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was “reasonably expected to have access to Unpublished Price Sensitive Information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unpublished price sensitive information in his possession unless he establishes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securities has been in possession of unpublished price sensitive information,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.

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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