Introduction –

The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), in a recent order, has revoked its directions against seven former officials of Multi Commodity Exchange Ltd (hereinafter referred to as ‘MCX’), for alleged involvement in insider trading.

SEBI found no merit in an ex parte order passed in the previous hearing, thereby undoing the damage and revoked the directions passed in that order.

On August 2, 2017, by an ex-parte order, SEBI had earlier held that 8 persons, who were promoters or directors or management personnel of MCX, had committed insider trading in the shares of MCX. Through this order, SEBI not only prohibited these 8 persons from dealing with their assets but also impounded what he called losses avoided by these persons.

This SEBI order was then appealed before the Securities Appellate Tribunal (hereinafter referred to as ‘SAT’), where the SAT directed SEBI to pass a final order as expeditiously as possible.

Brief facts of the case –

  • The Department of Consumer Affair granted exemption to National Spot Exchange Limited (hereinafter referred to as ‘NSEL’), a subsidiary of Financial Technologies India Limited (FTIL) and a group company of MCX, from the operation of Forward Contracts (Regulation) Act, 1952, for all forward contracts of one day duration for the sale and purchase of commodities traded on its platform subject to certain conditions. Thereafter, the Forward Markets Commission (FMC) (now merged with SEBI) was notified as the designated agency for submission of all information.
  • Upon analysis of returns and information filed by NSEL, the FMC prima facie was of the view that NSEL has failed to fulfil the conditions stipulated for exemption and informed the same to the DCA.
  • On April 27, 2012, the DCA issued a Show Cause Notice (SCN) to NSEL as to why action shouldn’t be taken against it for violation of the conditions.
  • The contents of this show cause notice, however, become public only later through an article published in Economic Times on October 3, 2012.
  • On July 31, 2013, NSEL suspended trading in all contracts and deferred settlement of all pending contracts.

Allegations of insider trading, however, were made in respect of MCX, which was an associate company of NSEL, since, both shared the same parent entity, FTIL, and to a great extent, shared the same management.

SEBI’s interim order 

SEBI in its order dated August 2, 2017, had found that 8 persons, all directors or senior officials of MCX at the relevant time, had:

(a) known about the SCN issued by the DCA to NSEL on April 27, 2012; and that

(b) they sold the shares, on the basis of Unpublished Price Sensitive Information (UPSI) held by them in MCX before the Government of India withdrew the exemption granted to NSEL from application of the FCRA, to avoid losses.

According to SEBI, the information relating to the implication of the SCN, that the exemption may be withdrawn was UPSI in respect of shares of MCX.

SEBI found that the UPSI became public when on the directions of the Government, NSEL suspended all trading on July 31, 2013. Thus, all trades during the period April 27, 2012 to July 31, 2013 were considered by him as being ‘Insider Trading’, fulfilling the conditions laid under SEBI (Prohibition of Insider Trading) Regulations, 1992 (PIT Regulations).

SEBI’s final order

The questions that arose before SEBI were:

a) Whether the implication of the SCN dated April 27, 2012, issued by DCA to NSEL, was price sensitive information in respect of MCX?

On this point, SEBI agreed with the previous order, that since FTIL was the holding company of both MCX and NSEL, the knowledge of the implication of the SCN was in fact, price sensitive.

b) Whether the price sensitive information was unpublished and if so, when did it get published?

This is where SEBI differed from its earlier findings and noted that the article published in the ET on October 3, 2012 had mentioned about the said SCN and the possibility that the Government could have withdrawn the exemption granted to NSEL.

Therefore, the UPSI became public knowledge on October 3, 2012 and not on July 31, 2013.

As a result, the period during which trades by an insider could be prohibited was reduced to April 27, 2012 to October 3, 2012 instead of Raman’s calculation which extended to 31 July, 2013.

c) Which of the Noticees traded in the scrip of MCX during the period when the price sensitive information remained unpublished?

Basis the new time period for committing insider trading, out of the 8 persons in Raman’s order, only 1 – Mr. Massey traded in that period.

d) Which of the Noticees violated the provisions of Regulation 3(i) and Regulation 4 of the SEBI (PIT) Regulations and Section 12A (d) of the SEBI Act when they traded when in possession of UPSI?

SEBI accepted Massey’s submission that his trades were done with prior approval of and after disclosure to MCX and to the world at large (disclosed upfront in the Prospectus dated February 28, 2012 that he would be selling 10,000 shares post IPO within 3 months of the IPO) and therefore, could not have been based on the UPSI.

Thus, the directions against 7 out of the 8 persons have been revoked.

SEBI said it will pass a separate order in respect of Hariharan Vaidyalingam, who was the eighth person to face SEBI’s interim action in MCX matter.