfer of specific interest in
property.

[To be continued]

– Vinod Kothari & Abhirup Ghosh



[1] Lease Financing and Hire Purchase, by Vinod
Kothari, Chapter – 19, Page 874

[3] Halsbury’s Laws of England, Second Edn., Vol. 29, p. 5, Para. I,

[4] Williston on Sales, 1948 Edn