Indirect evidence can be used to find insider trading

Upholding an order by the Securities and Exchange Board of India (SEBI) in VK Kaul v The Adjudicating Officer, Securities and Exchange Board of India, the Securities Appellate Tribunal (SAT) held that the term price sensitive information as used in the SEBI (Prohibition of Insider Trading) Regulations, 1992, is wide enough to include information relating directly or indirectly to a company.

The SAT ruled that “as long as, an insider of ‘the company’ deals in the securities of ‘a company’ listed on any stock exchange while in possession of UPSI [unpublished price sensitive information] relating to that company, the provisions of regulation 3(i) of the regulations will get attracted”. Regulation 3(i) prohibits dealing, communicating or counselling on matters relating to insider trading.

Kaul, a former non-executive independent director of Ranbaxy, and his wife had appealed a 4 January 2012 order by SEBI holding that they violated section 12A(d) and (e) of the SEBI Act, 1992, and imposing a penalty of ₹5 million (US$90,000) and ₹1 million respectively. SAT rejected the Kauls’ primary argument that information relating to a third-party investor seeking to buy shares of a listed company from the market cannot be treated as UPSI regarding the target company.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.