[Aaj Sikri and Kartik Arya are penultimate year BA LLB (Hons) students at Jindal Global Law School, Sonipat]
The insider trading norms in India have evolved with time. Before the implementation of SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), intention was relevant while deciding whether an insider has engaged in Insider Trading or not. The same was also upheld in the Rakesh Aggarwal v. SEBI case. However, the parties’ intention has been rendered infructuous by the PIT Regulations. To prove that a person (trader) has dealt in insider trading, the only relevant consideration as per regulation 4 of PIT regulations is that the person traded in the securities of the company while being in possession of Unpublished Price Sensitive Information (“UPSI”). Further, the legislative note to regulation 4(1) mentions that, “the reason for which he trades or the purpose to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the regulation.” Effectively, whether such a trade leads to a profit or loss is irrelevant to the offence of insider trading. This article aims to analyse the ex-parte order (“Order”) by Securities and Exchange Board of India (“SEBI”) in the matter of Infosys Limited passed by the whole time member, Madhabi Puri Buch (“WTM”). It will analyse how profit-making becomes a significant consideration, even though statutorily it remains insignificant, especially when an insider has engaged in complex derivative structures, such as Futures & Options (“F&O”).
Background of the Case
The order deals with how Pranshu Bhutra, the general corporate council of Infosys and other noticees violated PIT Regulations. They had communicated UPSI and traded on the basis of such information in the F&O segment. The relevant UPSI for this case were the audited financial results for the quarter ending June 2020. SEBI relied on telephonic conversations, that significantly increased in the UPSI period, to prove that Pranshu Bhutra had communicated UPSI to Amit Bhutra. Amit Bhutra and Bharath Jain were working partners in Capital One Partners. Amit Bhutra, Ankush Bhutra, and Manish Champalal were also working partners in Tesora Capital. Amit Bhutra and Bharat Jain had placed trading orders in the UPSI period through the F&O segment. Once the information became public on 15th July 2020, they squared their positions while generating a profit of Rs. 2.79 crores from Capital one Partners and Rs. 26.82 lakhs from Tesora Capital.
They had taken a net long position by purchasing futures contracts of Infosys between 10th and 14th July, before the UPSI became public. This position was squared off between 15th and 20th July, once the information had become public. They had also sold their put options between 14th and 15th July, before the UPSI became public, and later the same was squared off between 20th and 21st July.
SEBI held that Pranshu Bhutra was in violation of section 12A(e) of SEBI Act 1992 (“the Act”) and regulation 3(1) of PIT Regulations. It considered him an insider as per regulations 2(1)(g)(i), and 2(1)(g)(ii) of PIT regulations because he was reasonably expected to have access to UPSI by virtue of his position in the company. Amit Bhutra was also held to be in violation of sections 12A (d) and (e) of the Act and regulations 3(1), 3(2) and 4(1) of PIT Regulations, as he had procured information from Pranshu Bhutra and communicated it to Bharath Jain, and used the UPSI to trade on behalf of Capital One and Tesora Capital. Bharath Jain was also held to be in violation of sections 12A(d) and 12A(e) of the Act, and regulations 3(2) and 4(1) of PIT Regulations. For the sake of our argument, i.e., how profit was an important consideration, we will be only focusing upon Amit Bhutra and Bharath Jain vis-à-vis the trading offence with which they were charged.
To analyse how profit was an essential consideration in this case, we first need to understand the construct of the F&O segment. When viewed from an insider trading lens, buying or selling of F&O always depends on whether the UPSI is positive or negative. For instance, if the UPSI is positive, an insider will take a net long position while buying the futures. Since it was positive, an insider would be expected to sell those shares at a much higher price when the information becomes public, thereby booking a profit. Similarly, if the UPSI is negative, an insider would be expected to take a net short position. For options, to put it simply, if the UPSI is negative, an insider would either sell a call option or buy a put option. Similarly, if the UPSI is positive, they would buy a call option or sell a put option. This becomes important in insider trading as a clear directional view, and a higher delta (a ratio which indicates the change in price of an option with the change in the price of an underlying asset) indicates that an insider was confident about the view. This would, in turn, indicate that the trade was made while in possession of UPSI on the preponderance of probability scale.
As we noted earlier, profit-making was an irrelevant consideration for insider trading post the PIT Regulations. This was reiterated in the present case, to quote the WTM:
“It may be noted though, that the policy of the PIT Regulation is to prevent dealing in securities, while in possession of UPSI irrespective of whether the UPSI is positive or negative and irrespective of whether profit is made or not.”(emphasis supplied)
However, we argue that the WTM would not have come to the same conclusion had the noticees not made profits, thus, highlighting the importance of profit-making in insider trading. Our hypothesis will also establish a paradox: profit is an irrelevant consideration to hold a person liable for insider trading, and yet an important evidence on the preponderance of probability scale.
From the trading details of Capital One, since the UPSI was positive, it was found that they had taken a net long position in futures and sold put options, thereby earning a net profit of Rs. 278 lakhs. The overall delta of Capital One was 2,09,773, i.e., if the price increased by Rs.1 after the information became public, they would earn a profit of Rs. 2,09,773. However, as the WTM notes in para 29.4: “On the other hand if the price of INFY decreased by Rs. 1, then there would be a loss of approx. Rs. 2,09,773”. This begs the question: had the noticees incurred losses, would the WTM have come to the same conclusion, that they traded while in possession of UPSI? The answer is negative. The WTM based his conclusion on the premise that a higher delta represented their strong confidence of the trading view and a clear directional view. This prompted the WTM to go as far as to conclude that the trading was not only in possession of the UPSI but also on the basis of UPSI.
Similarly, from the trading details of Tesora, it was apparent that a profit of Rs. 26.82 lakhs has been made. This was a significant factor in holding that the trades were made while in possession of UPSI. It is imperative to mention that Tesora sold put options and took a net long position in Futures. Since the UPSI was positive, all the positions were squared off right after the information was made public. Consequently, the higher delta reflected their strong confidence. The same logic applies here.
Consider, for e.g., if the delta of both Capital One and Tesora highlighted significant losses, it would have reflected that the information was unreliable. This would have hit at the core of the concept of UPSI. In that scenario, the WTM would not have gone too far to conclude that the trades were made based on UPSI, as ‘profit making’ acted as a major evidence for the preponderance of probability scale.
This does not end here; as recently as on 27th September 2021, the same WTM, i.e., Madhabi Puri Buch, passed a similar order in a different matter, wherein the notice made a profit of Rs. 262.31 lakhs. The WTM followed the same line of reasoning and again emphasised the ‘profit made’ to hold that the noticee traded on the basis of UPSI.
We do not argue that the standard, i.e., profit is an irrelevant consideration for holding someone liable for insider trading, has been rendered infructuous. We have attempted only to highlight the paradox that has been created. In theory, the law recognises that even if a person did not make a profit, he/she could still be booked under regulation 4 of PIT Regulations. However, especially in situations where the transactions have been made through the F&O segment, profit making becomes the utmost consideration. This is to the extent that if a person incurred loss, the liability might have been escaped.
– Aaj Sikri and Kartik Arya