An insider is one who because of his status has access to price sensitive information which is not in public domain. James Surowiecki quoted, “If companies tell us more, Insider Trading will be worth less”. Quite precisely, as per Regulation 2 (ha) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) Unpublished Price Sensitive Information (“UPSI”) is not generally known to the public. But if known, may likely affect the price of the securities in the capital market.
The issue occurred in February 2007 when alerts were generated at the share market regarding dealing in shares of Indian Petrochemical Corporation Limited (“IPCL”) wherein it was observed that some entities purchased large quantities of IPCL shares before it announced its intention to declare interim dividend and considered to amalgamate with Reliance Industries Limited (“RIL”). In March 2016, SEBI by disposing off the charges of Insider Trading against Reliance Petroinvestments Ltd. (“RPIL”) added further lucidity to the understanding of who an insider may be.
- RPIL was not an insider as there was no evidence to establish the access of UPSI.
- RPIL is not a person “deemed to be connected”.
- RIL did not exercise any voting power in RPIL directly.
- RPIL, which also held 46% stake in IPCL, took a commercial decision authorizing its Directors to invest INR 30 crores in the equity of IPCL. Further it made additional investments of upto INR 100 Crore in the equity of IPCL.
- On March 2, 2007, IPCL made an announcement to the stock exchanges for declaration of Interim Dividend. It is pertinent to note that the order to purchase 98,280 shares of IPCL were placed before an announcement for declaration of Interim Dividend was made.
- On March 4, 2007, the proposal for merger of RIL and IPCL was discussed and on the next day the steps for initiating the proposed merger were taken.
- On March 10, 2007, a joint meeting of the boards of RIL and IPCL took place where a joint report was submitted setting out the recommended swap ratio was deliberated on. Subsequently, the Boards of RIL and IPCL approved the merger at their respective Board Meetings.
- In view thereof, SEBI ordered an investigation in June, 2007 regarding buying, dealing or selling in shares of IPCL in order to determine if any provisions of the SEBI Act or Rules and Regulations thereunder were violated.
- RPIL submitted that the acquisition of shares in IPCL was a part of creeping acquisition of IPCL which was already underway. For better understanding of the subject matter, creeping acquisition is when any person holds 15% or more but less than 55% of shares or voting rights of a target company (IPCL in the present case), such person can acquire additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 after making a public announcement to acquire at least additional 20% shares of target company from the shareholders.
- RPIL further added that their investment of INR 30 Crore was a commercial decision as they had made a decision to commence creeping acquisition of IPCL shares. As the investment limit agreed to, was almost exhausted in June, 2006. Thereafter, the share prices of IPCL had started to increase and eventually touched INR 325 per share, as a result of which shares were not purchased further.
- Moreover, RPIL stated that the relevant trade did not take place abruptly, the shares in question were purchased on the basis of share price of IPCL and in line with the commercial decision of RPIL.
- RPIL pleaded that the past trading pattern of RPIL in the shares of IPCL should have been taken into consideration by the SEBI to ascertain whether the relevant trades were conducted on the basis of UPSI, as there was no proof incumbent upon it in order to sustain a charge of insider trading.
- The two announcements made by IPCL were not Price Sensitive Information
According to the investigation report (“IR”), RPIL had made two announcements:
- The order to purchase 98,280 shares of IPCL.
- An announcement to the stock exchanges for declaration of Interim Dividend.
The share price of IPCL more or less moved in sync with the movement in Sensex. Wherein, the scrips witnessed a substantial price rise subsequent to the announcement of amalgamation of IPCL with RIL.
- RPIL is not an insider as defined in Regulation 2(e) of PIT Regulations
Regulation 2(e) of PIT Regulations stipulate that an insider is one who is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to UPSI in respect of securities of a company, or has had access to such UPSI.
- RPIL is not a person ‘deemed to be connected’ within the meaning of Regulation 2(h) of the PIT Regulations
The Adjudicating Officer noted that it is imperative to establish that the same individual or body corporate holds more than a third of the voting rights with respect to both the Companies being examined for the purposes of this clause.
It was found that RIL did not exercise any voting power in RPIL directly, as is evident from the shareholding pattern of RPIL during the financial year 2006-07 and RIL as a single entity did not directly hold the requisite one-third shares in RPIL, as the shareholding of RPIL was cross-held by a number of subsidiaries. Moreover, one-third of the voting right in RPIL were exercised by Reliance Ventures Ltd. and not by RIL.
On the basis of the foregoing findings, the Adjudicating Officer disposed of the Adjudication Proceedings initiated against RPIL.
Trading by an insider in the shares of a Company is not in itself violation of law. In fact, trading by the Insiders (directors, employees, officers etc.) is a positive sign which should be encouraged by the Companies as it aligns its interest with those of the insiders. The law on the other hand prohibits trading by an insider in breach of fiduciary and duty of care and confidence towards the stock of a Company on the basis of non-public information to the exclusion of others. Therefore, in our view SEBI action of disposing of the insider trading charges against RPIL holds good. The reason being, PIT Regulations were put in place as a fresh tryout for those having perpetual control over UPSI. As suggested in the Sodhi Committee Report, it placed paramount thrust upon review of empirical evidence and feedback after the concept of trading plan was introduced. In view thereof, the present case at hand goes on to affirm the judicial intent of the PIT Regulation in spirit.