De Minimis Rule has no Application to Insider Trading: Supreme Court
The Supreme court observed that the de minimis Rule has no application to insider trading.
Background
The Securities and Exchange Board of India has come up with the appeal, challenging an Order of the Securities Appellate Tribunal, by which the Order of its Whole Time Member directing the respondent to disgorge the amount of unlawful gains made by him, was set aside.
Arguments
Senior Advocate Arvind P. Datar, appearing for the appellant, argued that proportionality is a dangerous and subjective ground in matters involving insider trading, especially since one third of the total number of directors of a listed company are independent directors and even transactions involving thousands of crores might be a minor proportion to the turnover, if the company is very large in size.
He contended that Regulations 3 and 4 contain an absolute prohibition against insider trading and such a statutory prohibition cannot be diluted by arguing that the total value of the contracts terminated by the company was just a minor percentage of the order book value and the total turnover of the company.
He submitted that the de minimis syndicate has no application to insider trading, as it introduces an element of subjectivity.
Senior Advocate Somasekhar Sundaresan, appearing for the respondent, contended that the primary object of Insider Trading Regulations anywhere in the world is to prohibit an insider from taking advantage of asymmetrical access to unpublished price sensitive information over others who do not have such access.
He argued that the question whether an information is price sensitive or not, would depend upon its potency to materially impact, upon publication, the price of the securities.
He submitted that therefore by its very nature, it is barely a question of fact or at the most, a mixed question of fact and law which will not fall within the scope of Section 15Z of SEBI Act, 1992 warranting interference by the Court.
Decision
The division bench of Justice Indira Banerjee and Justice J. V. Ramasubramanian noted that the price sensitivity of an information has a correlation directly to the materiality of the impact that it can have on the price of the securities of the company.
The court further noted that out of the 7 items of information listed under the Explanation, all the others except Item No.(vii) are likely to have an impact directly upon the financial strength of the company.
The bench observed that the acquisition by GIPL, of an equity interest in SIL’s project was worth Rs. 460 crores approximately. Similarly, the acquisition by SIL, of the equity interest in GIPL’s project was worth Rs. 807.52 crores.
Therefore, it was further observed that the cancellation of the shareholders Agreements resulted in GIPL gaining very hugely in terms of order book value.
The court noted that the respondent did not wait for the information about the market trend, after the information became public.
The bench held that the Tribunal was right in thinking that the respondent had no motive or intention to make undeserved gains by encashing on the unpublished price sensitive information that he possessed.
The court agreed that the allegation of insider trading cannot be measured in terms of the value of the contracts terminated and the percentage of shares sold and that the theory of proportionality cannot be applied in such cases.
The bench said that it is true that the de minimis Rule has no application to insider trading, as it introduces an element of subjectivity.
The court added that it has gone on the basis that the termination of both the contracts put GIPL in a more advantageous position, in which one would have expected the price of the securities to soar.
The court stated that an attempt by the insider to encash the benefit of the information is not exactly the same as mens rea. Therefore, the Court can always test whether the act of the insider in dealing with the securities, was an attempt to take advantage of or encash the benefit of the information in his possession.
It is viewed by the court that the information regarding the termination of the two contracts can be characterised as price sensitive information, in that it was likely to place the existing shareholders in an advantageous position, once the information came into the public domain.
The court added that the sale by the respondent, of the shares held by him in GIPL would not fall within the mischief of insider trading, as it was somewhat similar to a distress sale, made before the information could have a positive impact on the price of the shares.
The court while dismissing the appeal held that the impugned order of the Tribunal does not call for any interference.
Case title: Securities and Exchange Board of India v/s Abhijit Rajan
Citation: Civil Appeal No.563 of 2020
