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Securities and Exchange Board of India vs Abhijit Rajan

Civil Appeal · 2022 INSC 979Decided 19 Sept 2022
Civil Appeal No. 563 of 2020
Indira Banerjee · V. Ramasubramanian

Background

The respondent was Chairman and Managing Director of Gammon Infrastructure Projects Limited (GIPL), which had entered shareholder agreements with another company (Simplex Infrastructure Limited) tied to two large road-construction projects. After GIPL's board decided to terminate both agreements, the respondent sold around 1.44 crore of his GIPL shares (worth about Rs. 10.28 crore) before this termination was publicly disclosed, and resigned soon after. SEBI investigated on a tip that the sale may have used unpublished price-sensitive information, and its Whole Time Member (WTM) found him guilty of insider trading, ordering him to disgorge about Rs. 1.09 crore in unlawful gains. The Securities Appellate Tribunal overturned this finding, and SEBI appealed to the Supreme Court.

Decision Breakdown

The Supreme Court agreed the terminated contracts' financial scale made the termination information "price sensitive," rejecting the argument that its small proportion to GIPL's overall turnover made it immaterial: the correct test is whether the information could materially affect the share price, not its proportional size (the "de minimis" principle does not apply to insider trading). However, on the crucial second question, the Court found in the respondent's favour: the actual arithmetic showed that terminating both contracts left GIPL roughly Rs. 800 crore better off, meaning the share price was expected to rise once the information became public, not fall. A person genuinely seeking to profit from inside information would have waited for that positive news to break before selling, not sold beforehand as the respondent did. The Court held this was, in substance, closer to a distress sale to meet the company's financial needs (a corporate debt restructuring situation) than a profit-driven insider trade, so it did not fall within the mischief the insider trading regulations were meant to prevent. The appeal was dismissed and the Tribunal's order set aside.

Lesson Learnt

Insider trading liability turns on whether a person's transaction is an attempt to actually encash an advantage from unpublished price-sensitive information, selling shares ahead of news that would predictably push the price up (rather than down) undercuts, rather than proves, an insider-trading allegation, even though the disproportionate-size defence itself does not work in such cases.

Official source (sci.gov.in)View Judgment (PDF)

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