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The Securities Appellate Tribunal (“SAT”) has in its recent order in the matter of Prakash C Kanugo v. SEBI,[1] highlighted the necessity of accurately establishing the period of unpublished price sensitive information (“UPSI”) in cases pertaining to SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). Remarkably, it has also clarified the liability of a company and its compliance officer under the PIT Regulations for wrong disclosures made by its employees.
In this case, the adjudicating officer (“AO”) of SEBI had found the managing director, the company and the compliance officer to have violated regulation 7(2)(a) of the PIT Regulations[2] and imposed penalties to the tune of Rs 15 Lakh, 1 Lakh and 4 Lakh respectively on the basis that the managing director had traded while in possession of UPSI pertaining to financial results of the company and that the company and compliance officer failed to make the necessary disclosures to the exchange.
Need for accurately establishing the UPSI Period
SAT opined that the contours of the UPSI period were not accurately determined by the AO. It noted that the AO had assumed that the UPSI period began upon the process of finalization of accounting having started internally. SAT noted that there was nothing on record to demonstrate that UPSI had come into existence then. It also noted that even about 18 days thereafter when the statutory audit commenced, there was no indication that the UPSI had come into existence.
SAT concluded that UPSI came into existence when the draft financial accounts were submitted to the management (more than a month after the date that the AO had determined for the UPSI period to have started). SAT thus held that though the managing director was an insider in terms of regulation 2(g) of the PIT Regulations, he had not traded while in possession of UPSI as he had traded before the UPSI period.
Liability of a company under the PIT Regulations for wrong disclosures made by its employees
SAT noted that the managing director had made a wrong disclosure to the company by claiming that he had only encumbered the shares to the buyer, whereas a letter issued by him to the concerned buyer indicated otherwise.
In light of this, SAT observed that the managing director had, for vested reasons, wrongly made a disclosure under regulation 31 of the (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) to the company and the stock exchange under the Takeover regulations whereas the applicable disclosure under regulation 7(2)(a) of the PIT Regulations was not made.
However, SAT notably observed that the finding of the AO that the company and the compliance officer, which made the disclosure under the Takeover Regulations on the basis of the letter provided by the managing director, were required to go into the nitty-gritty of the said transactions and failed to exercise due care in performing their duties was patently erroneous.
It has interestingly observed that “it is not necessary for the company or the compliance officer to go into the correctness of the transaction and verify as to whether the transactions had actually been done or not” Based on this, the company and the compliance officer were exonerated, and the penalty levied against them by the AO were set aside.
Lastly, noting that though the managing director had not traded in possession of UPSI, SAT observed that for failing to make the requisite disclosure under the regulation 7(2)(a) of the PIT Regulations, the penalty of Rs 5 lakh (instead of Rs. 17 Lakh) was justifiable.
Observations
These observations by SAT are important in clarifying the significance of correctly determining the UPSI period at the stage of investigations, to ensure discarding superfluous proceedings, consequently enabling SEBI to rightly utilize its resources towards graver cases of insider trading.
It is also a welcome decision towards providing clarity and reducing the burden on companies in compliance with PIT Regulations as it is rightly not a company’s responsibility to probe its employees’ every trading activity with skepticism, which would otherwise reduce efficiencies. However, It also merits stating that this does not have the implication of disposing the requirement of exercising reasonable due diligence by companies and compliance officers in complying with their obligations under the PIT Regulations.
[1] SAT Appeal No. 709 of 2022 decided on 06.11.2023.
[2] Regulation 7(2)(a) of the PIT Regulations requires every promoter, member of promoter group, designated persons and directors of a company to disclose to the company the number of shares acquired or disposed by them within specified time, if the value of securities traded aggregated to a traded value in excess of Rs. 10 Lakh or such other value as may be specified. The company is thereafter required to notify the stock exchanges about the same.