Question

…If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading. In other words, the actual gain or loss is immaterial, but the motive for making a gain is essential.
The words, “likely to materially affect the price” appearing in the main part of Regulation 2(ha) gain significance for the simple reason that profit motive, if not actual profit should be the motivating factor for a person to indulge in insider trading. This is why the information in Item No.(vii) of the Explanation under Regulation 2(ha) may have to be examined with reference to the words “likely to materially affect the price”. Keeping this in mind let us now come back to the facts of the case.
Gammon Infrastructure Projects Limited (“GIPL”) was awarded a contract for the execution of a project, whose total cost was admittedly ₹ 1,648 crores. Simplex Infrastructure Limited (“SIL”) was awarded a contract for a project whose cost was ₹ 940 crores. Both GIPL and SIL created Special Purpose Vehicles and then they entered into two shareholders Agreements. Under these Agreements, GIPL and SIL will have to make investments in the Special Purpose Vehicles created by each other, in such a manner that each of them will hold 49% equity interest in the other’s project.
It means that GIPL could have acquired 49% equity interest in the project worth ₹ 940 crores and SIL would have acquired 49% equity interest in a project worth ₹ 1,648 crore.
In arithmetical terms, the acquisition by GIPL, of an equity interest in SIL’s project was worth ₹ 460 crores approximately. Similarly, the acquisition by SIL, of the equity interest in GIPL’s project was worth ₹ 807.52 crores. Therefore, the cancellation of the shareholders Agreements resulted in GIPL gaining very hugely in terms of order book value. In such circumstances an ordinary man of prudence would expect an increase in the value of the shares of GIPL and would wait for the market trend to show itself up, if he actually desired to indulge in insider trading. But the respondent did not wait for the information about the market trend, after the information became public. The reason given by him, which is also accepted by the Whole-Time Member (“WTM”) and the Tribunal is that he had to dispose of his shares as well as certain other properties for the purpose of honouring a Corporate Debt Restructuring (“CDR”) package. It is on record that if the CDR package had not gone through successfully, the parent company of GIPL namely, Gammon India Ltd., could have gone for bankruptcy.
Therefore, the Tribunal was right in thinking that the respondent had no motive or intention to make undeserved gains by encashing on the unpublished price sensitive information that he possessed.
As a matter of fact, the Tribunal found that the closing price of shares rose, after the disclosure of the information. This shows that the unpublished price sensitive information was such that it was likely to be more beneficial to the shareholders, after the disclosure was made. Any person desirous of indulging in insider trading, would have waited till the information went public, to sell his holdings. The respondent did not do this, obviously on account of a pressing necessity.
[Excerpted from the judgment delivered by Ramasubramanian, J., in Securities and Exchange Board of India v. Abhijit Rajan, CA No. 563 of 2020 (hereafter ‘A Rajan’)]