PRE-CLEARANCE OBTAINED BASED ON MIS-REPRESENTATION, NOT A VALID CLEARANCE – Eshwars
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PRE-CLEARANCE OBTAINED BASED ON MIS-REPRESENTATION, NOT A VALID CLEARANCE

Authored by R. Padma Akila

In the matter of:  Insider Trading in the scrip of Indiabulls Real Estate Limited (“Company” / “IBREL”) Date of the order: 10.07.2020

Provisions invoked:

Section 12A[1] (d) and (e) of SEBI Act, 1992, read with Regulation 4(1)[2] of SEBI (PIT) Regulations, 2015

Facts of the case:

1. SEBI, on analysing the trading activity in the scrip of the Company had found the trading pattern of its CFO (“Noticee”), suggesting that he may have sold 10,000 shares (on 12.06.2017) of the Company, on the basis of unpublished price sensitive information (UPSI).

2. The alleged UPSI in this case was the decision to sell 4.25 Crore shares held by its promoter entity IBREL IBL Scheme Trust (“Trust”) to raise funds for its ongoing businesses and general corporate purposes.

3. The decision to sell the shares held by the Trust (the sole beneficiary of the Trust was the Company) was taken at a meeting of the operation committee of the Company on 08.06. 2017, which was attended by the Noticee, as an invitee.

4. When the information about the sale of shared by the promoter Trust became public (on 22.06.2017), the scrip fell by 9.80% on NSE and 9.76% on BSE in a single day.

Noticee’s defence:

1. He was not a `Connected Person’ as the decision to sell the shares was taken by the Trust, and that he had no relationship with the Trust.

2. He had obtained pre-clearance from the compliance officer of the company before selling the shares.

3. He had sold the shares received on the exercise of the ESOP provided by the Company.

4. The sale of his shares was not “motivated” by any information/UPSI, and he had wanted to sell the shares in 2017, to generate liquidity, but got to sell it only then.

Decision of the AO:

1. The AO, after considering the submissions of the Noticee, and the information available from the investigation (which were also shared with the Noticee) recorded the following findings:

(a) The information about the sale of shares by the Trust, was UPSI, which originated on 08.06.2017, the date the operations committee of the Company authorised the trustees of the Trust to sell the shares, and that it remained UPSI till 22.06.2017.

(b) The CFO of the Company was a `Connected Person’, and hence an `Insider’ within the meaning of the SEBI (PIT) Regulations, 2015, and he was in possession of the UPSI, having attended the meeting of the operations committee, where the UPSI emerged.

2. Regulation 4(1) of the SEBI(PIT) Regulations, 2015, makes it clear that a trade executed by an `Insider’ while being in possession of UPSI shall be presumed to be motivated by the knowledge of such UPSI, and the legislative note to Regulation 4(1), reaffirms the same.

3. The AO’s orders states that the only way to prove the insider’s innocence against the violation of Regulation 4(1) would be by establishing that any of the circumstances under the proviso (i), (ii) or (iii) [as it stood at the time of the purported offence] had existed for the insider to trade while being in possession of UPSI.

4. With respect to the Noticee, proviso (i) wasn’t applicable as he wasn’t a promoter; proviso (ii) [as it stood then, and now proviso v] was also not applicable to him, as he is an individual; proviso (iii) [as it stood then, and now proviso vi] – the sale by him was not pursuant to a trading plan.

5. The application for pre-clearance was made by him only on 12th June 2017, wherein he had declared that he did not possess any UPSI. Clause 6 of the Code of Conduct specified under Schedule B read with Regulation 9(1) and (2) of the SEBI (PIT) Regulations, 2015 says that no designated person shall apply for pre-clearance of any proposed trade if such designated person is in possession of UPSI, even if the trading window is not closed.

6. The AO concluded that, clearance received on the basis of misrepresentation of a vital fact, is neither a valid clearance nor a valid defence.

7. The AO also drew reference to SEBI’s Guidance Note dated August 24, 2015 on SEBI (PIT) Regulations 2015[1], where it was made clear that the sale of shares received through the exercise of ESOP was not an exception to the general rule under Regulation 4(1) and thus was not a valid defence.

[By amendment to the PIT Regulations, 2015 w.e.f. 01.04.2019, the exercise of ESOP has been incorporated as a defence in proviso (iv) in Reg. 4(1)]

8. The Noticee had violated Section 12A (d) and (e) of SEBI Act, 1992 read with Regulation 4(1) of the SEBI (PIT) Regulations, 2015 and has been imposed with a penalty of Rs. 10,00,000 for his violation of Regulation 4(1) of the SEBI (PIT) Regulations, 2015.

Regulatory issues that are to be noted from this decision of AO
1. To bring a charge on an insider, it would suffice that he traded when in possession of UPSI.

2. It is for the person so charged to show that one of the 6 situations specified in the proviso to sub-regulation (1) of regulation 4, of the PIT Regulations, 2015, are applicable to him.

3. Pre-clearance obtained on the basis of misrepresentation of vital fact, is not a valid clearance/defence.

4. It is only the exercise of ESOP while in possession of UPSI which is exempt and not sale of the shares exercised under ESOP.

[1] 12A. No person shall directly or indirectly—

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;

[2] 4(1) states that “No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information”, Provided that the insider may prove his innocence by demonstrating the circumstances including (i), (ii) or (iii) along with an explanatory note stating that a trade conducted by an insider while being in possession of an UPSI shall be presumed to be motivated by the knowledge of such UPSI

[1] Paragraph quoted by the AO from SEBI’s guidance “the Exercise of ESOPs shall not be considered to be “trading” except for the purposes of Chapter III of the Regulations. However other provisions of the Regulations shall apply to the sale of shares so acquired”.

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