SAT on Selective Disclosure of Information and Model Code of Conduct

The insider trading regime creates two types of offences in respect of insider trading, i.e., the “trading offence” whereby a person buys or sells securities while in possession of unpublished price sensitive information (UPSI) relating to such company and the “communication offence” which involves an inappropriate disclosure of UPSI on a selective basis. A vast number cases relating to insider trading, particularly in India, relate to the trading offence. However, the Securities Appellate Tribunal (SAT) was recently concerned in Piramal Enterprises v. Securities and Exchange Board of India with the communication offence and the alleged violation of the model code of conduct for insider trading, and expounded the law on these points.

The case arose out of the transaction wherein Abbott Laboratories Limited approached Piramal Enterprises Limited (PEL) to acquire its domestic healthcare business. During the time that the promoter directors of PEL were engaged in the discussions and Abbott had carried out due diligence, the other directors of PEL were yet to be informed of the potential transaction. However, Anand Piramal, one of the promoters who was not on the board of PEL, was aware of the Abbott proposal, including because he was required to enter into a non-compete agreement. In this context, the Securities and Exchange Board of India (SEBI) brought two charges against the company and the alleged insiders, viz., (i) they disclosed information about the Abbott transaction to persons who were not required to know about the transaction, and (ii) they failed to close the trading window thereby violating the model code of conduct under the SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI found these charges to be credible and impose penalties on the parties. Against this, the affected parties filed an appeal before SAT.

The following is a discussion of the key findings and some comments thereon:

Selective Disclosure of UPSI

SAT found merit in the case of the company and the promoters that information regarding the sale of the domestic healthcare division was disclosed to Anand Piramal on a ‘need to know’ basis. As a promoter of PEL, he was required to provide a non-compete undertaking to Abbott, and hence needed to know the existence and details of the transaction in advance. Moreover, there is no evidence that he dealt in the shares of the company while in possession of this information. Hence, SAT found no merit in the penalty that SEBI imposed.

This issue is likely to come up in several promoter-owned companies where promoters may receive UPSI either through nominee directors (in case of promoters that are corporate entities) or family members (where promoters are individuals). This is an inevitable consequence of promoter ownership structures, and has been addressed directly in the Kotak Committee Report issued in 2017. The recommendations in the report seek to legitimize such disclosures under controlled circumstances. SAT’s ruling in the Piramal Enterprises gives rise to a largely similar outcome, although it is largely fact-specific.

Non-Closure of Trading Window

It is not disputed that PEL failed to close the trading window at any point of time, including in the wake of the announcement regarding the Abbott transaction. This is despite such a requirement under the model code of conduct prescribed by SEBI. The company and insiders adopted the view that the onus to close the trading window is on the compliance officer, and sought to pin responsibility on that individual. On the facts, the compliance officer had entered into a settlement with SEBI regarding his own responsibility for the violation. However, SAT refused to allow the company and promoters to shift responsibility to the compliance officer. Reliance was placed on the fact that the sale of a company’s division is not a routine matter and requires appropriate treatment. Moreover, the board of PEL had not taken any decision relating to the trigger for window closure, nor had it informed the compliance officer regarding any such decision. It follows that the compliance officer has no way of knowing or determining when to close the trading window.

This ruling is important in as much as it treats the obligation for trading window closure as belonging not just to the compliance officer, but also the board and other insiders. It is a shared responsibility.


In determining the sanctions it could impose on PEL and the promoters for failure to close the trading window, SAT found that there was no trading by the relevant parties in the securities of the company and, as a result, there was only a technical violation of the legal requirements without significant impact on the markets. Although one employee was found to have traded in the shares of PEL, he was not associated in any manner with the Abbott transaction and did not possess any UPSI. SAT sought to make a distinction between a technical violation and a substantial violation as follows:

  1. The purpose of closing the trading window is for a salutary purpose. It is to ensure that trading is restricted during the period in question and pre-clearance requests can only be sanctioned as per the existing Model Code of PEL. In the given circumstances, even though the trading window was not closed, there was no trading of the scrips by any of the designated employees of the PEL nor any pre-clearance requests were received by PEL. Thus, even though, no announcement was made for closure of the trading window, we find that PEL ensured compliance in pith and substance of the Model Code of PEL and the PIT Regulations including the Model Code. We further find that UPSI at all times was preserved and there was no misuse of UPSI.

SAT goes on to add:

  1. Considering the aforesaid, we are of the opinion that the object of the Act is not only to protect the investors but also the securities market. The appellant is part of the securities market and its existence is required for the healthy growth of the securities market. SEBI is the watchdog and not a bulldog. If there is an infraction of a rule, remedial measures should be taken in the first instance and not punitive measures. In the absence of any direct or clinching evidence of insider trading or misuse of UPSI, a reasonable benefit of doubt should be extended to the PEL instead of mechanically imposing a penalty. Other factors should be considered including those stated in Section 23J of the Act which apparently was not considered.

[emphasis added]

In the end, SAT issued a warning to the parties and overturned the penalty that SEBI had imposed. Although this decision is largely based on the specific facts and circumstances of the case, it has implications regarding selective disclosures on a ‘need to know’ basis and that of failure to close the trading window (when no significant trading takes place nevertheless). At a broader level, it is worth considering whether SAT is likely to adopt a more lenient approach towards the communication offence as compared to the trading offence.

About the author

Umakanth Varottil

Umakanth Varottil is a 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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