Insider Trading vis-a-vis Slump Sale

orAcquisition
Brief Introduction of Regulation 3(1) permits an insider to communicate,
Law provide or allow access to UPSI to any other person and
Law of insider trading regulation 3(2) permits any person to receive UPSI,
as contained in the where such communication / procurement is in
Securities and furtherance of legitimate purpose, performance of duties
Exchange Board of or discharge of legal obligations. Further, regulation 3(3)
India (Prohibition of and 3(4) enable the parties to execute agreements to
Insider Trading) contract confidentially and non-disclosure obligations.
Regulations, 2015 Thus, the Regulations clearly provide execution of
(“the Regulations”), NDA in transactions like merger, slump sale or acquisition
prohibits an insider for exchange of confidential information with the caveat
from trading in the that the recipient of UPSI shall not trade in securities of
company’s securities the company while in possession of UPSI.
while in possession of
R.S.Loona unpublished price When does the UPSI comes into existence?
Managing Partner sensitive information In the context of slump sale or acquisition, material
Alliance Corporate Lawers (UPSI). The question that emerges for determination is as to when
Former ED (Law), SEBI expression ‘Insider’ as does UPSI with respect to such transactions comes into
defined in the Regulations is of very wide amplitude and existence i.e. when the NDA is signed or when the
embraces within its ambit not only the directors, officers transaction documents such as Share Purchase
or employees of the company but also all persons Agreement (in case of acquisition) and Business Transfer
holding professional or business relationship that allows Agreement (in case of slump sale) is executed or when
them, directly or indirectly, access to UPSI. Further, any other event, which suggests strong probability of
there is a list of persons who may be deemed as consummation of the transaction, occurs.
connected persons (insiders) unless the contrary is NDA per se does not contain any price sensitive
established. Such list includes immediate relatives, information but provides an agreement between the
holding, associate or subsidiary company, an parties to exchange the confidential information with a
intermediary, investment company, officials of a stock condition that the recipient of such information will keep
exchange or clearing corporation, directors and the same confidential and not trade in securities of the
employees of PFI, etc. Over and above the company when in possession of UPSI. Such intention
aforementioned persons, anyone who is in receipt of or has been made clear in regulation 3(4) of the Regulations.
having access to UPSI can be viewed as an insider. While the NDA per se cannot be perceived as a
document which will give rise to the existence of price
Slump Sale or Acquisition sensitive information about the transaction under
Any transaction of merger, slump sale or acquisition negotiation, signing of Share Purchase Agreement or
would invariably involve exchange of UPSI and hence, Business Transfer Agreement however, can certainly
parties involved in the transaction would generally enter give rise to the occurrence / commencement of UPSI
into Non-Disclosure Agreement (NDA) to prevent the since strong probability of consummation of the
misuse of UPSI by the recipient of such information. transaction emerges on execution thereof.
UPSI for the purpose of the Regulations means any
information relating to a company or its securities, which Whether trading window should be closed on
is not generally available but if made available may signing NDA?
materially affect price of the securities and shall ordinarily As per the model code of conduct prescribed under the
include information pertaining to financial results, Regulations, the trading window shall be closed during
dividends, change in capital structure, mergers, the period the price sensitive information remains
demergers, acquisitions, disposals and expansion of unpublished.
business and such other transactions. First question It follows that the trading window should be closed if
that emerges in this context is whether a contracting the company is able to predict with certainty the
party can furnish or allow access to UPSI without occurrence of slump sale / acquisition on signing of
committing breach of the Regulations. Answer to this NDA. But such prediction with accuracy may be extremely
question is provided by the following provisions of the difficult as the discussions pursuant to the NDA are
Regulations: inherently tentative. The negotiations can fail at any
stage, particularly, on receiving due diligence report or
valuation report. Hence, treating the negotiations as an An insider however may not be held liable for insider
event of slump sale or acquisition merely on signing of trading if he has undertaken trades pursuant to a trading
NDA can mislead investors and foster false optimism. plan set up in accordance with regulation 5.
The transaction of slump sale / acquisition ultimately
may occur after one / two years or even after longer Communication of UPSI
period of negotiation. Trading window cannot be kept Communication of UPSI is punishable under regulation
closed for unduly long period particularly when in terms 3(1) but where such charge is levied against an insider,
of regulation 2(1)(d)(i) of the Regulations UPSI will not SEBI has to produce documentary evidence, text
remain relevant for more than 6 months from the messages, call record and / or email correspondence to
concerned act. substantiate the allegation. Charge based on mere
NDA neither contains any UPSI nor the execution suspicion, surmises or conjectures cannot sustain.
thereof can be treated as even a material event within This position of law has been laid down by Hon’ble SAT
the meaning of regulation 30 of SEBI (LODR) Regulations in the case of Samir Arora v Sebi as under:
which may be required to be disclosed to the stock ‘It was argued before us on behalf of the respondent
exchange. Clause 5 of part A of Schedule III specifically that it is very difficult to gather adequate evidence in
provides the exclusive list of agreements which are respect of charges relating to conflict of interest, market
considered as material events. NDA is not covered by manipulation and insider trading. While we appreciate
the aforesaid Clause 5. the difficulty it is not possible for us to let mere
suspicions, conjectures and hypothesis take the place
SEBI’s Stand on this Issue of evidence as described in the Indian Evidence Act.’
Till now SEBI has not decided any case having direct Hon’ble Supreme Court has also held in the case of
bearing on the aforementioned issue though it has Nandkishore Prasad vs State of Bihar and Ors. (Dated
issued a show cause notice to insiders of a company April 19, 1978), that ‘Suspicion cannot be allowed to take
assuming execution date of NDA as the date when UPSI the place of proof even in domestic inquiries.’
in relation to the proposal for slump sale of the company’s Hon’ble SAT in the case of Dilip S. Pendse vs. Sebi
business came into existence. SEBI is yet to pass an has emphasised upon another vital aspect in relation to
order in the matter which will disclose SEBI’s stand on the allegation of insider trading. According to Hon’ble
this crucial issue. SEBI has however not charged the SAT, ‘the charge of insider trading is one of the most
company for not closing trading window on signing of serious charges in relation to the securities market and
NDA or for not disclosing to the stock exchange the having regard to the gravity of this wrong doing higher
signing of NDA as a material event under regulation 30 must be the preponderance of probabilities in establishing
of SEBI (LODR) Regulations. Prima facie there is a the same. ' This proposition of law has been reiterated
contradiction in SEBI’s approach as on one hand for the by Hon’ble SAT in the matter of Manoj Gaur v. SEBI
purpose of trading it has treated NDA giving rise to UPSI where it quashed the order passed by the Adjudicating
but on the other hand for the purpose of closing the Officer as SEBI could not produce any evidence, direct
trading window it has not considered NDA giving rise to or circumstantial, to show that Mr. Manoj Gaur passed
any UPSI. on the UPSI to his wife Mrs. Urvashi Gaur and his
brother Mr. Sameer Gaur.
Trading in Securities
Indian law on insider trading is largely based on US law Conclusion
which revolves around a basic concept ‘disclose or Law on the question of commencement of UPSI on
abstain’. No insider is permitted to trade in securities of execution of NDA in case of slump sale or acquisition is
the company while in possession of UPSI. Meaning not yet clear as SEBI has issued show cause notice to
thereby, an insider has to abstain from trading while in insiders for trading in the company’s scrip after signing
possession of UPSI but once the UPSI is disclosed to of NDA and hence one will have to wait and watch for
the stock exchange he may thereafter trade without emergence of final position of law in the matter.
attracting the penal provisions of the Regulations.