CASE ANALYSIS - VK PAUL V. SEBI BY - ASHAR HUSSAIN
CASE ANALYSIS - VK PAUL V. SEBI
AUTHORED BY - ASHAR HUSSAIN
19010125
B.B.A. L.L.B. 2019, SECTION-C
COMPANY LAW II
-
V.K. Kaul v. SEBI, (2012) 116 SCL 24
Cases pertaining to insider trading
have been decided by judiciaries all around the globe by relying heavily upon
circumstantial evidence. The reasoning behind the same is that in cases
pertaining to insider trading evidence directly is burdensome to find and
present before a court, since most of the evidence related to insider trading
is in verbal form and not documentary. Therefore, in cases related to insider
trading, circumstantial evidence is relied upon heavily. This essay will aim to
provide an analysis of one of the major cases in India related directly to
insider trading and circumstantial evidence, which is that of V.K. Kaul v.
SEBI.
Firstly, the facts of the case will
be discussed in brief. Mr. Kaul served on the board of Ranbaxy as a non-executive
independent director. Rexcel and Solus were both held by Ranbaxy. Solrex is a
joint venture between Rexcel and Solus. As a result, Ranbaxy was indirectly the
parent organization of Solrex. On March 20th, 2008, Solrex voted a resolution
to buy substantial volumes of OCP shares (the target company). This purchase
was completed on the 31st of March. Furthermore, on the 26th and 27th of March,
Mr. Kaul's wife purchased a large amount of shares of OCP and promptly sold
those after 10 days, when the stock's price had skyrocketed as a result of
Solrex's massive acquisition. Before moving on, it is imperative that a brief
explanation of the term ‘UPSI’ be provided since it is vital to the given
factual matrix. Unpublished Price Sensitive Information (UPSI) refers to
non-public information about the Company or its securities that, once made
public, is expected to substantially alter the value of a Company's securities.
The concise definition of the same has been provided under the Securities and
Exchange Board of India (Prohibitions of Insider Trading) Regulations, 1992
under Chapter-I, Section 2 (ha) and (k).[1] An
allegation was brought against Mr. Kaul that he committed insider trading. The
chronology of events, the date of Mrs. Kaul's purchase, regular telephonic
talks between Mr. Kaul and directors of Solrex, and Mr. Kaul's wife's
employment of the same stockbroker as Solrex were all utilized as evidence. Mr.
Kaul allegedly supplied UPSI to his spouse, on the basis on which she made
investments. This accusation is the result of a sequence of incidents. The
board members of Rexcel and Solus adopted a resolution on March 20, 2008, to
create a demat account on behalf of Solrex. The target firm, Orchid Chemicals
and Pharmaceuticals Limited, was to be purchased with this account. Because
neither company had the financial resources to make such a huge expenditure,
Ranbaxy stepped in to help. Following that, on March 28, 2008, the Ranbaxy
Board of Directors approved the money through Mr. Malvinder Singh, the
company's then-CEO and Managing Director. Furthermore, the UPSI was established
on March 20, 2008, when the demat account was launched and funding was obtained
based on the board's decision to acquire shares in the target firm on March
20th. The information regarding the
decision to purchase the stock was a price sensitive information, available
only to the company’s insiders. However, on both the boards of Rexcel and Solus
was Mr. Kaul. Subsequently, he was in frequent communication with Mr. Malvinder
Singh and Mr. Umesh Sethi, the global Finance head and the Vice-President of
Ranbaxy respectively. On 27th and 28th March 2008, as an insider, Mr. Kaul
invested on behalf of his wife. As a result of the above-mentioned events, it
was contended that Mr. Kaul was an insider of Ranbaxy as per Section 2 (c) (I)
of the Securities and Exchange Board of India (Prohibition of Insider Trading)
Regulations 1992. He was accused of allegedly providing UPSI to his spouse,
subsequently violating Section 12 A (d) and (e) of the Securities Board of
India Act, 1992. Broadly, Mr. Kaul, the appellant contended that the evidence
was entirely circumstantial and hence inadequate to prove the allegation.
The first issue contended by Mr. Kaul
was that the information pertaining to the investments made was incapable of
being classified as ‘price sensitive information’ in accordance with Section 2
(ha) and (k) of the 1992 regulations. The reasoning behind this argument was
that the terms ‘price sensitive information’, according to Section 2 (ha) entails
any such information that can materially alter the value of the shares of a
company once disclosed to the masses. Furthermore, it was contested that in
accordance with Section 2 (k), only the company possesses the authority to
publish such information. Therefore, since the unpublished information was of
no concern to Solrex but the target company, and since the company had no idea
of the information, hence, a conclusion was drawn that the said information
could not have been termed as UPSI. There are several flaws in the claims
presented herein. To begin, it was argued that such information must belong to
and be disclosed by that company. Nevertheless, Sections 2 (k) and (ha) refer
to any information relating to a company, directly or indirectly. As a result,
there is no such standard. Moreover, section 2 (e) discusses the realistic
expectation of a connected person of 'the company' getting access to UPSI in
regard to 'a company's' stocks. The advocate general made a similar
point in this instance as well. He additionally explained that 'a company'
refers to the entity for whom the decision is being made, whereas 'the company'
refers to the entity for which the decision is being made by the board of
directors. This difference is critical, since without it, the regulations'
objective will be defeated. Ergo, it is irrelevant whether the information
belongs to the same company as the company whose security prices would be
affected by its publication; as long as it pertains to any of the companies and
it would affect the company's security prices, it would have been considered
'price sensitive information'. In the present case, ‘the company’ investing in
Orchid was Solrex. Orchid must be termed as ‘a company’ in the present case.
Therefore, on 20th March 2008, the decision taken ought to be termed
as UPSI in accordance with the 1992 regulations. A comparison here can be drawn
with respect to the Securities and Exchange Board of India (Prohibition of
Insider Trading) Regulations, 2015.[2]
Section 2 (n) under the said regulations pertains to information regarding ‘a
company’ while broadly defining UPSI. Therefore, the decision to invest made by
the board of directors would still come under the ambit of UPSI under the 2015
regulations.
The second issue that arises in the
present case is whether Mr. Kaul be considered as an ‘insider’ per Section 2
(e) of the 1992 regulations. According to the regulations, an insider is
defined as anybody who is linked or perceived to be connected to a corporation
and 'by virtue of such relationship' might be expected to have accessibility to
the company's UPSI. Per the given factual matrix, Mr. Kaul’s role in Ranbaxy
was being a non-executive independent director. Furthermore, he was a member of
the compensation as well as the audit committee. As mentioned before, Mr. Kaul
was in constant touch with Mr. Malvinder Singh, who was the Vice-President of
Ranbaxy and Mr. Umesh Sethi, the CEO, around the period when the investment
decision was finalized. Ergo, it is only reasonable to assume that Mr. Kaul did
have or could have had access to any such UPSI. What is fishy here is that
neither of Mr. Sethi nor Mr. Singh remembered the exact details of the
conversation that transpired with Mr. Kaul. On top of that, they both had
trouble remembering when the conversation even took place. While arriving at
the conclusion, the tribunal cited several cases so as to justify the heavy
reliance on circumstantial evidence in the present case. Firstly, the court
relied on the case of Dilip Pendse[3]
wherein it stated that the charge of insider trading is a weighty charge, the
preponderance of probability while proving such a charge would be significantly
higher. Similarly, in the case of Mousam Singha Roy[4],
the court stated that no absolute standard of proof can exist in either civil
or criminal cases, hence the degree of proof varies per the facts and
circumstances of each case.[5]
Finally, the court heavily relied upon the case of Raj Rajaratnam[6]
which is a landmark American case that laid down the test for circumstantial
evidence. When relying on circumstantial evidence in insider trading cases, the
US court outlined a number of considerations to weigh. Access to information,
the relation between tipper and tippee, the time of contact, the timing of
deals, the pattern of trading, and the attempt to disguise the trades or
relationship are among these considerations. The court further stated that when
analyzing circumstantial evidence, it will not consider whether the accusation
is the only possible outcome considering the circumstances, but rather if there
really is a high potential of malpractice prevailing.[7]
Thus, based on the chain of events that transpired in the case, as well as the
precedents cited, the court, under Section 3 of the SEBI 1992 regulations found
Mr. and Mrs. Kaul to be guilty of insider trading.
There arises an issue concerning
liability under the current SEBI 2015 regulations. In India, the offence arises
only when a person in possession of UPSI, executes trades with such
information. However, there is no provision to impose liability on the person
who was not involved directly in the trade but was present and participating in
the communication aspect of the UPSI. SEBI, in accordance with regulation 3 of
the 2015 regulations has imposed an ‘obligation’ and ‘prohibition’ on any
person to not promulgate such price sensitive information. Although regulations
3 and 4 state that any communication of UPSI would amount to the offence of
insider trading, yet the effective application of both provisions have not
happened, and no liability has been imposed on anyone so far. Furthermore,
whilst Regulation 4 specifies that a breach of Regulation 3 will result in
insider trading proceedings, the provision's vagueness gives a lot of room for
reinterpretation within Regulation 3. Additionally, there is little clarity in
terms of whether such ‘communication’ outside the scope of ordinary course of
business or nature of employment would be ascertained as insider trading or
not. The SEBI has essentially weakened the implementation of insider trading
regulations by imposing a considerably higher standard to meet well before
actionable claim can be brought against any violators.
A contrast with US insider trading
regulations will offer further insight on how the aforesaid issue has been
addressed in a foreign country. The Securities Exchange Act of 1934, Section
10(b), and Rule 10b-5, define insider trading as when a business insider with
"material non-public information" deals in shares. The aforementioned
rule has also been interpreted in such a manner that even an
"insider" who "tips" somebody to purchase or sell some
stock is liable of insider trading. As a result, both of the
"tipper" and the "tippee" may indeed be charged with insider
trading. A cursory examination of the legislation reveals that the Indian
statute acknowledges such communication offences; rather, it is the explanation
supplied in the regulation via the note below such sections that prevents the
execution of these kind of punitive restrictions.[8] As
a result, if we analyze the current case considering the US rules, Mr.
Umesh Sethi and Mr. Malvinder Singh would indeed be held guilty for insider
trading as tippers as they were provided with the UPSI, which they in turn, conveyed
to Mr. Kaul, who became the tippee in this case. Mr. Umesh Sethi and Mr.
Malvinder Singh would also have been charged with insider trading if India's
legislation had just been applied more clearly and strictly. This is because
their questionable assertions about not remembering the specifics of the
conversations, when these took place, how these telephonic discussions took
place outside of the office with really no log of what was spoken, and so on,
may indicate that they were guilty of insider trading.
[3] Dilip Pendse v. SEBI, Order dated
19/11/2009.
[4] Mousam Singha Roy v. State of West
Bengal (2003) 12 SCC 377.
[5] Palak Minda, 'V.K Kaul Vs.
Adjudicating Officer, SEBI (Case Comment)' (Aishwarya Sandeep, 2022)
<https://aishwaryasandeep.com/2022/01/27/v-k-kaul-vs-adjudicating-officer-sebi-case-comment/>
accessed 11 April 2022.
[6] America v. Raj Rajaratnam, 09 Cr.
1184 (RJH).
[7] Maharshi Shah, 'Importance Of
Circumstantial Evidence In Deciding Cases Of Insider Trading' (TaxGuru, 2022)
<https://taxguru.in/sebi/importance-circumstantial-evidence-deciding-cases-insider-trading.html>
accessed 11 April 2022.
[8] 'SEBI Regulations On Insider
Trading - SEBI Attempt To Limit Insider Trading' (iPleaders, 2022)
<https://blog.ipleaders.in/sebi-regulations-on-insider-trading/> accessed
11 April 2022.