Explained | All you need to know about Infosys insider trading case

On June 1, market regulator Securities and Exchanges Board of India (SEBI) fined two Infosys employees, and six entities and individuals for insider trading.

The company has now initiated a probe and is likely to take action based on the investigation. Analysts and corporate governance experts have pointed out that the company should sensitise employees on insider trading regulations to avoid such slippages in the future.

This article looks at why the case is important, and explains what led to the charge of Rs 3.06 crore.

Why are we talking about insider trading now?

In an order dated May 31, SEBI banned eight entities and individuals selling and buying securities directly or indirectly until further notice.

These include two Infosys employees - Pranshu Bhutra, Senior Corporate Counsel; and, Venkata Subramaniam VV, Senior Principal, Corporate Accounting Group. The other parties are Amit Bhutra and Bharath C Jain from Capital One Partners, and Ankush Bhutra, Amit Bhutra, and Manish Champalal Jain from Tesora.

The investigation dates back to June 29 and July 15, 2020, when the company announced its quarterly results.

Why were they implicated?

Capital One and Tesora, two entities named in the SEBI order for insider trading, had traded in the futures and options (F&O) segment before the announcements of financial results for the quarter ending June 30, 2020. Soon after the announcement, they offloaded their positions.

This would not have been possible without the unpublished price sensitive information (UPSI). The F&O segment allows for an agreement between two parties to buy/sell scripts on a future date for a price mutually agreed upon while signing the contract.

According to the SEBI order, Capital One generated Rs 2.79 crore and Tesora’s gains were Rs 26.82 lakh.

Why is this an issue?

Using UPSI for trading is punishable under SEBI’s Prohibition of Insider Trading Act.

UPSI refers to the information about the company, which is not available in the public domain, and could have a significant impact on the prices of company’s securities in the stock market. The information could be related to financial results, dividends, change in capital structure, mergers and acquisitions, and key managerial personnel.

In this case, two Infosys employees who had access to UPSI, had shared the information to Capital One and Tesora that resulted in illegal gains.

The SEBI order states that Venkata has been in frequent communication with Pranshu and there were telephonic communications during the UPSI period between June 29 and July 15, 2020. The period refers to the time when the data was first made available in the database and results were announced.

This relationship had led to Venkata sharing UPSI information to Pranshu, who, in turn, shared it with the others implicated here.

Why is UPSI regulated under PIT regulations?

UPSI could be positive or negative. Using the information, once public, could increase or decrease the prices of shares. For instance, when companies post quarterly results or announce a new chief executive officer, shares move up or down. In either case, insiders can use the information to buy shares and sell it at a higher price after the announcement of the results, or wait for the announcements and buy shares at a lower price. Both scenarios are brought under the ambit of PIT regulation of SEBI.

Was this the only reason for the action?

No. Both entities have been involved in trading since the start of the year. The order revealed that between January 1, 2020, and October 31, 2020, Capital One and Tesora had significant trading activity on Infosys only during the time of announcement of financial results.

“The trading concentration of Capital One and Tesora in the scrip of INFY had increased drastically during the said weeks,” the report said.

What is Infosys’ response to this?

Infosys has ordered an internal investigation. It said appropriate action will be taken, once the probe is completed.

“On June 1, Infosys was informed of an interim ex-parte SEBI order, where two of its employees, among other third parties, were named, in an ongoing insider trading investigation. The company will extend full cooperation as required to SEBI on the matter. Additionally, as a result of the order, an internal investigation is being initiated and appropriate action will be taken on the conclusion of such investigation,” the company said in a statement.

Was it the company's fault?

Analysts and governance experts Moneycontrol spoke to said that the company cannot be blamed for this. While this is an individual failure and that the company’s governance systems continue to be robust, Infosys needs to emphasise and amplify its values to prevent such slippages in future, they added.

Are employees being caught in insider trading anything new?

No. On May 21, the regulator fined Indiabulls Venture former non-executive director, Pia Johnson, and her husband Mehul Johnson for violating PIT regulations by trading the firm’s scrip using USPI. They were fined Rs 1 crore by SEBI. A month back, edtech firm Aptech was fined Rs 1 crore for violating insider trading rules.