SC stops Sebi's regulatory overreach in Abhijit Rajan insider trading case

In a repeat of the Udayant Malhoutra case, the Supreme Court of India, on September 19, rejected the market regulator's interpretation of what constitutes insider trading and acquitted Abhijit Rajan, former chairman of Gammon India.

The two insider trading cases and some others smack of regulatory overreach that does no credit to the Securities and Exchange Board of India (Sebi) and calls for some introspection on how it decides an already hard-to-prove area of regulation.

Talking to Bizz Buzz, Sucheta Dalal, Founder Trustee of Moneylife Foundation says, "I believe when Sebi officials act with over zealousness- as in all the cases above, it creates a sense of harassment even among those who scrupulously comply with rules. It also does nothing to enhance Sebi's own credibility."

The regulator is not answerable. So in the Abhijit Rajan case itself we have no explanation for why one 'accused' who sold to meet margin requirements was let off while Rajan was dragged all the way to the Supreme Court. Is it because he is a more famous name and the regulator wanted to show its teeth, she added.

The Abjijit Rajan case goes back to 2013 when Rajan, the then chairman and managing director of Gammon Infrastructure Projects Ltd (GIPL) sold shares just before a material event was conveyed to the stock exchanges. The share sale followed the termination of agreement with Simplex Infrastructure under which both had investments in each other's special purpose vehicles.

Sebi had accused Rajan of insider trading for having sold just ahead of the announcement, based on unpublished price sensitive information (UPSI). In this case, the termination of the agreement benefited GIPL and led to a gain in price, so Rajan did not profit from the action. More pertinently, the shares were sold as part of the corporate debt restructuring (CDR) of GIPL's parent company Gammon India Ltd. The entire proceeds went to lenders, to stop them from initiating bankruptcy proceedings against the parent company. But Sebi was unconcerned by these facts.

In arguing before the securities appellate tribunal (SAT) in 2019, Sebi contended that it had only sought disgorgement of Rs 1.09 crore and did not initiate punitive action because the sale was to fulfil a CDR-related obligation. But it wasn't so simple. Although GIPL's price rose after the action, Rajan alleged that Sebi had deliberately chosen to make it appear that he had profited by selecting a particular date for its calculations. Unfazed by SAT rejecting its stand, SEBI approached the SC (Civil Appeal No.563 of 2020), which has again upheld Rajan's acquittal in a well-explained judgment.

Notably, Sebi's action inflicted irreparable reputational damage lasting six years. In July 2014, Sebi barred Rajan and two other directors in an interim order; on 23 March 2015, it confirmed the order; at the end of March 2016, it issued a show-cause notice followed by an order of whole-time member (WTM) S Raman, who let off the other two directors but confirmed the disgorgement order against Abhijit Rajan.

On September 19, a two-judge bench of justice Indira Banerjee and justice V Ramasubramanian noted 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…" It also noted the rise in share price after the sale as being beneficial to shareholders with no benefit derived by Rajan.

It was on 15 June 2020, in the middle of the Covid lock-down, when Sebi's WTM Anant Barua issued an ex-parte order against Udayant Malhoutra, the managing director of Dynamatic Technologies, impounding alleged gains over Rs3.83 crore for an 'insider trading' transaction that happened in 20

Malhoutra was accused of selling 51,000 shares about six days before the company announced its financial results. As it happened, the shares were pledged with Infrastructure Leasing and Financial Services against a Rs50-crore loan. The sale was in line with an agreement signed by Malhoutra with a consortium of lenders, to reduce his borrowing and pay back the loan at a specific time. He neither profited nor avoided a loss.

When the case wound its way to the Supreme Court, a 3-judge bench of justices Dhananjay Chandrachud, Indu Malhotra and Indira Banerjee upheld the SAT decision to let off Malhoutra.

A third case that smacks of similar overreach and cited by securities law experts is that of Shreehas P Tambe, senior vice-president of Biocon, Tambe sold 17,440 shares of the company, after obtaining pre-clearance, in order to make a part-payment for purchase of a residential property in December 2017. Sebi had alleged that Tambe possessed UPSI relating to Biocon's collaboration with Sandoz and restrained him from on accessing the market and imposed a monetary penalty of Rs 2 lakh. The only valid charge against him was that he disclosed the sale after the stipulated 48-hour period under insider trading rules.

Given that insider trading cases are notoriously difficult to prove, it is unclear why Sebi would set itself up for repeated embarrassment by adopting a stand of 'absolute liability' even when actions are not motivated by profiting from UPSI, but are in line with other legal or contractual agreements.

Earlier this year, Moneylife Foundation published a detailed "Review of Insider Trading Cases" mentored by advocate Ravichandra Hegde, partner of Parinam Law Associates. It studied the interpretation of Sebi rules through a series of landmark judgments after 2015.

The study concluded that Sebi has failed to adopt a uniform approach in deciding similar cases, leading to divergent orders that need further adjudication by appellate forums. When such cases are stuck down, do they embarrass the regulator? Is there any internal evaluation and checks and balances against such overzealous action?