In Shreehas P. Tambe v. SEBI [Appeal No. 491 of 2021, Date of Decision: July 26, 2022], the Securities Appellate Tribunal (SAT) held that, an insider was not guilty of insider trading as the trade in question was bona fide, despite the insider possessing UPSI.
This order was passed in appeal against an order of a SEBI whole-time member (WTM), who found that the appellant had violated Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), failed to comply with the model code of conduct and failed to make a disclosure under Regulation 7(2)(a) in relation to the trade.
The company in question was Biocon Ltd. and the UPSI related to a proposed global collaboration between Biocon and Sandoz. The appellant was a key managerial person of Biocon. The WTM found that the appellant was an insider and that the information regarding the collaboration was UPSI. The WTM held that the appellant was guilty of insider trading, debarred the appellant from accessing the securities markets for three months and imposed a penalty of INR 2 lakhs.
SAT agreed with the WTM that the appellant was an insider. However, the SAT opined that the appellant should receive the benefit of the proviso to Regulation 4(1) of the PIT Regulations, which allows a persons that has traded while in possession of UPSI to prove innocence. This was based on the fact that the appellant had obtained pre-clearance and had used the sale proceeds to fund an apartment purchase pursuant to an MOU with a developer. According to SAT, these facts showed that the trades were bona fide and not motivated or induced by UPSI. Importantly, SAT recorded a finding that the appellant is not guilty of insider trading, despite having traded while in possession of UPSI.
SAT stated that it arrived at this view without examining whether the appellant traded while in possession of UPSI or whether he had knowledge about the proposed collaboration and even presuming that the appellant traded while in possession of UPSI. It relied on the proviso to Regulation 4(1) which provides that an insider may prove innocence by demonstrating bona fide circumstances for trading while in possession of UPSI. It held that the proviso was inclusive and that it gives a window to the insider to prove his innocence by demonstrating the circumstances under which he has traded.
In these facts, SAT found that Regulation 4(1) was not violated and consequently, there was no violation of the model code of conduct. However, as the appellant had failed to make a disclosure within the time period under Regulation 7(2)(a), SAT upheld the limited finding of the WTM that the appellant had breached this regulation.
Please find a copy of the order, here.
This update has been contributed by Armaan Patkar (Partner)
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