VIOLATION OF THE CODE OF CONDUCT FOR INSIDERS TO PREVENT INSIDER TRADING CANNOT BE TREATED LIGHTLY- SEBI – Eshwars
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VIOLATION OF THE CODE OF CONDUCT FOR INSIDERS TO PREVENT INSIDER TRADING CANNOT BE TREATED LIGHTLY- SEBI

Authored by Padma Akila

Securities and Exchange Board of India (SEBI) vide order dated 9th August 2021, fined Rs 12 lakh on the former employee Mr. Prateek Sarawgi of Infosys Ltd. (“Infosys/Company”), for indulging in insider trading during the trading window closure while being the Designated Person of the Company. Mr. Prateek Sarawgi (“Noticee”) was working as Associate Manager- Business Finance with Infosys while indulging in the alleged insider trading activity.

Findings of the investigation by SEBI:

1. It was observed that Infosys had announced financial results for the quarter ended December 31, 2016, on January 13, 2017, on BSE and NSE between 09:04 AM and 09:18 AM. As per the Company’s submission, the trading window was closed from December 16, 2016, to January 15, 2017, with regard to financial results for the quarter ended December 2016.

2. The Noticee, an “insider” as stated under Regulation 2(1)(g) of the SEBI (PIT) Regulations, 2015, (“PIT Regulations”) had bought 100 shares of Infosys on January 12, 2017, and bought and sold 400 shares and 75 shares of Infosys respectively on January 13, 2017. Thus, it was alleged that the Noticee while in possession of unpublished price sensitive information (“UPSI”) by trading in the scrip of Infosys, had violated the provisions of Sections 12A(d) and 12A(e) of SEBI Act, 1992 read with Regulation 4 (1) of PIT Regulations.

While this was the case identified by SEBI, the Noticee was provided with several opportunities to show cause and the Noticee did not reply, nor did he avail the opportunity of personal hearing to advance his submissions before the Adjudicating Officer (“AO”) from SEBI. “In such circumstance, the allegations in the SCN (Show Cause notice) against the Noticee are taken up for consideration, on the basis of the material available on record,” said the AO in his order.

Adjudicating Officer’s findings and decision

The Order stated that declaration of financial results by the Company is UPSI which is of the nature that is not generally available and upon becoming generally available and is likely to materially affect the price of the securities. SEBI determined the period of UPSI to be January 6, 2017, to January 12, 2017. The Noticee was part of the presentation team and responsible for making PPT of financial result of the quarter ended December 2016. The presentation team had the information regarding organisation-wide revenue and cost numbers from January 08, 2017, to January 13, 2017, the day of the Company’s results and thus the Noticee was aware of the financial results of the Company. Hence, the Noticee was an insider who was in possession of UPSI.

Further, the AO relied upon the decision of the Hon’ble Securities Appellate Tribunal (SAT) in Shri E. Sudhir Reddy vs. SEBI wherein it was inter-alia held that “Knowledge of such unpublished price sensitive information in the hands of persons connected to the company puts them in an advantageous position over the ordinary shareholders and the general public. Such information can be used to make gains by buying shares anticipating rise in the price of the scrip or it can also be used to protect themselves against losses by selling the shares before the price falls. Such trading by the insider is not based on level playing field and is detrimental to the interest of the ordinary shareholders of the company and general public.”

Based on the above instances, coupled with the ratio laid down by the Hon’ble SAT in the aforementioned case, it was held that the Noticee in his official capacity had access to PSI pertaining to the financial position and earnings of the company and on the basis of the said information, had bought 500 shares and sold 75 shares of Infosys, while in possession of UPSI. Thus, violating Section 12A(d) and 12A(e) of SEBI Act read with Regulation 4 (1) of PIT Regulations.

The Order also stressed upon the fact that the objective of framing a Model Code of Conduct (CoC) under the PIT Regulations, is to prevent insider trading and prevent misuse of the PSI which undermines the confidence of investors. Further, it was stated that from the various provisions stipulated under the Model CoC for Listed Companies under the PIT Regulations, it was clear that these provisions are intended to prevent the possible abuse of unfair insider practices by the Company’s management/officials/employees etc., The CoC for listed companies under Regulation 9 of the PIT Regulations makes it clear that these provisions are formulated with a view to serve as a guiding charter for all concerned persons associated with the functioning of the company and their trading in its securities. In this regard, in the instant case, it is pertinent to note that the transactions executed by the Noticee were during the period when the trading window was closed. Thus, it was concluded that the Noticee being an insider had also violated the provisions of Clause 4 of CoC prescribed under Schedule B of Regulations 9(1) and 9(2) of PIT Regulations. Having concluded that the Noticee acted in violation of the abovementioned provisions of the PIT Regulations, the AO imposed a penalty of Rs 12 lakhs on him.

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