SAT: Employees Guilty; Gaurs Not!

Jaypee Group Chairman Manoj Gaur, his wife Urvashi Gaur and brother Sameer Gaur are not guilty but the company’s two Whole Time Directors and Company Secretary are. That’s what SAT ruled in the insider trading case SEBI brought against 6 entities of the Jaypee Group. In saying so, SAT has made a distinction between insiders and deemed insiders. Payaswini Upadhyay asks experts if this order has added to the confusion of insider trading jurisprudence

In January this year, market regulator SEBI found 6 entities of the Jaypee Group guilty of insider trading regulations. It slapped a total penalty of Rs 70 lakhs on the accused. This week, SAT upheld SEBI’s order in the case of the whole time directors and the company secretary but struck down the accusations against the Gaur family. But before we come to the why, here’s the backstory. On October 11th 2008, Jaiprakash Associates notified the exchanges of the Board agenda for October 21st- the board was to consider the quarterly results, rights issue and interim dividend. The unconsolidated quarterly results were recognized by SEBI as unpublished price sensitive information in its order. After its announcement to the exchanges, the company closed its trading window on October 11th. On October 13th, 14th and 16th, Chairman Manoj Gaur’s wife Urvashi Gaur and brother Sameer Gaur purchased 8400 shares of the company. The company secretary and the whole time directors also bought 1000 shares each on October 13th. And so, SEBI, in its order had found Manoj Gaur to be an insider who had passed on unpublished price sensitive information to his wife and brother who had traded in the shares of the company based on this information.  SEBI’s order found the whole time directors and company secretary also guilty as they were insiders who had traded in the shares of the company while in possession of unpublished price sensitive information All the parties appealed against the order at the Securities Appellate Tribunal. SAT accepted SEBI’s argument that the details of the Board agenda was unpublished price sensitive information, it accepted that closure of the trading window means unpublished price sensitive information existed, it accepted Manoj Gaur to be an insider, it accepted Urvashi and Sameer Gaur to be deemed connected persons. But having accepted all of this, SAT found the Gaur family not guilty. This based on 2 grounds
one, SEBI produced no evidence to show that Manoj Gaur had passed on the information to his wife and brother Sandeep Bhagat
Partner, S&R Associates “I don’t know what kind of communication can you produce in court in evidence between a husband and a wife or two brothers who are staying in the same house. Phone tapping etc- they’ve tried in the past but if you’re staying at the same place, I don’t know what you can do to convince SAT.” Umakanth Varottil
Assistant Professor- Faculty of Law
National University of Singapore “In other jurisdictions, circumstantial evidence has been held to be sufficient to succeed in insider trading cases but in India, the bar has been set fairly high by the SAT and that’s exactly what we see in this case as well. To my mind, there is a bit of a disjunct here which needs to addressed either by the SAT or if ever the matter were to go to the SC because the burden on SEBI is unduly high as a matter of judge-made law and which is why SEBI has not been successful in going after insiders in India.” In dealing with the whole time directors, the Tribunal held that when trading is done during the existence of unpublished price sensitive information, the presumption is that it’s on the basis of this very information. And the whole time directors haven’t been able to rebut this presumption. This test was laid down by SAT in 2007 in Rajiv B Gandhi’s case. But the Tribunal held that the case of a designated employee needs to distinguished from a person who is not involved in the day to day functioning of the company and so it did not apply this test in the case of Gaur family. Umakanth Varottil
Assistant Professor- Faculty of Law
National University of Singapore “SEBI has actually in 2002 has amended the regulation to say that mere possession of the information is sufficient in order to constitute insider trading. But SAT continues to read the words ‘in possession of’ to mean ‘on the basis of’ which means the motive for the trade should have occasioned from that information. So it seems a bit surprising to me that despite the law having been changed, at least in the SEBI regulations if not the Act itself, SAT continues to ignore this legislative change.” RS Loona
Managing Partner, Alliance Corporate Lawyers
Former ED, SEBI “As per the regulations, there is a category of insiders and deemed insiders and deemed insiders or deemed connected persons are treated as insiders. Now the test which was devised by SAT was that the insider has to rebut the presumption when that insider has traded based on the unpublished price sensitive information. Now that test obviously has to be applied to each and everyone- in fact this test was applied by SAT for the first time in the case of deemed connected persons and it should therefore be applied to all case where deemed connected persons are involved.” The second ground on which SAT has acquitted Urvashi and Sameer Gaur is their frequent trading pattern, their financial independence, the number of shares they purchased and their status- SAT said these factors make it highly improbable that they traded on the basis of unpublished price sensitive information. But SAT held the two whole time directors and the company secretary guilty saying that ‘when in possession of UPSI, the quantity of shares traded becomes immaterial’ Sandeep Bhagat
Partner, S&R Associates “Until now, the distinction which the court seem to have made between somebody who is an officer or an employee of the company vs somebody who is a connected person – that distinction is not there under the law. As long as you’re in insider, you’re subject to the provisions of the Act. In one case, they said we’ll look at the number of shares – its only a thousand shares, its fine. In the other case, they said, we don’t care how many shares you’ve traded in- it’s an absolute prohibition. And these are both orders given on the same day. So I think certainly there is some amount of confusion.” RS Loona
Managing Partner, Alliance Corporate Lawyers
Former ED, SEBI “I think SAT has tried to justify its order based on the quantum of shares which have been traded by these people and considering their financial background, they felt that this is not the number which a person would be trading if he is really an insider with this kind of background. That is one factor which has weighed quite heavily with them. But one can always differ with that because the primary issue is that whether these people are the insiders and if they are the insiders, then if we apply the test which SAT has applied earlier that it would be presumed that they have traded based on the UPSI- if we accept that, then I think it doesn’t matter whether the shares traded are one, 1000, 10,000 or 1 lakh- it doesn’t matter at all.” So essentially, this order by SAT has done 3 things to the insider trading jurisprudence- it has raised questions as to what level of evidence would be appreciated by the Tribunal. Second, probably for the first time, a distinction has been made between the executives of a company and deemed connected persons. And third it leads one to ask should there be a burden of proof on the insider to explain his behaviour. The first will make SEBI’s task much more difficult to gather evidence that’ll pass muster, the second may lead to a jurisprudence that hasn’t existed so far and the third can only become clear if SEBI decides to appeal this in the Supreme Court.
 
In Mumbai, Payaswini Upadhyay