Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, once a person has traded in securities while in possession of unpublished price sensitive information, is the purpose for which the sale proceeds are used relevant to establishing insider trading?

Paragraph 9Regulation 4 of the PIT Regulation 2015 prohibits trading when in possession of UPSI. It incorporates a rebuttable presumption that the trades done by the person in possession of such UPSI are motivated by the information contained therein. It provides for scenarios where the person accused of having traded while in possession of such UPSI, can demonstrate their innocence. It says ‘provided that the insider may prove his innocence by demonstrating circumstances including the following’. 9.1. The transaction that is subject matter of dispute is (a) off-market; (b) inter se transfer between insiders; (c) while they were in possession of same UPSI; and (d) that it was not in violation of Regulation 3 with the exception of sub-regulation C.A.NO. 4905/2022 12 (3) of Regulation 3 which we have already extracted supra and (e) both parties made a conscious and informed trade decision. It is further provided that such inter-se transfer be notified to the company in two-working days and that such companies shall further transmit such information to the stock exchange where such company is listed. “(i) the transaction is an off-market inter-se transfer between [insiders] who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision. [Provided that such unpublished price sensitive information was not obtained under sub-regulation (3) of regulation 3 of these regulations. Provided further that such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.]” 9.2. The second defence is if the transaction in question has been carried out through the block deal window mechanism between persons who were in possession of UPSI, having made an informed and conscious decision; not being in violation of Regulation 3; and not having secured the relevant information under sub-regulation (3) of Regulation 3. “(ii) the transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision; Provided that such unpublished price sensitive information was not obtained by either person under sub-regulation (3) of regulation 3 of these regulations.” 9.3. The transaction was in furtherance of statutory or regulatory obligations in connection with a bona fide transaction. “(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.” C.A.NO. 4905/2022 13 9.4. The transaction was in exercise of stock options, and the price thereof was predetermined as per applicable regulations. “(iv) the transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre- determined in compliance with applicable regulations.” 9.5. The fifth defence deals with non-individual investors and provides for two scenarios where innocence can be pleaded (1) where the people making the trade and the people in possession of the UPSI were different and (2) where adequate arrangements were in place to prevent the communication of the UPSI, and there is no evidence of such arrangements having been breached. “(v) in the case of non-individual insiders: – (a) the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and (b) appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached;” 9.6. The sixth defence is trades carried out in accordance with trading plans as formulated under Regulation 5. 9.7. At the end of Regulation 4(1) there is a note that embeds a presumption of trades so made being motivated by such knowledge and information in his possession, when such a person has UPSI. The intentions and the purposes to which the proceeds of the transactions are applied are thereby made irrelevant. The text of the note is: “NOTE: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has C.A.NO. 4905/2022 14 violated the regulation. He traded when in possession of unpublished price sensitive information is what would need to be demonstrated at the outset to bring a charge. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition.” (emphasis supplied)

Paragraph 11We are of the considered view that the law as discussed above leads us to only one conclusion. It is not in dispute that the respondents were in possession of UPSI. It is also not in dispute that the respondents had sold of large portions or the entirety of their shareholding while in possession of such UPSI. As such, in view of the note appended to Regulation 4 (1) reproduced supra, the purposes for which the proceeds are employed is an irrelevant consideration. The fact that the respondents had indulged in the trades at the relevant point in time is sufficient to conclude that they had conducted insider trading. In that view of the matter, less or no profit, is of no consequence.