The Supreme Court has upheld the acquittal of Abhijit Rajan, former chairman and managing director (CMD) of Gammon Infrastructure Projects Ltd (GIPL), in an insider trading case.
In an order, a bench of justice Indira Banerjee and justice V Ramasubramanian says, "...the information regarding the termination of the two contracts can be characterised as price sensitive information, in that it was likely to place the existing shareholders in an advantageous position, once the information came into the public domain. In such circumstances, our answer to question No2 would be that the sale by the respondent (Mr Rajan) of the shares held by him in GIPL would not fall within the mischief of insider trading, as it was somewhat similar to a distress sale, made before the information could have a positive impact on the price of the shares."
The case related with Mr Rajan on 22 August 2013, selling his 14.4mn (million) shares in GIPL for about Rs10.28 crore. On 9 August 2013, the board of directors of GIPL passed a resolution authorising the termination of shareholders agreements between the company and Simplex Infrastructure Ltd (SIL) for two road project contracts awarded by the National Highways Authority of India (NHAI).
GIPL was awarded the project worth Rs1,648 crore by NHAI and set up a special purpose vehicle (SPV) Vijayawada Gundugolanu Road Project Pvt Ltd (VGRPPL), for executing the project. Similarly, SIL was awarded a contract worth Rs940 crore by NHAI for two road projects and set up an SPV Maa Durga Expressways Pvt Ltd (MDEPL) to execute the project.
GIPL entered into two shareholders' agreements with SIL. Under these agreements, GIPL was to invest in MDEPL and SIL was to invest in VGRPPL for their respective projects. The mutual investments were to be tuned so that GIPL and SIL would hold 49% equity interest in each other's projects.
However, these agreements were terminated by the GIPL board. The company shared this information on 30 August 2013 with the exchanges.
After receiving input from National Stock Exchange (NSE), the Securities and Exchange Board of India (SEBI) conducted a preliminary enquiry. It passed an ex-parte order on 17 July 2014, prima facie, holding that Mr Rajan violated provisions of Section 12A(d) and (e) of the SEBI Act. SEBI restrained Mr Rajan from buying, selling or dealing in securities and accessing the security markets directly or indirectly.
Mr Rajan filed an appeal against the SEBI order which was dismissed as withdrawn on 4 February 2016.
After completing its investigation, SEBI issued certain directions on 21 March 2016. It also issued a show-cause notice on 29 March 2016 to Mr Rajan, Consolidated Infrastructure Co Pvt Ltd, and two of the company directors.
In an order passed on 13 July 2016, the whole-time member (WTM) of SEBI held Mr Rajan guilty of insider trading and liable to disgorge his unlawful gains of Rs1.09 crore. The notice issued to Consolidated Infrastructure and two of its directors was closed without any direction on the grounds that no case was made against them.
Mr Rajan challenged the order passed by the WTM before the securities appellate tribunal (SAT). The appeal was allowed by SAT. SEBI then challenged the SAT order before the apex court.
Mr Rajan, contended that what was sold by him was 70% of his total shareholding in the company and the sale was not an isolated one but coupled with the sale of multiple other assets to raise money to fund promoters' contribution to the corporate debt restructuring (CDR) package of Gammon India Ltd, the listed parent company of GIPL.
"...the failure of the respondent to meet the obligation towards CDR package would have led to GIL filing for bankruptcy. Every penny of the sale proceeds of the shares was transferred by the respondent towards the implementation of CDR package and hence it is a misconception to think that he made unlawful gains that ought to be disgorged," he contended.
The bench also noted that the Tribunal found that the closing price of shares rose after disclosing 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 (Mr Rajan) did not do this, obviously on account of a pressing necessity."
SEBI contended that it took note of the situation in which the respondent (Mr Rajan) was placed and the dire need that he had to sell the shares and, therefore, it confined the final order only to disgorgement.
"This argument is actually an argument of convenience," the SC says. "It so happened in this case that according to SEBI the closing price of the stock on 3 September 2013 showed favourable position for the respondent and SEBI was able to calculate as though the respondent made a profit. But if a company is likely to gain strength by making a significant change in its policy, the price of its securities is likely to shoot up. Despite such a natural phenomena, if a person sells his stocks without waiting for the market trend to show up, it can only be taken as a sale, devoid of any desire to make unlawful gains, even if it cannot be termed as a distress sale."
Civil Appeal No.563 of 2020 Date: 19 September 2022