ABHIJIT RAJAN V SEBI: SUPREME COURT CURTAILS SEBI’S ABUSE OF POWER

Introduction
The charge of insider trading is one of the most serious charges in relation to the securities
market and having regard to the gravity of this wrongdoing, higher must be the preponderance of
probabilities in establishing the same. It is also a settled principle of criminal jurisprudence that
the more serious the offence, the stricter the degree of proof, since a higher degree of assurance
is required to convict the accused.” SEBI has repeatedly failed to adhere to such principles and
adjudications and has therefore been embarrassed in both the SAT and the Hon’ble Supreme
Court. In this context, the article aims to provide an analysis of the case of Abhijit Rajan v SEBI
highlighting the key issues raised and resolved, providing greater clarity on the stance taken up
by the Supreme Court.

Relevant Facts
The straight- forward facts of the case state that on August 22, 2013, Abhijit Rajan, the then
Chairman and Managing Director of Gammon Infrastructure Projects Limited, sold 1,43,81,246
shares of GIPL for Rs.8.28 crores through the platforms of BSE Limited (BSE) and National
Stock Exchange of India Ltd. (NSE). Following that, the NSE provided this information to the
respondent Securities and Exchange Board of India in order to consider the possibility of trading
on the basis of unpublished price-sensitive information. SEBI conducted an investigation and
discovered that on the date of Mr Abhijit Ranjan's share sale, he had unpublished information
with him about the cancellation of GIPL's two shareholders agreement with one Simplex
Infrastructure Limited. GIPL made the cancellation announcement to the stock exchanges on
September 3rd, 2013. It made the information public on the BSE website at 1.05 p.m. and on the
NSE website at 2.40 p.m. After an investigation and hearing the appellant, he was found guilty of
insider trading and was directed to disgorge an amount of Rs.1.09 crores already deposited in an
escrow account as per the earlier direction under the provisions of Section 19 read with Section
11 and 11B of the Securities and Exchange Board of India Act, 1992 (referred to hereinafter as
the 'SEBI Act') read with Securities and Exchange Board of India (Prohibition of Insider
Trading) Act, 1992 (referred to hereinafter as

Matter of contention
SC considered firstly, whether the information regarding the decision of the Board of Directors
of GIPL to terminate the aforesaid two contracts can be characterized as “price sensitive
information”? secondly, whether the sale by the respondent of the equity shares held by him in
GIPL, under peculiar and compelling circumstances in which he was placed, would fall within
the mischief of ‘insider trading’ in terms of Regulation 3(i) read with Regulation 4 of the
Regulations? And thirdly, whether SEBI should have taken into account the last trade price of
the day on which information was disclosed instead of the trade price of the next day?

Decision held
On September 19th, a two-judge bench comprised of justice Indira Banerjee and Justice V
Ramasubramanian stated that "the respondent's sale 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..."It also stated that
the increase in share price following the sale benefited shareholders while Mr Rajan received no
benefit.
It was further noted that out of the 7 items of information listed under the Explanation, all the
others except Item No.(vii) are likely to have an impact directly upon the financial strength of the
company. Item No.(vii) stands apart, in that it is very broad and general in nature. While nothing
more is required to show that the information listed in Items (i) to (vi) of the Explanation under
Regulation 2(ha) is likely to materially affect the price of securities of a company, the same is
not the case insofar as the information in Item No.(vii) is concerned.
Therefore, while dealing with a case falling under Explanation (vii) of Regulation 2(ha), one
may have to see whether there was any likelihood of the said information materially affecting the
price of the securities of the company. Additionally, the activity in which the insider was
involved also determines his culpability for violation of Regulation

Analysis
The contentions of both sides and precedents employed by the apex court need to be perused
when analysing the impact of this Judgement.

Rajiv B. Gandhi and Others v SEBI

SEBI often relies on the ratio of Rajiv B. Gandhi and Others v SEBI, that “if an insider trades or
deals in securities of a listed company, it would be presumed that he traded on the basis of the
unpublished price sensitive information in his possession unless he establishes to the contrary.
Facts are necessary to establish the contrary being especially within the knowledge of the insider,
the burden of proving those facts is upon him. The presumption that arises is rebuttable and the
onus would be on the insider to show that he did not trade on the basis of the unpublished price-
sensitive information and that he traded on some other basis.
However, the alleged miscreants have often been successful in rebutting these presumptions by
showing how there was a need to accrue funds and as a result this powerful tool in the hands of
SEBI stands defeated.

Udayant Malhoutra Case

In this case, a repeat and compelling precedent of the Abhijeet Rajan Case, SEBI did not
consider whether there was any actual gain or avoidance of loss and failed to establish any
urgency in the passing of the ex parte order.
It was alleged that he had sold 51,000 shares of the Company on 24 October 2016 having inside
knowledge of price-sensitive information, namely, the unaudited financial results of the quarter
ending on 30 September 2016. It was alleged that the financial results were approved by the
Board of Directors on 11 November 2016, upon which the price of the scrips of the Company
sustained a drastic reduction.
A three-judge bench of the Supreme Court on the 15th of June 2020, came to the conclusion that
the Tribunal was on the facts of the case correct in setting aside the ex-parte order of the Whole
Time Member on the ground that no urgency has been made out to sustain such an order.

Shreehas P. Tambe
In the strikingly similar case of Shreehas P. Tambe, it was alleged that the appellant, being an
insider had sold 17,440 shares from December 19, 2017, to December 27, 2017, while in
possession of UPSI further, the appellant had violated Regulation 7(2)(a) of the PIT Regulations
as he had failed to make the required disclosure to the company within 48 hrs. Ultimately,
however, only a penalty of Rs. 1 lac under Regulation 7(2)(a) was upheld and the charge relating
to insider trading was quashed. Furthermore, in the Balram Garg case, it has been established
that merely the trading pattern cannot be circumstantial evidence to prove the communication of
UPSI.

Conclusion
SEBI has repeatedly been embarrassed when failing to establish cases of insider trading
motivated by possession of alleged UPSI. It often fails to peruse the legal and contractual
obligations that the person has undertaken and fails to see whether agreements were also in place
much before any UPSI existed. When the regulator has the potential to ruin reputations and
inflict financial damage in a system that rarely compensates victims of unfair action by the State
or its regulatory, enforcement, or investigation agencies, there is a need for greater moderation
and application of mind. Furthermore, the insistence on ‘absolute liability to the extent of
ignoring other circumstances of the case such as pre-existing agreements and contracts.